6 September 2011, The Public Sector Informant, The Canberra Times
ComSuper PSS members can access very high risk-free returns by making extra salary contributions.
Things are moving slowly in Belconnen. Apart from a notice that the ARIA and Military Super boards have merged, the websites of ComSuper funds CSS and PSS still report that both funds are controlled by ARIA, and not the merged organisation. After three months of negative returns in the CSS and PSS default funds, and the prospect of troubled times ahead, CSS members in particular can only hope that the new trustee board acts quickly to expand their investment options and give them the same choices available to their military colleagues.
Recent gyrations in the Australian and world share markets have understandably increased investor fears about the possibility of a double-dip recession in the United States and Europe. The Australian Government's reassuring comments about the economy's continuing strength provide little comfort for its own employees who are presently unable to invest their super solely or mainly in Australian assets.
At this point, I should clarify an issue that confused several readers, who queried why my article last month focused solely on CSS members. Compared with their CSS colleagues, whose returns depend considerably on investment performance, the returns of PSS members are protected and indeed underwritten by the government while they continue to contribute to their fund. It's only when PSS members leave Commonwealth employment or opt to preserve their benefits that they become exposed to investment risk.
When the PSS was first introduced in 1990, the consulting actuaries assumed that super funds' high investment returns would continue and that investment income would exceed average salary increases. On this basis, the Finance Department and Treasury were only too keen to implement PSS fund rules whereby a substantial component of high investment returns on member and productivity contributions accrued to the government. They did not foresee the conditions that have prevailed for several years now - of continuing salary growth and relatively low and even negative investment returns.
These changed circumstances have resulted in increased employer funding costs for contributing PSS members. This happens because the PSS rules calculate members' benefits by multiplying the final average salary over their last three years of employment by their accumulated contribution multiple. The more money that PSS members contribute to their fund, the larger is their accumulated contribution multiple at the time of exit. After 10 years' membership, the employer even matches members' contributions between 5 and 10 per cent of salary, guaranteeing PSS members a very high risk-free return on these voluntary contributions.
Unlike the CSS, the PSS also allows members to avoid investment risk in retirement completely, by offering members the option of converting all of their accumulated benefits to an inflation-indexed pension.
The CSS allows its members to convert their accumulated member and productivity benefit only to a non-indexed pension. Consequently, in both their working life and in retirement, the large majority of CSS members face the challenge of dealing with investment risk on a significant part of their
retirement assets. Far from being, as envisaged in 1990, an easy way to reduce the cost of providing employee retirement benefits, the PSS is now adding to the federal government's medium and long-term funding problems for several reasons.
First, low investment returns relative to salary growth over the past 10 years have increased the government's share of the total cost. Second, the uncertain investment environment and increasing longevity have increased the attractions for members to take their benefits as an indexed pension, payable for lengthy periods in the future.
Funding costs have also increased because PSS members are increasingly aware of the high risk-free returns available if they maximise their contributions at 10 per cent of salary. Especially when salaries have risen, these extra contributions provide percentage returns higher than those available from any other investment, including paying off mortgages.
Fortunately for PSS members, the government closed off entry to new members in 2005, increasing the political difficulties of undermining the fund's benefits. Nevertheless, the trustees have introduced several traps for the unwary which, if taken up by members, will reduce future funding costs. These include removing the requirement for PSS members to contribute to their fund (the previous minimum member contribution was 2per cent of salary) and allowing members to preserve their PSS benefits and join the PSS Accumulation Plan while they are still employed.
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