1999
Public Sector Superannuation Scheme
and
Commonwealth Superannuation
Scheme
(PSS and CSS)
A report on long-term costs
carried out by Towers Perrin
using data as at 30 June 1999
© Commonwealth of Australia 2000
ISBN 0642 44430 7
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Printed by Canprint Communications Pty Ltd Fyshwick ACT
Produced by Towers Perrin
CONTENTS
Page
Chapter 1:Executive Summary
Chapter 2:Introduction
Chapter 3:The PSS and the CSS
Chapter 4:Membership and Data
Chapter 5:Valuation Methodology
Chapter 6:Assumptions
Chapter 7:Projection of Actual Commonwealth Employer Costs
Chapter 8:Unfunded Liability
Chapter 9:Notional Commonwealth Employer Contribution Rates
Chapter 10:Clawback
Appendices:
ASummary of Benefit Provision29
BDetailed Assumptions36
Chapter 1:Executive Summary
I am pleased to present this report on the actuarial investigation of the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS) prepared at the request of the Department of Finance and Administration. This investigation has been carried out based on membership data as at 30 June 1999.
The previous investigation was carried out by the then Australian Government Actuary based on data as at 30 June 1996.
Results Produced In This Report
1.1The main aim of this investigation is to identify the long term cost of the PSS and the CSS that will be charged to the Consolidated Revenue Fund (CRF). The long term cost has been estimated in three ways:
Projection of Actual Commonwealth Employer Costs
I have projected the actual Commonwealth outlay in respect of superannuation benefits in each of the next 45 years and expressed these amounts as a percentage of projected Gross Domestic Product (GDP).
Unfunded Liability
I have estimated the total accrued superannuation liabilities of the Commonwealth in respect of service up to 30 June 1999 for which no assets are held.
Notional Commonwealth Employer Contribution Rate
This is the Commonwealth employer contribution rate necessary to ensure that employer financed benefits would remain fully funded in three years time, if they were fully funded now.
Results of the Investigation
Projection of Actual Commonwealth Employer Costs
1.2Actual Commonwealth Employer Costs are expected to reduce as a percentage of projected GDP from 0.4% in 1999 to 0.2% in 2044.
Present Value of Unfunded Liability
1.3The accrued Unfunded Liability at 30 June 1999 for current members and pensioners has been calculated to be $46 billion, which is 8% of current GDP.
1.4The corresponding figure at 30 June 1996 was $42 billion, which was 9% of GDP at that date.
1.5I have also developed a graph showing that the Unfunded Liability reduces as a percentage of projected GDP over the next 45 years.
Notional Commonwealth Employer Contribution Rates
1.6The Notional Commonwealth Employer Contribution Rates for the two schemes are shown below.
NOTIONAL COMMONWEALTH EMPLOYER CONTRIBUTION RATEContribution as a percentage of
Superannuation Salary
Report as at / CSS / PSS / Combined
30 June 1993 / 23.1% / 14.0% / 19.1%
30 June 1996 / 21.9% / 13.1% / 16.9%
30 June 1999 / 21.9% / 14.2% / 17.2%
Notes:All the rates shown in the above Table include contributions towards the 3% productivity superannuation benefit. The actual CSS 1999 rate for those agencies with separate productivity superannuation arrangements was 18.9% of superannuation salaries.
1.7The combined rate represents the cost to the Commonwealth of the superannuation benefits which are accruing for Commonwealth employees at the present time.
1.8The contribution rate for the CSS at 30 June 1999 is unchanged from that calculated at the last review.
1.9The contribution rate for the PSS has increased by 1.1% of Superannuation Salary. The reasons for this increase are as follows:
The PSS rate at 30 June 1999 has been calculated based on the method adopted by the Australian Government Actuary and other organisations appointed by the Department of Finance and Administration for the most recent round of agency assessments. The 1996 rate was calculated based on a different method.
The assumptions adopted for the 1999 review are different to those adopted for the 1996 review. In particular, I have increased the percentage of members assumed to retain their benefits within the schemes after ceasing employment. Further, I have increased the percentage of members assumed to take their PSS benefit as a pension.
Scheme Membership
1.10The following table summarises the membership of the schemes since 1993.
CONTRIBUTING MEMBERSHIPCSS / PSS / TOTAL
30 June 1993 / 109,591 / 97,891 / 207,482
30 June 1996 / 76,864 / 115,873 / 192,737
30 June 1999 / 52,880 / 106,141 / 159,021
1.11There have been a number of retrenchments during the three years to 30 June 1999. This has resulted in a decrease in total contributing membership.
Methodology
1.12All Commonwealth agencies are being individually assessed to identify the cost of providing superannuation benefits to their employees who are members of the CSS or the PSS. These assessments have been undertaken by the Australian Government Actuary and other organisations appointed by the Department of Finance and Administration. These assessments are known as agency assessments.
1.13For the purposes of this investigation, I have used the method adopted for the most recent round of agency assessments.
1.14This method is slightly different to that adopted for the 1996 investigation carried out by the Australian Government Actuary. It results in a slightly higher Notional Commonwealth Employer Contribution Rate for the PSS than would the application of the same method as was used for the 1996 investigation.
Assumptions
1.15The key financial assumptions adopted for this review are shown in the table below. The assumptions adopted for the previous review are shown for comparison purposes.
Item / Assumption / Previous ReviewCPI Increases / 3.5% per annum / 4.0% per annum
Investment Returns / 3.5% per annum (real) / 3.5% per annum (real)
General Salary Increases / 1.5% per annum (real) / 1.5% per annum (real)
GDP Increases / 2.5% per annum (real) / 2.5% per annum (real)
1.16The differences between the key financial assumptions at 1999 are the same as the corresponding differences in 1996. Therefore, the change in assumption relating to CPI increases will not lead to a material change in the results of the investigation.
1.17I have made a few changes to the assumptions relating to the future decisions of the members of the schemes. The significant changes relate to the number of members who retain their benefits within the schemes and the percentage of PSS benefits that are taken as a pension.
1.18In the case of the PSS, I have assumed that 35% of all members who resign will retain their member accumulation within the scheme. The corresponding assumption made in the previous report was that 30% of males and 25% of females would do so.
1.19In the case of the CSS, I have assumed that 75% of the total benefit of withdrawing males and females will be retained within the CSS. The assumption made in preparing the previous report was that 65% of the benefits of males and 50% of the benefits of females would be retained within the CSS.
1.20Based on the experience over the last three years, I have assumed that, on average, 40% of all eligible PSS lump sum benefits will be converted to pensions (compared to 30% assumed in the previous report).
1.21These changes in assumptions have resulted in an increase in the PSS Notional Commonwealth Employer Contribution Rate.
Clawback
1.22The liabilities of the PSS and the CSS form part of the Commonwealth’s overall liabilities. If the Commonwealth did not provide these benefits, then it would incur increased Age Pension outlays and reduced taxation receipts. This theoretical impact on the Unfunded Liability is referred to as clawback.
1.23The estimation of clawback presents special problems. As well as basic assumptions that current taxation and social security legislation will remain in a generally unchanged format, assumptions must be made about:
future benefit levels; and
the saving and spending behaviour of public servants.
1.24Clawback is estimated to be $17 billion as at 30 June 1999. This estimate is quite sensitive to the assumptions, and extremely subjective in nature. Therefore, this estimate of clawback should be used with caution.
Chapter 2:Introduction
Background
2.1This report estimates the long term cost of providing superannuation benefits to members of the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS). The estimates have been determined based on an actuarial investigation of the schemes as at 30 June 1999.
2.2This investigation has been carried out by Dr Andrew Goddard, FIAA, FIA of Towers Perrin at the request of the Department of Finance and Administration.
Purpose of the Investigation
2.3The main aim of this investigation is to identify the long term cost of the PSS and the CSS that will be charged to the Consolidated Revenue Fund (CRF). The long term cost has been estimated in three ways:
Projected Actual Commonwealth Employer Costs
I have projected these costs over the next 45 years and expressed them as a percentage of projected Gross Domestic Product.
Unfunded Liability
I have estimated the total accrued superannuation liabilities of the Commonwealth in respect of service up to 30 June 1999 for which no assets are held.
Notional Commonwealth Employer Contribution Rate
This is the Commonwealth employer contribution rate necessary to ensure that employer financed benefits would remain fully funded in three years time, if they were fully funded now.
2.4In identifying the long term cost of superannuation benefits provided by the Commonwealth, allowance has been made for the future transfer values payable by the Commonwealth to the superannuation schemes of Telstra, Australia Post and AirServices Australia. These transfer values are in respect of Commonwealth liabilities for benefits previously accrued in the CSS by employees of these organisations.
2.5The previous actuarial investigation of the schemes was carried out as at 30 June 1996 by the then Australian Government Actuary, Mr Craig Thorburn, FIAA. The results of that investigation were set out in a report dated June 1997 (the previous report).
Chapter 3:The PSS and the CSS
3.1The PSS was established on 1 July 1990 on the basis of a Policy Statement (the Reform Statement) made by the then Minister for Finance on 15 October 1989. Its operations are governed by the Superannuation Act 1990 and a Trust Deed and Rules. Employees of Commonwealth agencies are eligible for membership of the PSS. All permanent employees of Commonwealth agencies, except where agencies have other approved superannuation arrangements, must participate in the PSS.
3.2The CSS was introduced on 1 July 1976. Its operations are governed by the Superannuation Act 1976, as amended, and associated regulations. The CSS has been closed to new members since 1 July 1990. All CSS contributors at 1 July 1990 were given the option of transferring to the PSS. A further option to transfer to the PSS was provided in 1996 for a limited period of time. The current membership of the CSS covers all Commonwealth employees who were members on 30 June 1990 and who did not transfer to the PSS.
3.3Prior to July 1976 the superannuation of Commonwealth public servants was covered by the Superannuation Act 1922. Currently there are no members contributing under the Superannuation Act 1922. However, some pensioners and deferred beneficiaries remain entitled to benefits under this Act and the liabilities in respect of these beneficiaries are included in the CSS Unfunded Liability.
3.4The PSS and the CSS are defined benefit schemes. In the PSS, the primary benefit is expressed as a lump sum based on a multiple of final average salary that is related to member average contribution rate and total service. On exit, the benefit may be wholly or partially taken as an indexed pension.
3.5The CSS provides an indexed pension and a lump sum benefit. The indexed pension is based on a percentage of final salary and total service. The lump sum benefit, which may be taken as a non-indexed pension, is the sum of:
the accumulated value of member contributions paid by the member; plus
the accumulated value of productivity superannuation contributions paid by the employer in respect of the member.
3.6Generally, agencies pay productivity superannuation contributions in respect of their employees to the PSS or the CSS. However, there are some agencies that have made alternative arrangements in respect of their CSS members.
3.7Member and productivity superannuation contributions paid to the PSS and the CSS are invested by the trustees of the two schemes, the PSS Board and the CSS Board respectively (the Trustees). These contributions are accumulated at an interest rate (based on the investment returns achieved by the scheme assets) periodically declared by the Trustees.
3.8The PSS and CSS are partly funded to the extent that real assets are held in respect of member contributions and productivity superannuation contributions. These assets, as appearing in the reports of the PSS Board and the CSS Board, were:
ASSETS of the PSS and the CSS ($Millions)Date / PSS / CSS / TOTAL
30 June 1996 / 2,076 / 4,870 / 6,946
30 June 1999 / 3,481 / 5,591 / 9,072
Changes to Benefits Since 1996
3.9The introduction of the surcharge legislation from August 1996 has increased the tax applicable to employer financed benefits in respect of some members of the PSS and the CSS. As the surcharge is deducted from each affected member’s benefits, it is unnecessary to factor this into the valuation of the liabilities.
3.10There have been no other changes to the benefits provided by the PSS and the CSS since the previous report as at 30 June 1996.
3.11Details of the benefits provided by the PSS and the CSS are set out in Appendix A.
Chapter 4:Membership and Data
4.1Data relating to the membership of the PSS and the CSS was provided by ComSuper, on behalf of the PSS and CSS Boards, the schemes’ administrator, for the purposes of this investigation. Data provided included:
contributory members, pensioners and deferred beneficiaries of the PSS and the CSS as at 30 June 1999; and
exits from the PSS and the CSS during the three years to 30 June 1999.
4.2Detailed checks have been carried out to test the integrity of the data. In addition, a detailed reconciliation of the current data with the data utilised for the previous investigation as at 30 June 1996 has been carried out.
4.3I am satisfied that the data is sufficiently accurate for the purposes of this report.
4.4The Tables below summarise the total membership of the CSS and the PSS as at 30 June 1999.
CSS MEMBERSHIP as at 30 JUNE 1999Male / Females / Total
Number of Contributors / 36,616 / 16,264 / 52,880
Salaries – Total
– Average / $2,052 m
$56,055 / $777 m
$47,751 / $2,829 m
$53,501
Number of Preserved Beneficiaries / 9,172 / 3,349 / 12,521
Number of Age Pensioners / 43,356 / 12,561 / 55,917
Number of Invalidity Pensioners / 20,099 / 5,399 / 25,498
Number of Reversionary Pensioners / 1,034 / 25,928 / 26,962
PSS MEMBERSHIP as at 30 JUNE 1999
Male / Females / Total
Number of Contributors / 45,933 / 60,208 / 106,141
Salaries – Total
– Average / $2,063m
$44,918 / $2,404m
$39,936 / $4,467m
$42,092
Number of Preserved Beneficiaries / 21,057 / 30,119 / 51,176
Number of Age Pensioners / 2,505 / 1,775 / 4,280
Number of Invalidity Pensioners / 346 / 324 / 670
Number of Reversionary Pensioners / 76 / 134 / 210
4.5The number of contributors to the schemes has reduced significantly over the last six years as can be seen from the following table:
MOVEMENTS IN CONTRIBUTING MEMBERSHIPCSS / PSS / TOTAL
30 June 1993 / 109,591 / 97,891 / 207,482
30 June 1996 / 76,864 / 115,873 / 192,737
30 June 1999 / 52,880 / 106,141 / 159,021
4.6Since 1996 the number of CSS contributory members has reduced by 31%.
4.7The number of PSS contributory members has reduced by 8% since 1996.
4.8There have been a large number of retrenchments affecting the membership of both the PSS and the CSS during the last three years.
Chapter 5:Valuation Methodology
5.1The main aim of this investigation is to identify the long term cost of the PSS and the CSS that will be charged to the Consolidated Revenue Fund (CRF). The long term cost has been estimated in three ways:
Projected Actual Commonwealth Employer Costs
Unfunded Liability
Notional Commonwealth Employer Contribution Rate
5.2This section of the report describes the methodology adopted in determining the above estimates.
Actual Commonwealth Employer Costs
5.3When a member becomes entitled to a benefit from the PSS or the CSS, the member’s accumulation accounts (ie funded member and productivity contributions plus interest) are paid by the Trustees of the schemes to the CRF. The total benefit payment to the member is then made from the CRF.
5.4The indexed pension benefit from the CSS is therefore financed from the CRF on an unfunded basis. Similarly the benefit from the PSS after deducting the accumulated value of the member contributions and productivity superannuation contributions is also financed from the CRF on an unfunded basis.
5.5Hence, the Actual Commonwealth Employer Cost in each year is defined as being as follows:
Productivity superannuation contributions paid by the employer to the PSS and CSS funds; plus
benefit payments made by the CRF (including payments made under the Superannuation Act 1922 and transfer values to the superannuation funds of Telstra, Australia Post and AirServices Australia); less
benefit payments made from the PSS and CSS funds to the CRF.
5.6I have calculated the projected Actual Commonwealth Employer Cost (as defined above) over the next 45 years. This has been done by projecting the membership into the future based on the assumptions set out in Chapter 6 relating to the level of future salary increases, the timing and nature of exits from the schemes and the profile of new entrants to the PSS.
Unfunded Liability
5.7A part of each member’s benefit from the PSS and the CSS is paid from the CRF on an unfunded basis. These benefits represent the unfunded superannuation liabilities of the Commonwealth.
5.8Chapter 8 of this report sets out the Unfunded Liability of the Commonwealth as at 30 June 1999. I have estimated the value of the Unfunded Liability based on the method adopted for the Commonwealth agency assessments. The method is a variant of the Projected Unit Credit Method and assumes that all unfunded benefits accrue uniformly over total service.
5.9The steps involved in this process are as follows:
The membership of each scheme as at 30 June 1999 is projected into the future based on assumptions relating to future salary growth and rates of exit of members (as set out in Chapter 6). No allowance is made for new entrants in this process.
The total value of unfunded benefits payable to the projected exits in each future year is determined.