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

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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
Page 1 and 2: SUBMISSION TO THE REVIEW OF INDEXAT
Page 3 and 4: Executive Summary The Department of
Page 5: Chapter 1 - The Occupational Nature
Page 9 and 10: Chapter 3 - The Value of Benefits S
Page 11 and 12: eceiving a pension from the CSS and
Page 13 and 14: 15 years membership in the PSS, the
Page 15 and 16: Chapter 4 -Comparison with State an
Page 17 and 18: Income from Australian Government c
Page 19 and 20: Chapter 6 - The cost to the Governm
Page 21 and 22: For example, analysis by the Depart
Page 23 and 24: Australian Government Superannuatio
Page 25 and 26: • Parliamentarians who commenced
Page 27 and 28: Explanation of Costs Attachment C I

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