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Superannuation Legislation Amendment Bill 2007

CHAIR —I welcome officers from the Superannuated Commonwealth Officers Association. Before I call on you to make an opening statement is there anything you would like to add or correct in your written submission?

Mr Hazell —No, Chair.

CHAIR —Do you wish to make an opening statement?

Mr Hazell —Yes, thank you, Chair. The Superannuated Commonwealth Officers Association, SCOA, is a federal organisation with branches in all of the states. The only place we do not have a branch is in the Northern Territory. On behalf of SCOA I thank the committee for affording us the opportunity to make a submission and to be witnesses at this hearing.

The first issue I would like to speak to is salary sacrificing. Salary sacrificing for us is an omission in this legislation. There was a good opportunity here to afford Commonwealth public servants the opportunity to salary sacrifice their contributions into both the CSS and the PSS. Regrettably, this was not done. This would have brought us into line under simplifying superannuation provisions where we would have been salary sacrificing and paying at 15 per cent taxation rates. As it stands, without this opportunity the contributions will be taxed at the marginal rate. We believe this to be somewhat discriminatory in terms of taxation.

Opting out of contributing to the PSS and the CSS is in line with changes in superannuation to allow further choice. We have no difficulty with that and support the legislation in this regard. However, there are slings and arrows associated with this. Opting out of the PSS and CSS carries some penalty and potential losses. These need to be made clear to anybody at the time making a decision. If that is not made perfectly clear, then the person who has opted out may come back in years to come and sue ComSuper. There have been examples of this sort of thing, of people saying that they were not provided with sufficient information—sometimes successfully.

I would like to cite an article that probably illustrates best one of the penalties of opting out of the CSS. On Tuesday this week Daryl Dixon, a respected financial adviser in Canberra, had an article in the Canberra Times in which he estimated the reduction in the pre age-55 retirement pension of a person aged 45 at present—so with 10 years to run—who is earning currently $50,000 a year. The loss was estimated to be in the order of $800 for every year that no contribution was made to the CSS. So in 10 years you could accumulate—in reverse, if you like to think of it that way—an $8,000 reduction in your pension that you would otherwise have had at age 55. That is a very substantial drop in pension for quite a modest income earned of $50,000. So I draw that to the committee’s attention, stressing again the need for good information.

I refer now to the restoration of the reversionary pensions to widows, and I move into an anecdote for a moment. About 35 years ago a colleague of mine died. The poor man was only 24 years of age and he left behind the widow and two small children. Several years down the track she remarried and lost her New South Wales superannuation pension. Those were the rules in those days. Some years later—five or six—she received advice from the department of the New South Wales superannuation fund that her pension was being restored. Indeed it was, and it came at a very crucial time in her life. The second marriage had failed, so she had her pension back; and that made a big difference to the lady’s life.

Regrettably, at the same time the Commonwealth government did not choose for its funds to go down the same path. Here we are 25, 26, 27, 28 years later at last making the decision to restore pensions to widows who have remarried and who had lost their pensions in the past. It is very late, so late in fact that it is going to be very difficult to find these people. However, I think it is incumbent upon the government and the superannuation funds to make a supreme effort and to be seen to make the effort in this case. Otherwise it will be seen for nothing more than an illusion. I cannot stress strongly enough that this needs to be done.

One of the things that we did not mention in our submission was the possibility of using an approach to advertise this that was rather successful, where superannuation funds combined and put on the net listings of all those people who had a financial interest in a superannuation fund who somehow or other had got lost to them. It could be something like: ‘do you have’ or ‘is this your name’ ‘or ‘is this your money’ in a particular fund and ‘here is your opportunity to follow it up’. I believe we need to do this. The elderly widows who are in nursing homes now—and there will be some of them—may have friends or children who can say, ‘Mum, that’s your name. You’re on the list. We will sort out your pension.’ It could make a very big difference to their lifestyle in their declining years.

The age range of the people concerned would be somewhere in the early 50s. I cited a case of a very young widow. There were more elderly widows than that and there may be some who are centenarians. The New South Wales branch of SCOA has identified 10 of their members who are centenarians, for example. So the age range is still quite diverse. The total numbers could be in thousands, but not very many thousands. With the chair’s indulgence I would like to ask Lance Garraway to speak to the value of independent advice and full disclosure.

Mr Garraway —I would like to speak to the importance of independent financial advice in a situation such as this. If we look back to the early nineties when the movement across, or the opportunity to select the PSS as against the CSS, was afforded to our members, that was an internal movement. Nevertheless, at that time, apart from ComSuper advice, no external advice was provided.

I left the Public Service through redundancy in 1993 and went off to nine years in financial planning. I participated rather heavily when the Kennett government changed the revised scheme and offered the opportunity of the new scheme. It was critical at the time, because the new scheme was a lump-sum based scheme and there were aspects of what we are doing now of people taking the opportunity, if they wished, to move to a lump-sum based situation. At that time the Kennett government provided and paid for quite a reasonable round of external financial advice. There were families involved in this. In most cases there were generally two partners involved and often it is a matter of the splicing in of the benefit of a lump sum versus a pension and the nuances associated with that. I would ask the committee to consider the value of this independent financial advice in promoting this situation because I can see that in many cases it would be of great value.

CHAIR —Mr Hazell, in terms of going back in history to the rationale for cancelling pensions due to remarriage—and I realise this probably relates more to the domain of the department—was it your understanding that the rationale was that a woman who remarried had somebody providing for her and therefore she no longer had the need for the pension? Is that what the rationale was?

Mr Hazell —There would seem to have been a more quixotic world in the past where there was more chivalry, as it were, where the so-called fairer sex at the time were supposed to be dependent. It is a better world these days. In those days the entreaty upon a daughter was to marry well. Unfortunately for widows, they had to marry often as well. In this case it was thought that the woman was now dependent upon a man, so he could support her. In my opinion that was the view.

CHAIR —In the case you cited before, which I think you said was a New South Wales example, that woman subsequently remarried. She regained her pension when her second husband died?

Mr Hazell —No. The second marriage failed but she had regained her pension a little bit before that, and that gave her the necessary strength of purpose, character and security to make the right kind of decision that would protect her and her children.

CHAIR —In what year did that happen?

Mr Hazell —It was probably in the early eighties—I am fishing for a year in my mind, but it is about 20 to 25 years ago.

CHAIR —How long has the association been pushing for this change?

Mr Hazell —The history of us pushing for this change, I am afraid, eludes me. It is not something that we have been pushing for recently. It got lost in the annals of time, to our shame, as we changed leaders over the years and changed people. I would say that we probably pushed for it well into the eighties and maybe the early nineties, but other issues overran it by then. It was probably a lost cause. It revitalised itself when the government put it on the table, as far as I am concerned—I would have to ask my old colleagues for assistance.

CHAIR —I was just looking to ascribe a victory to your association for justice and equality—

Mr Hazell —I like to be frank and fearless, Chair.

Senator SHERRY —I was not aware of your background in planning, Mr Garraway. Why would an individual opt out of a defined benefit fund when an opt-out is to their disadvantage?

Mr Garraway —I can refer perhaps to the Victorian government experience. I saw about 300 people in the Victorian public sector—

Senator SHERRY —Before you go on, do you know what the average notional contribution was in the Victorian defined benefits versus the Commonwealth defined benefits that we are dealing with here?

Mr Garraway —I cannot answer that accurately—

Senator SHERRY —It is a similar circumstance.

Mr Garraway —It was fairly similar. You could line the two schemes together, as much as you can, looking at individual benefits, and there was a similarity in the schemes. It would be very hard to say that one was better than the other, because you are looking at years of service and quite a number of things that are very hard to align. I draw an example to that. I was able to say to my clients up-front, because greedy financial advisers always like a lump sum, of course—

Senator SHERRY —Yes, I had noted that. The commissioner goes along with it usually.

Mr Garraway —Yes. I was always able to put myself in a position to say, ‘I took a pension,’ and that does not mean that I stayed honest from that point, but I did. We had ACTU accreditation in the company I worked for. I use the example of teachers. A lot of teachers marry teachers, and you could then have a situation where both stayed in the revised scheme, so you would have a very large pension and also a very small lump sum. So in retirement there is a value for an ongoing pension which, coming out of both schemes, is assured and an excellent backstop, whereas in retirement you also need some flexible moneys obviously via the lump sum. That was an example at the time. Later on—if I may refer to this—the Kennett government also looked at cashing out their schemes and gave people the opportunity to cash their benefits into lump-sum super, or a portion of that, like a half-benefit. With that, you could also bring to people’s minds the value of the lump sum versus the pension. I think that can be done dispassionately to point out the strengths and weaknesses of both sides.

Senator SHERRY —If you were giving dispassionate, reasonable and, I think, fair and balanced advice, wouldn’t it be true that, in giving a person advice to opt out of a defined benefit, which is a very serious issue, you would have to at least point to the notional value at, say, age 60 or 65, when they can retire, of the value of that defined benefit converted into a lump sum?

Mr Garraway —Yes—and the frailty of investment opportunities. In good years they are very good and in bad years they are certainly not good. Of course, you do not have to go through the vagaries of that with a defined benefit pension. So, yes, it was more or less pointing to the pros and cons of both sides. The first redundancy program in the Commonwealth was here in Victoria, at the Williamstown naval dockyard and at a government aircraft factory. You were looking at a lot of very senior people having the opportunity to move—engineers and naval architects. I drew the short straw and got the opportunity of managing that first redundancy exercise. People were absolutely mesmerised by the lump sums. In those days, for the very senior technical people, they were $400,000 and $500,000. If we are talking 86—

Senator SHERRY —Sure, but isn’t it true that the pot of gold at the end of a rainbow, if I can use that expression, in real money terms can be actually less than the value of the defined benefit?

Mr Garraway —Yes, but within a family’s requirements in retirement it is often very valuable; while a pension is very good for day-to-day living, you also need the opportunity to access some cash moneys. Often that is—

Senator SHERRY —Do you?  We do not advance the age pension as a cash lump sum. There is an age pension of $13,700 a year, approximately. We do not offer optional cash-out of the age pension as a lump sum for people who you could argue are in more pressing circumstances and may need a lump sum. Why wouldn’t we do that, if that is the theory? 

Mr Hazell —Could I suggest that, if that were available, there would be a whole tribe of people lining up for it—

Senator SHERRY —I am sure there would be, yes.

Mr Hazell —on the basis of their health. If you have had equivocal medical advice in the last few years and you struggle through to retirement and the opportunity for a lump sum is there and you are single—you no longer have a spouse or what have you; you are gay; you have a flock of nieces and nephews you would like to provide for—the lump sum becomes extremely attractive. It does not matter that there is an overall financial loss. You may not be there to experience it. I think there are a host of personal and individual reasons that can drive a person towards a lump sum; sometimes not being of sound mind might be one of them.

Senator SHERRY —So if a person were diagnosed as being terminally ill, for example, it would seem to me in that circumstance that it would be financially logical and to their advantage to switch out of a DB into a DC situation. There is just one other issue. You referred to the Kennett opt-out, if you like. Financial advice was offered. Was the government paying for that as free advice? 

Mr Garraway —Yes—$250.

Senator SHERRY —There were presumably planning companies or planners contracted to provide that advice so that there was a quality control to make sure—bulk purchase and quality control? 

Mr Garraway —Absolutely.

Senator FORSHAW —I just wanted to pick up on the issue that is not covered in the bill and that you have suggested should be—salary sacrifice. I appreciate that we are dealing with the legislation as it is. Can you expand a bit on what has been happening there? I take it that you have been campaigning for this to be available for some time. What is the argument or the rationale put to you that it is not being agreed to? 

Mr Hazell —It is available for the PSSAP—that is my understanding—because that is an accumulation fund. It is available only if you choose to salary sacrifice into some other fund out there—not CSS, not PSS. Why shouldn’t it be available for the PSS and CSS? After all, the funds that you are putting into the CSS—that is an accumulation fund. The fact that there is this whole rack of defined benefits out here provided by the employer generally is not related to the CSS accumulation fund, being a hybrid scheme. The only bridge between the two is the 54-11 concept where, should you be made redundant by your employer at any age, or if you happen to get to nearly 55 and you have been in the Public Service for 35 years and decide it is time to go then you can take early retirement and you have your pension calculated in a different manner, depending upon the amount of money you have accumulated in the CSS accumulation fund. It is not called that, but I am making it perfectly clear that that is really what it is. That is the only bridge between the defined benefit components over here and the accumulation component of the CSS.

So, if the CSS is an accumulation fund, why shouldn’t it be treated in the same way as any other accumulation fund in the country under simplifying superannuation? That is one of our arguments. How long have we been on this? I guess it has not been very long. It is one of those things that we raised as an addendum to our submission to the Treasury on simplifying superannuation, when it was a proposal—that was on 9 August last year. We raised it again in our prebudget submission at the end of last year as a component of that. So it is in both of those. We have been conscious of it for a while because of the existence of the PSSAP, which is relatively young.

Senator FORSHAW —Have you had a response to indicate that it is being favourably considered or that it is being rejected? The fact that it is not in this legislation does not necessarily tell me the attitude of the government to what you are putting.

Mr Hazell —The major thing for us is that, when we put forward a submission such as the one we put forward to Treasury on simplifying superannuation, we were thanked for our submission. Similarly, we were thanked for our prebudget submission. That is the end of the matter. You know you have had a hit if it gets into legislation somewhere or other. At this stage it is still out there in the ether, and we will raise it again in our next prebudget submission.

Senator FORSHAW —Thank you.

Senator FIERRAVANTI-WELLS —In your submission you talk about information and informing members, particularly in recommendation 2 and 3, about the proposed amendments. Could I take you back, with your corporate history, to the 1990s when there was the change from CSS to PSS. I was in the Public Service at that time. One thing that I remember was the rather lack of information at the time. If you have some experience about what happened in the early nineties, how would you see that sort of information flowing today?

Mr Hazell —My recollection of the early nineties was that a sporting offer was made, as it were, by the superannuation fund, but we were advised of what it would mean in lump sum dollars. You could see the dearth between the two.

Senator FIERRAVANTI-WELLS —Some of us saw the dearth between the two.

Mr Hazell —That is right. But some of us leapt on the bandwagon, went forward and said, ‘I’ll join the PSS because my wife has just got a good inheritance. She’s got the capital moneys and I need to maximise my pension.’ The fact that the PSS had an indexed component that you could buy yourself was attractive to a lot of people, but you had to know that it was costing you something, and you could see the difference in the total cost between the two. That information was provided. To me it was all perfectly clear, but regarding my discipline many years ago, I was a tired old maths teacher, so I could see where numbers were leading me. I think the information was clear but it did not seem to be independent—it was provided by the superannuation funds. I think that being seen to be independent is important.

Senator FIERRAVANTI-WELLS —In terms of the spouse pension reinstatement, do you have a feel for the number of widows that we are talking about?

Mr Hazell —There are only—in rough figures—about 8,000 1922 scheme people left on this planet and being paid pensions. I can only relate to that how many people have dropped off along the way. Their ages are quite attenuated—from about 50 through to over 100 perhaps. I cannot imagine there being any more than 8,000. It would be probably fewer than that.

Senator FIERRAVANTI-WELLS —Given that a lot of them have not interacted with the Commonwealth for so many years, do you have suggestions as to how you would see that interaction occurring?

Mr Hazell —I can only personalise it in terms of the Superannuated Commonwealth Officers Association. In our newsletters we are going to ask all of our members: ‘Do you have an aunt, a mother or what have you who falls into this category? Can you apprise her of the situation and make sure that she at least knows that she has this option?’ Some may choose to not go down that path. I will be pressing upon the government to charge ComSuper with the responsibility of making sure that the same sort of message, couched in the way the government would like to see it, goes out in their newsletters. These days they are called the ARIA board newsletters, but they used to be ComSuper’s. I am sure they are prepared by ComSuper, but they go out under the ARIA board’s banner. Every superannuant and everybody in a preserved situation gets one of those. Contributors to the fund get different information, but they get a newsletter. We can ask the people who ComSuper is in contact with to do exactly the same thing: ‘Could you tap somebody who falls into this category on the shoulder—an aunt, a mother, a friend or what have you?’ We can do that form of advertising and it could be quite sharply pointed. That would probably lead to some success, but I also suggest using the internet and doing much the same as the superannuation funds have done to find people who have dropped off their radar. That is the best I can do at the moment. I have had only a few days to think about this, but I am sure that there will be advisers in the department of finance, particularly in the communications area, who can come up with some brilliant ideas.

CHAIR —As there are no further questions, thank you very much. We very much appreciate your joining us here today. The secretary will have some information for you in relation to a matter that you raised before the meeting. Thank you very much indeed.

Mr Hazell —Thank you. It is much appreciated.

[12.32 pm]