PSS and CSS

Long Term Cost Report

A report on the long term cost of the

Public Sector Superannuation Scheme and the

Commonwealth Superannuation Scheme

2005

Prepared by:

Mercer Human Resource Consulting Pty Limited

Sydney

November 2005

2005

Public Sector Superannuation Scheme

and

Commonwealth Superannuation Scheme

(PSS and CSS)

A report on the long-term costs

carried out by Mercer Human

Resource Consulting Pty Limited

using data as at 30June2005


CONTENTS

1.Executive Summary

2.Introduction......

3.The PSS and CSS

4.Membership and Data

5.Valuation Methodology

6.Assumptions......

7.Projected Employer Costs

8.Unfunded Liability

9.Notional Employer Contribution Rates

Appendix ASummary of Benefit Provisions...... 33

Appendix BDetailed Assumptions

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1.Executive Summary

We are pleased to present this report on the actuarial investigation of the long term costs 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 30June2005.

The previous actuarial investigation of the long term costs of the PSS and CSS was carried out by Mercer Human Resource Consulting (Mercer) in 2002 based on data as at 30June2002.

Results Produced in this Report

1.1The main aim of this investigation is to identify the long-term cost of the PSS and CSS that will be charged to the Consolidated Revenue Fund (CRF). The long-term cost has been estimated in three ways:

  • Projected Employer Costs

We have projected the outlay in respect of PSS and CSS benefits in each of the next 40 years and expressed these amounts as a percentage of projected Gross Domestic Product (GDP).

  • Unfunded Liability

We have estimated the Unfunded Liability of the PSS and CSS as at 30June2005. The Unfunded Liability represents an estimate of the present value of the total accrued superannuation liabilities of the Australian Government in respect of service up to 30June2005 that will be charged to the CRF.

  • Notional Employer Contribution Rates

These are the employer contribution rates necessary to ensure that employer-financed benefits from the PSS and CSS would remain fully funded in three years time, if they were fully funded now. The contribution rates are reduced to allow for any additional lump sums paid in the previous year under the expanded agency assessment framework.

Results – Projected Employer Costs

1.2The projected Employer Costs are expected to reduce as a percentage of projected GDP from 0.36% in the year ending 30June2006 to 0.14% in the year ending 30June2045.

Results – Unfunded Liability

1.3The accrued Unfunded Liability is summarised in the following table:

Accrued Unfunded Liability ($ billions)
Report as at / PSS / CSS / Combined
30 June 1999 / 5.7 / 40.3 / 46.0
30 June 2002 / 9.1 / 49.3 / 58.4
30 June 2005 / 13.8 / 50.6 / 64.4

1.4The accrued Unfunded Liability has been calculated using actuarial assumptions that differ from those used at the last actuarial investigation. The assumptions have been developed based on current economic expectations and the actual demographic experience of the schemes particularly over the three years to 30June 2005.

1.5The accrued Unfunded Liability as at 30June2005 for current members, preserved members and pensioners has been calculated to be $64.4billion, which is 7.8% of current GDP. The corresponding figure as at 30June2002 was $58.4billion, which was 8.4% of GDP as at that date.

1.6Total Unfunded Liability is expected to reduce as a percentage of projected GDP from 7.8% as at 30June2005 to 1.3% as at 30June2045, mainly due to the closure of the PSS from 1July2005.

1.7We have projected the accrued Unfunded Liability as at 30June2002 to 30June2005 on the basis of the actuarial assumptions used in the 30June2002 actuarial investigation and assuming a constant number of contributors in aggregate for the PSS and CSS. The projected accrued Unfunded Liability on this basis as at 30June2005 is $65.3 billion. The difference between the projected and actual unfunded liabilities is mainly due to differences between the actual experience of the schemes over the period and assumptions made. These differences included:

  • salary increases being higher than expected;
  • average notional crediting interest rates as implied by the exit rate at 30June2005 being higher than expected for both the PSS and CSS;
  • the number of new PSS contributors being higher than expected;
  • the overall liability in respect of net exits from the schemes being lower than expected; and
  • all outstanding deferred transfer values for the Telstra Superannuation Fund and the Australia Post Superannuation Fund being fully paid by the Australian Government during the period 1July2002 to 30June2005.

In addition part of the difference between the projected and actual unfunded liabilities is due to the assumptions adopted for the 2005 investigation being different from those adopted for the 2002 investigation.

Results – Notional Employer Contribution Rates

1.8The Notional Employer Contribution Rates (NECRs) for the two schemes (including contributions towards the 3% productivity superannuation benefit) are summarised in the following table:

Notional Employer Contribution Rates
(% of Superannuation Salaries)
Report as at / PSS / CSS / Combined
30 June 1999 / 14.2% / 21.9% / 17.2%
30 June 2002 / 15.4% / 28.3% / 19.3%
30 June 2005 / 15.6% / 28.2% / 18.3%

1.9The NECRs as at 30June2005, excluding the employer productivity contribution rate of approximately 3%, are:

PSS / CSS
30 June 2005 / 12.6% / 25.2%

The CSS rate of 25.2% of superannuation salaries is the actual CSS 2005 rate for those agencies with separate productivity superannuation arrangements.

1.10The combined rate in Section 1.8 broadly represents the cost to the Australian Government of the superannuation benefits that are accruing for employees at the present time.

1.11The contribution rate for the PSS as at 30 June 2005 has increased by 0.2% of superannuation salaries compared to the rate as at 30 June 2002. The contribution rate for the CSS as at 30June2005 has decreased by 0.1% of superannuation salaries compared to the rate as at 30 June 2002.

Scheme Membership

1.12The following tables summarise the membership of the schemes since 1999.

Contributing Membership
PSS / CSS / Total
30June1999 / 106,141 / 52,880 / 159,021
30June2002 / 129,683 / 39,986 / 169,669
30June2005 / 154,897 / 32,006 / 186,903
Preserved Membership
PSS / CSS / Total
30June1999 / 51,176 / 12,521 / 63,697
30June2002 / 76,357 / 13,969 / 90,326
30June2005 / 85,709 / 12,227 / 97,936
Pensioners
PSS / CSS / Total
30June1999 / 4,950 / 81,415 / 86,365
30June2002 / 7,598 / 83,370 / 90,968
30June2005 / 10,912 / 85,028 / 95,940
Dependent Pensioners
PSS / CSS / Total
30June1999 / 210 / 26,962 / 27,172
30June2002 / 331 / 27,930 / 28,261
30June2005 / 507 / 28,560 / 29,067

1.13In both the PSS and CSS fewer contributory members exited during the period from 1July2002 to 30June2005 than anticipated in the actuarial assumptions. This, in conjunction with a greater than anticipated number of new members joining the PSS has resulted in the overall membership at 30June2005 being higher than expected.

1.14The number of CSS preserved members at 30June2005 was lower than expected for two main reasons. During the period from 1July2002 to 30June2005:

  • there were fewer than expected contributor exits; and
  • a greater than expected number of preserved members became pensioners.

The number of PSS preserved members at 30June2005 was also lower than expected mainly due to a higher than expected number of members becoming pensioners.

1.15The number of PSS and CSS pensioners at 30June2005 was higher than anticipated due to a greater than expected number of preserved members becoming pensioners during the period from 1July2002 to 30June2005.

Methodology

1.16For the purposes of this actuarial investigation we have used the method adopted for the 2002 actuarial investigation (refer Section 5).

1.17The investigation has been performed having regard to all relevant legislation that has been enacted.

Economic Assumptions

1.18The key economic assumptions adopted for this investigation are shown in the table below. The assumptions adopted for the previous investigation are shown for comparative purposes.

Item / 2005 Actuarial Investigation / 2002 Actuarial Investigation
CPI Increases / 2.5% per annum / 2.5% per annum
Investment Returns / 6.0% per annum (nominal)
3.5% per annum (real) / 6.0% per annum (nominal)
3.5% per annum (real)
General Salary Increases / 4.0% per annum (nominal)
1.5% per annum (real) / 4.0% per annum (nominal)
1.5% per annum (real)
GDP Increases* / 2.3% per annum (real) / 2.1% per annum (real)

* The GDP increase rate shown is the average of the annual rates over the forty year period from the date of each investigation. Full details are shown in Appendix B

1.19Of the economic assumptions only the GDP increase assumption is different between the 2002 investigation and the 2005 investigation.

1.20As the schemes are unfunded, our view is that the best determinant of the investment return is the expected return on government bonds over the long term, as this would be the cost to the Australian Government were they to “fund” the schemes via borrowings. Based on historic margins between the yield on Government bonds and the rate of inflation we believe that a real yield of 3.5% per annum (6% per annum nominal) continues to be appropriate.

Demographic Assumptions

1.21The demographic assumptions have been reviewed based on the experience of the schemes over the three years to 30June2005. The most significant changes are:

  • Reduction to the assumed mortality of pensioners; and
  • Reduction in the assumed proportions of members married.

1.22In total the changes in assumptions have resulted in a decrease in the combined Unfunded Liability of the PSS and CSS of approximately $130 million as at 30June2005.

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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 estimate has been determined based on an actuarial investigation of the schemes as at 30June2005.

2.2This investigation has been carried out by Martin Stevenson FIAA FIA, of Mercer Human Resource Consulting (Mercer) at the request of the Department of Finance and Administration. This report has been peer reviewed by David Knox FIAA of Mercer.

2.3This report satisfies the requirements of Professional Standard No. 401 of The Institute of Actuaries of Australia to the extent that the Standard is relevant to the investigation. Professional Standard No. 401 relates to the preparation of reports commenting on the financial condition of defined benefit superannuation funds.

2.4Martin Stevenson FIAA FIA and Tony Snoyman FIAA of Mercer carried out the previous actuarial investigation of the schemes as at 30June2002. The results of that investigation were set out in a report dated February2003.

Purpose of the Investigation

2.5The main aim of this investigation is to identify the long-term cost of the PSS and CSS that will be charged to the Consolidated Revenue Fund (CRF). The long term cost has been estimated in three ways.

  • Projected Employer Costs

We have projected the Australian Government’s outlay in respect of superannuation benefits in each of the next 40 years and expressed these amounts as a percentage of projected Gross Domestic Product (GDP).

  • Unfunded Liability

We have estimated the Unfunded Liability of the PSS and CSS as at 30June2005. The Unfunded Liability represents an estimate of the present value of the total accrued superannuation liabilities of the Australian Government in respect of service up to 30June2005 that will be charged to the CRF.

  • Notional Employer Contribution Rates

These are the employer contribution rates necessary to ensure that employer-financed benefits from the PSS and CSS would remain fully funded in three years time, if they were fully funded now. The contribution rates are reduced to allow for any additional lump sums paid in the previous year under the expanded agency assessment framework.

2.6In identifying the long-term cost of superannuation benefits provided by the Australian Government in the 2002 Long Term Cost Report, allowance was made for the “deferred transfer values” payable in the future by the Australian Government in respect of transferred members.
All outstanding deferred transfer values in respect of Telstra Super and the Australia Post Superannuation Fund were fully paid by the Australian Government during the three years 1July2002 to 30June2005. There were no outstanding deferred transfer values as at 30 June 2005.

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3.The PSS and CSS

Introduction

3.1The PSS was established on 1July1990 on the basis of a Policy Statement (“the Reform Statement”) made by the then Minister for Finance on 15October1989. The Superannuation Act 1990 and a Trust Deed and Rules govern its operations. The PSS was closed to new members from 1July2005. Employees of Australian Government agencies prior to 1July2005 were eligible for membership of the PSS.
Most employees of Australian Government agencies who commence employment on or after 1July2005 are eligible to join the Public Sector Superannuation Accumulation Plan (PSSAP) that was established on 1July2005.

3.2The CSS was introduced on 1July1976. Its operations are governed by the Superannuation Act 1976, as amended, and associated regulations. The CSS has been closed to new members since 1July1990. All CSS contributors at 1July1990 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 Australian Government employees who were members on 30June1990 and who have not transferred to the PSS.

3.3Prior to July1976 the superannuation of Australian Government public servants was covered by the Superannuation Act 1922. There are no longer any members contributing under the Superannuation Act 1922. However, some pensioners and preserved members remain entitled to benefits under this Act and the liabilities in respect of these members are included in the CSS Unfunded Liability.

Benefits

3.4The PSS and CSS are defined benefit schemes. The PSSAP is an accumulation scheme.

3.5In the PSS the primary benefit is expressed as a lump sum based on a multiple of final average salary that is related to a member’s average contribution rate and total service. On exit, the benefit may be wholly or partially taken as an indexed pension.

3.6The CSS provides a retirement benefit equal to the sum of:

  • employer-financed indexed pension – being a percentage of final salary based on the period of contributory service and discounted for early retirement before age 65;
  • productivity component – made up of accumulated productivity contributions; and
  • member-financed benefit – made up of accumulated basic and supplementary contributions.

The member can elect to take the productivity component and member-financed benefit either as a non-indexed pension or a lump sum.

3.7Further details of the benefits provided by the PSS and CSS are set out in Appendix A.

Contributions

3.8Generally agencies pay productivity superannuation contributions in respect of their employees to the PSS or CSS. However, there are some agencies that have made alternative arrangements in respect of their CSS members.

3.9Member and productivity superannuation contributions paid to the PSS and CSS are invested by the Trustees of the two schemes, the PSS Board and the CSS Board respectively. Prior to 30June2003 these contributions were accumulated at a crediting rate periodically declared by the Trustees. The crediting rate was based on the investment returns achieved by the scheme assets. With effect from 1July2003 the Trustees suspended allocation of earnings through annual crediting rates. Earnings after 30June2003 are allocated through the exit rate, which is the total earnings rate from 1July2003 to the date of exit.

3.10The 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 CSS ($ millions)
Date / PSS / CSS / Total
30June1999 / 3,481 / 5,591 / 9,072
30June2002 / 4,468 / 5,337 / 9,805
30June2005 / 7,583 / 6,015 / 13,598

Changes to Benefits Since 2002

3.11There have been no material changes to the benefits provided by the PSS and CSS since the previous actuarial investigation as at 30June2002.

3.12Changes have been made to the PSS and CSS exit rate and crediting rate policies. With effect from 1July2003 the Trustees suspended allocation of earnings through annual crediting rates. Instead earnings are allocated through the exit rate. These changes have been made to enable the introduction of a cash investment option.

3.13With the introduction of Government co-contributions the schemes now accept co-contributions. These are treated as fully funded additional member accounts and therefore have no impact on the Unfunded Liability.

4.Membership and Data

4.1Data relating to the membership of the PSS and CSS was provided for this actuarial investigation by ComSuper, the schemes’ administrator, on behalf of the PSS and CSS Boards. Data provided included:

  • Details of contributory members, pensioners and preserved members of the PSS and CSS as at 30June2005; and
  • Details of Exits by contributory members and preserved members from the PSS and CSS during the three year period from 1July2002 to 30June2005.

A range of validity checks were conducted by ComSuper on the data prior to it being provided to Mercer.

4.2A range of checks have been carried out by our firm to test the integrity of the data and the variation reports produced by ComSuper. In addition, a reconciliation of the current data with the data utilised for the previous investigation as at 30June2002 has been carried out.

4.3We are satisfied that the data is sufficiently accurate for the purposes of this report.

4.4The tables below summarise the total membership of the PSS and CSS as at 30June2005.

PSS Membership as at 30June2005
Male / Females / Total
Number of Contributors / 65,341 / 89,556 / 154,897
Total Salaries of Contributors / $3,954m / $4,817m / $8,771m
Number of Preserved
Members / 35,093 / 50,616 / 85,709
Number of Age Pensioners / 5,062 / 4,440 / 9,502
Number of Invalidity Pensioners / 718 / 692 / 1,410
Number of Reversionary Pensioners / 161 / 346 / 507
CSS Membership as at 30June2005
Male / Females / Total
Number of Contributors / 21,696 / 10,310 / 32,006
Total Salaries of Contributors / $1,650m / $685m / $2,335m
Number of Preserved
Members / 8,752 / 3,475 / 12,227
Number of Age Pensioners / 48,787 / 16,060 / 64,847
Number of Invalidity Pensioners / 15,221 / 4,960 / 20,181
Number of Reversionary Pensioners / 1,249 / 27,311 / 28,560

4.5The combined number of contributors to the schemes reduced significantly over the six years to 30June1999 but increased in the most recent six years to 30June2005. This can be seen from the following table:

Movements in Contributors
PSS / CSS / Total
30June1993 / 97,891 / 109,591 / 207,482
30June1996 / 115,873 / 76,864 / 192,737
30June1999 / 106,141 / 52,880 / 159,021
30June2002 / 129,683 / 39,986 / 169,669
30June2005 / 154,897 / 32,006 / 186,903

4.6Between 1July2002 and 30June2005 the number of PSS contributors increased by 19.4%.

4.7Between 1July2002 and 30June2005 the number of CSS contributors reduced by 20.0%.

5.Valuation Methodology

5.1The main aim of this investigation is to identify the long-term cost of the PSS and CSS that will be charged to the Consolidated Revenue Fund (CRF). The long term cost has been estimated in three ways: