Submission to the Review of Indexation Arrangements in Australian ...

SUBMISSION TO THE REVIEW OF
INDEXATION ARRANGEMENTS IN
AUSTRALIAN GOVERNMENT CIVILIAN
AND MILITARY SUPERANNUATION
SCHEMES
August 2008

TABLE OF CONTENTS
Executive Summary __________________________________________________3
Chapter 1 – The Occupational Nature of Australian Government
Superannuation Arrangements _________________________________________5
Superannuation is a condition of employment_________________________________ 5
Indexation of pensions as a condition of employment___________________________ 6
Chapter 2 – The Form of Benefits_______________________________________7
Benefits paid from the CSS ________________________________________________ 7
Benefits paid from the PSS ________________________________________________ 7
Chapter 3 – The Value of Benefits_______________________________________9
Superannuation Pensions in payment _______________________________________ 9
Total superannuation benefits_____________________________________________ 10
Factors Impacting on the Value of Benefits __________________________________ 12
Chapter 4 –Comparison with State and Territory Superannuation Schemes __15
Chapter 5 – The Interaction with Australian Government Safety Net Benefits_16
Other Australian Government measures ____________________________________ 16
Interaction of superannuation pension and Age Pension _______________________ 16
Changing the superannuation pension indexation method _____________________ 18
Chapter 6 – The Cost to the Government of Changing Indexation ___________19
Current superannuation scheme costs ______________________________________ 19
Aligning indexation with the Age Pension methodology________________________ 19
Indexation by the higher of CPI or MTAWE ________________________________ 21
Impact on Notional Employer Contribution Rates ___________________________ 22
ATTACHMENTS
Attachment A: Australian Government Superannuation Schemes ___________23
Attachment B: Pension Indexation – A Historical Perspective ______________26
Attachment C: Explanation of Costs____________________________________27
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Executive Summary
The Department of Finance and Deregulation is responsible for advising the
Government on policy issues related to the superannuation schemes for Australian
Government employees. The main schemes are:
• the Commonwealth Superannuation Scheme (CSS) and the Public Sector
Superannuation Scheme (PSS), which are both defined benefit schemes; and
• the Public Sector Superannuation Accumulation Plan (PSSAP), which is a fully
funded accumulation scheme.
In addressing the Terms of Reference, the focus of this submission is primarily on the
CSS and the PSS, which are the two main defined benefit schemes for Australian
Government civilian employees. Some reference is also made to the smaller schemes
administered in the Finance and Deregulation portfolio. 1 Costings address both
civilian and military schemes.
This submission, in particular, addresses:
• The occupational nature of superannuation (Chapter 1) - superannuation is
provided as part of a person’s terms and conditions of employment. Changing the
indexation method would represent an improvement in the employment contract
of existing and former Australian Government employees who are members of the
CSS or the PSS by increasing their total remuneration package. This would
increase the employment costs of agencies, which would be difficult to offset by
productivity gains.
• The form and value of benefits (Chapters 2 and 3) – indexation is one element
of the total benefit provided to members. The total benefit will also depend on
factors such as the member’s personal level of contributions and length of
employment with the Australia Government. The indexed pension will not always
represent the total value of benefits that a member has received at retirement as
some of the total benefits may have been taken as a lump sum.
• Arrangements for indexation in State and Territory schemes (Chapter 4) –
Pensions payable from the State defined benefit civilian superannuation schemes
are also indexed by the Consumer Price Index (CPI).
• Interaction of the Age Pension and superannuation scheme payments
(Chapter 5) – Many members receiving a CSS or PSS pension may be entitled to
receive a full or part-rate Age Pension. This would however, depend on their
individual circumstances, such as whether they have other retirement income.
1 This is the scheme established under the Superannuation Act 1922 (1922 Scheme) and the scheme under the
Papua New Guinea (Staffing Assistance) (Superannuation) Regulations (the PNG Scheme).
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• The cost to the Government of changing indexation (Chapter 6) - Changing
the indexation method would have a potentially significant budget and balance
sheet impact. If the methodology was changed to align with that for the Age
Pension there would be an estimated immediate increase in the unfunded liability
of the order of $28 billion (around $17.3 billion for civilian and around
$10.3 billion for the military schemes). This cost would rise to some $57 billion
by 2020 (around $34 billion for civilian and around $23 billion for the military
schemes). The costs of higher indexation in the medium to long term would have
to be found from the Budget as the Future Fund is only funded to meet unfunded
liabilities arising from current indexation arrangements.
Page 4 of 28

Chapter 1 – The Occupational Nature of Australian
Government Superannuation Arrangements
Australian Government employees have had employer provided superannuation since
1922, which compares favourably with community standards. The Government
provides superannuation benefits to retired Australian Government employees in its
role as an employer.
Superannuation is a condition of employment
Superannuation is provided as part of an employee’s terms and conditions of
employment. The current notional employer contribution rate (NECR) for the CSS is
28.2% and for the PSS it is 15.6% as set out in the PSS and CSS Long Term Cost Report
2005. 2 Members of the PSSAP receive employer contributions of 15.4%. These
compare to a Superannuation Guarantee minimum employer contribution rate of 9%
under the Superannuation Guarantee (Administration) Act 1992.
Members of the CSS and the PSS have a statutory entitlement to a defined level of
superannuation benefits at retirement. This is outlined in the establishing legislation
of the schemes. Members of various other Australian Government superannuation
schemes also have defined benefits at retirement, as described in Attachment A.
Key features of Australian Government defined benefit arrangements include:
• member contributions from after tax salary 3 ;
• superannuation benefits largely calculated on the basis of member contributions,
salary, age and length of service;
• the Government bears a large portion of the investment risk for the PSS;
• employer financed superannuation benefits that can be taken in the form of a
lifetime indexed pension; and
• indexed reversionary pensions payable to the spouse and children of a deceased
member.
More recently, the Government has established accumulation arrangements for new
civilian employees and new Parliamentarians. 4 This is consistent with trends in the
private sector. Key features of these arrangements include:
• superannuation benefits linked to level of member and employer contributions;
• the employee bearing the investment risk; and
• benefits paid in the form of a lump sum – no pension is payable from the PSSAP.
2 The NECR for the Defence Force Retirement and Death Benefits Scheme (DFRDB) is 33.5% and for the
Military Superannuation and Benefits Scheme (MSBS) it is 24.7% - these are sourced from the MSBS and
DFRDB Long Term Cost Report 2005.
3 Except for the Judges and Governors-General schemes, where no member contributions are made. From 1 July
2008, CSS and PSS members can elect to make no contributions.
4 The Review into Military Superannuation Arrangements has recommended that the MSBS be closed and a new
accumulation scheme be established. The Government is yet to respond to this Review.
Page 5 of 28

Indexation of pensions as a condition of employment
The legislation underpinning the CSS and the PSS provides for pensions from those
schemes to be indexed twice yearly. 5 Increases are in line with the All Groups
Consumer Price Index (CPI) for the weighted average of the 8 capital cities as
published by the Australian Bureau of Statistics. Pensions are increased at the
beginning of July and January, according to any increase in the CPI for the six months
to the preceding September and March respectively. That is, pension increases occur
3 months after the end of the relevant period.
A change to the indexation arrangements for superannuation pensions paid from the
CSS and PSS would require legislative change. Such a change would represent an
improvement in the employment contract of Australian Government employees who
are members of these schemes by increasing their total remuneration package.
This would mean agencies would face increased employment costs that would be
difficult to offset by productivity gains. Without supplementation from the Budget,
these increased employment costs would have to be met from agencies’ existing
budgets or through a reduction in another element of employees’ remuneration, such
as salary. This is notwithstanding that an increasing number of employees will not be
members of the CSS or the PSS in the future.
Employees who commenced after 1 July 2005, and are members of the PSSAP, would
not benefit from a change in indexation, as the PSSAP does not provide indexed
pensions at retirement.
For retired employees, a change in indexation arrangements would, in effect,
represent a retrospective upgrade to their terms and conditions of employment. The
change would increase their superannuation savings, which would be funded wholly
by the Government.
Improving the employment contracts of present and former employees by changing
the method of indexing superannuation pensions would increase the current notional
employer contribution rates, thereby increasing taxpayer funded employer costs.
5
Section 148 of the Superannuation Act 1976 in relation to the CSS and Division 6 of the PSS Trust Deed in
relation to the PSS.
Page 6 of 28

Chapter 2 – The Form of Benefits
Generally, the Australian Government defined benefit superannuation schemes, whilst
having some common design characteristics, are tailored to the specific employment
patterns of their members. For example, the CSS and PSS were largely designed for
career public servants; the military schemes are tailored to the needs of military
service. A brief overview of each of the Australian Government superannuation
schemes is at Attachment A.
The nature and form of the benefits payable from the CSS and the PSS is described
below.
Benefits paid from the CSS
Prior to 1 July 2008, a member of the CSS was required to make mandatory member
contributions of 5% of gross superannuation salary, paid from after tax salary. From
1 July 2008, a member can elect to make no contributions. A member can also make
additional supplementary contributions. Member contributions are paid into the CSS
Fund and accumulate with fund earnings.
In addition, a member receives employer productivity contributions of around 3% of
superannuation salary, which are paid into the CSS Fund and accumulate with fund
earnings. The balance of the member’s employer financed benefit is unfunded; that
is, it is not funded until the member’s benefit becomes payable.
The unfunded employer component of the member’s benefit must generally be taken
as a lifetime CPI indexed pension. However, the accumulated 5% member
contributions and the funded employer productivity contributions can be taken as
either a lifetime non-indexed pension or a lump sum.
The CPI indexed pension is calculated as either:
• A CSS age pension if the member retires after minimum retiring age (usually age
55). This is calculated as a percentage of final superannuation salary, based on the
period of contributory service of the member and discounted for early retirement
before age 65 6 ; or
• 2.5 times the accumulated 5% member contributions and interest multiplied by a
pension factor, if the member resigns from employment before their minimum
retiring age and preserves their benefit in the CSS until retirement age. This is
commonly known as the 54/11 benefit.
Benefits paid from the PSS
Prior to 1 July 2008, a member was required to contribute at a rate of between 2% to
10% of their gross superannuation salary, with contributions paid from after tax
6 Generally, CSS age pension accrual rates are 2% per annum for first 20 years of membership, 1% per annum for
the next 10 years, and 0.25% per annum for each of the next 10 years. The maximum percentage is 52.5% of final
salary. In addition, the member receives their funded contributions as a lump sum, which may be converted to a
pension.
Page 7 of 28

salary. From 1 July 2008, a member can elect to make no member contributions.
Member contributions are paid into the PSS Fund and accumulate with fund earnings.
Employer productivity contributions of around 3% of superannuation salary are paid
into the PSS Fund and accumulate with fund earnings. The balance of the member’s
employer financed benefit is unfunded; that is, it is not funded until the member’s
benefit becomes payable.
A PSS benefit accrues as a fully defined lump sum benefit. It is calculated by
multiplying the member’s benefit multiple by his or her final average salary (FAS). 7
FAS is generally the average of a member’s salary for superannuation on the three
birthdays preceding exit. A member’s benefit multiple depends on the rate of member
contribution they make. The rate of accrual is generally as follows:
Table 1: PSS accrual rates
Member
Contribution
Rate
Employer
Benefit
Accrual
Total
Benefit
Accrual
Member
Contribution
Rate
Employer
Benefit
Accrual 8
0% 11% .11 6% 17% .23
2% 13% .15 7% 18% .25
3% 14% .17 8% 19% .27
4% 15% .19 9% 20% .29
5% 16% .21 10% 21% .31
Source: PSS Trust Deed and Rules
Total
Benefit
Accrual
For example, a person who contributed for 30 years at 5% of salary and whose final
average salary on retirement was $50,000, would have a benefit multiple of 6.3, that
is, 30 * .21. The lump sum benefit would be $315,000, that is, 6.3 * $50,000.
Retirement benefits in the PSS can be taken as either:
A full lump sum benefit.
A lifetime CPI indexed pension (calculated by dividing the lump sum benefit by a
pension age factor).
A combination of CPI indexed pension and lump sum. At least 50% of the lump
sum benefit must be taken as a pension.
7 The total benefit is subject to a maximum benefit limit, which is typically 10 times final average salary.
8 The rate of accrual is also subject to a ten year rule. That is, for a ten year period of membership in the PSS – not
necessarily a continuous period or the first ten years – the maximum employer benefit accrual is based on an
average member contribution rate of 5%per annum, regardless of whether actual member contributions are above
that amount.
Page 8 of 28

Chapter 3 – The Value of Benefits
Superannuation benefits from the CSS and PSS are broadly calculated with reference
to a member’s contributions and their salary, age and length of membership. 9
This chapter provides information on the value of benefits provided by the CSS and
the PSS, which provide most of the pensions in payment. However, some information
is also provided on the 1922 Scheme (which preceded the CSS and was closed in
1976 – see Attachment A). The CSS and the PSS had 122,701 pensions in payment at
30 June 2007 compared with 7,226 in the 1922 Scheme. 10
Superannuation Pensions in payment
Table 2 provides a breakdown of the average value of the various types of pensions
paid from the 1922 Scheme, the CSS and the PSS as at 30 June 2007.
Table 2: Average annual pensions in payment
1922 Scheme CSS PSS
Age Retirement Pensions $28,057 $27,242 $17,938
Involuntary Retirement
Pensions $18,137 $22,464 $16,578
Invalidity Pensions $32,490 $24,589 $21,763
Reversionary Pensions $21,541 $16,889 $13,831
Average all Pensions
Source: ComSuper
$23,999 $23,945 $17,603
Reversionary pensions paid to dependants are lower than other pensions, as they are
typically 67% of a member’s pension at death. They are indexed to CPI for the life of
the dependant. 11 As at 30 June 2007, there were 29,334 reversionary pensions being
paid from the 1922 Scheme, the CSS and the PSS, which is about 23% of all pensions
currently being paid.
The distribution of CPI indexed pensions for the CSS and the PSS is shown below in
Table 3. These figures also include reversionary pensions.
9 In the 1922 scheme, the age retirement benefit was payable from 1973 as a lifetime CPI indexed pension based
on units held at retirement with a maximum pension of 70% of salary. The percentage was lower for higher
income earners. There was also a separate component, known as the Provident Account, where the benefit payable
was a lump sum of 3 times the accumulated member contributions.
10
Data sourced from the Commissioner for Superannuation 2006-07 Annual Report and ARIA Annual Report
2006-07.
11 Unless the dependant is a child of the member, where age limits apply.
Page 9 of 28

Table 3: Distribution of annual pension amounts as at 30 June 2007
Indexed Pension
Amount
1922
Scheme
Number Percentage
CSS PSS Total Total
Less than $10,000 648 14,015 5,161 19,824 15.3%
$10,000-$20,000 2,420 33,263 4,648 40,331 31.0%
$20,000-$30,000 2,298 30,744 2,600 35,642 27.4%
$30,000-$40,000 1,125 17,500 1,190 19,815 15.3%
$40,000-$50,000 477 7,955 557 8,989 6.9%
$50,000-$60,000 192 2,966 330 3,488 2.7%
$60,000-$70,000 38 977 124 1,139 0.9%
$70,000-$80,000 19 339 42 400 0.3%
Greater than $80,000 9 264 26 299 0.3%
Source: ComSuper
Total 7,226 108,023 14,678 129,927
100% 12
It is important to note that the amount of these pensions in payment will not always
represent the total value of benefits provided from the CSS and the PSS nor be the
only source of retirement income for members. This is because:
• superannuation benefits from the CSS and the PSS are often taken as a
combination of lump sum and pension;
• members may not have had a full career in the Australian Government public
service. Accordingly, they may have additional superannuation provided by other
employers;
• members may be entitled to receive a part-rate Age Pension; and
• members may have saved for their retirement outside superannuation.
These factors are considered further in this chapter and in Chapter 5.
Total superannuation benefits
The pensions paid to members will typically be one part of the total benefit received
from the CSS or the PSS. This is because many members of the CSS and the PSS
take a proportion of their total benefits in the form of a lump sum, which then lowers
the pension paid.
Data is not available on the total number of current pensioners who took some of their
superannuation entitlement as a lump sum. However, information on this is available
for new superannuants. Table 4 demonstrates that most members who commenced
12 Does not add to 100% due to rounding.
Page 10 of 28

eceiving a pension from the CSS and the PSS between 1 July 2002 and 30 June 2008
took part of their total benefit as a lump sum.
Table 4: Split between pensions and lump sums for CSS and PSS members who
retired between 1 July 2002 and 30 June 2008 13
Retirement Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
PSS
Number of new Pensioners 1,018 1,090 1,413 1,649 1,565 1,637
Current Average Pension $18,580 $19,178 $18,955 $20,388 $20,761 $23,360
Number who took full
Pension 586 658 772 744 599 575
Current Average Pension $20,605 $21,033 $21,212 $22,632 $26,617 $29,178
Number who took part
Lump Sum 432 432 641 905 966 1,062
Current Average Pension $15,833 $16,353 $16,237 $18,543 $17,130 $20,210
Average Lump Sum $51,098 $56,992 $58,036 $54,209 $43,800 $54,952
CSS
Number of new Pensioners 3,293 3,103 3,055 3,315 3,411 2,931
Current Average Pension 14
$33,688 $34,073 $36,829 $39,940 $42,421 $45,339
Number who took full
Pension 318 367 302 299 329 235
Current Average Pension $35,454 $36,854 $40,181 $47,036 $47,839 $56,535
Number who took part
Lump Sum 2,975 2,736 2,753 3,016 3,082 2,696
Current Average Pension $33,499 $33,700 $36,461 $39,237 $41,843 $44,363
Average Lump Sum
Source: ComSuper
$140,450 $143,756 $163,730 $178,049 $202,285 $228,104
The growth in lump sums taken in the CSS, in part, reflects the high investment
returns in recent years. This, in turn, impacts on the value of the 54/11 benefit taken
by members. 15
By way of comparison, research by the Association of Superannuation Funds of
Australia Limited (ASFA) 16 indicates that the average superannuation retirement
13
Pension amounts reflect the annual amounts that were being paid in the 2007-08 financial year not the amount
that a pensioner commenced to receive on retirement.
14 Includes both CSS CPI indexed pension and CSS non-indexed pension.
15 ComSuper data shows that between 1 July 2002 and 30 June 2008, 11,520 CSS members took the 54/11 benefit.
This is approximately 66% of members who commenced pensions from the CSS during this period.
16 ASFA Media Release 11 February 2008.
Page 11 of 28

payouts in 2008 are likely to be $155,000 for men and $73,000 for women. The
combination of average lump sum and pensions paid in 2008 from the PSS and the
CSS compares favourably with these amounts.
Factors Impacting on the Value of Benefits
The total value of a member’s superannuation benefit in the CSS and the PSS can be
affected by the following factors:
• member’s salary at or near retirement;
• level of contributions made by the employee;
• the length of service; and
• age at retirement.
Salary of a member
In the CSS, where the member retires after their minimum retiring age, and is entitled
to a CSS age pension, their benefit is calculated as a percentage of final salary. In the
PSS, an employee’s benefit is calculated as a percentage of their final average salary.
All other things being equal, a person with a higher final salary in the CSS or a higher
final average salary in the PSS, will receive a higher final benefit than a person with a
lower final salary or final average salary.
Member contribution rate
In the CSS, the contributions and interest on these contributions affects the value of
the 54/11 benefit but not the CSS age pension benefit, since the latter is based on
years of service.
In the PSS, the final benefit depends upon the contribution rate of the member. The
more that a person contributes as a percentage of their salary, the higher will be the
member’s benefit multiple and, therefore, total benefit. According to the 2005 PSS
and CSS Long Term Cost Report the average member contribution rate in the PSS, at
that time, was 5.3%.
Length of service
Early retirement or short service will reduce the superannuation benefit at retirement.
A member of the CSS who retires with 30 years of service at 60 years of age, could
expect a pension equal to 45% of their final salary at retirement (plus an additional
benefit based on their accumulated funded contributions and earnings). If this person
only had 15 years service their pension would be 27% of their final salary at
retirement (plus the additional benefit).
A member of the PSS who retires at 60 years of age with 30 years service, could
expect a pension of between about 41% and 80% of their final average salary at
retirement if they converted all of their lump sum into a pension. However, after
Page 12 of 28

15 years membership in the PSS, the annual pension would only be between about
20% and 38% of final average salary. 17
Age conversion factors in the CSS and the PSS
Conversion factors are used in the CSS 18 and the PSS for converting a lump sum to a
pension. Table 5 shows the factors for retirement at ages 55, 60 and 65. For example,
a PSS member who retires at age 60 could convert a lump sum of $550,000 into an
indexed pension of $50,000 per annum.
Table 5: Age conversion factors in the CSS and the PSS
Age CSS conversion
factor 19
PSS conversion
factor
55 10.8 12
60 10 11
65 9.1 10
Source: Superannuation Act 1976 and PSS Trust Deed and Rules
The factors that are used in the CSS and the PSS are attractive when compared to
those that would be available commercially. Actuarial advice obtained by the
Department suggests that for a male age 60 to obtain an initial pension of $50,000 per
annum that is indexed by CPI, and provides a reversionary pension of 67%, they
would require a lump sum amount of $1.26 million. 20 The equivalent CSS and PSS
pensions would require lump sum amounts of $500,000 and $550,000 respectively.
The age conversion factors in the CSS and the PSS make pensions quite valuable.
The value of pensions is further increased as they are indexed for the life of the
member and their dependants, however long that may be.
Analysis 21 undertaken by the Department shows that for a lump sum amount of
$300,000, the total income derived from a PSS pension would exceed an
account-based pension by about $400,000 over the life of the member and their
dependants. The PSS pension would be paid for an additional 12 years. To obtain an
equivalent income stream, the account based approach would need to start with an
additional amount of around $85,000 (that is, a lump sum of the order of 28% higher)
17 The range represents member contributions of 2% and 10% for the entire service period.
18
As discussed in Chapter 2, this only applies to the 54/11 benefit.
19
For comparative purposes the CSS factor has been calculated as 1/CSS pension factor where the person has not
made an election under section 137A of the Superannuation Act 1976.
20 Based on actuarial advice, this pension uses a pension conversion factor of 25.2.
21 The assumptions underpinning the analysis are:
• Investment returns of 7.5% per annum in respect of the account-based pension.
• CPI indexation of 2.5% per annum.
• Member is male aged 60 with a 57 year old spouse. Mortality is in line with the Australian Life Tables
2000-2002.
• No account is taken of tax-effects and fees.
Page 13 of 28

In this example, average high investment returns (of the order of 10% per annum)
would have provided a superior financial outcome for the account-based pensions. 22
22 According to the Australian Prudential Regulation Authority superannuation data the ten year average return on
assets for entities with at least $100 million in assets from 1997-2006 was 6.7%. (Source: APRA Insight
“Celebrating 10 years of superannuation data collection 1996-2006” Issue 2 2007).
Page 14 of 28

Chapter 4 –Comparison with State and Territory
superannuation schemes
Indexed pensions from the superannuation schemes for civilian employees have been
indexed using various methods since at least 1947. Changes that have been made to
the indexation arrangements over time are described in Attachment B.
Pensions payable from State defined benefit civilian superannuation schemes are also
indexed by CPI. The timing and frequency of indexation varies across these schemes,
as summarised in Table 6.
Table 6: Comparison of indexation arrangements – Australian and State
Government superannuation schemes
Jurisdiction Scheme Basis Frequency
Australian
Government 23
CSS
PSS
CPI- All Capital Cities Bi-annual
Victoria Revised Scheme CPI-All Capital Cities Bi-annual
WA State Pension
Scheme
CPI-Perth All Groups Bi-annual
NSW State
CPI – Sydney All Annual
Superannuation
Scheme
Groups
Queensland Q Super State CPI – Brisbane All Annual
Accounts Groups
NT / ACT 24
N/A N/A N/A
Tasmania Retirement
Benefits Fund
Defined Benefit
Scheme
CPI-All Capital Cities Bi-annual
SA Pension Scheme CPI-Adelaide All
Groups
Bi-annual
Source: Department of Finance and Deregulation research
Some schemes in the wider community also index their superannuation pensions by
the CPI. For example, pensions from the Westpac Staff Superannuation Plan, are
indexed each year in line with the September CPI to a maximum of 5% or such higher
increase as the Trustee and the Westpac Bank approves.
23
Pensions from the PNG scheme, the 1922 Scheme and the military superannuation schemes are also indexed in
the same way as the CSS and PSS.
24 Northern Territory superannuation arrangements are lump sum. However, some NT and ACT Government
employees are members of the CSS and some ACT Government employees are members of the CSS or PSS.
Page 15 of 28

Chapter 5 – The Interaction with Australian Government
Safety Net Benefits
Australia’s retirement income policy is designed to ensure that Australians have a
certain level of income available to them in their retirement years. Australia’s three
pillar retirement income system comprises:
• compulsory superannuation savings;
• voluntary superannuation and other private savings; and
• a publicly funded, means tested, Age Pension and associated social security
arrangements.
In retirement, members of the CSS and the PSS may receive retirement income from
each of the three pillars depending on their personal circumstances. Most people’s
income in retirement will be funded from a combination of superannuation, other
private savings and a full or part-rate Age Pension.
Superannuation and other savings enable individuals to achieve a higher standard of
living in retirement than the Age Pension alone.
Superannuation incomes received by retired members of the CSS and PSS can be
topped up by a full or part-rate Age Pension depending on individual circumstances.
The Age Pension is important for those retirees who were unable to save enough
through their working life, for people who had extended periods out of the workforce
or who had broken periods of employment.
Other Australian Government measures
A number of changes have been made to superannuation, taxation and taxpayer
funded Age Pension arrangements over the last 10 years. For example, pensioners
and self-funded retirees have benefited from bonus payments and new supplementary
payments. Part-rate pensioners have benefited from changes to the pension taper
rates.
There have also been taxation changes such as the Senior Australians Tax Offset and
those as a result of Better Super.
The Australian Government also provides support to older Australians through
subsidies and services for health and aged care. Services and concessions include the
Pharmaceutical Benefits Scheme and subsidised health care, through Medicare.
Interaction of superannuation pension and Age Pension
The level of retirement income payable from the CSS and PSS is broadly related to
the member’s personal contributions, period of eligible employment with the
Australian Government and salary at or near retirement. Any other income or assets
do not affect the total benefits payable to retiring members.
By contrast, the Age Pension is means-tested on both income and assets and does not
depend on previous labour force attachment or individual contributions.
Page 16 of 28

Income from Australian Government civilian superannuation pensions is counted as
income for the purposes of the income test for the Age Pension.
Income over the maximum Age Pension income test threshold reduces the rate of
pension by 40 cents in the dollar (single) or 20 cents in the dollar each for couples.
That is, for every $1 of extra income, the Age Pension is reduced by 40 cents for a
single person and 40 cents (20 cents each) for a couple. The rate at which the Age
Pension is reduced is known as the ‘taper rate’.
The average annual indexed pension as at 30 June 2007 was around $17,603 in the
PSS and around $23,945 in the CSS. If a single person with these incomes had no
other income, and had assets below the asset test threshold, they would be entitled to a
part-rate Age Pension of approximately $8,611 and $6,074 respectively. Their
average total income would, therefore, be about $26,214 and $30,019 respectively.
The graph below depicts the interaction between the current rate of single age pension
and a pension received from the CSS or the PSS, where an individual has no other
income and his/her assets are below the assets test threshold. The full Age Pension
for 20 March to 19 September 2008 is $546.80 per fortnight for a single person (or
around $14,216 per annum). A single person can have income up to $138 per
fortnight (or around $3,588 per annum) and still receive the full Age Pension under
the income test. However, where the person’s income exceeds this threshold amount,
the Age Pension payable is reduced in accordance with the income taper rate.
Total Income
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
Single Age Pension and PSS or CSS Pension
(no income other than PSS or CSS Pension)
$0
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
PSS or CSS Pension
Source: Department of Finance and Deregulation research
Annual PSS/CSS Pension
Total payment
For example, where a person has a PSS or CSS pension of $10,000 per annum, they
would also be entitled to receive a part-rate Age pension of approximately $11,652
per annum. Where the person has an annual PSS or CSS pension of $20,000 they
would be eligible to receive a part-rate pension of approximately $7,652 per annum.
Page 17 of 28

The income taper cuts off at an annual income of approximately $39,507. That is, an
individual (who is not a member of a couple) with an annual PSS or CSS pension of
under $39,500 would receive a part-rate Age Pension, provided they had no other
income and assets below the asset test threshold. In this context, Table 3 shows that
some 89% of civilian superannuation pensions at 30 June 2007 were below $40,000
per annum.
A separate test applies for couples. The maximum rate of pension for 20 March to
19 September 2008 is $456.80 for each member of a couple (or around $11,876 per
annum). Where a couple did not have other income and had assets below the assets
test threshold, the couple would receive an Age Pension of approximately $23,752 per
annum.
Where one member of a couple had a PSS or CSS pension of $10,000 per annum the
annual part-rate Age Pension payment would be approximately $22,250 per annum
(combined). 25 If one of the couple had an annual PSS or CSS pension of $20,000 the
annual part-rate Age Pension payment would be approximately $18,250 per annum
(combined). Where a couple receives an annual PSS or CSS pension of
approximately $66,000 or more there would be no payment of the Age Pension.
Changing the superannuation pension indexation method
Changing the indexation method for pensions to a higher rate of indexation, will
increase pensions payable over time. However, for those civilian scheme pensioners
who do qualify for a part-rate Age Pension, their total income would not increase by
the full increase in the pension, as there would be a reduction in their part-rate Age
Pension because of the taper rate for the Age Pension.
The total income benefit in changing the indexation method for superannuation
pensions would, therefore, be greater for those CSS and PSS members with
superannuation pensions that exceed the income test threshold. It would also be
greater for those members receiving a CSS or PSS pension that is less than $138 a
fortnight for a single person. This latter category is likely to be people who did not
have a long period of employment with the Australian Government. Table 3 shows
that these two categories of members comprise a small proportion of all civilian
superannuation pensions.
25 This assumes that the couple had no other income, and had assets below the asset test threshold.
Page 18 of 28

Chapter 6 – The cost to the Government of changing
indexation
Changing the method of indexation has a potentially significant Budget impact.
Changes will affect the Government’s unfunded superannuation liability and pension
payments to members. It will also affect employer costs.
The unfunded liability represents an estimate of the present value of the total accrued
superannuation liabilities in respect of employment service up to a particular date.
Changing the indexation method changes the “cost” of that accrued service. Higher
indexation will increase pension payments and the unfunded liability.
This chapter provides estimates of the cost implications for two alternative indexation
methods as canvassed over time by individuals and pensioner representative
organisations. These cost estimates are based on advice from actuarial advisors of the
Department of Finance and Deregulation and the Department of Defence. 26
Attachment C outlines the basis of the costings, including the reasons for the variation
from a previous estimate.
Current superannuation scheme costs
In the civilian and military defined benefit superannuation schemes, the majority of
the employer contribution is unfunded (not funded until the member’s benefit is paid).
The Government’s total unfunded superannuation liability is estimated to be around
$108 billion as at 30 June 2008. 27 . The value of this liability is projected to continue
growing (in nominal terms) into the future, reaching around $147 billion by 2020. 28
Aligning indexation with the Age Pension methodology
A common request is for the current CPI indexation method to be changed to align
with the Age Pension methodology.
Indexation of the Age Pension is determined under the Social Security Act 1991.
Essentially, the Age Pension base increases in line with the growth in CPI and is
subject to a minimum dollar amount of 25% of Male Total Average Weekly Earnings
(MTAWE). If the CPI indexed Age Pension base is less than 25% of MTAWE, then
the Age Pension paid is increased to that level.
To reflect the Age Pension methodology, the actuarial advisors have assumed that
superannuation pensions will grow by 4% per annum. This compares with an annual
growth of 2.5% per annum, which is used by the actuaries as the basis for CPI
indexation. 29
26
Mercer (Australia) Pty Ltd in respect of the civilian schemes and the Australian Government Actuary in respect
of the military schemes.
27
2008-09 Budget Paper No.1, page 7-7
28
2008-09 Budget Paper No. 1, page 7-8
29
For example, refer to the CSS and PSS 2005 Long Term Cost Report.
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The estimated immediate increase in the unfunded liability for the civilian and
military superannuation schemes as a result of aligning the indexation methodology
with the Age Pension methodology from 1 July 2009 would be in the order of
$28 billion (around $17.3 billion for the civilian schemes and around $10.3 billion for
the military schemes). By 2020, the impact on the unfunded liability is expected to
increase to around $57 billion (around $34 billion for the civilian schemes and around
$23 billion for the military schemes).
In this context, the Department of Finance and Deregulation notes that the Australian
Government does not have identified assets available to offset an additional unfunded
liability of this order. The Future Fund currently only has sufficient assets to meet
superannuation liabilities at and beyond 2020 arising from current indexation
arrangements. Accordingly, the costs of higher indexation in the medium to long
term would have to be found from the Budget. This would require the Government to
reprioritise spending on other initiatives or programs.
In addition to the impact on the unfunded liability, there will also be an increase in
pension payments to members as shown in Table 7. The cash effect of changing the
indexation method would be relatively small in the first few years. However, the
additional cash expenditure would continue to grow and peak after 2020, which is
when the Budget will face the spending challenges associated with an ageing
population and other pressures. 30
Table 7: Additional cash payments
1922 Scheme, CSS
and PSS
DFRDB and MSBS Total
2008-09 $0m $0 $0
2009-10 -$24m 31
$1m -$23m
2010-11 $26m $16m $42m
2011-12 $75m $36m $111m
2012-13 $131m $59m $190m
2019-20 $656m $255m $911m
Source: Actuarial advice received by the Department of Finance and Deregulation and the Department
of Defence.
As discussed in Chapter 5, the total income of scheme pensioners who qualify for a
part-rate Age Pension would not increase by the full amount of the increase in their
superannuation pension. This is because there would be a reduction in their part-rate
Age Pension because of the income taper rate for the Age Pension. The cash impact
on the Australian Government will be reduced accordingly.
30 Intergenerational Report 2007, Commonwealth of Australia, April 2007.
31 This is due to benefits being taken in the form of periodic pension payments rather than a lump sum
(immediately impacting on cash payments) due to the assumed increase in the proportion of PSS employer
component being taken as a pension.
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For example, analysis by the Department of Finance and Deregulation for civilian
scheme pensioners shows that the additional cash payments outlined above in respect
of those schemes would reduce by around 15% per annum as a result of the Age
Pension income test.
Indexation by the higher of CPI or MTAWE
Another common request is for the current CPI indexation methodology to be
changed so that indexation is based on the higher of CPI and MTAWE. This would
be more favourable than the Age Pension indexation methodology.
Indexation by the higher of CPI or MTAWE will produce a long term indexation rate
higher than aligning the indexation of superannuation pensions with the Age Pension
methodology. As such, the actuarial advisors have assumed that this will produce a
long term average indexation rate of 4.6%.
The estimated immediate increase in the civilian and military unfunded liabilities of
this indexation method is in the order of $40 billion (around $25 billion for the
civilian and around $15 billion for the military). By 2020, the impact on the unfunded
liability is expected to increase to around $82 billion (around $49 billion for the
civilian schemes and around $33 billion for the military schemes)
The additional cash payments in superannuation pensions associated with this
indexation arrangement is set out in Table 8.
Table 8: Additional cash payments
1922 Scheme, CSS
and PSS
DFRDB and MSBS Total
2008-09 $0m $0m $0m
2009-10 -$12m 32
$6m -$6m
2010-11 $58m $30m $88m
2011-12 $130m $59m $189m
2012-13 $211m $93m $304m
2019-20 $965m $385m $1,350m
Source: Actuarial advice received by the Department of Finance and Deregulation and the Department
of Defence.
As with the previous scenario, analysis by the Department of Finance and
Deregulation for civilian scheme pensioners shows that the additional cash payments
outlined above in respect of those schemes would reduce by around 15% per annum.
32 This is due to benefits being taken in the form of periodic pension payments rather than a lump sum
(immediately impacting on cash payments) due to the assumed increase in the proportion of PSS employer
component being taken as a pension.
Page 21 of 28

Impact on notional employer contribution rates (NECR)
Changing the current CPI indexation methodology would increase the NECR of the
civilian and military superannuation schemes as set out in Table 9.
Table 9: Impact on the NECR
Relative to the figures quoted in the 2005 Long Term Cost Reports (LTCR) for the
civilian and military superannuation schemes, the NECR under the alternative
indexation methodologies would increase to the following (note, the rates are
inclusive of employer productivity contributions):
NECR (% of Superannuation Salaries)
CSS PSS DFRDB MSBS
2005 LTCR 28.2% 15.6% 33.5% 24.7%
Aligning CPI
indexation
methodology with Age
Pension methodology
Higher of CPI or
MTAWE
34.8% 19.7% 41.9% 33.2%
38.1% 21.2% 46.3% 36.8%
Source: Actuarial advice received by the Department of Finance and Deregulation and the Department
of Defence.
Page 22 of 28

Australian Government Superannuation Schemes
Australian Government civilian superannuation arrangements
Attachment A
The Australian Government has, since 1922, provided its civilian employees with
superannuation benefits as part of their terms and conditions of employment. The
schemes which provide superannuation in the form of defined benefits are:
• The first Commonwealth public sector scheme was the scheme established under
the Superannuation Act 1922 (1922 Scheme). 33 It provided a defined benefit
pension scheme and an accumulation Provident Fund. The scheme was closed to
new members in 1976 and contributors were transferred to the CSS.
• The Papua New Guinea (Staffing Assistance) (Superannuation) Regulations (PNG
Scheme) which provides retirement benefits for employees of the administration
of the Territory of Papua and New Guinea. The scheme was closed to new
members in 1976.
• The Commonwealth Superannuation Scheme (CSS), a hybrid accumulation /
defined benefit scheme, which was established under the Superannuation
Act 1976. The scheme was closed to new members from 1 July 1990.
• The Public Sector Superannuation Scheme (PSS), established by the
Superannuation Act 1990, and the Trust Deed and Rules under that Act, which
commenced on 1 July 1990. The scheme was closed to new members from
1 July 2005.
The CSS and the PSS are both partially unfunded schemes. They provide benefits
that satisfy a participating employer’s 34 superannuation guarantee obligations and are
regulated superannuation schemes for the purposes of the Superannuation Industry
(Supervision) Act 1993 and associated Regulations.
Australian Government employees who were not members of the CSS and the PSS
schemes received employer provided superannuation either:
• as a member of a funded superannuation scheme provided by the employer, such
as Australia Post; or
• under arrangements included in the Superannuation (Productivity Benefit) Act
1988 (the PB Act). The PB Act, which was established on 1 July 1988 and closed
on 30 June 2005, ensured that other persons employed by the Australian
33 Entry to the pension scheme required employees to pass a medical test after which members paid compulsory
contributions, which increased with the term of the membership. Those who had a medical impairment were
excluded from the pension scheme and became members of the Provident Account, on payment of compulsory
contributions of 5% of salary.
34 Participating employers are Australian Government Departments and agencies that are part of the
Commonwealth, as well as authorised bodies that are not legally part of the Commonwealth such as
Commonwealth authorities under the Commonwealth Authorities and Companies Act 1997.
Page 23 of 28

Government, who were not CSS or PSS members, were provided with at least the
Superannuation Guarantee level of employer superannuation, usually through a
funded superannuation scheme
More recently, the Australian Government has established its own fully funded
accumulation scheme, the Public Sector Superannuation Accumulation Plan (PSSAP).
The PSSAP was open to new employees from 1 July 2005. The employer
contribution rate for members of the PSSAP is 15.4% of the member’s
superannuation salary.
Other Australian Government superannuation arrangements
The Australian Government also has superannuation schemes for other classes of
employees, such as defence force personnel, Parliamentarians, Federal judges and
Governors-General. These are discussed below.
Military superannuation schemes 35
The military superannuation schemes have been designed to meet the specific needs
of defence force staff. In particular, the defence schemes take into account the wide
variation in defence force staff retirement age, rank structure and make special
provision for staff who retire on invalidity grounds. 36
• The Defence Forces Retirement Benefits Scheme (DFRB), a defined benefit
scheme, which was established in 1948. The scheme was closed to new members
in 1973.
• The Defence Force Retirement and Death Benefits Scheme (DFRDB), a defined
benefit scheme, which replaced the DFRB Scheme. The scheme was closed to
new members in 1991.
• The Military Superannuation Benefits Scheme (MSBS), a hybrid accumulation /
defined benefit scheme, which was established in 1991. The scheme remains
open to new members.
Parliamentarians
Before 9 October 2004, it was compulsory for all Senators and Members who joined
the Parliament to become members of the Parliamentary Contributory Superannuation
Scheme (PCSS). The PCSS provides former members of the Federal Parliament with
retirement benefits in accordance with the provisions of the Parliamentary
Contributory Superannuation Act 1948 (the Act).
• The PCSS, a defined benefit scheme, which was established in 1948 and was
closed to new members from 9 October 2004.
35
Report of the Review into Military Superannuation Arrangements, Appendix E, provides further information on
these schemes.
36 April 2001, A ‘Reasonable and Secure’ Retirement? The benefit design of Commonwealth public sector and
defence force unfunded superannuation funds and schemes, Report of the Senate Select Committee on
Superannuation and Financial Services, pp 14-21.
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• Parliamentarians who commenced at or after the 2004 Federal Election receive
employer contributions of 15.4% into an accumulation scheme of their choice.
These arrangements are contained in the Parliamentary Superannuation Act 2004.
Judges
The Judges' Pensions Act 1968 makes provision in relation to the entitlements to
pensions of persons who hold office as judges of the High Court of Australia, the
Federal Court of Australia and the Family Court of Australia and certain other office
holders.
• The Judges' Pensions Act 1968 provides for the payment of defined benefits in the
form of pensions to members. A retired Judge who is at least 60 years of age and
has served as a Judge for not less than 10 years will be entitled to a pension under
the Pensions Act.
Governor-General
Before 1974, the office of Governor-General was regulated only by the Constitution.
The Governor-General Act 1974, amongst other things, introduced a pension scheme
for retired Governor-Generals.
• The Governor-General Act 1974 provides a defined benefit pension scheme
whereby a retired Governor-General is entitled to a pension equivalent to that paid
to a retired Chief Justice of the High Court (ie 60% of the salary of a serving
Chief Justice).
Page 25 of 28

Pension Indexation – A Historical Perspective
Attachment B
Superannuation pensions payable from the relevant civilian schemes are payable for
the life of the member and their eligible dependants. The level of reversion varies
between schemes but in the case of the PSS and CSS it is generally 67% of the former
member’s pension, with an additional 11% payable for eligible children up to a
maximum reversion of 100%.
Pensions from the superannuation schemes for civilian employees have been indexed
using various methods since at least 1947. At that time there was only one scheme
covering Australian Government employees, the 1922 Scheme.
Until 1973, indexation occurred on an ad hoc basis. Increases were limited to the
employer funded component of the benefit. Regular and automatic indexation of
pensions for Australian Government employees commenced in July 1973, following
an independent enquiry undertaken by Professor A H Pollard.
The method of indexation adopted in 1973 provided for the Commonwealth’s share of
pensions to be adjusted automatically each year from 1 July. The adjustment was
1.4 times the increase in the All Groups CPI number for the weighted average of the
6 State capital cities in the previous March to March period 37 , subject to the proviso
that this did not exceed the increase in seasonally adjusted Average Weekly Earnings
per employed male unit for the same period.
From 1 July 1976, as part of the arrangements for the introduction of the CSS, the
indexation arrangements were changed so that:
• the entire pension paid from the 1922 Scheme; and
• the main employer financed pension paid from the CSS,
were updated annually from 1 July by the increase in the CPI over the March to
March period.
In 1986 a technical change was made to the indexation provisions to recognise that
the CPI covered the 8 capital cities.
When the PSS was introduced on 1 July 1990 it provided for the full pensions paid
from that scheme to be indexed in the same manner.
The current method of twice yearly indexation commenced from 1 January 2002.
Under that method pensions are now increased in July each year according to the
increases in the CPI in the previous September to March quarter and in January
according to the movement in the CPI in the March to September.
37 The first increase, in 1973, used the period June 1971 to March 1973.
Page 26 of 28

Explanation of Costs
Attachment C
It has been previously estimated that changing the indexation of civilian and military
superannuation pensions to align it with the Age Pension methodology would increase
the unfunded liability by around $18 billion ($12 billion for the civilian
superannuation schemes and $6 billion for the military superannuation schemes).
In the case of the civilian superannuation schemes the estimate was based on
sensitivity analysis around the 2005 PSS and CSS Long Term Cost Report which
indicated that a 1.5% increase in CPI would increase the unfunded liability by around
$12 billion. For the military superannuation schemes the estimate was based on the
2002 MSBS and DFRDB Long Term Cost Report.
These estimates did not address whether there would be behavioural changes in the
proportion of PSS or MSBS benefits that would be taken as pensions because of a
changed indexation rate.
Revised estimate –Indexation aligned with the Age Pension methodology from
1 July 2009
As with the previous estimate, the actuarial advisors have assumed that
superannuation pensions will grow by 4% per annum as the basis for reflecting the
Age Pension methodology.
The immediate increase in the unfunded liability of changing the indexation of
civilian and military superannuation pensions to align it with the Age Pension
methodology is estimated to be around $28 billion. That is, around $17.3 billion for
the civilian superannuation schemes and around $10.3 billion for the military
superannuation schemes.
The increase between this estimate and the previous estimate of $18 billion is
attributable to the main following factors:
• the growth in the unfunded liability over the period since the previous estimate,
which accounts for around half of the increase; and
• an actuarially assumed behavioural change by PSS and MSBS members. It is
assumed that the proportion of the PSS and MSBS benefits that would be taken as
an indexed pension would increase because of the changed indexation
arrangements.
Estimate – Higher of CPI or MTAWE indexation from 1 July 2009
The immediate increase in the unfunded liability of changing the pension indexation
to the higher of CPI and MTAWE is $40 billion. That is, around $25 billion for the
civilian superannuation schemes and around $15 billion for the military
superannuation schemes.
The increase between this estimate and the estimate for changing the indexation to
align it with the Age Pension methodology is attributable to the higher actuarially
assumed long term indexation rate that would apply under this methodology of
4.6% per annum.
Page 27 of 28

Additional information - impact on the military superannuation unfunded
liability
The estimates in relation to the impact on the unfunded liability in respect of the
military superannuation schemes are also based on the MSBS remaining open with no
changes to military superannuation arrangements.
Explanation of the increase in the unfunded liability
This may be illustrated by considering the effect of a once off hypothetical pension
increase of CPI plus 1.5% 38 for just one year only (ie. back to normal CPI every other
year). As next year’s pension is linked to this year’s pension, all future pension
payments for current pensioners would be 1.5% higher than they otherwise would
have been. This once off additional increase adds 1.5% to the pension liability (as all
future payments have increased by 1.5%).
If another special increase of 1.5% above CPI was given in the next year as well, this
would add close to a further 1.5% increase to the pension liability at that time (which
would partly depend on the numbers of pensioners dying and the number of new
pensions commencing in the year). That is, the two special once off increases (one
this year and another one next year) would add up to an increase of just under 3% in
the unfunded pension liability.
Increasing to MTAWE instead of CPI is equivalent to committing to 45 years (which
is the estimated life of the unfunded liability) of 1.5% increases above CPI.
Increasing by the higher of CPI or MTAWE is equivalent to providing 45 years of
2.1% increases above CPI. Therefore the immediate impact on the unfunded
liabilities of $27 billion (for MTAWE indexation) or $40 billion (for the higher of CPI
or MTAWE) reflects the commitment to these future pension increases.
38 This is the assumed difference between MWATE and CPI.
Page 28 of 28