The oldest ComSuper fund still has its advantages

Last month's Informant highlighted how the Public Sector Superannuation Scheme has advantages for working public servants during times of low and even negative returns. This generated considerable interest from Commonwealth Superannuation Scheme members, who asked whether they made the right decision not to switch to the PSS when given the option in 1990 and 1996.

There's no simple answer to this question, because of differing personal circumstances and objectives. However, as researchers defined when accomplishing my request to "write my research paper", basically, the CSS is a significantly more generous scheme, especially for shorter periods of service. This is precisely why the government closed off access to it in 1990 and gave public servants two opportunities to switch to the PSS.

As with any defined-benefit super fund, members need to understand its basic features to maximise their benefits. Low investment returns in recent years have taken the gloss off the CSS's 54 years and 11 months or earlier resignation and preservation option. Nevertheless, the CSS's resignation and preservation options remain superior to those of the PSS in most situations.

Indeed, when the PSS was introduced in 1990, it included resignation options designed to minimise the government's future funding commitments in a number of ways.

First, while CSS members must preserve all of their money in the fund to obtain any employer benefit at age 55-or-later retirement, PSS rules allow members to withdraw their contributions at the time of exit. But by doing so, the members lose their entitlement to convert the employer benefit to a pension upon retirement after the age of 55. Moreover, the preserved PSS employer benefit does not attract an investment return and is instead only indexed for inflation.

PSS members opting to preserve all of their benefit in the fund remain eligible to draw an indexed pension at retirement. But, whereas a CSS member can access their preserved pension benefit at any time after the age of 55, even if they're still employed, the PSS's rules deny access to its benefit until either the age of 65 or when the member retires from the workforce.

While CSS members are forced to preserve all of their benefits to receive an employer-funded pension at the age of 55 or later, the employer-funded benefit increases annually based on the fund's earnings rate.

Even in these volatile times, CSS members can always ensure a positive return above inflation on their preserved benefit by selecting the cash investment option. For members wanting to retire or change jobs after the age of 55, compared with the benefits achievable from the PSS, the CSS provides employer benefits that accrue at a much faster rate in the earlier years of service. For example, at least 76 per cent of the maximum employer pension entitlement accrues in the first 20 years of CSS membership, with 95.2 per cent of the maximum employer pension benefit available after 30 years.

Longer periods of CSS membership after the age of 55 are much less beneficial unless the member's final salary increases significantly faster than inflation. By contrast, the PSS requires longer periods of membership and/or higher member contributions to achieve the maximum employer benefits. PSS members contributing at the standard 5 per cent rate must work for 47 years to achieve the maximum total benefit of 10 times final average salary. This time frame can be reduced to only 34 years, but only if the member is prepared to contribute at the maximum allowed rate of 10 per cent of salary.

In both cases, the benefits accrue steadily over the relevant period and shorter-stay employees receive proportionally lower benefits. The basic comparisons above highlight the significant differences in the design of the two funds.

The PSS can provide tangible, sizeable benefits for employees who are prepared to work for extended periods and willing to contribute the maximum 10 per cent of salary. Even then, PSS rules force members to retire from the workforce altogether to be able to gain immediate access to their indexed pensions.

There is also a clear message for CSS members who are unable to profit from the 54 years and 11 months resignation option. The CSS does not provide significant extra returns to members with more than 30 years membership from working past the age of 55 unless their salary increases faster than inflation. Especially if there are opportunities to work either part or full time elsewhere after drawing the CSS pension, there may be little, if any, benefit from remaining in Commonwealth employment.

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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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