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Thursday, 27 May 1993
Page: 1468

Senator WATSON (1.33 p.m.) —I call for a commonality in accounting standards in reporting on public sector superannuation activity. Whether the Queensland Government superannuation scheme is fully funded has been a matter of considerable debate for some time, and through Senate forums I have been one of the many contributors. The question of funding or not funding is often a matter of semantics. That is, funded and unfunded may be defined in many ways that can support either particular description. The term `funding' is commonly used to describe the provision of moneys for a particular purpose. A holiday may be funded from savings or from a gift or from loans. The term is commonly used to describe government financial support for specified activities or organisations, for example funding for the arts, funding for the Australian Institute of Sport and the like. In this sense, anything on which governments spend their money can be said to be funded by governments. This clearly includes the superannuation of their employees.

  A fund, in the general sense, may be any stock or sum of money or other assets which can be identified as an accounting entity, usually and especially one set apart for a particular purpose such as a building fund. The term `fund' is also used to describe an organisation, or group of people collectively, which has members, rules and a governing body, for example the XYZ Superannuation Fund.

  In the context of superannuation, the term `funding' has a more restricted and specific meaning. For example, Security in retirement defines a superannuation fund as `an indefinitely continuing fund providing retirement and death benefits'. The Senate Standing Committee on Community Affairs, in its report Income support for the retired and the aged, stated that funded schemes are:

. . . superannuation schemes which finance the payment of benefits by drawing on an investment fund into which contributions have been paid.

It continued that unfunded schemes are those which:

. . . finance benefits from the current resources of the employer rather than from an investment fund. They are typically found only in the public sector . . .

In the Occupational Superannuation Standards Act the definition of `superannuation fund' is, firstly, `an indefinitely continuing fund', and, secondly, a fund `maintained solely for one or more of the following purposes: the provision of benefits for each member of the fund'. In fact, Ronald Mendelsohn, in Superannuation and Retirement in Australia, says:

Funding: (1). . . is an arrangement whereby assets are set aside during a person's lifetime or working period from which his or her pension or other superannuation benefits are paid during retirement. (2). . . the process of accumulation in occupational superannuation plans. Most such plans are funded. Contributions are paid, usually regularly, into a fund controlled by trustees and are available to pay benefits. Some plans are still unfunded; benefits as they fall due are paid by employers from their own resources.

From the foregoing, the necessary elements of a funded superannuation scheme appear to be the following—and I list them: firstly, the existence of a clearly defined and readily identified accounting entity, producing accounts and therefore capable of being audited; secondly, the dedication of the fund exclusively to the provision of superannuation and related purposes; thirdly, the payment into the fund of contributions from employees and also employers; fourthly, the accumulation and investment of assets to produce a flow of income; and, finally, the payment of benefits to members from the fund. There is general agreement that schemes that provide for the payment of benefits by employers as they fall due are regarded as unfunded.

  If we then apply these definitions to the Queensland State Superannuation Fund, we find that, at a hearing of the Senate Standing Committee on Finance and Public Administration on 21 February 1992, the Director of the Queensland Government Superannuation Fund, Mr Hennessy, was asked:

I understand that, nationally, most State government funds and the Commonwealth are substantially underfunded, but I had heard that, in Queensland, it was not. What is the position with your fund?

Mr Hennessy replied:

Our government funds are fully funded, both from the employee and the employer perspective, and the funding is kept up to date. Both the employee and employer funds and contributions are assessed by the State actuary every three years. . . We got in early, before the liabilities were built up. The problem in the States is that they not only now have to meet their unfunded emerging benefits, but they also have to fund the future benefits.

This is found in the record of Hansard at pages 1167-8. The references to `our government funds', `the employer and employee perspectives' and `both the government and employer funds' point unambiguously to the existence of two funds, that is, in the context of superannuation, two discrete accounting entities, dedicated exclusively to superannuation, whose assets are invested and from which the benefits flow or are paid.

  The reference by Mr Hennessy to the problems of other States having to meet their `unfunded emerging benefits' and having `to fund the future benefits' is a clear recognition of the current usage of the term `unfunded' as applying to superannuation. After expressions of doubt in the Senate as to whether the Queensland funds were in fact funded, Mr Hennessy actually wrote to the President of the Senate explaining that the funding of the employer component of the Queensland Government superannuation liabilities is held in Consolidated Revenue—and I refer to the Senate Hansard of 30 November 1992, page 3805. The form in which the fund is held is not stated—whether it is in cash balances, government securities or merely an acknowledgment of a liability.

  The characteristics of the Queensland State Government Superannuation Fund are described in two reports of the State actuary—firstly, the Report on the funding of the Crown's component of State super benefits dated 10 October 1991, and, secondly, The actuarial investigation of the State Service Superannuation Fund of 8 August 1991. Both reports deal with the position as at 30 June 1991.

  The reports' titles are quite significant in this respect. The report on the funding could refer to funding in the broad sense of the mere provision of money, whereas the actuarial investigation of the fund clearly implies a superannuation fund in the accepted sense. Similar ambiguities abound in the report on the funding of the Crown's component. In the second paragraph on page 1 it is stated that the Crown's contributions are paid into a separate fund to the members' contributions, implying not only existence of a Crown fund but the payment of employer contributions in parallel with the members' contributions to the members' fund.

  The next sentence, however, states that `benefit payments are then shared by the members' and the Crown's funds in a proportion determined by the actuary'. The next paragraph refers to the funding of the Crown's component of the benefits. While these statements could be applied to conventionally funded benefits, they could just as validly be used to describe the payment of unfunded benefits on an emerging liability basis. The first paragraph on page 2 again clearly implies a specific fund into which the Crown contributes $2.31 for every $1 of member contributions, and from which five-sevenths or 74.4 per cent of the defined benefits are paid.

  The report then includes a table, the main figures of which indicate the value of benefits and expenses payable by the Crown, $4.75 billion, less the value of assets, $2.948 billion, leaving an amount required to be funded by the Crown of $1.802 billion. So the value of actual future Crown contributions is $2.430 billion, with a surplus in the Crown fund account of $628 million.

  As you would appreciate, Mr Deputy President, such a table has some unusual features. The nature and the repository of the assets are not stated, nor is any allowance made for the future earnings on them. The value of the future Crown contributions is shown as an asset, but these contributions are actually made on an emerging basis—as are those of other States and the Commonwealth, whose superannuation liabilities are accepted. No doubt if one were to use such terminology as the Commonwealth and the other States are using the Queensland methodology could be shown to be `fully funded', which clearly they are not; so it is arguable that the table shows an unfunded liability of $1,802 million. That is the amount to be funded by the Crown.

  But if we then go to pages 7 to 9 of the report, several reasons are given in justification of a retention of the present rate of Crown contributions, none of which has been taken into account in the original calculation of the Crown's liability of $4,750 million. If these reasons are valid then the Crown's liability should be put at $5,378 million, bringing the deficiency to $2,430 million. All these figures assume the existence of a fund with net assets of $2,948 million.

  Our committee on superannuation has been unable to verify the existence of such a fund. Its inquiries have been met with the statement that it is `in the Consolidated Revenue account', whatever that phrase might mean. It is repeated in Mr Hennessy's letter and the report on the members' fund, which does not deal with the fund set up in the Consolidated Revenue account. No mention of a superannuation fund is made in the Budget papers, although the existence of one could be inferred from table 5.4 in the `Public Sector Financial Assets and Liabilities' section of statement 4, where cash and investment balances are shown at $3,841 million at June 1992.

  If a fund is in existence, it could easily be verified by the production of an audited set of accounts, together with evidence of its dedication to the provision of superannuation benefits. On the basis of the above figures, it would have an unfunded deficiency of $2.4 billion. If there is no such fund, or if there is merely a series of IOUs from one government pocket to another, then the government superannuation liability would be clearly unfunded and would amount to around $5.4 billion.

  In conclusion, the following five points are worthy of comment. Firstly, there is no evidence of the existence of a fund, in the ordinary superannuation context, into which government contributions are paid and from which benefits are met. Secondly, there may well be cash and investments in the Consolidated Revenue Fund set aside for superannuation—presumably the $2,948 million of assets shown in the Actuary's report for 1990, and possibly the whole, or most, of the $3.6 billion in the 1992-93 Budget papers. Thirdly, if this is regarded as `funding'—which is doubtful, since there is no evidence of a legal restriction on its appropriation for other purposes—there still remains an `unfunded' shortfall of at least $2 billion.

  Fourthly, there is a need for the adoption of public sector accounting standards which set out a common approach to reporting superannuation of funding or unfunding. Only then will the public know of the real extent of the State or Commonwealth debt in the superannuation area. Fifthly, if there is no scope for collaboration to bring about a commonality of accounting standards in this critical area of public sector activity, then, at very least, the newly appointed Public Accounts Committee in the Queensland Parliament should conduct a far-reaching inquiry into the matter, calling on experts to second-guess the advice which has been given to date. The New South Wales and the Tasmanian auditor-generals could give some useful advice. From an academic point of view, another writer on the subject, Professor Bob Walker, from the University of New South Wales, could also offer independent and professional advice.

  I look forward to this matter being the subject of further scrutiny. Particularly I call on the Queensland Public Accounts Committee to conduct an investigation because I think that as a result of that we would all be a lot wiser.