Public service super costs on the rise

Confirming the Productivity Commission's conclusion that private sector superannuation members manage their superannuation payouts wisely, Mercer Consulting has attributed the $7 billion blowout in unfunded liabilities of the two major federal defined benefit funds to similarly sensible behaviour by members.

Whilst bad news for taxpayers, this large blowout in future costs over only three years is excellent news for members of the Public Sector Superannuation Scheme and the Commonwealth Superannuation Scheme who are taking maximum advantage of their super arrangements.

Both these funds were designed using mortality factors from the 1920s on the assumption that many members would be keen to cash out their super as a lump sum and not take a pension. As a result, several decades of Telstra, Qantas and government employees who opted for lump sums missed out on the generous and secure pensions available from preserving their benefits until retirement.

How times have changed. Mercer's technical report provides a glowing testament to the advantages of understanding and acting upon the strategies to maximise the benefits of an employers' super fund. With the cash interest rate now at 2 per cent and volatile investment returns from more risky assets, the indexed pensions available to the fortunate members of these pension funds are true bargains.

Importantly also, the PSS fund introduced in 1990 to replace the more generous CSS fund attempted to save money for the employer by requiring large member contributions to maximise the final payouts.

But the remaining members in this fund (it closed to new entrants in 2005) now understand this and are able to achieve returns of about 100 per cent annually on additional member contributions.

Contributing up to the maximum permitted 10 per cent of salary is thus much more profitable even than paying off a mortgage more quickly. There is a further advantage of maximising contributions in the case of redundancy, an increasing risk these days.

In the private sector, with rare exceptions, all super benefits have to be preserved untouchable until retirement age. Redundant PSS members can, if they wish, take all their benefit as a generous indexed pension commencing at any age.

Knowledge of these and other special features of the CSS has and will continue to result in increases in the unfunded liability for many years yet.

The recent age pension asset test changes will provide further benefits for public servants taking their benefits. The assets used to acquire these pensions are not subject to the assets test and age pension eligibility determined by the more generous income test.

Lump sum recipients can avoid the assets test by purchasing non-commutable annuities from commercial firms but the big drawback is the yields on offer are about 50 per cent less than those available to the public servants.

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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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