Time to climb out of super black hole

Not unexpectedly, my last column on unfunded commonwealth superannuation liabilities provoked a strong reaction from both federal employees concerned about receiving all their super benefits and policy advisers unwilling to fess up to creating an unfunded liabilities black hole.
 
Contrary to what the government and its advisers may think, financial modelling demonstrates clearly that the $100 billion of Future Fund assets are inadequate to finance the benefits offered to federal employees.
 
Even if new entry to the military super scheme is closed off in 2016 and more employees opt for lump sum rather than indexed pension benefits, the unfunded liabilities will balloon above current levels.
 
Just how inadequate Future Fund assets are even without any blowout in costs is highlighted by this simple calculation: a compounded annual real rate of return on its current assets of 6 per cent a year or 8.5 per cent a year nominal return over the next 35 years would be needed to finance the current estimated unfunded liabilities. In this eventuality, we will all live happily ever after with our investments doubling every 8.5 years in nominal terms. Even a high 5 per cent a year real return would leave a residual liability of $250bn on future taxpayers.
 
Federal employees are more fortunate than their UniSuper defined benefit colleagues whose employers have refused to finance any funding shortfall, and face the prospect of future benefit reductions. The federal government is most unlikely to renege on its defined benefit fund promises which are protected by enabling legislation. Any breaking of these commitments would also have an impact on our credit rating. This is why the government acted quickly on the Commission of Audit’s recommendations and is likely to pursue other options to reduce our unfunded liabilities.
 
State governments and private employers have in the past aggressively offered seemingly attractive benefits to employees to switch their defined benefits into accumulation fund assets. A notable example is the multi-billion savings achieved by Telstra from its high pressure initiative in the 1990s to coax poorly advised and short-sighted employees to switch from their federal pension fund to a lump sum scheme.
 
Only a relatively small proportion of employees stayed with the pension fund. Those who did had the equivalent of a winning lottery ticket. One pension fund member retired recently at 60 with an indexed pension of 80 per cent of his previous salary plus a large lump sum. Compared with this payout, the Telstra fund lump sum payout would have been small change.
 
Read the complete article: time to climb out of super black hole (subscription required)

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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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