Department of Finance and Deregulation

PSS and CSS Long Term Cost Report 2011

A report on the long term cost of the
Public Sector Superannuation Scheme and the Commonwealth Superannuation Scheme
Prepared by Mercer Consulting (Australia) Pty Ltd
using data as at 30 June 2011

FINANCIAL MANAGEMENT GROUP

Mercer Consulting (Australia) Pty Ltd

ABN 55 153 168 140 AFS Licence # 411770

Darling Park Tower 3

201 Sussex Street Sydney NSW 2000

GPO Box 9946 Sydney NSW 2001

+61 2 8864 8888

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© Commonwealth of Australia 2012

Department of Finance and Deregulation

(Financial Management Group)

ISBN 978-1-922096-03-6 (Print)

ISBN 978-1-922096-04-3 (Online)

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Contents

1.Executive Summary......

2.Scheme Information and Assets......

3.Membership and Data......

4.Assumptions......

5.Unfunded Liability......

6.Projected Outlays......

7.Notional Employer Contribution Rates......

8.Sensitivity Analysis......

Appendix A: Summary of Benefit Provisions......

Appendix B: Detailed Assumptions......

Appendix C: Actuary’s Certification......

1

MERCER

1

Executive Summary

1.1.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 Deregulation. This report has been carried out based on membership data as at 30June2011.

Previous PSS and CSS Long Term Report

1.2.The previous actuarial investigation into the long term costs of the PSS and CSS was undertaken by Mercer Consulting (Australia) Pty Limited, formerly known as Mercer(Australia)Pty Ltd, based on data as at 30June2008. The outcomes of this investigation are outlined in the PSS and CSS Long Term Cost Report 2008 (2008 Report).

Purpose of the Report

1.3.This report estimates the long term cost of providing superannuation benefits to members of the PSS and the CSS. The scheme costs have been estimated in three ways:

  • Unfunded Liability;
  • Projected Outlays; and
  • Notional Employer Contribution Rates.

Unfunded Liability

1.4.The accrued Unfunded Liability as at 30June2011 for current members in respect of service up to 30June2011, preserved members and pensioners has been calculated to be $93.0billion. This represents an estimate of the present value of the superannuation liability less the fair value of scheme assets.

1.5.A breakdown of the Unfunded Liability by scheme and prior years estimates are outlined below:

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
30 June 2008 / 20.9 / 59.2 / 80.1
30 June 2011 / 33.1 / 59.9 / 93.0

Note:The prior year figures have not been adjusted to 2011 dollars.

1.6.The 2008 Report projected that the Unfunded Liability would be $88.1 billion as at 30June2011, approximately $4.9 billion less than the current estimate of $93 billion, due to factors including:

  • fewer than expected contributors ceasing employment;
  • average investment returns (credited to members’ accounts) being lower than expected for both the PSS and CSS;
  • salary increases being higher than expected;
  • the take-up rate of PSS pensions being higher than expected; and
  • PSS members contributing at rates higher than assumed (increasing the value of benefits accruing).

1.7.Further detail regarding the Unfunded Liability is contained in Section 5 of this Report.

Projected Outlays

1.8.The annual projected outlays associated with the PSS and CSS are calculated as follows:

  • productivity superannuation contributions paid by the employer to the PSS and CSS funds; plus
  • benefit payments made from the Consolidated Revenue Fund (CRF) (including payments made under the Superannuation Act 1922); less
  • payments made from the PSS and CSS Funds to the CRF.

1.9.The projected outlays are expected to reduce as a percentage of projected Gross Domestic Product (GDP) from 0.29% in the year ending 30June2012 to 0.10% in the year ending 30June2051.

1.10.Further detail regarding the projected outlays is contained in Section 6 of this Report.

Notional Employer Contribution Rates

1.11.The Notional Employer Contribution Rates (NECRs) represent the estimated contribution rate that would be required to fund the benefits accruing to contributors over the next three years (based on current projections). That is, if the scheme was fully funded at the valuation date and contributions were made at the NECR, then the liability for contributors would be expected to be fully funded at the end of the period.

1.12.The NECRs for the two schemes (including contributions towards the productivity superannuation benefit of approximately 3%) 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
30 June 2008 / 16.3 / 21.4 / 17.1
30 June 2011 / 18.8 / 20.3 / 19.0

* Old methodology. The methodology was changed in the 2008 Long Term Cost Report to bring calculations more in line with the approach used in Australian Accounting Standards and the Budget process. Please refer to the 2008 Report for further details of the change.

Note: The combined rates are weighted average rates based on the superannuation salaries of the members of the two schemes.

1.13.The contribution rate for the PSS as at 30 June 2011 has increased by 2.5percentagepointscompared to the rate as at 30 June 2008. The contribution rate for the CSS as at 30June2011 has decreased by 1.1 percentage points compared to the rate as at 30June 2008.

1.14.The significant increase of NECR for the PSS is primarily due to the change in assumptions, based on observed behaviour, relating to:

  • Increase in the average PSS member contributions from 4.75% to 6%. Higher member contribution rates lead to a higher accrual of benefits and therefore more valuable benefits.
  • Increase in the proportion of PSS benefits taken as a pension from 60% to 70%. Under the assumptions made in this actuarial investigation, a member electing to take their benefit as a pension leads to a more valuable benefit.

1.15.The decrease of NECR for the CSS is due to nature of the benefit design whereby the rate of benefit accrual declines with length of membership.

1.16.Further detail regarding the NECR is contained in Section 7 of this Report.

Scheme Membership

1.17.The table below summarises the total membership of the PSS and CSS as at 30June2011:

Membership as at 30June2011

PSS / CSS
Number of Contributors / 113,224 / 15,916
Total Salaries of Contributors / $9,457m / $1,606m
Number of Preserved Members / 103,092 / 9,110
Number of Pensioners / 23,921 / 114,999

1.18.Further detail regarding scheme membership is contained in Section 3 of this Report.

Assumptions

1.19.The key economic assumptions adopted for this report are shown in the table below. All economic assumptions used to value the liability and projected outlays are the same as those used in 2008 Report.

Item / Assumption
CPI Increases / 2.5% per annum
Investment Returns / Discount Rate / 6.0% per annum (nominal)
3.5% per annum (real)
General Salary Increases / 4.0% per annum (nominal)
1.5% per annum (real)

1.20.The demographic assumptions have been reviewed based on the experience of the schemes over the three years to 30June2011. The most significant changes include:

  • an increase in the assumed rate of PSS member contributions;
  • an Increase in the take-up of pension benefits by PSS members; and
  • the extension of retirement assumptions to age 75.

1.21.Further detail regarding assumptions is contained in Section 4 of this Report.

2

Scheme Information and Assets

Introduction

2.1.The PSS was established on 1July1990, following the closure of the CSS on the same date. 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.

2.2.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.

2.3.The 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.

2.4.Prior 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 remain entitled to benefits under this Act and the liabilities in respect of these members are included in the CSS Unfunded Liability.

Benefits

2.5.The PSS and CSS are defined benefit schemes.

2.6.In 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.

2.7.The 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.

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

Employer Productivity Contributions and Member Contributions

2.9.Member and employer productivity superannuation contributions paid to the PSS and CSS are invested by the trustee of the two schemes, the Commonwealth Superannuation Corporation (CSC). These contributions are accumulated at a crediting rate periodically declared by the trustee.

2.10.Employer productivity contributions are contributions of approximately 3% of employees’ salaries that employers are required to pay as a result of award negotiations in the late 1980s. They (usually) form part of the scheme benefits. Generally 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. These agencies pay their productivity superannuation contributions elsewhere.

2.11.The 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 schemes’ trustee, 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
30 June 2008 / 11,346 / 6,073 / 17,419
30 June 2011 / 12,481 / 4,598 / 17,079

2.12.The Unfunded Liability is that portion of the total superannuation liability in excess of the assets held in the schemes. That is, these assets offset the schemes’ liabilities.

Investment Policy and Earning Rate Policy

2.13.For PSS contributors, the total benefit is a defined benefit payable from the CRF. Member contributions and productivity contributions, accumulated with investment returns, are paid from the PSS Fund into the CRF to offset the cost of benefit payments. Hence, the role of investment return is to reduce the cost of the scheme to the Government.

2.14.For PSS preserved members and all CSS members, the member and productivity contributions are accumulated with investment returns to provide part of the eventual benefits. Hence, the role of investment return for these members is to enhance benefits.

2.15.We have reviewed the trustee’s investment policy and considered it to be suitable, taking into account the largely unfunded nature of the schemes’ liabilities and the Government’s method of funding outlays from the CRF.

2.16.The earning rate applied to members’ accruals is effectively the actual rate of investment return, with no smoothing or reserves. The policy is documented and included on the trustee’s website. We consider the trustee’s earning rate policy to be suitable.

Changes to Benefits Since 2008

2.17.There have been some changes to the benefits provided by the PSS and CSS since the previous report as at 30June 2008.

2.18.From 1 July 2011, the Government increased the age to which PSS members can accrue employer benefits from age 70 to 75 provided they meet a work test.

2.19.At the time this report was prepared, a bill was before parliament to increase the level of Superannuation Guarantee (SG) from 9% to 12%. Despite the bill subsequently being passed, any impact on the increase in minimum benefits as a result of the SG level increasing above 9% is not taken into account in this report.

2.20.In defined benefit schemes such as the PSS and CSS, the SG operates by requiring that a minimum level of benefits be provided (instead of a minimum level of contributions).

3

Membership and Data

3.1.Data relating to the membership of the PSS and CSS was provided for this report by ComSuper, the schemes’ administrator, on behalf of the schemes’ trustee. Data provided included:

  • details of contributory members, pensioners and preserved members (generally former contributors who have preserved their benefits) of the PSS and CSS as at 30June2011; and
  • details of exits by contributory members and preserved members from the PSS and CSS during the three year period from 1July2008 to 30June2011.
  • A range of validity data checks were conducted by ComSuper prior to the data being provided to Mercer. A series of checks have also 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 2008 Report has been carried out. We are satisfied that the data is sufficiently accurate for the purposes of this report. However, CSC and ComSuper are ultimately responsible for the validity, accuracy and comprehensiveness of this information.
  • In the PSS, fewer contributory members exited during the period from 1 July 2008 to 30June 2011 than anticipated in the actuarial assumptions,for a variety of reasons including fewer members electing to cease contributory membership of the PSS and join the Public Sector Superannuation Accumulation Plan (PSSap). In the CSS fewer contributors exited during the period than expected as well. Therefore, the actual contributory membership at 30 June 2011 was higher than expected.
  • The number of PSS preserved members at 30 June 2011 was lower than expected mainly due to lower than expected number of contributor exits and also a consolidation of member records by ComSuper. The number of CSS preserved members at 30June2011 was also lower than expected mainly since there were fewer than expected contributor exits into the preserved section.

3.5.The tables below summarise the total membership of the PSS and CSS as at 30June2011:

PSS Membership as at 30June2011

Male / Females / Total
Number of Contributors / 47,638 / 65,586 / 113,224
Total Salaries of Contributors / $4,267m / $5,190m / $9,457m
Number of Preserved
Members / 42,043 / 61,049 / 103,092
Number of Age Pensioners / 9,961 / 10,325 / 20,286
Number of Invalidity Pensioners / 1,150 / 1,432 / 2,582
Number of Reversionary Pensioners / 329 / 724 / 1,053

CSS Membership as at 30June2011

Male / Females / Total
Number of Contributors / 10,264 / 5,652 / 15,916
Total Salaries of Contributors / $1,082m / $524m / $1,606m
Number of Preserved
Members / 6,481 / 2,629 / 9,110
Number of Age Pensioners / 52,581 / 19,209 / 71,790
Number of Invalidity Pensioners / 10,433 / 4,309 / 14,742
Number of Reversionary Pensioners / 1,441 / 27,026 / 28,467

3.6.The following tables summarise the membership of the schemes since 1999:

Contributing Members

PSS / CSS / Total
30June1999 / 106,141 / 52,880 / 159,021
30June2002 / 129,683 / 39,986 / 169,669
30June2005 / 154,897 / 32,006 / 186,903
30 June 2008 / 132,274 / 22,162 / 154,436
30 June 2011 / 113,224 / 15,916 / 129,140

3.7.Between 1July2008 and 30June2011:

  • the number of PSS contributors reduced by 14.4%; and
  • the number of CSS contributors reduced by 28.2%.
  • Between 1July2008 and 30June2011 ComSuper conducted a consolidation of member records. This has led to a reduction in the number of preserved members relative to expectations. This did not have a material impact on the liability.

Preserved/ Deferred Benefit Members

PSS / CSS / Total
30June1999 / 51,176 / 12,521 / 63,697
30June2002 / 76,357 / 13,969 / 90,326
30June2005 / 85,709 / 12,227 / 97,936
30 June 2008 / 103,628 / 11,461 / 115,089
30 June 2011 / 103,092 / 9,110 / 112,202

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
30 June 2008 / 15,759 / 86,901 / 102,660
30 June 2011 / 22,868 / 86,532 / 109,400

Dependent Pensioners

PSS / CSS / Total
30June1999 / 210 / 26,962 / 27,172
30June2002 / 331 / 27,930 / 28,261
30June2005 / 507 / 28,560 / 29,067
30 June 2008 / 693 / 28,531 / 29,224
30 June 2011 / 1,053 / 28,467 / 29,520

4

Assumptions

4.1.In order to value liabilities, it is necessary to make assumptions regarding the incidence, timing and amount of future benefits. These assumptions fall into two broad categories:

  • economic assumptions: assumptions that relate to the general economic environment and not directly to the membership of the schemes; and
  • demographic assumptions: assumptions that relate to the experience of the membership of the scheme.
  • This section sets out details of the assumptions adopted for the 2011Report and highlights any changes from those adopted for the 2008Report.
  • In total the changes in assumptions have resulted in an increase in the combined Unfunded Liability of the PSS and CSS of approximately $1.3 billion as at 30 June 2011.
  • The assumptions are detailed in AppendixB.

Economic Assumptions

Key Economic Assumptions

4.5.The key economic assumptions adopted for this report include:

  • future increases in the Consumer Price Index (CPI) which links to the level of pension increases;
  • future rate of investment return / discount rate; and
  • future increases in salaries (i.e. increases in salaries other than those arising from promotions).
  • The relationships between the assumptions adopted for these factors have agreater bearing on the long term cost estimates of the PSS and CSS than do theindividual assumptions. This is due to the effect of one assumption being usedto project the liability into the future (e.g. future salary increases) and anotherassumption being used to discount that liability to current day values (investmentreturn).

4.7.The key economic assumptions adopted for this report are shown in the table below. The assumptions are the same as those used for the 2008 Report.