Accumulation funds a strong alternative for public servants

Reader feedback to my last two columns highlighted the opportunity available to the federal government to reduce its burgeoning unfunded superannuation liability and at the same time provide tangible benefits to existing public servants. This is to allow existing military (MSBS) and public service super (PSS) members to transfer their current benefits to an accumulation fund.

The PSS accumulation fund (PSSAP) introduced in 2005, and the proposed new military fund (which could even be the PSSAP) proposed for introduction in 2016, would be simple alternative funds. While many current PSS and MSBS members will prefer to remain in their current fund in order to take an indexed pension at retirement age, or at the time of redundancy, others may prefer to - and could even benefit from - becoming members of an accumulation fund.

Accumulation funds have several advantages compared with the lump-sum benefits offered by both the PSS and the MSBS. These include the lack of any compulsion or incentive to make personal member contributions.
Both the PSS and MSBS provide larger employer benefits to those who contribute and after 10 years membership in the PSS, the employer matches any additional member contribution above 5 per cent. Members wanting to contribute additional money to their accumulation fund can do so on a salary-sacrifice basis out of pre-tax income.

Unlike many other defined benefit funds, both the PSS and MSBS allow only aftertax contributions from members. Even more concerning for members wanting to take a lump-sum benefit is the fact that all the employer benefit (except for the small productivity component) is subject to a 16.5 per cent tax, even after age 60.

This situation is exacerbated by the fact that on leaving employment, except on redundancy or retirement, the unfunded employer benefit grows only in line with the consumer price index (CPI). For people leaving at a relatively young age, this is a huge penalty if the age at which super can be accessed is extended beyond the current age 60.

These drawbacks are partially or even fully compensated for by the attractive pension options available at retirement age. Especially for those needing lump sums to pay off mortgages or meet other commitments, not contributing to super and paying off the mortgage can be a preferable alternative to remaining in a fund when access to the money is frozen until retirement age, death or permanent disability.

Allowing current MSBS and PSS members the option to switch to an accumulation fund would involve the government in large outlays, but it would be converting unfunded superannuation liabilities to funded ones and the cost of doing so would be a genuine and legitimate use of the Future Fund assets. Next week, I will explore the attractions of doing this.

 

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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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