Super returns for public sector workers
The lifetime indexed pensions available to public sector defined benefit super members are now providing unprecedented value to their recipients. Compared with trying to invest lump sums when interest rates are low and share markets volatile, receiving a fortnightly CPI indexed pension for the member's or a surviving partner's lifetime deserves close attention.
The benefits offered to defined benefit members are so good that the federal government stopped new entry to its funds in 2005 and will close off access to the military fund in 2016. These decisions followed the belated discovery that the longevity of members has increased dramatically since 1922 despite mortality factors for this year being used to calculate entitlements.
Closing entry to the funds was also encouraged by the 1999 change in compulsory preservation laws forcing members to preserve all their new member contributions in super until retirement age. This change, together with greater member understanding of the benefits of an indexed pension, closed off the large employer cost saving from members who voluntarily forfeited their pension rights by withdrawing their contributions.
It's now too late for members who chose lump sums to change their minds, but current members including those with preserved benefits still have valuable opportunities to access their indexed pension entitlements now or at retirement age.
Perhaps the least well-known benefit of being a member of the PSS, and very relevant for those now facing redundancy, is the option to draw all the benefit immediately at any age as a lifetime indexed pension. This has two advantages. First, a large component of the alternative lump sum is tied up untouchable in super until retirement age. The indexed pension is payable starting the day after leaving employment. Second, the size of the pension is calculated using outdated longevity factors.
Comparable pensions purchased in the private sector would cost twice as much. For example, at age 40 a factor of 15 is used giving a pre-tax indexed annual yield of 6.7 per cent on the alternative lump sum. Even if tax is payable at the 34.5 per cent rate applicable to incomes up to $80,000 a year, the return is still 4.4 per cent a year - well above the returns from safe investments. The clear message for defined benefit fund members is to investigate the value of the pension benefits available to them.