Superannuation -
Daryl Dixon
The Public Sector Informant (Canberra Times), March 2010
Debt Mismanagement
The Finance Department is converting public servants' super contributions into future debt.
Judging by the Senate estimate committee's lack of interest in ComSuper's activities, ComSuper will, as reported in last month's
Informant, soon disappear with little fanfare. Despite the Federal Government's decision to replace the position of Superannuation Commissioner with a chief executive and outsource the administration of the PSS Accumulation Plan, ComSuper's staff were not required to appear before the estimates committee last month because the senators had no questions.
This is disappointing for public servants given the impending changes in administrative arrangements as well as superannuants' concerns about how the Government treats them. In previous issues, the
Informant has highlighted superannuation presioners' concerns about the inadequate indexation arrangements for their pensions and the adverse effects on retired public servants of the September 2009 changes to the age-pension income test.
More recently, several retirees concerned about the Government's growing unfunded pension debt have contacted the
Informant to highlight significant corporate governance issues associated with ComSuper's payment of pensions. Their main complaint is that long-standing funding arrangements put in place by the Finance Department work to increase the long-term unfunded liability of the respective pension funds.
Several readers also queried why, if one objective of the Future Fund was to help meet the government's unfunded super liabilities, the money so allocated was not invested for funding relevant superannuation schemes. As it now stands, the assets in fund could end up being used elsewhere and/or directed to investments unsuited to providing income streams to fund future pensions.
There may be little that current and retired public servants can do to ensure the Future Fund's assets are used when needed to fund their future pension payments. But there is a strong corporate governance case for changes to the Finance Department's funding arrangements for ComSuper payments.
The
Informant sought confirmation of the following procedures from the department but received no reply. Nevertheless, information obtained from former senior Finance and ComSuper staff has confirmed that these funding arrangements apply.
First, government employers and agencies face a actuarially determined annual levy to cover the assessed employer on-cost for employee membership of their respective super fund. But only a small part of these payments are retained and paid to the relevant super funds to fund future superannuation benefits. These retained amounts are the funded employer productivity benefits and the total employer contribution in respect of the funded PSS Accumulation Plan.
The Finance Department uses the balance of the employer payments - most of the payments made to cover future debts - as a below-the-line current funding source. In essence, money that employers pay to fund future accruing liabilities is used to fund current outlays and ease the government's present funding problems.
In a normal super fund, by contrast, employer payments are invested to earn interest until needed to provide benefits. For federal employees, however, even though employers are charged the actuarial cost of employee membership of their super fund, the government, with the few exceptions mentioned above, uses the money immediately to fund current outlays.
Second, another arrangement at the time of drawing benefits from the funds adds to future unfunded debts. This is in the situation where former staff choose to take their funded member and productivity benefits as an indexed (PSS) or unindexed (CSS) pension. Both options increase the government's future pension obligations.
Instead of keeping the lump sum used to acquire the relevant pension in the super fund, ComSuper transfers the total amount to Finance, which then uses the money for immediate purposes. In effect, Finance converts a funded lump-sum super asset into an unfunded future pension debt.
These long-standing arrangements have, over many years, increased the unfunded superannuation liabilities of the Commonwealth's super funds by billions of dollars. By not following well-established normal superannuation funding arrangements, the Commonwealth has increased its future debts and increased the risk that, at some future date, the government will alter the promised benefits (as recently took place in Ireland and Greece).
Next month's
Informant will explain how these funding arrangements have also resulted in higher tax burdens for Commonwealth superannuation pensioners who joined their funds before the 15 per cent tax on super contributions and fund income was introduced in 1988.
Especially compared with their state counterparts, these pensioners pay more tax than would be necessary if the Finance Department used alternative funding procedures to pay their pensions.
Daryl Dixon is executive chairman of Dixon Advisory and Superannuation Services -
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