Redundancies are coming, but should you accept?

Early retirement options Public servants in defined-benefit funds have all the advantages when forced to quit. For members of the PSS accumulation plan fund, there's absolutely no safety net or cushion provided in the event of redundancy.

As expected, many federal government employers have been forced to offer redundancy packages to meet their staff-reduction targets. Natural attrition and non-renewal of short-term contract staff has reduced the workforce but not by enough, leading to redundancy offers to reach the required savings.

This process will take some time to have its full effect on Canberra's economy. Moreover, unlike during earlier episodes of major job reductions, more workers are being presented with the choice between a voluntary package and being forced to seek redeployment.

The redeployment option is made less attractive by the fact that almost all public sector employers are trying to shed jobs. The loss of redundancy benefits if forced to leave at the end of the retention period also lessens the attraction of seeking redeployment.

As with previous redundancy programs, the easy targets are longer-serving employees with substantial superannuation and accrued leave entitlements. Especially for those close to or above the age of 55 with either CSS or PSS entitlements, the inducement of up to a year's salary and a full pay- out of leave and long-service leave entitlements can cushion the blow of retiring earlier than planned. These staff also have a safety net, even in the event of an involuntary unplanned exit, because they are members of a defined-benefit super fund.

Most of the rapidly shrinking ranks of CSS members are either in their 50s or older, because the fund was closed to new members in 1990. After age 55, CSS members exiting via a redundancy have the option of drawing an indexed pension benefit. This pension, while less than the member's previous after-tax wage income, provides an immediate income stream and - along with the super lump sum, redundancy and leave pay-outs - helps with the adjustment process.

Before age 55, the option of preserving entitlements until that age before drawing a pension can be very attractive. In this situation, the redundancy and leave pay-outs can similarly help with the adjustment process until the CSS pension becomes available. For PSS members, especially those with a shorter period of service, the immediate pension available when accepting a redundancy is often lower than that available to CSS members.

But when employees have no alternative or actually want to leave, a redundancy package provides a valuable option at any age. This is to take all the PSS benefit as a lifetime indexed pension, starting immediately. If the lump sum alternative is chosen, a large part, if not all, of the pay-out must be preserved in super until the preservation age, currently 60 for anyone aged 49 or less.

So far, employers have focused on CSS and PSS members when offering packages. But as time passes,with the PSS closed to new members in 2005, membership of the PSS accumulation plan is increasing.For members of this super fund, there's absolutely no safety net or cushion provided in the event of redundancy.

PSSap members cannot access their benefits until they reach their preservation age: a minimum of 55 and as late as 60 for people now aged 49 or younger. Without access to another job, redundancy and leave pay-outs are unlikely to provide an adequate buffer for PSSap members who lose a job.

The uncertainty created by the current job shedding adds to the difficulties facing PSSap members. Unlike their CSS and PSS colleagues, they have no protection in the case of redundancy. Many are also disadvantaged because their employer is forced to contribute 15.4 per cent of their salary to superannuation.

For example, PSSap members with family and mortgage commitments who lose their jobs would have been better off if their employer super contributions had been reduced to the compulsory level of 9.25 per cent of salary, and their salaries had increased by 6.15 per cent. This would increase the money available to reduce their mortgage and place them in a better position if they are forced to leave their job. PSSap members who don't need extra salary - e.g. those at or near the age when they can access their super - could then still salary sacrifice the extra 6.15 per cent or more of salary to super if they wished.

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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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