Chapter 33 - Superannuation

33) SUPERANNUATION

1.1.1.This category comprises expenditure on contributions by governments to superannuation funds or superannuation payments for those employees and holders of public office whose salaries are included in the Commission’s standard budget, together with associated administrative expenditures.

34.Under accrual accounting, both payments in respect of earlier unfunded liabilities and provisions for current liabilities will be included in the year in which they are incurred.

35.The ACT’s position relative to the States, based on the 1999 Review methodology and using the latest available data, is illustrated below. This sees the ACT being assessed by the Commission as having negative needs in this category.

STANDARDISED, ACTUAL & AUSTRALIAN AVERAGE EXPENDITURE: SUPERANNUATION, 2000-01

Standardised expenditure is the amount that the Commission deems the ACT is required to spend if it is to provide an average level of service.

Actual expenditure is the actual funding spent by the ACT on this category in 2000-01.

36.A category structure is provided in the following table and illustrates the major components of the current assessment, together with comments on how the ACT is affected by the application of the different factors.

37.This chapter focuses on those components of the 1999 Review methodology that the ACT wishes to raise with the Commission. In particular, the ACT is seeking that the following components be examined:

the Commonwealth Superannuation Scheme (CSS) adjustment; and
the introduction of a Public Sector Superannuation Scheme (PSS) adjustment.

SUPERANNUATION:

SUMMARY OF THE 1999 REVIEW METHODOLOGY

Component factors assessedACT position

(1) Assessment Structure: Cash Standard, 1996–97 and 1997-98

Scale affected expenditure
(wgt 0.42%) / The ACT is assessed as having positive needs due to its above average wages and salary disability and diseconomies of small scale disability.
Input Costs
Administrative Scale
Superannuation Services (wgt 99.58%) / The ACT is assessed as having negative needs for this category as its adjusted wage and salary related standardised expenditures per capita were lower than the Australian average. The negative needs were, however, partly reduced by the CSS adjustment made for the ACT.
Expenditure Relativities
(2) Assessment Structure: Accrual Standard and Transitional Arrangements, 98-99
Accrued Expenses (wgt 30.40%) / The ACT is assessed as having negative needs for this category as its adjusted wage and salary related standardised expenditures per capita were lower than the Australian average.
Expenditure Relativities
Nominal interest on equalised unfunded liabilities (wgt - 0%) / The ACT is assessed as having zero needs (an equal per capita assessment is applied).
Nominal interest on unequalised unfunded liabilities (wgt 28.65%) / The historical factor is negative for the ACT given that the Territory’s superannuation category factors (averaged over the last 20 years) were below one, although they were partly reduced given the interest rate cost disability faced by the ACT.
Historical Factor
Interest rate cost factor
Outstanding Liabilities (wgt 40.95%) / The historical factor is negative for the ACT.
Historical Factor
(3) Assessment Structure: Accrual Standard and Transitional Arrangements, 99-00
Accrued expenses (wgt 33.10%) / The ACT is assessed as having negative needs for this category as its adjusted wage and salary related standardised expenditures per capita were lower than the Australian average. The negative needs were, partly reduced by the CSS adjustment.
Nominal interest on equalised unfunded liabilities (wgt -1.71%) / The ACT is assessed as having zero needs (an equal per capita assessment is applied).
Nominal interest on unequalised unfunded liabilities (wgt 26.52%) / The historical factor is negative for the ACT as it was assessed as having a relatively smaller size of unfunded disabilities.
Historical Factor
Interest rate factor
Outstanding Liabilities(wgt 42.09%) / The historical factor is negative for the ACT.
Historical Factor
(4) Assessment Structure: Accrual Standard and Transitional Arrangements, 00-01
Accrued expenses (wgt 34.18%) / The ACT is assessed as having negative needs for this category as previously outlined.
Expenditure Relativities
Nominal interest on equalised
Unfunded liabilities (wgt -0.03) / The ACT is assessed as having zero needs (an equal per capita assessment is applied).
Nominal interest on unequalised unfunded liabilities (wgt 23.64%) / The historical factor is negative for the ACT as it was assessed as having a relatively smaller size of unfunded disabilities.
Historical Factor
Interest rate factor
Outstanding Liabilities (wgt 2.21%) / The historical factor is negative for the ACT.
Historical Factor
SUMMARY:
The ACT is assessed as having negative needs for this category as its adjusted wage and salary related standardised expenditures per capita were lower than the Australian average. However, as the phase-in adjustment winds down and the nominal interest on unequalised unfunded liabilities decreases over time, the ACT’s negative needs should reduce.

37.1.1.The ACT, in general, supports the current method of assessment for superannuation liabilities.

37.1.2.However, the ACT considers that the 5% allowance currently provided to the Territory for the Commonwealth Superannuation Scheme (CSS) significantly underestimates the annual cost disability. It should be revised to more accurately reflect the actual liabilities accruing to the ACT.

37.1.3.In addition, the ACT believes that there is a need to take into account the additional costs of the Public Sector Superannuation Scheme (PSS) and the associated liabilities accruing to the ACT in the superannuation assessment.

Superannuation for ACT Government Employees

37.1.4.The ACT participates in two main superannuation schemes for its public sector employees:

the CSS, which is a defined benefits scheme carried over from the period of Commonwealth administration. This scheme has been closed to new employees since 1 July 1990 and at present has approximately 3,800 active ACT Public Sector members and 4,800 members on pensions or with preserved benefits; and

the PSS, which is a defined benefits scheme also carried over from the period of Commonwealth administration. The PSS has been open since 1July1990 under the provisions of the Commonwealth’s Superannuation Act 1990. Currently the PSS has approximately 10,200 active ACT Public Sector members and 6,200 members on pensions or with preserved benefits.

37.1.5.The ACT has been required to meet the employer costs of CSS and PSS benefits accruing to its employees since the inception of selfgovernment. These schemes are legacies of the period of Commonwealth administration and while the ACT is required to meet the schemes’ costs, it has no control over the associated benefits.

37.1.6.Prior to the establishment of the ACT Public Service (ACTPS), staff required for the conduct of the public administration of the ACT were transitional Commonwealth staff provided for in the ACT Self-Government (Consequential Provisions) Act 1988. From 1 July 1994, transitional staff commenced employment under the provisions of the Public Sector Management Act 1994 of the ACT.

37.1.7.Many of the transferred staff were members of the CSS and retained membership as employees of the ACT because, under the provisions of the Superannuation Acts, the ACT is an approved authority. CSS members now make up 28% of the ACTPS and incur some of the highest superannuation costs in Australia, at an average (actuarially determined) employer contribution rate of 24.3% of superannuation salary.

Extent of Disabilities faced by the ACT

37.1.8.Under the current circumstances, the ACT faces large disabilities which are not faced by other States (with the exception of the Northern Territory in regard to its CSS arrangements).

37.1.9.The ACT must contend with the above standard costs of the Commonwealth’s superannuation schemes. These additional costs are illustrated in Table 33.1.

TABLE 33.1 – CSS AND PSS EMPLOYER COSTS AS AT 30 JUNE 2001

No. of employees / Total Active Members Salary
$ / Average Member Salary
$ / Employer Liability
% / Annual Employer Liability
$ / Liability Per Employee
$
CSS / 3,800 / 200,378,648 / 52,731 / 24.3 a / 48,692,011 / 12,814
PSS / 10,165 / 455,469,494 / 44,808 / 10.5 a / 47,824,297 / 4,705
Average / 13,965 / 655,848,142 / 46,964 / 15.3 a / 100,344,766 / 7,185
SG Min. / 13,965 / 656,355,000 / 47,000 / 9.0 / 59,071,950 / 4,230
Calculation of Additional Costs:
CSS / 3,800 / 200,378,648 / 52,731 / 24.3 / 48,692,011 / 12,814
SG CSS / 3,800 / 200,378,648 / 52,731 / 9.0 / 18,034,078 / 4,746
Estimated Additional CSS Costs / 30,657,933 / 8,068
PSS / 10,165 / 455,469,494 / 44,808 / 10.5 / 47,824,297 / 4,705
SG PSS / 10,165 / 455,469,494 / 44,808 / 9.0 / 40,992,254 / 4,033
Estimated Additional PSS Costs / 6,832,042 / 672

a: Five year actuarially determined rates, 1997.

SG Min. is the Superannuation Guarantee prescribed minimum rate of employer contribution.

Source: Superannuation Unit, ACT Department of Treasury, 2002.

Commonwealth Legislation – the Superannuation Acts

37.1.10.Previously, a number of States have argued that the means of reducing high average employer costs is to make employees contribute more towards their superannuation or amend superannuation arrangements to less costly alternatives.

37.1.11.This is not a plausible solution for the ACT, as it funds CSS and PSS membership under the Commonwealth’s Superannuation Acts (1976 and 1990) and does not have the legislative power to amend these Acts.

37.1.12.Furthermore, under the Commonwealth’s Superannuation Guarantee Scheme Guidelines, the ACT can not force its employees to change to lower yielding schemes.

37.1.13.While closure of the PSS would allow the ACT Government more freedom of choice over superannuation policy, which is likely to lead to lower superannuation costs for the Territory, the ACT is unable to deny its existing public servants ongoing access to the CSS and PSS. Similarly, the large CSS costs faced by the ACT will continue for many years to come as members can not be forced from this superannuation scheme.

37.1.14.The Commonwealth Government has sought, for a number of years, to close the PSS to all new members. However, on 8August2001 the Commonwealth’s bill seeking consent to the closure of the PSS was blocked in the Senate. As yet, this bill has not been re-introduced. The Commonwealth in its 2002 Budget has now flagged the closure of the PSS from 1July2003, subject to passage of the amending legislation.

Composition of the ACT Public Service

37.1.15.95% of the ACTPS are members of Commonwealth superannuation schemes. Of these, 67% are members of the PSS and 28% are members of the CSS.

37.1.16.In addition, 28% of the ACTPS has tenure of 10 or more years. On behalf of these employees, the ACT makes employer contributions of 24.3% for CSS members and up to 21% for PSS members. For those with less than ten years of PSS membership, the ACT contributes up to 16% of their superannuation salary. These rates are well above the Superannuation Guarantee prescribed minimum of 9%.

Administration Costs

37.1.17.Unlike the majority of other superannuation schemes, members of the CSS and PSS are not charged administration fees, these costs are borne entirely by employers. The ACT is billed annually, by Comsuper, for CSS and PSS administration costs for the maintenance of contributor accounts and ongoing pension payments, as well as for the processing of benefits.

37.1.18.The ACT will incur administration costs of around $2.5m for 200102, or approximately $98 per member.

37.1.19.The ACT requests that the a disability factor be included in the superannuation assessment to reflect the additional administration costs the ACT must bear as a result of its public servants having access to the CSS and PSS superannuation schemes.

37.1.20.There is a general movement towards superannuation choice within the public sector as a cost-effective alternative to historic higher costing State superannuation schemes. Out in the market the employer contribution rate for most superannuation schemes is defined by the Superannuation Guarantee minimum, currently set at 9%. As evident in Table 33.2, many States are now opting for this level of contribution.

TABLE 33.2 –STATE superannuation Scheme Comparisons

Jurisdiction

/ Scheme / Nominal Employer Contribution
Commonwealth / CSS
PSS
DFRDB
MSBS / 21.9%
14.2%
33.0%
22.3%
ACT / CSS
PSS / 24.3%
Member contribution plus 11.0% (range of 13.0% to 21.0%)
NSW / First State Super / 9% (SG Minimum)
QLD / QSuper
-Defined Benefit
-Accumulation / Member contribution plus 7.75% (range of 9.75% to 15.75%)
Contributing member = member contribution plus 7.75% (range of 9.75% to 15.75%).
Non-contributing member = 9.0% (SG Minimum)
WA / Gold State Super
West State Super / 12.0% (based on 5.0% member contribution)
9.0% (SG Minimum)
SA / Southern State Super / 9.0% (SG Minimum) for member contribution >4.5%
NT / NTSS
NTGPASS
AGEST / -
12.0%
9.0% (SG Minimum)
TAS / Tasmanian Accumulation Scheme /
9.0% (SG Minimum)

Note: The Superannuation Guarantee prescribed minimum (SG Minimum) rate of 9.0% becomes effective as of 1 July 2002.

The employer contributions, where applicable, exclude the productivity payment component of 3.0% p.a. In the ACT’s case, this certainly applies to both the CSS and PSS schemes.

Sources: State Superannuation Scheme Annual Reports, 2000-01.

37.1.20.1.1.1.1.1.1.While the ACT has examined the option of moving to introduce a range of industry based superannuation funds, there are a number of issues unique to Canberra which have prevented this.

Proximity of the Commonwealth and ACT Public Sectors

37.1.20.1.1.1.1.1.2.The close proximity of the Commonwealth and ACT Public Sectors within the ACT, and their interrelationship, lends itself to a high degree of workforce mobility. It is common for public servants to span their careers within both sectors. On this basis, it is more practicable for the ACT to maintain its involvement with the Commonwealth’s superannuation schemes, as both the ACT and Commonwealth would incur additional administration costs associated with the recurrent transferral of funds if they each operated separate schemes. In proportional terms, the diseconomies of small scale faced by the ACT would lead to it bearing far greater costs than the Commonwealth.

37.1.20.1.1.1.1.1.3.In addition to its proximity, the significance of the Commonwealth Public Sector in the ACT [1] requires the ACT Public Sector to offer equivalent employment conditions in order to remain competitive in the local labour market. Subsequently, as long as the Commonwealth maintains the PSS, the ACT has little choice other than to retain the scheme, ensuring a concerted effort to attract and maintain the necessary skilled labour is put in place.

37.1.20.1.1.1.1.1.4.If the ACT moved to minimum guarantee superannuation choice, without a commensurate move by the Commonwealth, the Territory would place itself in an uncompetitive position in attracting new staff. Given that ACTPS pay rates are already lower, on average, than for the Commonwealth, deterioration in superannuation payments would inevitably exacerbate recruitment difficulties.

37.1.20.1.1.1.1.1.5.Diseconomies of small scale rule out the feasibility of the ACT operating its own fund offering competitive benefits. Thus, the ACT’s superannuation policy decisions are constrained by the Commonwealth, and until the Federal Government changes to a more cost effective superannuation policy, such as superannuation choice, it will be necessary for the ACT to uphold its current arrangements.

37.1.20.1.1.1.1.1.6.These issues are unique to the ACT, and are a product of its National Capital status as host to the Commonwealth.

37.1.20.1.1.1.1.1.7.Conversely, in other States, where the private sector dominates the economy, State Government superannuation arrangements need only match private sector alternatives to remain attractive to staff. In most cases this requires an employer contribution rate as prescribed by the Superannuation Guarantee Guidelines (currently set at 9%).

Underestimation of the CSS costs faced by the ACT

37.1.20.1.1.1.1.1.8.Currently, the ACT and NT receive a 5% disability allowance to account for above standard costs of the CSS that they have not been able to reduce.

37.1.20.1.1.1.1.1.9.In the lead up to the finalisation of the ACT’s Main Submission to the 2004 Review, the Commission, at the ACT’s behest, ran a simulation of the superannuation assessment to calculate how much the 5% adjustment was worth to both the ACT and the NT. The Commission estimates that the adjustment is worth $5.3m per annum to the ACT and $15.7m per annum to the NT.

37.1.20.1.1.1.1.1.10.While the ACT supports the assessment of a CSS adjustment to the superannuation assessment for both the ACT and NT, it notes that the current assessment methods:

do not fully compensate either Territory for the full extent of the above standard costs they incur; and
are currently inconsistent in their application to the ACT and NT.

37.1.20.1.1.1.1.1.11.In regard to the first dot point, in light of the earlier evidence put forward by the ACT outlining the high costs of the CSS (Table 33.1), this allowance significantly underestimates the costs accruing to the ACT.

37.1.20.1.1.1.1.1.12.In regard to the second dot point above, the ACT is concerned that the current assessment methods underestimate the costs faced by the ACT, and overestimate the allowance for the NT. A consistent approach does not appear to have been used to derive the disabilities accruing to the ACT and NT.

37.1.20.1.1.1.1.1.13.The bases underpinning this assertion are that:

the NT receives substantially more per active CSS member then the ACT - the current 5% allowance equates to $1,395 per active ACT CSS member and more than $6,000 per active NT CSS member; and
less than 10% of the Northern Territory’s public servants are in the CSS while 95% of ACT public servants are in Commonwealth superannuation schemes.

37.1.20.1.1.1.1.1.14.If the unit costs for CSS members are similar in the ACT and NT, it could be expected that an allowance of 5% for both States is inconsistent given the proportion of public servants belonging to the CSS. The current allowance partially reflects the higher unit costs associated with the CSS for the ACT and NT, but it does not reflect the demand side of the equation.

37.1.20.1.1.1.1.1.15.To overcome this, the ACT suggests that the following model be incorporated into the assessment:

Above Standard Superannuation Unit Costs / X / Number of Active CSS Members / = / Allowance

37.1.20.1.1.1.1.1.16.Given that most States are heading towards Superannuation Choice and that, under different circumstances, the ACT would also adopt this approach, it is reasonable to assume that the Superannuation Guarantee minimum (SG minimum) level of contribution reflects the standard.

37.1.20.1.1.1.1.1.17.Based on this approach, as evident in Table 33.1, the ACT incurs $30,657,933 for its public servants in the CSS. Currently, under the 5% allowance, the ACT only receives $5.3m for the above standard costs of the CSS. This is approximately 1/6 of the ACT’s actual additional CSS costs.