Chapter 3
Issues raised in evidence
3.1 Witnesses who gave evidence on the provisions of the bills concentrated
on several key issues. These were as follows:
- Government commitment;
- consultation;
- closure of the PSS;
- lump sum superannuation payments on redundancy;
- late preservation of benefits;
- timetable;
- differential outcomes for APS employees;
- accumulation funds;
- fund selection process;
- nature of default fund;
- effect on mobility within the APS;
- implications for national savings policy;
- merger of the CSS and PSS Boards; and
- supplementation.
Government commitment
3.2 Witnesses drew the Committee's attention to commitments concerning
future superannuation entitlements of current and future public sector
employees made by the Prime Minister, the Hon. John Howard MP, prior to
the Coalition's election to office.
Consultation
3.3 Witnesses complained of the lack of discussion or negotiation with
members or their representatives prior to the announcement of proposed
changes to the existing superannuation arrangements. Representatives of
the CPSU, APESMA and the ACTU all noted that this was a departure from
the previous practice of governments to consult with organisations of
employees prior to making decisions on important matters such as employee
superannuation entitlements.
3.4 In reply to questions from the Committee concerning consultation,
Mr Stephen Bartos, General Manager, Resource Management Framework,
Department of Finance and Administration, confirmed that consultation
with employee representatives began after the Minister for Finance and
Administration announced the proposed changes to the superannuation schemes
in September 1997. [1]
Closure of the PSS
3.5 The PSS will be closed to new members from 1 July 1998 and existing
PSS fund members will have no rights on resignation after 30 June 1998
to preserve their benefits and rejoin the scheme during a subsequent period
of employment. Under the proposed choice of funds legislation, departments
and agencies will have to choose one of two arrangements for providing
at least the minimum superannuation contributions for each employee: either
(a) offer limited choice (ie. four or more specified funds or RSAs) or
(b) offer unlimited choice. This will take effect for new members from
1 July 1998 and for existing members of both the CSS and PSS from 1 July
2000.
3.6 While existing PSS and CSS members will be able to retain their fund
membership as a third option, witnesses noted that closure of the PSS
meant that the Commonwealth would effectively be offering its employees
less choice than will be available generally since, unlike other employers,
it will not be required to provide an industry scheme as a fourth option
under the limited choice model.
Lump sum superannuation payments on redundancy
3.7 The Superannuation Legislation (Commonwealth Employment) Repeal and
Amendment Bill 1997 (the Bill) provides that, from 1 July 1999, no part
of the employer funded superannuation benefit will be payable on redundancy
and all employer contributions, from whatever date they commenced, must
be preserved until age 55.
3.8 Ms Linda Rubinstein, ACTU pointed out that when the Government announced
in the last budget that all superannuation contributions under SIS would
be preserved from 1 July 1999, this measure was to be applied prospectively,
ie existing preservation rules will apply to superannuation accrued at
that date. The proposed amendments will retrospectively freeze all of
an APS employee's employer funded benefits from 1 July 1999, not simply
the benefits attached to future contributions. [2]
3.9 The ACTU noted that the current level of redundancy benefits would
need to be significantly improved should employees be unable to access
employer funded superannuation benefits which presently make up a significant
proportion of the total redundancy `package' for APS employees.
Late preservation of benefits
3.10 In recent years a number of CSS contributors did not elect to preserve
their superannuation contributions on resignation, with the consequent
loss of access to the employer benefit. They have since sought to achieve
a late election to preserve former contributions on the grounds, among
others, of insufficient or incorrect advice having been provided by the
employer at the time of resignation. Through appeals to the AAT and the
Federal Court from decisions by the Commissioner of Superannuation, a
proportion of those applications have been successful.
3.11 The Bill contains provisions which will reduce the grounds on which
a claim can be made and curtail the time allowed for an individual to
make such a claim. The CPSU considers that the Bill `closes almost all
capacity for former CSS members to achieve a late election to preserve
former contributions' [3] which will only be
permitted where the person was unable to make an election `because of
exceptional circumstances or physical or mental incapacity'.
3.12 Ms Rubinstein told the Committee that former employees should retain
the opportunity to have their claims tested in the AAT or the Federal
Court. To do otherwise would mean `that an existing right will be seriously
weakened. Individuals who have suffered financial loss as a result of
incorrect advice or lack of reasonable information will have no redress.'
[4]
Timetable
3.13 New APS employees must be provided with a choice of superannuation
funds in accordance with the choice of funds policy from 1 July 1998.
Witnesses noted that, with regulations governing a disclosure regime for
those funds not yet in place, the time available for employer departments
and agencies to select a range of funds and educate new members to make
an informed choice of fund is limited.
3.14 Mr Richard Butler, APESMA, noted that the ACT government had not
yet received a report which it commissioned into the superannuation arrangements
for its employees following the closure of the PSS. In addition, none
of the agreements put in place following recent enterprise bargaining
negotiations in various Commonwealth departments and agencies have specified
the superannuation arrangements for new employees. He was doubtful that
arrangements could be concluded by the 1 July deadline:
What you are doing is asking agencies which, in the past, like a lot
of people in the Commonwealth sector, have not had a great interest in
superannuation, because superannuation was something that was administered
and run by the Department of Finance and Comsuper…. It was something
that the agencies very rarely had to look after in both the administration
and operation of it.
Certainly, in terms of the capacity to explain it to their employees,
they will now be responsible for doing all those things. We are expecting
them, if the legislation goes through, to be in a position to do that
come 1 July this year. Quite candidly, I doubt that it is possible. [5]
Differential outcomes for APS employees
3.15 Issues raised by witnesses as being areas where outcomes will be
different for those APS employees in the existing CSS and PSS funds and
new APS employees commencing after 1 July 1998 include death and disability
insurance covering administration and fund management costs.
3.16 Ms Sally O'Loughlin, Assistant National Secretary, CPSU noted that
current employees enjoy excellent insurance options for death and disability
cover, whereas people employed after 1 July 1998 will be in a public offer,
an RSA or another type of fund where:
…they will probably have to pay quite a significant amount themselves
in order to achieve anything like the same level of insurance cover as
they enjoy at the moment through the PSS. Again, this is just a simple
issue of equity… [6]
3.17 She also raised the issue of fund administration and management
costs. Currently funds are appropriated to ComSuper for the provision
of administrative services for the PSS and CSS. From 1 July the trustee
responsibilities of the two funds will pass to the newly established Commonwealth
Superannuation Board (CS Board) and the Budget appropriation that ComSuper
currently receives will be devolved to individual Budget funded departments
and agencies. The CS Board will pay the administration costs for both
schemes out of monies the Board collects from those departments and agencies.
[7]
3.18 The CPSU contends, therefore, that while administrative costs for
PSS and CSS members will continue to be funded from Budget appropriations,
those people who are employed after 1 July 1998 under the choice of fund
principle will have a portion of their superannuation contributions deducted
to pay the administration costs of that fund. [8]
Accumulation funds
3.19 The CPSU also drew the Committee's attention to the consequences
arising from an assumption that most new employees will join accumulation
funds while existing employees remain in the PSS and CSS, which are `defined
benefit' funds. In the latter case, the employer has the liability for
provision of a final benefit until that benefit is paid, while an accumulation
fund member picks up total liability for provision of final benefit once
he or she has made a payment to the fund.
3.20 The Committee questioned Mr Craig Thorburn, Acting Deputy Commissioner,
Life Insurance, Insurance and Superannuation Commission, as to whether
a defined benefit fund is more secure than an accumulation fund:
No, I would say they are under the same prudential regime. The one difference
I think with defined benefit funds and accumulation schemes is that defined
benefit schemes effectively have the future economic conditions underwritten
by the employer. Therefore, the security of the defined benefit scheme
is tied to a greater extent to the security of the employer….
With an accumulation fund, the future investment returns are the main
driver, but variable future investment returns are not underwritten by
the employer. [9]
3.21 In answer to a question from the Committee, Mr Thorburn agreed that
a member of an accumulation fund carries a greater level of uncertainty.
[10]
3.22 The CPSU also noted that the quantum of benefit will differ substantially
for APS employees depending on which type of fund they are in:
…the final benefit that a person can achieve through using an accumulation
scheme, such as will be the norm for people who will not be allowed to
choose to be in the PSS, will be a much lesser benefit than if they were
in the PSS, particularly if you do the comparison for someone who wants
to achieve a fully indexed pension as their final benefit.
…The loss of the ability to take an indexed pension, which is available
to people through the PSS, compared to what people would be able to achieve
through an accumulation scheme is in the order of $100,000 or more. That
is a very significant loss of benefit. [11]
Fund selection process
3.23 Having heard evidence concerning the introduction of the choice
of funds policy and of the likelihood of a large number of employees opting
for a default fund, the Committee sought clarification from officials
of the Department of Finance and Administration on the selection process
and criteria to be adopted for selecting four funds, where employers are
offering limited choice, and a default fund, for Commonwealth departments
and agencies. Mr Bartos indicated that no guidelines would be issued to
employers on the selection process, but they were free to adopt his department's
practice. He added:
In respect of choosing a default fund, my preferred approach is to do
that by way of a competitive selection on a tender basis, but I believe
that the choice of a default fund will, for almost all employers, be a
fairly conservative one. [12]
3.24 On the selection of funds generally, the Committee sought to establish
how the process would be handled within each department, and the level
of expertise of those officials responsible for decisions on superannuation
matters.
3.25 Mr Bartos indicated that neither his department nor any other agency
had yet made a final decision on the procedure - whether by tender or
selection on the basis of information from superannuation providers -
to be adopted for fund selection, pending passage of the legislation through
parliament.
3.26 Questioned as to the form any tender process might take, Mr Bartos
indicated that it need not necessarily be a public tender process such
as might be used in the provision of goods and services but should include
`a very rigorous comparison' of the information submitted by superannuation
funds putting themselves forward for selection. [13]
3.27 Concerning the expertise of departmental officers who will make
the final selection, he said:
…In relation to what expertise employers have, every department
or agency has the same sorts of obligations as other employers in the
community to exercise good judgement in relation to all of the conditions
of employment offered to staff - superannuation being one of them. There
is a range of other issues in terms of all of the terms and conditions
of employment on which we do take professional advice. Certainly on superannuation
we will be taking professional advice and at the end of the day making
a good management judgment. [14]
Nature of default fund
3.28 Committee members questioned whether employees might not be some
hundreds of thousands of dollars worse off by the time of their retirement
if they entered a conservative default fund at an early age. They also
sought confirmation as to whether a default fund would be obliged to provide
death and disability cover for members. Ms Wilson advised that there is
no requirement in the legislation for the default fund to provide such
cover but that DOFA would advise employing agencies to seriously consider
including it in any specifications for a default fund.
Effect on mobility within the APS
3.29 In its submission to the Committee, the CPSU indicated its concern
that the introduction of scheme choice at a departmental rather than an
APS-wide level `will radically reduce portability for employees moving
within the APS.' [15]
3.30 Information supplied to the Committee by Ms Christine Goode, the
Commissioner for Superannuation, indicates that mobility of APS staff
in 1996-97 was 14.3 per cent. [16] Based on
the number of permanent staff employed in the APS at June 1997 - 118 568
[17] - up to 16 955 movements could take
place annually.
3.31 The Committee queried the effect on mobility within the Commonwealth
Public service under the new arrangements, with each department or agency
potentially having to offer the transferring officer the choice of retaining
his or her existing fund even if that fund was not on the receiving department's
menu of choice. Mr Bartos did not see this issue as an impediment to mobility:
I think it would only cause problems if an agency were to take the position
that it was offering four and only four funds to its employees and was
not prepared to be flexible enough to make payments to another fund for
a new employee who might happen to come in from another agency. My expectation
is that that will not happen. I do not see employers being that inflexible.
[18]
3.32 Asked about possible increased administration costs of a proliferation
of superannuation accounts for each department or agency, Mr Bartos indicated
that making payments into different funds is not administratively costly
- departments currently make a large number of payments on behalf of their
employees to different payees. He added:
The point of this legislation is based around choice rather than necessarily
around administrative costs. [19]
Implications for national savings policy
3.33 Ms O' Loughlin of the CPSU pointed out that a shift towards accumulation
schemes meant that the benefits taken by future employees would be in
the form of lump sums instead of pensions. She argued that this was contrary
to the general directions of national savings policy:
It is our understanding and our own view that governments of all persuasions
have moved over time to a position that pension outcomes generally speaking
are better outcomes as far as the national superannuation and pension
system is concerned. [20]
Merger of CSS and PSS Boards
3.34 The Commonwealth Superannuation Board Bill 1997 establishes a new
Commonwealth Superannuation Board to take over the responsibility of the
CSS and PSS Boards and the Commissioner for Superannuation.
3.35 The CPSU representative advised the Committee that while the CPSU
was not necessarily opposed to this change, the Government had not consulted
with the staff of the Public Service, nor their representative organisations
about the matter.
3.36 Ms O'Loughlin argued that merging the two boards was 'a significant
thing to do', and she thought that the Government should have consulted
'the people whose money is invested by those two boards'. [21]
Supplementation
3.37 Witnesses raised the issue of the level of Commonwealth funding
for the cost of employee superannuation under the new arrangements. Currently,
the rate of supplementation to departmental running costs is based on
the relative proportions of PSS (supplemented at 13.1 per cent) and CSS
( at 21.9 per cent) members on their staffs. Mr Bartos confirmed that
there would be no reduction in agencies' running costs, however:
After implementation of choice, it will become, in practical terms, very
difficult to work out an exact supplementation figure for agencies for
their superannuation costs. So the government has decided that, with the
introduction of choice, the existing amounts of money that agencies have
will no longer be readjusted every year; what they currently have in their
running costs bucket will be maintained. What that means in effect is
that, if superannuation costs continue to reduce over time, agencies will
have a greater level of supplementation than they might otherwise have
had under current arrangements… [22]
3.38 The Committee sought clarification from Mr Bartos as to whether
the amount included in departmental running costs for superannuation funding
would continue at current levels. Mr Bartos indicated that it was `just
part of agencies' running costs base' legislated each year by parliament
as part of the appropriations and, as such, subject to change each year.
[23].
Footnotes
[1] Evidence, p. 52.
[2] Evidence, p. 3.
[3] Submission, p. 70.
[4] Submission, p. 5.
[5] Evidence, p. 19.
[6] Evidence, p. 6.
[7] Submission, Department of Finance
and Administration, p. 15-16.
[8] Evidence, p. 6.
[9] Evidence, p. 30.
[10] Evidence, p. 30.
[11] Evidence, p. 7.
[12] Evidence, p. 44.
[13] Evidence, p. 48.
[14] Evidence, p. 47.
[15] Submission, p. 3.
[16] Mobility in the Australian Public Service,
PSMPC, December 1997, p. 37.
[17] Ibid, p. 5.
[18] Evidence, p. 40.
[19] Evidence, p. 41.
[20] Evidence, p. 5.
[21] Evidence, p. 13.
[22] Evidence, p. 36.
[23] Evidence, p. 36.
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