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Superannuation Legislation Amendment Bill 2007

CHAIR —Welcome. Ms Campbell, I invite you to make an opening statement.

Ms Campbell —I am responsible for superannuation policy. The Superannuation Legislation Amendment Bill 2007 makes a number of enhancements to the Australian government’s civilian superannuation schemes, namely, the Commonwealth Superannuation Scheme, the CSS, and the Public Sector Superannuation Scheme, the PSS. The main focus is to provide members of those schemes with the same flexibility and incentives to contribute to superannuation that are available to the broader community. These flexibilities and incentives are available to members of the Public Sector Superannuation Accumulation Plan, PSSAP, which was introduced on 1 July 2005. The PSSAP is a fully funded accumulation scheme and its commencement marked a significant change in the superannuation arrangements for newly appointed civilian government employees.

The majority of the government’s current employees are, however, members of the CSS and the PSS, which are both largely unfunded defined benefit schemes. The overall design of both the CSS and the PSS is prescriptive and can be inflexible for many members of these schemes. This can act as a disincentive for members to remain in government employment. The proposals set out in the bill have been designed to align with the government’s long-term objective of encouraging people to remain longer in the workforce. They provide some flexibility for CSS and PSS members to tailor their retirement and superannuation arrangements to best meet their needs and would assist with employee retention in response to the challenges of an ageing Australian Public Service workforce. The bill also contains amendments to address anomalies in the Defence Force Retirement and Death Benefits Act 1973 and to ensure consistency with civilian schemes. My colleagues from the Department of Defence will be able to answer detailed questions on the Defence changes.

We have been talking about the reinstatement of benefits for widows from whom benefits had previously been taken away. It is worth noting that these people have been able to apply to the Commissioner for Superannuation to have those benefits reinstated, should they be in necessitous circumstances. That has been in place for some time.

CHAIR —Thank you. I will kick off. Something that has been common in the submissions is the suggestion or request that employer-provided independent financial advice be provided to people, explaining the virtues or otherwise of staying where they are, doing what they are doing, or doing something else. Is that something that government has considered?

Ms Campbell —The government has considered the need to inform members of their choices. This will be provided by the ARIA board, the trustees of the superannuation schemes. As for independent financial advice that a member may choose to accept, the government and previous governments have not provided that in the past. In 1990, with the offer to CSS members to transfer to the PSS, the then government did not provide individual financial advice for those members. It is general community norm that independent financial advice be paid for by a member. This option that is now provided is not a fixed-term option—it is an open-ended option, so people are not rushing to make a decision. Back in 1990 when the changes were made to the CSS and the PSS, there was a fixed time limit where people had to make those decisions. That is not the case on this occasion. The government plans on ensuring that there is a broad disclosure provided to members to assist in making these decisions.

CHAIR —The ARIA advice would advise people not to rush and to seek independent advice?

Ms Campbell —The ARIA advice would be on the circumstances, the changes, and that they should seek independent financial advice and that there is no time limit on this decision.

CHAIR —Why would a member of the PSS be required to join the PSSAP before exercising a choice of fund? When looking at the legislation, it struck me as curious that you would not be able to exercise a choice at the outset and that you had to, firstly, park yourself somewhere—which I guess is one expression of choice—before you then express a choice again. What is the rationale there?

Ms Campbell —For a number of staff, and those primarily employed under the Australian Public Service Act, the PSSAP is the default superannuation scheme. When the PSSAP was being established, a key element of the negotiations with the CPSU was the rate of 15.4 per cent. In developing this policy it was considered that that would provide assurance to members that this was not about reducing their incentives; they would be put into the PSSAP and then they could exercise further choice from there.

Mr Sotiropoulos —The other reason for introducing the first step to PSSAP is the benefit structure within the PSS itself. It does not currently operate within the choice framework. To introduce that would be extremely complex, whereas the PSSAP currently operates within the choice framework. It is a simple transition for people.

CHAIR —In relation to the restoration of pensions previously cancelled due to remarriage, do you have a handle on how many people could be eligible and how many people may come forward?

Ms Campbell —We do not have a handle. We do not have any numbers. ComSuper does not have those types of records. Obviously, we tried to seek this information in developing the policy. We are not aware. We expect it to be a small number, but we do not have any firm numbers.

CHAIR —That means you would not be able to cover everyone. If you are seeking to advise them of this change, you would have to do that through public advertising of some sort?

Ms Campbell —We do not have a list of names. We do not know who those people are, so it would be by public advertising. Mr Sotiropoulos can talk a little further about proposals on how to communicate this policy to the general community.

Mr Sotiropoulos —As SCOA indicated earlier this morning, we have spoken with them about advertising through their biannual newsletters. We will be working with them on the wording to incorporate in their newsletter to advise their members. We have also spoken with both Centrelink and the Department of Families, Community Services and Indigenous Affairs about incorporating messages within their age pensioner newsletters. We have already provided wording for the international newsletter, which will shortly be released. We will also be doing it nationally. It will not be just a one-off. We will be doing it in a couple of newsletters to ensure that people have an opportunity and that a broad cross-section are advised. ComSuper will also incorporate the change within their newsletters that they provide to members. In other words, those members will then be able to talk to fellow members and identify people. Those are the three avenues we have so far identified on the civilian side. On the Defence side, Defence colleagues may be able to expand a little.

Mr Grzeskowiak —We have a Military Superannuation Communication Committee, which includes membership, for example, from ComSuper and the various boards of the military superannuation schemes. We will be working through that committee to develop a strategy, clearly using similar sorts of things that you have heard about from the civilian schemes. In our case, we anticipate using the good offices of some of the various ex-service organisations, through their regular newsletters as well, to try and get out to them; in a similar way, we do not have a list of these people. We anticipate small numbers.

CHAIR —Given that you do not know who these people are, it would not be straightforward to determine the average age of the people? Or is that something that is a bit easier?

Ms Campbell —I think some of the evidence that was provided earlier suggested that people became widows when they were as young as 24 or 25 right through to a more mature widow base, so we do not have that information.

CHAIR —Thank you for that. You no doubt heard the evidence from the Regular Defence Force Welfare Association in relation to the letter that they received from Minister Billson about the possibility of act of grace payments for reversionary benefits. Are you aware of that letter? I guess you are, because you heard the evidence, but were you previously aware of that correspondence and the fact that Minister Billson’s portfolio would be putting it to your portfolio for consideration?

Ms Campbell —I was not previously aware of that letter, but I am not responsible for act of grace payments within the Department of Finance and Administration, and I expect that—

CHAIR —I appreciate that.

Ms Campbell —maybe the deputy responsible for that may be aware.

CHAIR —Sure, and I appreciate that it is, I think, Senator Colbeck who—

Ms Campbell —Yes, the parliamentary secretary is responsible.

CHAIR —is responsible for act of grace payments. Senator Sherry raised whether it would make more sense that they be considered an entitlement rather than something which was determined through the act of grace process and that there are, no doubt, cost differences between the two. I know that you are not responsible for act of grace payments, but was consideration given to having them as something that is automatically an entitlement?

Ms Campbell —I might ask my colleagues from Defence to answer that one.

Mr Grzeskowiak —We are talking about the post 60 retirement marriage rule changes announced in the budget in May 2006. I believe that consideration was looked at. Ultimately, the Office of Parliamentary Counsel advised that the legislation should be prospective. As part of that advice it was noted that there were alternative means of the filling the gap, primarily through the use of an act of grace payment. As I understand it, when the civilian schemes were changed in this regard in 2003, the process of act of grace payments was the mechanism used then to deal with the gap between the announcement of the legislation and the enactment of the legislation. It is the intent of Defence to negotiate with DOFA officials on the issue of act of grace payments in this regard back to the date of the announcement.

Senator SHERRY —I want to start with this issue first. The operative date in the civilian funds was back in July 2003. Why is the change to apply to the military funds four years later?

Mr Grzeskowiak —At the time of the change to the civilian schemes in 2003, I understand that that consideration was driven by a number of cases on the civilian side that had emerged at the time. At that time in the military scheme there was no such pressure and the view was taken that we would have a look at options. The Minister for Defence, or possibly the minister assisting—and I am not sure which at that time—asked in 2004 for options to be canvassed in this regard. That was done and that culminated in a bid in the development of the 2005 budgetary process. The bid was unsuccessful in 2005. It was resubmitted in the context of the 2006 budget and that bid was successful. It was announced in the May budget in 2006 and is now proposed as part of this legislative amendment.

Senator SHERRY —You seem to be saying that there is a need in both sets of funds—and the need is obvious—but because of a different process the change was delayed in the case of the military funds because it went through Defence to Finance. Whereas the change with respect to the mainstream civilian funds came directly from Finance to Finance and they got in earlier as a consequence.

Mr Grzeskowiak —I cannot comment on the processes Defence would be involved in. It is fair to say that in 2003 in terms of the Defence schemes, this was not presenting as an issue.

Senator SHERRY —I accept that, but you accept that it is an issue now?

Mr Grzeskowiak —Yes, Senator, that is why it is now in this proposal

Senator SHERRY —So it just begs the question, doesn’t it: why should they be treated differently—same problem but different operative date?

Mr Grzeskowiak —There are a number of differences between the military schemes and the other Public Service schemes.

Senator SHERRY —Yes, sure, I understand that.

Mr Grzeskowiak —It does not necessarily follow that the schemes are identical in every respect.

Senator SHERRY —But, nevertheless, the same issue is now being dealt with four years later as with the civilian funds.

Mr Grzeskowiak —That is correct.

Senator SHERRY —Just going to the costing—and coming back to you, Ms Campbell—the earlier witnesses referred to the costing on this measure, I think, of $600,000 in the four years of the out years. Is that correct?

Ms Campbell —I think that related to the 2006 measure. I am sorry, I do not have the budget papers from 2006 with me, but I think they were referring to the cost that Defence put in as $600,000.

Senator SHERRY —I just want to clarify this because we are faced with a situation where the Minister Assisting the Minister for Defence, Mr Billson, has indicated—he has not committed and there is a big difference—that an act of grace payment is a possibility for the group of people between the time of the announcement a year ago and the time of the legislation passed in parliament. Why shouldn’t certainty be conferred on what is apparently a very small group of people? If they are going to be recognised and a payment made as an act of grace payment, why shouldn’t the act simply reflect that so that there is certainty for those individuals?

Mr Grzeskowiak —The advice that Defence got through its legal officers when we put this legislation forward was that it was not to be retrospective and that there was an alternative approach through act of grace payments. I am not in a position to offer you certainty on that now. There needs to be negotiation between departmental officials, but it is certainly our intent to seek act of grace payments for any cases that may emerge.

Senator SHERRY —But you see the issue here. The cost is going to be covered apparently, although there is no commitment, by act of grace payment—whatever that cost is and whatever the number is—through a less certain and more tortuous process, I have to say. Why should an individual go through a more tortuous and less certain process than simply one where this provision was made retrospective?

Mr Grzeskowiak —Certainly act of grace payments is a different process, and I cannot give you the certainty on that now. But the lack of retrospectivity here aligns with the views of the legislation drafters in terms of the best way forward.

Senator SHERRY —I was going to get to that advice that you have mentioned a couple of times. What was the reason for not applying retrospectivity?

Mr Grzeskowiak —The primary reason that I am aware of was that there is essentially another avenue and that other avenue is through act of grace payments.

Senator SHERRY —So there is no legal restraint on applying retrospectivity?

Mr Grzeskowiak —That is a bit out of my specialist field here.

Senator SHERRY —I am going to the advice that you have received or that you have knowledge of.

Mr Grzeskowiak —I am not aware whether there is any legal constraint—

Senator SHERRY —Could you take that on notice?

Mr Grzeskowiak —I can take that on notice.

Senator SHERRY —I am just a bit puzzled as to why the drafters would recommend no retrospectivity to the time of the budget announcement—and I cannot see a legal impediment, frankly—but then say, on the other hand, that you can still make payment but do it in a different way which is less certain and, at least in terms of the cash cost, going to be more expensive.

Mr Grzeskowiak —I cannot answer that question for you, Senator.

Senator SHERRY —You can take that on notice and give us some more information on that. When you referred in your evidence to a ‘small number’, that can be 10, 100, 1,000, 10,000 depending on your perspective of a small number. So what is your definition of a small number? Are we talking about fewer than 50?

Mr Grzeskowiak —In this regard I mean small in the generally accepted definition of small. Fewer than 50 would be good.

Senator SHERRY —Fewer than 20?

Mr Grzeskowiak —I do not know.

Senator SHERRY —So we can at least be down to fewer than 50?

Mr Grzeskowiak —It is almost a guess, but it is just based on a knowledge of people who practise in this area. We do not believe that there are many people for whom this legislation would change the effect.

Senator SHERRY —I do not like the word ‘guess’. You are as informed as anyone could be, presumably, in this area. What is your best estimate?

Mr Grzeskowiak —I would suggest that lower than 50 is a reasonable estimate.

Senator SHERRY —Did you attempt to discover what the number has been through communication with the military funds?

Mr Grzeskowiak —I think we did ask the question. I think that, in the same way as for the civilian schemes, it is really impossible to know a definitive answer.

Senator SHERRY —Coming back to you, Ms Campbell, there are costings on the figures of withdrawal from the defined benefit funds—

Ms Campbell —Yes, Senator.

Senator SHERRY —so therefore you would have to have an estimate of the number of people likely to take that option up. Can you give me the actual number of the estimated people who would do that?

Ms Campbell —We have actuarial assessments and those assessments really relate to the actuaries’ best advice, particularly in the PSS, on numbers of people who are contributing at, say, two per cent. I think in the past we have not gone into the details of what we think those assumptions—

Senator SHERRY —You have not, and that is why I am asking. You have got a cost, so there has got to be a figure there because there is an assumption.

Ms Campbell —We expect the numbers to be quite small. Particularly with the CSS, we expect the numbers to be very small.

Senator SHERRY —You have had an actuarial assessment and I got the figure of ‘very small’ and ‘quite small’. What is the figure, because the actuary must have made a calculation?

Ms Campbell —The actuaries with regard to CSS expect minimal—

Senator SHERRY —What does that mean?

Ms Campbell —Not much.

Senator SHERRY —Seriously, you have got an actuarial estimate, so there must have been a number in there.

Ms Campbell —We have got those numbers and because of the large magnitude of the CSS we worked on an estimate of close to zero per cent of people taking out—

Senator SHERRY —Close to zero.

Ms Campbell —Because it is due to people’s individual circumstances. We did not see a trend and there was no better data to use, because you cannot change your contribution in the CSS from five down to two per cent. You have to put in the five per cent. With the PSS we were able to look at the two per cent contributors and say that there was a tendency for these people to want to put their money, if they had any money, somewhere else so they have chosen to lower it. Because that is not available in the CSS it was very difficult for the actuaries to make an educated estimate of those who were likely to withdraw their money. So they used zero per cent, noting that there would be people who would accept it because of their personal circumstances, but they did not have a basis on which to change that.

Senator SHERRY —What about the PSS?

Ms Campbell —We estimated approximately 10 per cent may take this option.

Senator SHERRY —Coming to the issue of informed choice, the selection to opt out of a defined benefit is a complex equation, and I am sure that you would appreciate that. You have indicated that in general people will be informed of the new option, but how are they to be specifically informed? There is a complex calculation as to loss of benefit in exiting a DB based on an individual circumstance.

Ms Campbell —The ARIA trustees have the responsibility for informing their members of these changes, and they will be putting out detailed information on what the changes mean. Individuals’ circumstances are not always only aligned with their contributions to defined benefit schemes. Obviously, as I think one of the earlier witnesses suggested, there may be two parties in a household who have income and who may have a number of other sources of income, so each individual will have their own circumstances. In giving general advice, it is always recommended that individuals seek their own informed financial advice on their own personal circumstances.

Senator SHERRY —I understand the distinction between general and specific advice, but will there be a capacity for an individual to go to ARIA and get specific advice as to their individual circumstances?

Ms Campbell —ARIA do not provide financial advice, but people can go to ComSuper and find out their current level of benefits. They are provided on an annual basis with the annual report of their benefits. They are able to do that, but ComSuper and ARIA do not provide financial advice.

Senator SHERRY —Shouldn’t they? In terms of this provision, wouldn’t it be a good idea for them to do so, at least on a contract basis? I am not suggesting they go out and employ lots of financial planners.

Ms Campbell —We consider that ARIA’s responsibility is for the defined benefit scheme. We have separated the provision of financial advice, and we continue to believe that that is a valid separation.

Senator SHERRY —There is a legal impediment on the fund that is significant, but most funds provide contracted or, for that matter, direct financial advice.

Mr Sotiropoulos —As Ms Campbell has mentioned, ARIA do not hold a licence to provide financial advice, but they do have financial advisers that they can refer members to.

Senator SHERRY —I am aware of that. But will they be doing anything specific as a consequence of this? It is a significant change with potentially very significant impacts on those who determine to exercise an informed choice.

Mr Sotiropoulos —Are you talking about ‘specific’ for a member or ‘specific’ for all members?

Senator SHERRY —Potentially open to any member who wishes to make an informed decision about exiting a defined benefit fund.

Mr Sotiropoulos —As Ms Campbell mentioned, they will be issuing product disclosure statements in accordance with the CSS requirements. They have also indicated that they will hold seminars across the country.

Senator SHERRY —But this is general advice, not specific advice.

Mr Sotiropoulos —That is right.

Ms Campbell —It is general advice, and the intent is that if a member wanted individual advice they would need to seek individual financial advice.

Senator SHERRY —There is some potential there for mis-selling. An individual could go off to a so-called independent financial planner, but are you aware of what happened in the UK when the government there introduced a similar opt-out provision of a DB? People were mis-sold, unfortunately, by some financial planners to move out of their DB. They ended up with a financial scandal of truly monumental proportions. I am just concerned that you do not seem to have thought through the safety implications of this. You do not see any onus on the department or on the funds to ensure that there is specific advice available to members of the fund and provided by the fund before they opt out?

Ms Campbell —Senator, are you thinking about something along the lines of options that ComSuper would provide to them—this is what they would get if they continued in the fund; this is what would happen if they left?

Senator SHERRY —Yes, specific advice. I know you understand that an individual’s circumstances and benefit in a DB are incredibly complex. As of today, the benefit can be significantly different from the benefit if, hypothetically, they work through to, say, 55 or 60—there are issues around the reversionary benefit; it is a very complex set of calculations—versus leaving the fund and doing something else with the contributions.

Ms Campbell —Senator, we are very conscious of not stepping into the line of giving individual finance advice or having ComSuper, that do not have that licence, doing that.

Senator SHERRY —My point is: shouldn’t they? Given this important change, shouldn’t they have a licence or, alternatively, contract people they believe will be reliable in terms of providing this advice? You would have to have a knowledge of the public sector fund to start with to give specific advice, wouldn’t you?

Ms Campbell —It might be worth us revisiting what happened in 1990 with the changes from CSS to PSS to see what type of advice was provided at that stage to see whether we can learn any lessons from that.

Senator SHERRY —But the difference between the change then and now is that that was a change from a DB to a DB; this is a change from a DB potentially to a DC, and then a DC outside the public sector. There is a loss in a DB to a DC—there is less certainty and there are issues around fees and commissions. Those issues were not involved in the 1990 movement from a DB to a DB.

Ms Campbell —One of the goals that the government is seeking to achieve here is to provide members with choice.

Senator SHERRY —I am not denying that. I am not arguing about that. I am just putting to you that there are some implications in making that change that need to be thought through.

Ms Campbell —It is the intent at the moment to provide the general advice that the trustees are required to under the SI(S) legislation and to refer members to seek individual financial advice. I think it is open for the trustees to have a look at how they provide the general advice—they cannot obviously provide the individual advice—and how they can provide that general advice in a manner which addresses some of the issues that you have raised.

Senator SHERRY —Perhaps you could contact ASIC. ASIC have just caught a planner group that targeted some teachers in a defined benefit fund in New South Wales, as I understand, and convinced them to shift out of what was a good fund into an accumulation fund—a mis-selling. I just cite that as an example of some of the abuse that could occur. It might only be a few people, but at the end of the day I do not want to see any people suffer a disadvantage as a result of abuse of the system. I am a bit concerned that you seem to believe that there could be abuse around this provision.

Ms Campbell —I do not think I said that. I think I said that the general intent was that the general advice provided by the trustees—

Senator SHERRY —But general advice is not good enough in the circumstances. You post the changes once the law is changed and it goes out to all the public sector members and they go off to a planner. That planner may not have knowledge of the public sector super—may not even be able to do any calculations—but even if they do, that planner may see an advantage in recommending a switch because they are being paid a commission. We have had examples of this in the Australian system over the last couple of years.

Ms Campbell —This is of course a choice. It is up to individuals to make that choice.

Senator SHERRY —I have heard all that before: it is their choice. Have you read the product disclosure statement recently?

Ms Campbell —Yes, Senator.

Senator SHERRY —How many members of the public sector can read and understand a PDS 50 or a hundred pages long?

Ms Campbell —Senator, I do not think that I am in a position to be able to give you an estimate of that.

Senator SHERRY —I have used the example of teachers. If 150 teachers can be conned—which is what happened, and presumably they are reasonably well educated—and cannot read and understand a PDS, then we have got to have potentially some issues around mis-selling. I am concerned that the department is not adopting best practice to ensure that this is minimised.

Ms Campbell —I think that we have already said that we will work with the ARIA trustee board to provide the advice that they can provide without having a financial licence and not providing individual advice to members.

Senator SHERRY —I suggest to you that that is not good enough. That becomes general advice, not specific advice, and it is the specific advice around the circumstances of the individual which vary enormously in a DB. However, I have made the point. In the UK there was an enormous scandal around mis-selling and people were convinced to move out of DBs into DC schemes based on commission based selling. I am not suggesting it would be as significant here, but there were significant issues around this matter because people were not provided with independent, ethical advice about the disadvantage that could occur. I do not want the department or a future government—and there will be a change of government at some time, whenever that may be—having to handle a scandal and then pay out compensation such as occurred in the UK around this issue.

Mr Sotiropoulos —If I could clarify just one point on this matter: in terms of what ComSuper can provide, they will be able to provide a member with what the benefit will be if they stay in the scheme and also what the benefit would be if they were to leave the scheme—in other words, preserving their benefit. The other aspect of—

Senator SHERRY —There is one thing that they cannot do: they cannot provide a comparison with the ‘to’ scheme. They can only provide information on the ‘from’ scheme.

Mr Sotiropoulos —That is right. The other protection for members is that they are not taking their money and putting it somewhere else.

Senator SHERRY —It is future contributions.

Mr Sotiropoulos —That is right. They will be leaving what they have got within the schemes.

Senator SHERRY —They do not have any option on that, do they? There is no choice.

Mr Sotiropoulos —But that is a protection for them.

Senator SHERRY —Isn’t this the irony? You can talk all about the jargon of choice—and I do get slightly bemused—but there is no portability provision being applied, is there?

Ms Campbell —No, Senator, portability is not being applied.

Senator SHERRY —That has been applied elsewhere but it is not being applied to funds. We are getting choice but not portability.

Ms Campbell —It has not been applied elsewhere in the Commonwealth, Senator.

Senator SHERRY —No, but I am talking about the general superannuation funds.

Ms Campbell —But there have been other examples of portability, yes—often of fund schemes.

Senator SHERRY —The government has required portability in respect of general superannuation funds, hasn’t it? It has only recently legislated to that effect.

Ms Campbell —Yes, Senator.

Senator SHERRY —But it is not applying in this case. We are having choice applied but not portability. Do you detect a bit of a contradiction?

Ms Campbell —I do not think that it is a contradiction. I think the government has decided to provide choice for PSS members.

Senator SHERRY —But not portability.

CHAIR —The government has not decided to apply portability.

Senator SHERRY —Correct. What about the issue of salary sacrifice?

Ms Campbell —The PSS and CSS come as a package deal. Members contribute post marginal tax salary. In the PSS they have a matching contribution provided by the government and the taxpayer and what are considered to be generous pension conversion factors and a reversionary pension. That comes as a package. Were the government to decide that those contributions were to be paid post the 15 per cent tax rate, that will come at an additional cost to the taxpayer—

Senator SHERRY —Sure, but that is an option. Under the salary sacrifice provision—where the employer offers it, and I accept that the majority do not offer it—within the old caps, and within the new caps for that matter, you can salary sacrifice on top of the employer contribution up to those caps. Why shouldn’t it be allowed for the public sector?

Ms Campbell —And in the public sector you can as well.

Senator SHERRY —In this fund?

Ms Campbell —Not into this fund but into other funds. And now with these changes you can reduce your contribution to these funds to zero and you can—

Senator SHERRY —But this gets me to the point that you have got to go to another fund. You are in the mainstream public sector fund—DB—but you have got to go to another fund to salary sacrifice.

Ms Campbell —That is correct, Senator.

Senator SHERRY —It is not a hybrid fund, is it, in the sense that it offers both DB and BC salary sacrifice if you want it?

Ms Campbell —No, Senator.

Senator SHERRY —Why is that case?

Ms Campbell —The funds have been closed. They are closed funds and contributions of new members joining funds into PSSAP, which allows salary sacrifice into the PSSAP system—

Senator SHERRY —But there are lots of examples of hybrid defined benefit-DC funds that allows salary sacrifice in the private sector, but not here.

Ms Campbell —Yes, but on this occasion the taxpayer picks up the additional costs through the revenue forgone were the government to decide to do this.

Senator SHERRY —Sure, but part of the government’s simpler super propaganda we are seeing on the TV at the moment is: go out and do it. But unfortunately the members of these funds, who are still active members, albeit the fund has closed, cannot do it. Why are public servants being denied this?

Ms Campbell —They can do it. They can contribute to another fund to salary sacrifice.

Senator SHERRY —Why should they have to be in two funds when most superannuation funds offer salary sacrificing in the one fund?

Ms Campbell —The current structure of the PSS and CSS is for a postmarginal tax salary contribution or, with the changes proposed in the legislation, there is no requirement to contribute to those funds and people can take their money and salary sacrifice somewhere else.

Senator SHERRY —One thing that puzzles me about these changes we are considering is why the same changes are not being made to the military superannuation funds.

Ms Campbell —My military colleagues can probably deal with that better than I.

Mr Grzeskowiak —Senator Sherry, I think you would be aware that we are running a review of the military superannuation schemes at the moment.

Senator SHERRY —Yes.

Mr Grzeskowiak —That review is due to report to the government at the end of July and we anticipate that changes to the military schemes would flow from the government’s decision based on the recommendations of that review when the government is ready to make that decision.

Senator SHERRY —But, like with the earlier change we discussed, it seems to me that we get these changes on choice and improvement in benefits in some areas occurring in the mainstream public sector funds but the poor old military personnel end up getting the changes a few years later.

Mr Grzeskowiak —In this case, there is nothing to say that the changes that may or may not result in military schemes as a result of this review would mirror any changes that are currently ongoing with the civilian schemes. They may be quite different in nature, reflecting what we like to call the special nature of military service. The review is scheduled to report in four weeks time. Then the government will consider that and decide what to do.

Senator SHERRY —But the policy is about choice and I just do not see it being applied to the military funds. Surely there is a contradiction here, Ms Campbell.

Ms Campbell —The government has the military funds under review and, as my colleague has indicated, that report is due shortly.

Senator SHERRY —I have one last question, Mr Grzeskowiak. I looked at the military super website last week and I was somewhat concerned to see in the example provided on the lump sum payout that, as of 1 July, the simpler super changes are actually increasing the tax payable by military personnel and not reducing it. Are you aware of that?

Mr Grzeskowiak —Yes, I am aware of that. This issue has been canvassed at previous estimates.

Senator SHERRY —Sorry. I had not canvassed the military super fund website which showed the reduction benefit as a result of the 1 July changes because it was not on the website at that point in time.

Mr Grzeskowiak —That calculation is not showing a reduction in benefits but a reduction due to a change in the taxation treatment.

Senator SHERRY —Yes. Their tax is going up and their benefits are being reduced.

Mr Grzeskowiak —As a point of technicality, I was saying that the tax treatment is different.

Senator SHERRY —The tax treatment is different and they are ending up with less money. Are you aware of that?

Mr Grzeskowiak —I am aware of that.

Senator SHERRY —Is this matter being fixed?

Mr Grzeskowiak —We are continuing to seek clarification on the effect of some of the Better Super changes that came into effect a few days ago.

Senator SHERRY —There is an example—which I think is accurate, by the way; that is the advice I have received—which shows that the tax for military personnel goes up and their benefit goes down as a result of the changes on 1 July. When are we going to get some clarification on this, because there are a lot of very worried military personnel out there?

Mr Grzeskowiak —That is understood. I was advised by ComSuper only this morning that the examples on the website that you referred to are accurate given the state of the legislation under regulations that existed prior to 28 June this year. You may be aware that on 28 June this year the Treasury issued a revised set of regulations. ComSuper is currently working through that with the Australian Taxation Office to see if that has any effect on the way that they will treat that. We are really looking at partial lump sums here rather than the MSBS scheme. That is being looked at as we speak. I sought advice from the ATO and the Treasury earlier on this issue, and I am now reseeking that advice based on the regulation changes that occurred last week. I do not yet have a definitive answer to my questions.

Senator SHERRY —I do not blame you personally because you are the meat in the sandwich in this mess, frankly. When do you anticipate that you will get this clarification, based on the new regulations?

Mr Grzeskowiak —It is being worked on now so I would hope within a few weeks. When I get that clarification, through our own internal networks we will be advising our military people of what we know. As with the civilian schemes, I cannot give financial advice but I can give factual advice about the way things—

Senator SHERRY —I accept that you can only do your best in what is a difficult set of circumstances. In getting that clarification, are you going to an outside actuary?

Mr Grzeskowiak —At this point I am not using an actuary. My understanding of this is that the issue is really more about how the taxation system treats partial lump sums compared to the way that used to be done. Therefore, actuarial assessments may not be what I need. It may be more a question of the detailed clarification of how ComSuper will apply the new regulations and the effect that that would potentially have on a number of people, because the effect only occurs for somebody who chooses to access a partial lump sum before the age of 60.

Senator SHERRY —Just as a matter of interest, do you have any idea what proportion of members would access a partial lump sum?

Mr Grzeskowiak —That is very much a matter of individual choice.

Senator SHERRY —I understand that it is an individual choice, but—

Mr Grzeskowiak —I do have some rough figures, but not about who might access a partial lump sum. Because of the preservation rules and the way that they work, I believe that in the order of 80 per cent of current MSBS members cannot access partial lump sums before they are 60 anyway. Therefore, that leaves in the order of 20 per cent of current MSBS scheme members who would have the option of accessing before they are 60. Because of the way the proportioning regulations stand, once somebody reaches 60 there is no issue. It is only an issue for someone aged between 55 and 60. Probably 20 per cent of our MSBS scheme members fall into that category, and therefore we need to help them understand what the regulations mean.

Senator SHERRY —Since you have—in my view quite correctly—ensured that an accurate description of the effect of the regulations is on the military super website, has the minister issued any clarifying statements?

Mr Grzeskowiak —Which minister?

Senator SHERRY —The minister responsible for the defence forces—Mr Billson, Mr Nelson or the Assistant Treasurer.

Mr Grzeskowiak —There was an announcement by the Assistant Treasurer on 10 April—

Senator SHERRY —Yes, I am aware of that one.

Mr Grzeskowiak —concerning the DFRDB schemes.

Senator SHERRY —Yes, but not the MSBS.

Mr Grzeskowiak —No, we have not been able to advise the Minister Assisting the Minister for Defence of a definitive statement on the workings on the proportioning pool because, as yet, we do not have that detail. I am awaiting that detail before I can put out any information within Defence.

Senator SHERRY —Is the Minister Assisting the Minister for Defence aware of this issue?

Mr Grzeskowiak —He is aware of the issue.

Senator SHERRY —It is fair to say that it is causing concern?

Mr Grzeskowiak —Yes, the minister is aware of the issue.

Senator SHERRY —I have had contact with a significant number of current fund members who want to know why their tax will potentially go up and not down if they access a lump sum. Is it your understanding that the tax was supposed to go down and not up—that that was the policy intent?

Mr Grzeskowiak —It is my understanding that, once somebody turns 60 and takes a pension, for defined benefit schemes there will be a 10 per cent reduction in taxation liability. That is a separate issue from—

Senator SHERRY —It is a rebate; it is not a 10 per cent reduction in tax liability.

Mr Grzeskowiak —It is a rebate; sorry.

Senator SHERRY —So the tax variation will depend on the application of the rebate. Ms Campbell might be able to help me. Was it the policy intent that an individual’s tax would go up if they accessed a lump sum prior to age 60? I cannot recall any statement about this.

Ms Campbell —The Department of Finance and Administration does not have responsibility for the taxation, and I am afraid I do not have any insights into that.

Senator SHERRY —As I say, I just hope you can sort this mess out as soon as possible, because there are a lot of worried military personnel out there wondering why their tax has gone up and not down.

Senator FIERRAVANTI-WELLS —We were talking about the restoration of pensions previously cancelled on remarriage, both civilian and non-civilian. We are talking about limited numbers, but I assume the application would at least have some degree of complexity. Do we envisage some degree of assistance for widows in relation to compiling those sorts of applications?

Ms Campbell —We envisage that people will contact ComSuper if they think they are in these circumstances and then ComSuper will pull out their files and assist in going though that process.

Senator FIERRAVANTI-WELLS —Thank you.

CHAIR —I remind the Department of Finance and Administration and the Department of Defence that the deadline for responses to questions on notice is 10 July. I think there were a couple of questions that both departments took on notice—maybe it was the Department of Defence that took two questions on notice. I thank officers of both departments for joining us today. That concludes this public hearing of the Senate Standing Committee on Finance and Public Administration.

Committee adjourned at 2.37 pm