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Superannuation Legislation Amendment Bill 2007

CHAIR —Thank you very much for joining us. At the outset, would you like to make any corrections to your written submission?

Ms Gillespie —No, thank you.

CHAIR —Would you like to make an opening statement?

Ms Gillespie —Yes, if you do not mind. Given that we are on the phone, which makes things a tad difficult, I will start and then Peter will talk to some matters, if that is all right with the committee. We will then take questions as usual, if that is fine with you.

CHAIR —That is fine.

Ms Gillespie —Regarding superannuation generally, the committee may be interested in knowing that the CPSU meets regularly with officers who deal with superannuation matters in the Department of Finance and Administration. We have a very good working relationship with them. We are certainly very pleased with the consultation that has occurred over a number of years over the major changes that have been taking place to public sector superannuation, particularly in the choice environment. We certainly believe that the changes are critical to ensuring that our members have an adequate retirement income. As an indicator, if you like, of the level of interest amongst our membership on superannuation matters, every year we do a survey of women in our sector. Of course, they are a majority of not only our members but workers in the Public Service. In that survey, superannuation recently rated higher than pay in terms of level of interest to women. That is an indication of the interest out there with public servants, you could say, and particularly women. That is something that has been growing over time.

The CPSU, as our submission indicates, generally supports the changes that are before the committee in relation to superannuation, but we are unable discern how the claims of Senator Minchin on budget night, that these changes would encourage Commonwealth public servants to remain in the workforce longer, would actually operate in effect. We will talk to that a bit later. We agree that the changes will provide some welcome but, in our view, limited flexibility for Commonwealth public servants. We want to highlight some of the risks associated with the changes. We particularly seek support for employer-funded financial advice to enable Commonwealth public servants affected by the changes to be able to make an informed choice. We think it is critical for the future adequate retirement income of those people that they make an informed choice. We also seek to identify a couple of lost opportunities for more substantial changes, which could have been included in these amendments, including the removal of discrimination for interdependency, including same-sex couples.

With regard to the actual detail of the proposed changes, our response is structured in line with the proposed bill. In terms of schedule 1, we agree with the removal of compulsory contributions in the 1976 scheme—the CSS, as it is known. The CPSU is concerned that the CSS is a complex scheme and believes that employees should be required to make an informed choice, and that informed choice is dependent on the provision of adequate information and necessary financial advice. I might remind the committee that in the past, when the CSS was closed and the PSS defined benefit scheme was being proposed, there was extensive employer-funded consultation with the affected employees. We would seek the same level of consultation and advice being given to people who may contemplate the changes made available to them under these amendments.

In terms of schedule 2—choice of funds for employees in the 1990 scheme, the PSS defined benefit scheme—the CPSU supports the ability of employees in the PSS to leave this scheme and, if eligible, move into the PSS accumulation scheme. We also support the ability of these employees to then have the option to exercise choice of fund if they so wish. Given the defined benefit nature of the PSS, the potential financial impact of moving into an accumulation type scheme is noted by us. Importantly for the CPSU, the benefit for employees moving into the PSSAP is a mandated 15.4 per cent employer contribution. That is the rate that we negotiated with the government before that scheme was actually created and put into legislation. Any reduction in that 15.4 per cent employer contribution for employees who leave the PSS defined benefit scheme and move into the PSSAP could obviously significantly disadvantage these employees. We would oppose that vigorously. I will ask Peter Feltham to now expand on how this may happen so that members of the committee can understand how that would work.

Mr Feltham —For a while, we have been identifying an issue with regard to the ability of a certified or collective agreement to allow or not allow the maintenance of the employer contribution of 15.4 per cent. We believe there is a high level of risk that we have to deal with industrially in negotiating agreements to ensure that that 15.4 per cent employer contribution is carried over into another fund of the employee’s choice. As Margaret said, the issue of the 15.4 per cent is covered within the PSS Accumulation Plan, because that is contained within the trust deed of that scheme, but the same is not true of any other fund. In collective agreements we are endeavouring to ensure that that 15.4 per cent is locked into any relevant fund that the employee chooses.

We have now also uncovered a risk with regard to salary sacrificing arrangements which may apply in that an employee could have their salary discounted by the amount that they are salary sacrificing. Therefore, their discount salary is used for things like determining their employer’s superannuation contribution, their redundancy entitlement and matters like some forms of leave, like purchased leave, which is based on an annual salary. If that annual salary is discounted, then there is clearly a risk that the superannuation and salary sacrificing arrangements will disadvantage people. We note the SCOA submission. I would assume that, as you have just met with the Superannuated Commonwealth Officers Association, that matter would have been raised. We support their submission with regard to this point.

The CPSU has recently conducted an audit of those salary sacrificing arrangements. It has identified a number of non-union agreements which in our view could allow employees to be disadvantaged with regard to the determination of their salary and allow an effectively discounted rate of superannuation to be paid on their behalf, because the superannuation contribution is not based on the actual salary; it would be based on the discounted salary. In our view, that reaffirms the need for people to get informed advice and be given financial support to be able to receive that advice, because there are complex decisions that employees will need to make.

Ms Gillespie —I will now move through the other schedules and note our support or otherwise. In relation to schedule 3—early release of benefits—we strongly support this proposal which we believe will bring the early release of benefits to employees in the CSS consistent with the general standard. We note that similar amendments will be made to the PSS via changes to the trust deed or rules. In relation to schedule 4—changes to the military superannuation—as advised in our submission, we make no comment about the proposed changes. In relation to schedule 5—technical changes to the CSS—as advised in our written submission, we support these changes. In relation to schedule 6—further changes to military superannuation—we make no comment.

A number of other matters are covered in our written submission. They are matters that we have raised previously with the Senate committee, the minister and/or the department of finance and/or federal Treasury, relating to recent changes to superannuation. We believe that the changes that are currently before the committee give the opportunity for further consideration of some of these amendments. With your permission, we would like to briefly address those matters. I will hand over to Peter to go through them.

Mr Feltham —Again in the order they appear in our written submission, the first point we would like to raise is in the context of salary sacrificing and the ongoing frustration of our members in the defined benefit scheme—that is, the CSS and the PSS defined benefit scheme—to not be able to salary sacrifice. We accept that part of the rationale for the changes that are proposed, which this committee is looking at, is to provide more flexibility. We accept that, allowing employees in the PSS scheme to leave that scheme and move to another scheme, and/or allowing employees in the PSS defined benefit scheme or the CSS scheme to reduce their compulsory contributions to zero, would allow them to salary sacrifice elsewhere, but we have a difficulty reconciling that with the government and the general financial sector’s view that what we ought to be doing is consolidating superannuation accounts. What this has caused over a number of years is for the employees who have wanted to salary sacrifice to effectively have to join another scheme to salary sacrifice. We have never, in our view, been able to get a satisfactory explanation as to why it is not possible to allow people in the PSS defined benefit scheme or the CSS to salary sacrifice directly into those schemes. We note that that point is also covered in the Superannuated Commonwealth Officers Association submission, and we support their submission in that regard as well.

The second point that we would like to raise is with regard to transition to retirement. CPSU notes that transition to retirement is now generally available in most, if not all, superannuation funds in Australia other than the defined benefit schemes, and specifically in that regard in our sort of patch the PSS defined benefit and the CSS schemes. We have continued to actively pursue allowing transition to retirement arrangement options to be provided in those schemes. When transition to retirement was first mooted in a Treasury discussion paper in November 2004, the CPSU responded to that paper in December 2004 by supporting the introduction of transition to retirement and encouraging it to be made available across the community. Our submission to that Treasury inquiry reported that the public sector workforce is ageing. At the time that that report was provided, 39.3 per cent of Australian Public Service employees were over the age of 45. The trend since that time in the Australian Public Service Commission State of the service reports would confirm that the public sector is continuing to age.

Notwithstanding our submission, in April 2005 regulations were introduced which established transition to retirement from 1 July 2005. The regulations did not require any compulsion on behalf of superannuation funds to introduce it, and in our follow-up discussions with the department of finance it was confirmed to us that the government did not agree to provide transition to retirement to people in the CSS or the PSS defined benefits scheme. As Margaret Gillespie indicated earlier, we do question the impact that these changes are going to have. Senator Minchin’s media release No. 38 of 2007, delivered on budget night, indicates:

While these measures will allow eligible members to access schemes which suit their individual needs, Commonwealth public servants can still choose to remain with their current superannuation schemes.

In addition to that, it states:

These measures, to be offered to eligible members of Australian Government superannuation schemes, will provide flexibility and encourage Commonwealth public servants to remain in the workforce longer

In our view, the offering of transition to retirement arrangements within the CSS and the PSS defined benefits would do more to attract Commonwealth public servants over the age of 55 to remain in the public sector by allowing them to access the transition to retirement arrangements.

The issue of flexibility with regard to transition to retirement is really a nonissue, in our view. Transition to retirement is made available on the basis of an employee being able to access their accumulated benefits. The changes that the government are proposing in the bill that the committee is considering will have employees leave the PSS defined benefits scheme with their contributions and all their money retained in that scheme. Transition to retirement can only take effect when an employee can access their accumulated contributions, and by them leaving that scheme they will start in a new scheme with no contributions in a superannuation fund and therefore no funds to be able to use with regard to transition to retirement. So there is no flexibility in the short to medium term for employees to leave the PSS defined benefit or to even zero out their contributions in the PSS defined benefit or CSS and go into another scheme, because they will have no accumulated benefits in those schemes to be able to use to transition to retirement. I might now hand back to Margaret on the third point, which is rectifying reversionary benefit pension discrimination with regard to interdependence.

Ms Gillespie —The CPSU has raised this matter with the Department of Finance and Administration and the minister for a number of years now. The matter was raised by the Democrats in the Senate after the 2007 budget, and it was also raised in a Senate estimates committee hearing in February 2007. We are at a loss to understand why changes have not been made to prevent discrimination. We understand that the amount of money involved is minimal compared with the close to $100 billion of the government’s unfunded liability that goes to government employees and Defence personnel. As we know, the Future Fund has been set up to deal with that matter. In an interchange with Senator Sherry on 23 May this year in the Senate, an amount of $2 billion was mentioned in relation to the actual cost of this matter. My reading of the Hansard indicated that the cash was not a problem; it was basically the compounding effect of the unfunded liability. The Future Fund has been established; so, from our point of view, the government has now run out of excuses as to why it has not included, in this raft of amendments, the removal of the discrimination, particularly with regard to independent and/or same-sex relationships. We certainly believe that the Senate committee should have a long, hard look at that, and we would like to put on the record our bitter disappointment when, on budget night, we realised that these changes were not being promulgated as part of the changes.

There are two other matters that Peter will now very briefly speak to: one is indexation, which I am sure SCOA has already covered, and the other is the taxation arrangements for employees in untaxed superannuation schemes. That is something that our members who are close to retirement are becoming very agitated about.

Mr Feltham —I missed the sequencing of our proposal to change the CSS and PSS pension indexing arrangements away from CPI to MTAWE. We have put in a number of submissions on this point, as have a number of other organisations, as Margaret indicated, including SCOA. Two Senate committees, including the Senate Select Committee on Superannuation’s report of April 2001, recommended that the government examine the feasibility of adopting an indexation method other than CPI for Commonwealth public sector and Defence Force superannuation schemes to more adequately reflect the actual increases in the cost of living. That is one which we continue to seek to have rectified through any method we can.

The final point in our submission, as Margaret indicated, is with regard to the changes in the taxation arrangements introduced out of simplified, simple or better superannuation, as it has been known since the budget in 2006. We have—I guess it is reflective of the ageing workforce in the public sector—increasing interest in superannuation and increasing concern about what is seen to be the inequitable treatment of employees in untaxed funds compared with taxed funds with regard to superannuation. We note the recommendations earlier this year of the Senate Standing Committee on Economics and the unanimous recommendation specifically that the government should consider separately assessing for taxation purposes superannuation income streams and additional assessable income. We support the recommendation of the Senate economics committee.

Ms Gillespie —That just about covers the matters we wanted to raise with the committee. As I said at the beginning, we believe that there is now an ideal opportunity to allow that PSS and CSS provide a range of options that are now generally available to employees in more contemporary superannuation schemes, such as salary sacrifice. The changes to abolish the compulsory employee contributions in the CSS and the PSS and the option of contributors to leave the PSS will provide employees with more options, including the ability to salary sacrifice. But we do not accept that these changes will, in the short to medium term, provide any benefit to employees—for instance, for employees in same-sex relationships or employees who wish to establish a transition to retirement arrangement—as the employee is required to leave their superannuation in the CSS and PSS defined benefit schemes and to start afresh elsewhere. Transition to retirement can work only where an employee has an accumulated benefit and they can access it as a non-commutable pension. With regard to employees in a same-sex relationship, again it is the accumulated benefit in the CSS or PSS that provides the benefit, not providing an option for these employees to contribute to another scheme from a zero dollar base. We would certainly like to thank the committee for providing us with the opportunity to speak to you today.

CHAIR —Thank you. Firstly, I have a couple of points of clarification on some of the items you covered that do not relate to the legislation. In terms of a reversionary pension for those in an interdependent relationship, clearly you are arguing that in the future that should be available. Are you proposing that that be looked at going back to previous public servants who have been in an interdependent relationship but whose partner may have died?

Mr Feltham —We are seeking it from now.

CHAIR —Yes, you are seeking it from now, but you are not seeking to go back over the years to—

Mr Feltham —Retrospective for those partners of people in same-sex relationships who have already died?


Mr Feltham —I believe we are. If it is meant to be equitable, contributors should be treated the same way as they are in other superannuation schemes where there is not the discriminatory tradition based on the definition of ‘spouse’ historically in superannuation funds. Especially since the CSS amendment a number of years ago to broaden the definition of ‘independence’, from that point there was not an issue generally in CSS compliance superannuation schemes. The issue for us is that the 1976 and 1990 schemes do not comply, and we have been seeking for a number of years to rectify that level of discrimination.

CHAIR —So you are proposing to look back as well as forward?

Ms Gillespie —Yes. As we know now, it is a finite group. You can actually cost it. It is not an ongoing thing; it is actually a finite group.

Mr Feltham —The defined benefit scheme is closed as of 30 June 2005.

CHAIR —Thank you for that information. With regard to your proposal for the CSS and PSS pension indexation moving from CPI to MTAWE—and the government’s position on this is clear—is there a parliamentary party that does support your position there?

Mr Feltham —I am not sure I can answer that. I suppose it is a matter on which the CPSU will be asking questions of parliamentary parties in the lead-up to the coming federal election.

Ms Gillespie —We would certainly invite submissions!

CHAIR —Finally, in relation to the need for financial advice for anyone who may be seeking to move funds or to cease making contributions to the CSS, clearly you are arguing that that be employer funded financial advice. Are you aware of any parts of the private sector where there is employer funded advice in relation to superannuation changes? I appreciate that this is a significant change that the government is bringing in, but are there any parallel examples?

Mr Feltham —I think there may be parallels in regard to redundancy. It is now pretty common practice that an employer will fund an employee to go and get independent financial advice in circumstances of redundancy—where to invest their money, whether to go on their world trip or whatever. I think that is a general standard that now applies as part of general redundancy entitlements.

In the change from a defined benefit scheme to an accumulated benefit scheme, there are a number of layers of complexity. There is the basic concept of the holder of the risk effectively changing from the employer—in the case of the CSS and the PSS defined benefit scheme, that is the government—to the employee. With an accumulation scheme, the risk transfers to the employee, the contributor, and that makes this a very significant change. As Margaret Gillespie has indicated, this has been the case in the public sector in the past because of the complexity of the changes—and that was only a change from a hybrid scheme, the CSS 1976 scheme, into the defined benefit scheme, the PSS scheme, in 1990.

CHAIR —Has the union put to the Department of Finance and Administration the proposal for employer funded advice?

Mr Feltham —Not at this stage. We met with the department of finance about three days after the federal budget this year. We can arrange another meeting with them. We do that on a six-monthly basis or when anything significant happens. So we can certainly put that to the department of finance, but, from a CPSU perspective, we would be looking at having that progressed through negotiations. Ideally, we would like to have that supported by government to facilitate that.

Ms Gillespie —The other reason, of course, is that we had not seen the legislation. It is hard to have a position until we have seen the legislation. All we had was press releases and the budget papers. But that would be something we would probably want to pursue.

Senator SHERRY —Have there been any discussions between the CPSU and the trustees of the existing PSS and CSS schemes about the need for properly funded, ethical financial advice as to options?

Mr Feltham —Directly, no. The CPSU does have meetings with Steve Gibbs, the CEO of ARIA, which is the organisation that administers the three public sector schemes. It is something we can discuss. I note from the SCOA submission that they are seeking from both ARIA and ComSuper detailed information on the implications for people who may be considering moving from a defined benefit scheme into an accumulation scheme. From a CPSU perspective, we are seeking to extend that by one level to have the employer fund the financial advice.

Senator SHERRY —I understand that and I think it is quite reasonable. We have just heard evidence from Mr Garraway, the Victorian president of the Superannuated Commonwealth Officers Association, who was involved in that process when this option was offered through the Victorian defined benefit schemes. The employer funded, to the value of $250, financial advice that was bulk purchased and contracted on an independent and arm’s-length basis.

Mr Feltham —I do not think the CPSU was directly aware of that, but thank you for that information. As state government schemes have evolved over the years as well, I would imagine that that sort of need for independent advice would have occurred around the country in all state schemes at one point or another.

Senator SHERRY —My understanding is that it is relatively common in both the private sector and the public sector—but you might have a look at that. I want to come to the issue of salary sacrifice. In the recent changes that were dubbed ‘simpler super’, there were new contribution caps. I think the cap is $50,000 if you earn less than $50,000—and we have seen the $1 million rush in the last year—and $150,000, going forward, for people who are older than 60. In advocating salary sacrifice, would you accept that those caps would apply?

Mr Feltham —I do not know that we have considered it in that sort of detail. I do not think we are after anything above and beyond what generally applies to the community. I would think, off the top of my head, that we would support whatever the community standard is in that regard.

Senator SHERRY —So effectively at the moment, because of the restrictions on the schemes—these schemes anyway—a member cannot salary sacrifice up to the new limits that are being prescribed in ‘simpler super’?

Mr Feltham —They cannot salary sacrifice into those particular funds. I would imagine that small thousands of public servants have probably salary sacrificed elsewhere. We understand that the bulk of those may have salary sacrificed into a fund like AGEST.

Senator SHERRY —I was going to raise that because it seems to me that the ongoing rationale for having two separate funds—one an accumulation fund offering salary sacrifice, a DB fund, and from 1 July 2005 an accumulation fund—is lacking now.

Ms Gillespie —It is a matter that, of course, has come to our attention. It is an obvious matter. We have certainly taken the view that, while all things are equal, we are not overly concerned. But if competing funds ratcheted up so much for the employee dollar, if you like, then we would see more members’ money being spent on advertising in a competition sense than would be warranted. It is one of those things that we are observing. The new scheme has been in place for only just over a year, so things are emerging, but it is something that we are keeping an eye on in terms of two competing schemes. The main point we were making was that all advice at the moment is to consolidate your superannuation into one fund. Public servants in defined benefits schemes have to open another account in order to salary sacrifice, and that is the issue that we are bringing to the attention of the committee today.

Senator SHERRY —Isn’t it correct that most members of ARIA are also members of AGEST?

Ms Gillespie —No, not at all.

Senator SHERRY —What is your understanding?

Ms Gillespie —If they salary sacrifice, they will have two accounts.

Senator SHERRY —What about the three per cent contribution that goes into AGEST?

Mr Feltham —No—the three per cent contribution goes into the CSS defined benefit scheme or the PSS. That is a three per cent productivity component.

Senator SHERRY —So that is not going into AGEST at all?

Mr Feltham —No, it is not.

Senator SHERRY —What is going into AGEST? I want to clarify that for the committee.

Ms Gillespie —The key point is that, at the moment, if you want to salary sacrifice and you are in the CSS, you open up an AGEST account normally or you can choose another one. That is a common practice across the service in particular. What we have been arguing for is that there is no reason why a public servant should be mandated to go somewhere else. They should be able to if they want to, but the common advice is that you actually keep all your money in the same place.

Senator SHERRY —I accept that rationale. I just want to be clear about the members in AGEST. Are their 60,000 or 70,000 members in AGEST?

Mr Feltham —I think there are more than that. AGEST is now an open fund and it can attract or retain contributors from anywhere. I think AGEST has focused on retaining public servants after they leave the Public Service. AGEST was the Public Service and federal public sector default fund for employees who were previously not eligible to join the PSS defined benefits scheme because of the entry qualification—that is, three months service or three months within the space of two years. It was determined that you were not allowed to join the PSS defined benefits scheme—

Senator SHERRY —I want to clarify the position of AGEST. Are you saying to the committee that the only members of AGEST at the moment who are active members—let’s differentiate between active members and inactive members—are those who are salary sacrificing?

Mr Feltham —I am not sure we can give a definitive answer to that one. There would be a large proportion, but I am not sure it would be 100 per cent.

Ms Gillespie —I think there would probably be temporary employees who have accounts in AGEST—of course, we are not trying to pretend that we are experts on AGEST—and there would be a large number of contributors with very small accounts.

Senator SHERRY —There would be a large number of members of AGEST, whatever the number is, who are also members of ARIA.

Ms Gillespie —That is correct.

Senator SHERRY —There has to be an overlap in membership.

Ms Gillespie —Definitely.

Senator SHERRY —You do not have any data on that?

Ms Gillespie —No, we do not.

Senator SHERRY —Okay. Just to be clear on this, in the current changes before us and the current structure of the CSS-PSS, there is no salary sacrificing and there is no transition to retirement. Is there any portability of accrued benefit?

Mr Feltham —There is limited portability to reciprocal defined benefit schemes. There are only about half-a-dozen schemes around the country where there is portability from the CSS and the PSS, but that is the PSS defined benefit scheme. The accumulation plans are different.

Senator SHERRY —But, if a person joins the Public Service and they are in an accumulation fund and they are in the PSS-CSS, they are not able to transfer that accumulated amount into what is now ARIA, are they? They cannot transfer money in and they cannot transfer their accrued balance out if they leave the public sector.

Mr Feltham —Only to about half-a-dozen funds around the country. I think Telstra’s super scheme is included and most of the university schemes are included in that, but there is a very small number of schemes where portability is available currently.

Senator SHERRY —Really what I am getting at is that, at a time when the government has promoted ‘choice’, portability, transition to retirement and salary sacrificing, it is not providing those facilities within the current mainstream public sector funds.

Ms Gillespie —Yes, that would certainly be our view.

Senator SHERRY —We have touched on portability, transition to retirement and salary sacrificing. Are there any other options, if I could describe them in that way, that are not available in the current arrangements?

Mr Feltham —If you want to extend the debate further, I suppose it is investment choice. The CSS and the PSS defined benefit schemes introduced a cash investment option, but clearly superannuation funds more generally provide a range of investment options. That can number from half-a-dozen to probably 20 different investment options. In the CSS and PSS defined benefit schemes there are only the two options: the default option and the cash option. I understand that work is being done to change the way in which the investment returns are paid out of both the CSS and the PSS defined benefit funds currently in the lead-up to a consideration of offering broader investment choice. So I think that one is under control, if I could describe it as such. That is the only other one that I think is provided generally in superannuation funds that is denied to people in the CSS and PSS defined benefit schemes.

Senator SHERRY —To finish, would the options that are more broadly available in the general community that are not available to the public sector funds require changes to law and/or regulation, as you understand it?

Mr Feltham —Yes, they would. As I understand it, most of the changes would have to be made to the CSS act. The PSS defined benefit scheme provides a bit more flexibility. The bulk of the options, I would suspect, would probably be able to be achieved by changes to either the trust deed or the rules.

Senator SHERRY —It has just struck me in discussing these changes to the PSS-CSS that the same changes are not being made to the military superannuation funds. Do you have an explanation as to why that is the case?

Mr Feltham —No, and I think we tried to keep ourselves out of any discussion about the military, except where there are issues that are common—for example, the indexation arrangements.

CHAIR —Thank you for joining us this afternoon.

[1.15 pm]