Public servants on steadier ground than academics

Defined-benefit funds CSS and PSS pensioners are highly unlikely to face the uncertainties plaguing UniSuper.

A protection for public servants is that a breach of the Commonwealth's statutory commitments would trash Australia's credit reputation.

Apparently tempted by the extra cash on offer, Australian National University employees have been keen to volunteer for one of the 230 early-retirement packages now on offer.

As I explained last month, this is an attractive opportunity for staff who want to retire or who can find another job after gaining access to their Commonwealth Superannuation Scheme or UniSuper benefits. Unfortunately, last month's explanation of UniSuper's funding problems generated concern from several CSS and Public Sector Superannuation Scheme members about the security of their pensions.

How certain can public servants be of receiving all of the indexed, lifetime benefits promised to them and their spouses? And, can PSS members also be sure that, if they accept the attractive option to convert their lump-sum entitlement to a pension, they and their spouses will be covered for as long as they live?

Even though UniSuper benefits are backed by a pool of assets, and the Commonwealth employer benefits are unfunded and paid out of consolidated revenue, these defined- benefit schemes are chalk and cheese. Unless the Australian Prudential Regulation Authority or the government intervenes to change the structure of UniSuper's defined-benefit fund, current UniSuper defined-benefit pensioners face an uncertain future.

There are two main areas of concern for UniSuper defined-benefit members. The first is that, since at least 2002, the universities as employers have made it clear they are unprepared to make good any funding shortfall. If investment returns on the fund's portfolio are good, there might not be a problem.

On this front, there are concerns. After a 10-year period when average annual investment returns exceeded 8 per cent, the trustees still decided to reduce the benefit-accrual formula for service after January 1, 2015. The possibility of similar benefit reductions after that date remains.

Second, the problem particularly for members who opt to take a non-commutable,indexed, lifetime pension is that there are no reserves to help cover down times. The assets left in the fund by pensioner retirees are not even segregated in a separate account; the money is merged with the assets of current members.

This means that, if there are large-scale withdrawals of members' money via redundancies, resignations and retirements, the funds available to back the pensions are reduced. For pensioners especially, an employer guarantee or reserves to cover longevity and investment fluctuation risks are essential for a certain retirement.

Turning now to the Commonwealth defined-benefit funds - such as the CSS and PSS - and their pension commitments, there is no pool of money to back the pension. The Howard government set up the Future Fund, which now owns over $80 billion of assets to help fund future unfunded super liabilities. But there is no guarantee that a future government would not seek to draw on the fund for other purposes.

If the economy performs well and investment returns are good, the likelihood is the Future Fund will help meet much of the unfunded super liabilities of the future. Of even greater consequence, however, is the federal legislation governing the operation of the defined-benefit funds.

For trustees to be able to reduce future benefits, the Commonwealth would need to amend this legislation and parliamentary approval would be required. This is a considerable obstacle to reducing benefits.

An even greater protection for public servants is that a breach of the Commonwealth's statutory commitments would trash Australia's credit reputation. The fact that the federal government has compelling reasons to honour its statutory commitments is the best protection Commonwealth employee pensioners can have, especially with the Future Fund available to help in future.


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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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