Chapter 2
Appropriateness
In the light of the circumstances that applied in 1973, the Scheme
design does not seem unreasonable. [1]
Public perceptions of parliamentary superannuation
2.1 From time to time there has been expressed criticism of parliamentary
superannuation as being too generous and unrelated to the superannuation
entitlements of ordinary people. Some of the more recent and graphic criticisms
were contained in an article in the January 1997 edition of the Reader's
Digest, [2] and in the resulting letters
to the editors of daily newspapers and several submissions to the Committee.
2.2 The Committee was mindful of the existence of these perceptions and
for the need to test some of them in evidence at the public hearing on
parliamentary superannuation held in Canberra on 4 June 1997. Accordingly,
the author of the Reader's Digest article, Mr Paul Raffaele, was invited
to give evidence to the Committee. Mr Peter Szalay, a member of the public,
also gave evidence following a submission made by him to the Committee.
2.3 In submissions received from the public, the following comments are
representative of the points most often made:
The "one career" path is not to be expected any more.
So members of parliament who resign, do not stand for re-election, or
who are not re-elected are now in the same position as all other people
in the workforce ... Hence they should not receive pension benefits
in excess of those provided for government employees. [3]
Mr Michael Lavarch's $52,000 pa pension for life after only nine
years in his job would be seen by all intelligent taxpayers as obscene.
[4]
Politicians legislate that the rest of the community must wait
to 55 years of age before they have proper access to their superannuation.
[5]
Redundancy payouts should be considered for defeated politicians
to tide them over for a few months as for other members of the community.
[6]
Payments of superannuation benefits for politicians should occur
on reaching retirement age, the same as for the rest of the community.
[7]
Whatever rules apply to workers, supervisors and managers in
factories and offices should apply to politicians, in terms of contributions
and withdrawals. [8]
2.4 Evidence presented to the Committee did highlight some anomalies
in the Parliamentary Contributory Superannuation Scheme (PCSS). However,
the Committee considers there may have been undue attention paid to individual
cases in the press which has exaggerated general perceptions of unreasonableness.
2.5 In the following paragraphs of this chapter, the Committee examines:
- the objectives of the PCSS;
- whether the scheme is operating appropriately for its members; and
- how it compares to superannuation in the wider community.
Is the scheme trying to do too much?
2.6 The Committee considers that as a community, we may generally have
required too much of superannuation. At the micro level, this kind of
expectation may have manifested itself in the Parliamentary Scheme. The
evidence in support of this view included that from Dr Vince FitzGerald,
who said of the PCSS:
It has got aspects which appear to be covering not only the needs
of parliamentarians who go through to retiring age and then retire,
but also to have something of the character of a severance pay arrangement.
[9]
2.7 Dr FitzGerald suggested that aspects of the scheme could be better
handled by providing assistance in some other way to those members who
leave involuntarily, to help members re-establish themselves 'in some
other pursuit and get back to earning an income in some other way'. [10]
The issue of a dislocation benefit is considered in Chapter 4.
The tenure of Australian Parliamentarians
2.8 The Committee's secretariat undertook research on the tenure of federal
parliamentarians since the 1940s. This table is a breakdown of the average
term in years of completed service of those parliamentarians elected in
the particular decade.
Average Tenure
| |
1940s |
1950s |
1960s |
1970s |
1980s |
| H of R |
12.9 |
14.7 |
11.0 |
8.7 |
8.9 |
| Senate |
11.6 |
14.6 |
11.2 |
10.8 |
7.0 |
2.9 While the figures for the 1980s appointees may be statistically skewed
downward due to the omission of those still serving, the Committee is
satisfied that the figures do indicate a trend toward shorter parliamentary
careers. The Committee regards this trend as important in assessing the
appropriateness of the current PCSS.
2.10 One implication of this trend is that fewer parliamentarians will
reach the criteria to qualify for a pension. For them, the PCSS becomes
purely a compensation or redundancy scheme. However, the Government-financed
element of this benefit is 26.8 per cent of salary paid during their service,
which is considerable. The amount received in this way, or part thereof,
could be applied to superannuation for the former member.
The age of parliamentarians
2.11 The Committee noted the view of the Australian Government Actuary
that there has been a trend toward younger members of Parliament. [11]
However, the following table is not necessarily supportive of this view.
[12]
Average Age of Senators and Members
1901 - 48.1 1950 - 51.8 1978 - 47.5 1992 - 50.1 1995 - 49.4 1996 - 48.0
2.12 Perhaps a more relevant table is that following, which details the
ages at which and the periods in which parliamentarians were first elected.
[13]
Age at which first elected
| Period or Parliament |
Senate |
House of Reps |
Both Houses |
| |
|
|
|
| 1901-48 |
48.8 |
45.0 |
46.3 |
| 1949-79 |
47.8 |
42.1 |
43.9 |
| 1995 - all sitting Members & Senators |
41.7 |
40.1 |
40.5 |
| 1996 - all sitting Members & Senators |
41.4 |
40.6 |
40.9 |
2.13 These tables are somewhat difficult to reconcile and, given the
limited statistical analysis available, the Committee is reluctant to
draw firm conclusions. However, the evidence does indicate that there
is probably a lowering in the age of initial election to the Parliament.
The consequences are that parliamentarians are becoming eligible for pensions
at a younger age. This factor, plus increases in life expectancy since
the turn of the century, means that the costs, or potential costs, of
these pensions is rising because recipients receive payments for a longer
period.
The relative benefits to long and short term members
2.14 In Part B of this Report (the Judges section), the Committee examined
the difficult issue of equity between members. The principles outlined
there can be equally considered in relation to the parliamentary scheme.
In that light, the PCSS can be seen as particularly generous to younger
members who leave parliament soon after qualifying for a pension, and
relatively less beneficial to long term members. Also, Mr Daryl Dixon,
a superannuation consultant, found a 'discrimination':
... against people not achieving the required three terms in
office and in this context, benefits provided can not be considered
as equitable compared with the treatment of longer serving members.
[14]
2.15 These perceived inequities are well illustrated in the following
graphs submitted the Government Actuary. The graphs show the actuarial
value of benefits, as a multiple of the Parliamentary Allowance, that
are provided to a 32 year-old new entrant to the PCSS. In the first graph
there is no commutation of pension, while the lower graph assumes a 50
per cent commutation of any pension to a lump sum. [15]
2.16 The spectacular increase in the actuarial value of benefits around
the pension qualifying period is obvious, while actuarial evidence is
less necessary to understand that the longer time a pension is paid, the
more overall benefit is received.
[THESE GRAPHS ARE NOT PROVIDED IN THE INTERNET VERSION OF THIS REPORT.
BOTH GRAPHS SHOW A GRADUAL INCREASE IN VALUES TO A MAXIMUM OF APPROXIMATELY
TWICE THE BASIC PARLIAMENTARY SALARY AFTER 11 YEARS OF SERVICE, FOLLOWED
BY AN ABRUPT JUMP IN VALUES.
READERS REQUIRING ACCESS TO THESE GRAPHS SHOULD CONTACT THE COMMITTEE
SECRETARIAT BY E-MAIL AT SUPERANNUATION.SEN@APH.GOV.AU
OR PHONE 02 62773439.]
2.17 Further evidence on relative benefits was provided by the Parliamentary
Retiring Allowances Trust, the body responsible for the PCSS. The Trust
said:
The PCSS is inequitable for short-term members. Whereas it generally
caters very well for young retirees with more than 8 years service who
become entitled to a pension, it provides much lower benefit for short-term
members. [16]
Superannuation, parliamentarians and the wider community
2.18 In the previous chapter, major changes to the PCSS since the establishment
of the scheme were outlined, with the last major changes to the structure
being in 1973 (see paragraphs 1.3 to 1.9). The commutation option was
established in 1978-79 (paragraph 1.8), and the changes since have been
less major, and largely restricted to necessity. Examples include the
introduction of the Superannuation Guarantee (SG), and correcting anomalies
such as the 1983 revisions to the commutation percentage and to pensions
under the office of profit provision.
2.19 In Australia over the past 18 years or so, there have been significant
changes to the superannuation environment and in the community's involvement
with superannuation. In the 1970's, superannuation was provided to relatively
few in the workforce. Where it was provided, 'it was to look after those
who retired after long service with the employer'. [17]
2.20 This situation fairly reflected, and indeed encouraged (to the limited
extent that superannuation was provided), more stable employment patterns
than is the case today. Generally, those who left employment prior to
retirement received little in the way of employer support. In the case
of parliamentarians, this generally meant that their only superannuation
would be a pension under the PCSS.
2.21 Changes in the late 1980's and 1990's especially, have brought about
near universal superannuation coverage for all in the workforce. Through
the SG provisions particularly, much greater levels of employer support
are provided for shorter term employees. As indicated by the Government
Actuary, this means current parliamentarians are likely to receive superannuation
benefits from employment before and after parliamentary life. Therefore,
most future members of the PCSS will end up with significantly more superannuation
than in the 1970's, when a parliamentarian was most likely to receive
only a PCSS benefit. [18]
The nature of parliamentary life
2.22 In considering whether there are special aspects of the life of
a federal politician that particularly affect the matter of superannuation
that justify special superannuation provisions different from those applying
in the general community, the Committee regarded the following factors
as relevant:
- uncertainty of tenure;
- disruption to lifestyle; and
- the problems of employment after parliament.
Uncertainty
2.23 Election to Parliament by its very nature implies an uncertain future.
Apart from the particular issues relating to marginal seats and election
volatility, there is preselection and all the other stresses relating
to political life. While the Committee fully recognises that many other
occupations involve a greater or lesser degree of volatility, there are
characteristics of parliamentary life that perhaps lead to a shorter and
more intense career than many (if not most) others. This should be fairly
reflected in the associated remuneration package.
Disruption
2.24 For many, the decision to seek and achieve parliamentary office
involves considerable disruption to an established lifestyle and career.
This point was well made by Mr Robert McClelland MP:
The decision to terminate my legal career and enter Parliament
was one which was not taken lightly. Obviously a number of factors were
considered but paramount was the extent of disruption which would be
caused to my family not only as result of absences but also in terms
of financial security. [19]
Post-parliamentary employment
2.25 Employment at the end of a parliamentary career is an issue closely
related to that of career disruption on entering parliament. It is true
that some former parliamentarians, particularly those who have held ministerial
positions, find that their parliamentary experience opens up excellent
opportunities for employment. For others, however, the situation is the
reverse, and employment opportunities may be limited, especially with
regard to the resumption of a former career.
2.26 Where a person leaves employment to become a member of parliament
and subsequently has to re-establish a career after parliamentary life,
Mr Wilson Tuckey MP said:
They have spent a lot of their own money, which is one cost,
and they have suffered this disruption and they have got to relocate
themselves in their vocation outside of parliament .
The concern I have is that the longer you are out and the older
you get, that is a negative to re-establishing yourself. [20]
2.27 Mr McClelland MP also averted to the problem of re-establishment,
in his case back into legal practice:
For many of us in the parliament it is very difficult to even
get accepted back into your old career structure ...
If I wanted to go back, I have found that, even after 18 months,
I am behind the pace in terms of knowing what the case law is. I would
not have funds to buy back into a partnership or to take up chambers.
[21]
Early pensions
2.28 The availability of an indexed pension at an early age is probably
the most criticised aspect of the PCSS. This is not a benefit provision
unique to the PCSS, as other superannuation schemes also provide for a
pension entitlement prior to retirement age. However, in the private sector,
'pensions tend to be either non-indexed or indexed subject to a certain
cap or qualifier'. The Government Actuary added:
the capacity to take your pension prior to the preservation age
for lump sums is something that is permitted in the private sector but
is rare. [22]
2.29 Dr FitzGerald also regarded the giving the same pension to members
retiring regardless of age as 'quite unusual'. [23]
2.30 Regarding other public sector schemes which provide for early pensions,
Mr Daryl Dixon cited the Commonwealth Superannuation Scheme which provides
for Commonwealth public servants. In that scheme, the pension payable
is discounted by three per cent a year 'for every year below the age of
60':
That means at the age of 31 no pension is payable. So if you
wanted a comparison between politicians and Commonwealth public servants,
the Commonwealth super scheme is nowhere near as generous as the politicians'
scheme. [24]
2.31 Mr Dixon considers the parliamentary pension should be defined as
an age 60 pension, and discounted by an actuarial factor to mean there
would be no pension payable at age 30. [25]
2.32 The Government Actuary provided an estimate of a 20 per cent saving
in the cost of the PCSS for new members if pension benefits were not paid
prior to age 55. [26]
Flexibility, portability and choice
2.33 As with all defined benefit schemes, there is an inherent inflexibility
in the PCSS. Whether this is desirable can be seen in the light of the
proposed reforms discussed in the next chapter. At this stage it is worth
noting the inflexibility in contributions. With membership compulsory,
members must contribute at the rate of eleven and one-half per cent for
the first 18 years of membership and at five and three-quarters per cent
for subsequent membership. By comparison, those schemes operating for
Commonwealth public servants have allowed for a flexibility in contribution
rates, with benefits varying accordingly.
2.34 The result of the inflexible nature of the PCSS is a lack of choice
for individual parliamentarians. In view of the increasing prospect of
new members bringing to their parliamentary life substantial superannuation
as a result of other employment, it seems inefficient as well as unnecessary
to be requiring them to contribute to a scheme which may result in them
exceeding Reasonable Benefit Limits or exceeding their own superannuation
requirements.
2.35 As part of its research on the issue of choice, the Committee examined
the report of the Wallis Report on the Australian financial system. Recommendation
88 of that report said in part:
Employees should be provided with choice of fund, subject to
any constraints necessary to address concerns about administrative costs
and fund liquidity.
2.36 The Committee also recognises the lack of portability involved in
the parliamentary scheme. While it is possible for a member of the PCSS
to purchase notional past service which will be taken into account in
determining future entitlements under the PCSS, this option is generally
not taken up. Then, on leaving parliamentary service, there is no transferability
of a PCSS pension entitlement to another scheme.
2.37 One possible solution to these dilemmas is for membership of the
PCSS to be optional, to the extent that every parliamentarian is a member
until he or she opts out.
To be or not be funded
2.38 The Government Actuary was equivocal on the issue of whether the
PCSS should be funded. He indicated that to fund the scheme by paying
the employer contributions would increase budget outlays in the first
year by 'approximately $12 million':
This increase would decline over a long period and eventually
there would be a reduction in budget outlays. [27]
2.39 In about 60 years time the cost to the budget of the PCSS would
reduce to approximately $12 million in present day values. [28]
To put this into context, net Commonwealth PCSS benefit expenditure in
1995-96 was $17 million. This was a heavy expenditure year because of
the large turnover of members following the March 1996 election. For comparison
the:
... combined annual cash flow requirements for the main Commonwealth
civilian and military superannuation schemes are expected to average
about $3 billion per annum in the near future. Annual cash flow requirements
for the old age pension are currently about $15 billion per annum. [29]
2.40 The Government Actuary considered if there were no change to the
scheme, that 'PCSS expenditure will not have a material impact on future
budgets'. [30]
2.41 Alternatively, the Commonwealth could take the decision to fund
the whole unfunded liability now. That unfunded liability, calculated
as part of the 1996 Long Term Cost Report on the PCSS, was $371 million.
[31] Since the Government has indicated
that it wishes employers to provide choice, a limited choice should also
be provided for parliamentarians. This will inevitably lead to full funding
for parliamentary superannuation.
Conclusion
2.42 The evidence outlined in this chapter indicates that the PCSS:
- does not necessarily serve its members well;
- may be outdated in some of its provisions; and
- attempts to achieve too much in relation to what a superannuation
scheme can fairly be expected to provide.
2.43 There is clearly a negative perception in the mind of the public
about the scheme, and an uneasy relationship between the PCSS and superannuation
in the broader community. In the light of these findings, the next chapter
examines suggested reform.
[Return to Table of Contents]
Footnotes
[1] Submission No. 42, Department of
Finance, p. 9.
[2] Paul Raffaele, Australia's Outrageous
Parliamentary Pensions, Reader's Digest, January 1997.
[3] Submission No. 5, J.H. Jury.
[4] Submission No. 7, Mr J. Collins.
[5] Submission No. 16, Mr J. Bear.
[6] Submission No. 27, Mr & Ms A.
& M. Thomson.
[7] Submission No. 37, Mr M. Quirk.
[8] Submission No. 38, Mr B. Fernandez.
[9] Evidence, Dr Vincent FitzGerald,
p. 153.
[10] Evidence, Dr Vincent FitzGerald,
p. 153.
[11] Submission No. 42, Australian Government
Actuary, p. 7.
[12] Statistics provided by Parliamentary Library
Information Service to the Committee, 28 November 1997.
[13] Statistics provided by Parliamentary Library
Information Service to the Committee, 19 June 1997, incorporating extracts
from A Federal Legislature The Australian Commonwealth Parliament 1901-1980,
by Joan Ryden, published 1980.
[14] Submission No. 48, Mr Daryl Dixon,
p. 2.
[15] Submission No. 42, Australian Government
Actuary, p. 7-8.
[16] Submission No. 43, Parliamentary
Retiring Allowances Trust, pp. 2-3.
[17] Submission No. 42, Australian Government
Actuary, p. 9.
[18] Submission No. 42, Australian Government
Actuary, p. 9.
[19] Submission No. 24, Mr Robert McClelland
MP.
[20] Evidence, Mr Wilson Tuckey MP,
p. 149.
[21] Evidence, Mr Robert McClelland
MP, p. 128.
[22] Evidence, Mr Craig Thorburn, p.
126.
[23] Evidence, Dr Vincent FitzGerald,
p. 153.
[24] Evidence, Mr Daryl Dixon, p. 130.
[25] Evidence, Mr Daryl Dixon, p. 132.
[26] Supplementary Submission to No. 42,
Australian Government Actuary.
[27] Submission No. 42, Australian Government
Actuary, p. 21.
[28] Submission No. 42, Australian Government
Actuary, p. 21.
[29] Submission No. 42, Australian Government
Actuary, p. 19.
[30] Submission No. 42, Australian Government
Actuary, p. 19.
[31] Submission No. 42, Australian Government
Actuary, p. 20.
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