The ambiguous benefits of a redundancy offer
That recent Canberra Times research revealed widespread take-up of voluntary redundancies by older public servants caused no surprise. Not only do Australian Public Service redundancy provisions pay larger amounts to employees with longer periods of service, but older people are likelier to be in a far better position to afford the reduction in living standards caused by leaving a secure job.
In this respect, the public service is no different from the private sector, where a longer period of work also drives a higher tax-free redundancy benefit compared with the benefits available to those with a shorter career.
In all occupations, job-shedding creates complexities for staff as well as difficult challenges for management, when long-term employees leave and take decades of corporate knowledge with them. Public servants at any age contemplating changing jobs will find the extra benefits offered via a redundancy package attractive.
On the other hand, when making the decision to give up secure and well-paid employment, public servants and other workers need to review thoroughly the costs and benefits of accepting a redundancy package. For people close to retirement age and with good superannuation benefits, the financial risks of accepting a package are much lower than for younger people, especially if future employment prospects are uncertain.
The ability to obtain immediate access to super benefits is a crucial factor in evaluating the benefits of and financial risks involved in accepting a redundancy offer. For members of both the Commonwealth Superannuation Scheme and the Public Sector Superannuation Scheme, there can be substantial benefits from staying in their job and continuing to contribute to these funds.
With the older, more generous CSS, which was closed off to new members in 1990, the benefits of working until close to the age of 55 or even later can be substantial. For example, while CSS rules allow members accepting a redundancy to start a pension at any age, the benefits available before 55 can be substantially lower than those available from preserving the benefit until 55 or claiming a retirement pension after age 55. This is why not many CSS members will be attracted to accepting a redundancy at earlier ages. The package is unlikely to be sufficient to compensate for the loss of future super benefits.
Similarly, PSS members can gain substantial super benefits by keeping their job until they have obtained the maximum permitted multiple of 10 times final average salary. This will be achieved much more quickly with a member contribution of 10 per cent of salary because of the extra annual 5 per cent of final average salary benefit attached to this high level of contribution. The value of the annual employer PSS contribution can be as much as 31 per cent of salary at this contribution level, especially for members prepared to take all their benefit as an indexed pension.
The high annual value of this employer contribution means that, within a relatively short period of time, PSS members can obtain benefits equal to or even greater than the benefits available from a redundancy package. Nevertheless, PSS members contemplating changing jobs or retiring before the age of 55 can benefit from accepting a redundancy.
Special provisions in the PSS allow redundant employees to access their PSS benefits as an indexed pension at any age. Normally, the PSS benefits are available only to members retiring from the workforce after age 55. Further, unlike the CSS, where there is a steep discount in the redundancy pension drawn before age 55, the PSS options are more favourable.
For example, the redundancy pension at age 45 is calculated by dividing the available lump sum by a factor of 14. A comparable private sector pension would be divided by a factor between 22 and 25. All things considered, while receiving a lump-sum redundancy pay-out may appear attractive, continued membership of the CSS and PSS can be of greater benefit, especially for younger employees.
With household expenses such as mortgage repayments and schooling costs generally at their peak in the early stages of a career, this could be the key explanation for the lower take-up rate of redundancy pay-outs by younger workers.
Find out more about financial advice for redundancy