Department of Finance and Deregulation
PSS AND CSS LONG TERM
COST REPORT 2011
A report on the long term cost of the
Public Sector Superannuation Scheme and the
Commonwealth Superannuation Scheme
Prepared by Mercer Consulting (Australia) Pty Ltd
using data as at 30 June 2011
FINANCIAL MANAGEMENT GROUP
MERCER
1
Mercer Consulting (Australia) Pty Ltd
ABN 55 153 168 140 AFS Licence # 411770
Darling Park Tower 3
201 Sussex Street Sydney NSW 2000
GPO Box 9946 Sydney NSW 2001
+61 2 8864 8888
Copyright Notice
© Commonwealth of Australia 2012
Department of Finance and Deregulation
(Financial Management Group)
ISBN 978-1-922096-03-6 (Print)
ISBN 978-1-922096-04-3 (Online)
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PARKES ACT 2600
or emailed to capa@finance.gov.au
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CONTENTS
1. Executive Summary .................................................................................................. 1
2. Scheme Information and Assets ................................................................................ 5
3. Membership and Data ............................................................................................... 8
4. Assumptions............................................................................................................ 11
5. Unfunded Liability .................................................................................................... 18
6. Projected Outlays .................................................................................................... 21
7. Notional Employer Contribution Rates ..................................................................... 23
8. Sensitivity Analysis .................................................................................................. 25
Appendix A:
Summary of Benefit Provisions .............................................................. 29
Appendix B:
Detailed Assumptions............................................................................. 36
Appendix C:
Actuary’s Certification............................................................................. 46
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1
Executive Summary
1.1. We are pleased to present this report on the actuarial investigation of the long term costs
of the Public Sector Superannuation Scheme (PSS) and the Commonwealth
Superannuation Scheme (CSS), prepared at the request of the Department of Finance
and Deregulation. This report has been carried out based on membership data as at
30 June 2011.
Previous PSS and CSS Long Term Report
1.2. The previous actuarial investigation into the long term costs of the PSS and CSS was
undertaken by Mercer Consulting (Australia) Pty Limited, formerly known as
Mercer (Australia) Pty Ltd, based on data as at 30 June 2008. The outcomes of this
investigation are outlined in the PSS and CSS Long Term Cost Report 2008 (2008
Report).
Purpose of the Report
1.3. This report estimates the long term cost of providing superannuation benefits to
members of the PSS and the CSS. The scheme costs have been estimated in three
ways:

Unfunded Liability;

Projected Outlays; and

Notional Employer Contribution Rates.
Unfunded Liability
1.4. The accrued Unfunded Liability as at 30 June 2011 for current members in respect of
service up to 30 June 2011, preserved members and pensioners has been calculated to
be $93.0 billion. This represents an estimate of the present value of the superannuation
liability less the fair value of scheme assets.
1.5. A breakdown of the Unfunded Liability by scheme and prior years estimates are outlined
below:
Accrued Unfunded Liability ($ billions)
Report as at
PSS
30 June 1999
5.7
30 June 2002
9.1
30 June 2005
13.8
30 June 2008
20.9
30 June 2011
33.1
Note:
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CSS
40.3
49.3
50.6
59.2
59.9
Combined
46.0
58.4
64.4
80.1
93.0
The prior year figures have not been adjusted to 2011 dollars.
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1.6. The 2008 Report projected that the Unfunded Liability would be $88.1 billion as at
30 June 2011, approximately $4.9 billion less than the current estimate of $93 billion, due
to factors including:

fewer than expected contributors ceasing employment;

average investment returns (credited to members’ accounts) being lower than
expected for both the PSS and CSS;

salary increases being higher than expected;

the take-up rate of PSS pensions being higher than expected; and

PSS members contributing at rates higher than assumed (increasing the value of
benefits accruing).
1.7. Further detail regarding the Unfunded Liability is contained in Section 5 of this Report.
Projected Outlays
1.8. The annual projected outlays associated with the PSS and CSS are calculated as
follows:

productivity superannuation contributions paid by the employer to the PSS and CSS
funds; plus

benefit payments made from the Consolidated Revenue Fund (CRF) (including
payments made under the Superannuation Act 1922); less

payments made from the PSS and CSS Funds to the CRF.
1.9. The projected outlays are expected to reduce as a percentage of projected Gross
Domestic Product (GDP) from 0.29% in the year ending 30 June 2012 to 0.10% in the
year ending 30 June 2051.
1.10.
Further detail regarding the projected outlays is contained in Section 6 of this Report.
Notional Employer Contribution Rates
1.11. The Notional Employer Contribution Rates (NECRs) represent the estimated
contribution rate that would be required to fund the benefits accruing to contributors over
the next three years (based on current projections). That is, if the scheme was fully
funded at the valuation date and contributions were made at the NECR, then the liability
for contributors would be expected to be fully funded at the end of the period.
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1.12. The NECRs for the two schemes (including contributions towards the productivity
superannuation benefit of approximately 3%) are summarised in the following table:
Notional Employer Contribution Rates (% of Superannuation Salaries)
Report as at
PSS
CSS
Combined
30 June 1999*
14.2
21.9
17.2
30 June 2002*
15.4
28.3
19.3
30 June 2005*
15.6
28.2
18.3
30 June 2008
16.3
21.4
17.1
30 June 2011
18.8
20.3
19.0
* Old methodology. The methodology was changed in the 2008 Long Term Cost Report to bring calculations
more in line with the approach used in Australian Accounting Standards and the Budget process. Please
refer to the 2008 Report for further details of the change.
Note: The combined rates are weighted average rates based on the superannuation salaries of the
members of the two schemes.
1.13. The contribution rate for the PSS as at 30 June 2011 has increased by
2.5 percentage points compared to the rate as at 30 June 2008. The contribution rate for
the CSS as at 30 June 2011 has decreased by 1.1 percentage points compared to the
rate as at 30 June 2008.
1.14. The significant increase of NECR for the PSS is primarily due to the change in
assumptions, based on observed behaviour, relating to:

Increase in the average PSS member contributions from 4.75% to 6%. Higher
member contribution rates lead to a higher accrual of benefits and therefore more
valuable benefits.

Increase in the proportion of PSS benefits taken as a pension from 60% to 70%.
Under the assumptions made in this actuarial investigation, a member electing to
take their benefit as a pension leads to a more valuable benefit.
1.15. The decrease of NECR for the CSS is due to nature of the benefit design whereby
the rate of benefit accrual declines with length of membership.
1.16.
Further detail regarding the NECR is contained in Section 7 of this Report.
Scheme Membership
1.17. The table below summarises the total membership of the PSS and CSS as at
30 June 2011:
Membership as at 30 June 2011
Number of Contributors
Total Salaries of Contributors
Number of Preserved Members
Number of Pensioners
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PSS
113,224
$9,457m
103,092
23,921
CSS
15,916
$1,606m
9,110
114,999
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1.18.
Further detail regarding scheme membership is contained in Section 3 of this Report.
Assumptions
1.19. The key economic assumptions adopted for this report are shown in the table below.
All economic assumptions used to value the liability and projected outlays are the same
as those used in 2008 Report.
Item
CPI Increases
Investment Returns / Discount Rate
General Salary Increases
Assumption
2.5% per annum
6.0% per annum (nominal)
3.5% per annum (real)
4.0% per annum (nominal)
1.5% per annum (real)
1.20. The demographic assumptions have been reviewed based on the experience of the
schemes over the three years to 30 June 2011. The most significant changes include:

an increase in the assumed rate of PSS member contributions;

an Increase in the take-up of pension benefits by PSS members; and

the extension of retirement assumptions to age 75.
1.21.
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Further detail regarding assumptions is contained in Section 4 of this Report.
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2
Scheme Information and Assets
Introduction
2.1.
The PSS was established on 1 July 1990, following the closure of the CSS on the same
date. The Superannuation Act 1990 and a Trust Deed and Rules govern its operations.
The PSS was closed to new members from 1 July 2005. Employees of Australian
Government agencies prior to 1 July 2005 were eligible for membership of the PSS.
2.2.
Most employees of Australian Government agencies who commence employment on or
after 1 July 2005 are eligible to join the Public Sector Superannuation Accumulation Plan
(PSSap) that was established on 1 July 2005.
2.3.
The CSS was introduced on 1 July 1976. Its operations are governed by the
Superannuation Act 1976, as amended, and associated regulations. The CSS has been
closed to new members since 1 July 1990. All CSS contributors at 1 July 1990 were
given the option of transferring to the PSS. A further option to transfer to the PSS was
provided in 1996 for a limited period of time. The current membership of the CSS covers
Australian Government employees who were members on 30 June 1990 and who have
not transferred to the PSS.
2.4.
Prior to July 1976 the superannuation of Australian Government public servants was
covered by the Superannuation Act 1922. There are no longer any members contributing
under the Superannuation Act 1922. However, some pensioners remain entitled to
benefits under this Act and the liabilities in respect of these members are included in the
CSS Unfunded Liability.
Benefits
2.5.
The PSS and CSS are defined benefit schemes.
2.6.
In the PSS, the primary benefit is expressed as a lump sum based on a multiple of final
average salary that is related to a member’s average contribution rate and total service.
On exit, the benefit may be wholly or partially taken as an indexed pension.
2.7.
The CSS provides a retirement benefit equal to the sum of:
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
employer-financed indexed pension – being a percentage of final salary based on
the period of contributory service and discounted for early retirement before age 65;

productivity component – made up of accumulated productivity contributions; and

member-financed benefit – made up of accumulated basic and supplementary
contributions.
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The member can elect to take the productivity component and member-financed benefit
either as a non-indexed pension or a lump sum.
2.8.
Further details of the benefits provided by the PSS and CSS are set out in Appendix A.
Employer Productivity Contributions and Member Contributions
2.9.
Member and employer productivity superannuation contributions paid to the PSS and
CSS are invested by the trustee of the two schemes, the Commonwealth
Superannuation Corporation (CSC). These contributions are accumulated at a crediting
rate periodically declared by the trustee.
2.10.
Employer productivity contributions are contributions of approximately 3% of employees’
salaries that employers are required to pay as a result of award negotiations in the late
1980s. They (usually) form part of the scheme benefits. Generally agencies pay
productivity superannuation contributions in respect of their employees to the PSS or
CSS. However, there are some agencies that have made alternative arrangements in
respect of their CSS members. These agencies pay their productivity superannuation
contributions elsewhere.
2.11.
The PSS and CSS are partly funded to the extent that real assets are held in respect of
member contributions and productivity superannuation contributions. These assets, as
appearing in the reports of the schemes’ trustee, were:
Assets of the PSS and CSS ($ millions)
Date
PSS
CSS
30 June 1999
3,481
5,591
30 June 2002
4,468
5,337
30 June 2005
7,583
6,015
30 June 2008
11,346
6,073
30 June 2011
12,481
4,598
2.12.
Total
9,072
9,805
13,598
17,419
17,079
The Unfunded Liability is that portion of the total superannuation liability in excess of the
assets held in the schemes. That is, these assets offset the schemes’ liabilities.
Investment Policy and Earning Rate Policy
2.13.
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For PSS contributors, the total benefit is a defined benefit payable from the CRF.
Member contributions and productivity contributions, accumulated with investment
returns, are paid from the PSS Fund into the CRF to offset the cost of benefit payments.
Hence, the role of investment return is to reduce the cost of the scheme to the
Government.
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2.14.
For PSS preserved members and all CSS members, the member and productivity
contributions are accumulated with investment returns to provide part of the eventual
benefits. Hence, the role of investment return for these members is to enhance benefits.
2.15.
We have reviewed the trustee’s investment policy and considered it to be suitable, taking
into account the largely unfunded nature of the schemes’ liabilities and the Government’s
method of funding outlays from the CRF.
2.16.
The earning rate applied to members’ accruals is effectively the actual rate of investment
return, with no smoothing or reserves. The policy is documented and included on the
trustee’s website. We consider the trustee’s earning rate policy to be suitable.
Changes to Benefits Since 2008
2.17.
There have been some changes to the benefits provided by the PSS and CSS since the
previous report as at 30 June 2008.
2.18.
From 1 July 2011, the Government increased the age to which PSS members can
accrue employer benefits from age 70 to 75 provided they meet a work test.
2.19.
At the time this report was prepared, a bill was before parliament to increase the level of
Superannuation Guarantee (SG) from 9% to 12%. Despite the bill subsequently being
passed, any impact on the increase in minimum benefits as a result of the SG level
increasing above 9% is not taken into account in this report.
2.20.
In defined benefit schemes such as the PSS and CSS, the SG operates by requiring that
a minimum level of benefits be provided (instead of a minimum level of contributions).
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3
Membership and Data
3.1.
Data relating to the membership of the PSS and CSS was provided for this report by
ComSuper, the schemes’ administrator, on behalf of the schemes’ trustee. Data
provided included:

details of contributory members, pensioners and preserved members (generally
former contributors who have preserved their benefits) of the PSS and CSS as at
30 June 2011; and

details of exits by contributory members and preserved members from the PSS and
CSS during the three year period from 1 July 2008 to 30 June 2011.
3.2.
A range of validity data checks were conducted by ComSuper prior to the data being
provided to Mercer. A series of checks have also been carried out by our firm to test the
integrity of the data and the variation reports produced by ComSuper. In addition, a
reconciliation of the current data with the data utilised for the 2008 Report has been
carried out. We are satisfied that the data is sufficiently accurate for the purposes of this
report. However, CSC and ComSuper are ultimately responsible for the validity,
accuracy and comprehensiveness of this information.
3.3.
In the PSS, fewer contributory members exited during the period from 1 July 2008 to
30 June 2011 than anticipated in the actuarial assumptions, for a variety of reasons
including fewer members electing to cease contributory membership of the PSS and join
the Public Sector Superannuation Accumulation Plan (PSSap). In the CSS fewer
contributors exited during the period than expected as well. Therefore, the actual
contributory membership at 30 June 2011 was higher than expected.
3.4.
The number of PSS preserved members at 30 June 2011 was lower than expected
mainly due to lower than expected number of contributor exits and also a consolidation
of member records by ComSuper. The number of CSS preserved members at
30 June 2011 was also lower than expected mainly since there were fewer than
expected contributor exits into the preserved section.
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3.5.
The tables below summarise the total membership of the PSS and CSS as at
30 June 2011:
PSS Membership as at 30 June 2011
Number of Contributors
Total Salaries of Contributors
Number of Preserved
Members
Number of Age Pensioners
Number of Invalidity Pensioners
Number of Reversionary
Pensioners
Male
47,638
$4,267m
Females
65,586
$5,190m
Total
113,224
$9,457m
42,043
61,049
103,092
9,961
1,150
10,325
1,432
20,286
2,582
329
724
1,053
CSS Membership as at 30 June 2011
Number of Contributors
Total Salaries of Contributors
Number of Preserved
Members
Number of Age Pensioners
Number of Invalidity Pensioners
Number of Reversionary
Pensioners
3.6.
Male
10,264
$1,082m
Females
5,652
$524m
Total
15,916
$1,606m
6,481
2,629
9,110
52,581
10,433
19,209
4,309
71,790
14,742
1,441
27,026
28,467
The following tables summarise the membership of the schemes since 1999:
Contributing Members
30 June 1999
30 June 2002
30 June 2005
30 June 2008
30 June 2011
3.7.
3.8.
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PSS
106,141
129,683
154,897
132,274
113,224
CSS
52,880
39,986
32,006
22,162
15,916
Total
159,021
169,669
186,903
154,436
129,140
Between 1 July 2008 and 30 June 2011:

the number of PSS contributors reduced by 14.4%; and

the number of CSS contributors reduced by 28.2%.
Between 1 July 2008 and 30 June 2011 ComSuper conducted a consolidation of
member records. This has led to a reduction in the number of preserved members
relative to expectations. This did not have a material impact on the liability.
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Preserved / Deferred Benefit Members
PSS
30 June 1999
51,176
30 June 2002
76,357
30 June 2005
85,709
30 June 2008
103,628
30 June 2011
103,092
CSS
12,521
13,969
12,227
11,461
9,110
Total
63,697
90,326
97,936
115,089
112,202
PSS
4,950
7,598
10,912
15,759
22,868
CSS
81,415
83,370
85,028
86,901
86,532
Total
86,365
90,968
95,940
102,660
109,400
PSS
210
331
507
693
1,053
CSS
26,962
27,930
28,560
28,531
28,467
Total
27,172
28,261
29,067
29,224
29,520
Pensioners
30 June 1999
30 June 2002
30 June 2005
30 June 2008
30 June 2011
Dependent Pensioners
30 June 1999
30 June 2002
30 June 2005
30 June 2008
30 June 2011
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4
Assumptions
4.1.
In order to value liabilities, it is necessary to make assumptions regarding the incidence,
timing and amount of future benefits. These assumptions fall into two broad categories:

economic assumptions: assumptions that relate to the general economic
environment and not directly to the membership of the schemes; and

demographic assumptions: assumptions that relate to the experience of the
membership of the scheme.
4.2.
This section sets out details of the assumptions adopted for the 2011 Report and
highlights any changes from those adopted for the 2008 Report.
4.3.
In total the changes in assumptions have resulted in an increase in the combined
Unfunded Liability of the PSS and CSS of approximately $1.3 billion as at 30 June 2011.
4.4.
The assumptions are detailed in Appendix B.
Economic Assumptions
Key Economic Assumptions
4.5.
4.6.
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The key economic assumptions adopted for this report include:

future increases in the Consumer Price Index (CPI) which links to the level of
pension increases;

future rate of investment return / discount rate; and

future increases in salaries (i.e. increases in salaries other than those arising from
promotions).
The relationships between the assumptions adopted for these factors have a greater
bearing on the long term cost estimates of the PSS and CSS than do the individual
assumptions. This is due to the effect of one assumption being used to project the
liability into the future (e.g. future salary increases) and another assumption being used
to discount that liability to current day values (investment return).
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4.7.
The key economic assumptions adopted for this report are shown in the table below.
The assumptions are the same as those used for the 2008 Report.
Item
CPI Increases
Investment Returns / Discount Rate
General Salary Increases
4.8.
4.9.
Assumption
2.5% per annum
6.0% per annum (nominal)
3.5% per annum (real)
4.0% per annum (nominal)
1.5% per annum (real)
The assumed rate of future CPI increases remains at 2.5% per annum. This rate was
set based on the following considerations:

The Reserve Bank target for CPI increase is 2% to 3% per annum.

The average CPI increase rate for the last ten years to 30 June 2011 was
2.9% per annum.

The long term level of inflation projected by the 2010 Intergenerational Report is
2.5% per annum.
The assumed investment returns / discount rate remains at 6.0% per annum (nominal).
The discount rate for a funded scheme is typically based on expected investment returns
in a superannuation fund. As the PSS and CSS are largely unfunded our view is that the
best determinant of the discount rate is the expected return on government bonds over
the long term, as this would be the cost to the Australian Government were it to “fund” the
schemes via borrowings. Based on the long term outlook for inflation and the long term
outlook for the real bond yields (i.e. bond yield above inflation) we consider that a real
yield of 3.5% per annum continues to be appropriate. The average real yield of ten year
government bonds over the fifteen years to 30 June 2011 has been consistent with this
long term assumption1.
4.10. The assumed rate of future general salary increases remains at 4.0% per annum
(nominal). Since the early 1990s wage inflation increases have ranged from
2.0% per annum to 6.8% per annum, with an average of 3.7% per annum. The margin of
Average Weekly Ordinary Time Earning over CPI has averaged 1.5% per annum over
the past 10 years. Real wages growth (i.e. above price inflation) is expected to be in line
with labour productivity growth. The 2010 Intergenerational Report assumes that long
term wage growth will be 4.0%, (with productivity growth in the order of 1.6% combined
with long term price inflation of 2.5%). Taking into account both the actual past
experience and the forward looking assumptions of productivity growth, an expectation
for general salary increases of 4.0% per annum continues to be appropriate.
1
The Future Fund was established in 2006 to accumulate financial assets and invest them on behalf of the Australian
Government to address the Government’s unfunded superannuation liability. Withdrawals from the Future Fund to
pay superannuation benefits may only occur once the balance of the fund is greater than the target asset level or from
1 July 2020, whichever is the earlier. In determining our assumption for the future investment return of the schemes
we have not allowed for the expected investment return on the assets of the Future Fund on the basis that the Future
Fund assets are not legally considered to be owned by the schemes and have been separately accounted for in the
Governments financial statements.
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4.11.
One consideration in setting the assumption for wages growth has been the introduction
of the Australian Government Employment Bargaining Framework (the Framework)
which took effect from 31 January 2011. This Framework contains guidance for
appropriate agency salary increases including a recommended Average Annualised
Wage Increase of 3.0%. While this will impact on short term wage outcomes for
members of the schemes, we have not adjusted our assumption of 4.0% for the following
reasons:

As a general principal we have not adopted different economic assumptions for the
short term and long term. To adopt short term wage assumptions would necessitate
the use of other short term assumptions (inflation, investment) the net impact of
which would not be material to the results.

Over time, we expect periods of wage growth to be below our long term assumption
(such as the next few years as implied by the Framework) offset by periods of
growth above our assumption.
4.12. We have also made assumptions regarding the rate of increase in Gross Domestic
Product, to enable a comparison between projected outlays and liabilities as a
percentage of GDP, as follows:
Item
GDP Increases*
2011 Report
2008 Report
2.6% per annum (real) 2.4% per annum (real)
* The GDP increase rate shown is the average of the annual rates over the forty year period from the
investigation date of each report. The GDP growth rates adopted for this report were based on real GDP
growth projections provided by the Department of the Treasury. GDP at 30 June 2011 was $1,475 billion.
Taxation
4.13. Allowance has been made for 15% tax payable on superannuation employer productivity
contributions.
4.14. The PSS and CSS are treated as complying superannuation funds within the meaning of
the Superannuation Industry (Supervision) Act 1993 and tax is generally payable at a
concessional rate of 15% on net investment earnings and employer contributions with
deductions allowable for administration expenses.
4.15. In determining the projected outlays, no adjustment has been made for tax on the
unfunded portion of the benefits paid from the PSS and CSS.
Superannuation Guarantee
4.16. It has been assumed that the Superannuation Guarantee rate will be maintained at 9% of
salaries (see Section 2.14).
4.17. Since 1 July 2008, defined benefit schemes have been required to assess their
superannuation guarantee obligations against ordinary times earnings, rather than the
relevant scheme superannuation salary. However, we do not consider this has any
material impact on the Unfunded Liability or the NECRs.
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Demographic Assumptions
4.18. Based on a detailed analysis of the membership experience for the three years from
1 July 2008 to 30 June 2011, the following decisions regarding the assumptions to be
used in this report have been made. In all cases details of the revised assumptions
adopted for this report are set out in Appendix B.
Promotional Increases in Salaries
4.19. Salary increases consist of general salary increases due to salary inflation together with
increases due to promotion. General salary increases capture the average salary
increase for all government employees, while promotional salary increases capture the
increases due to promotion within and between employment bands.
4.20. The general salary increases over the three years 1 July 2008 to 30 June 2011 have
been higher than expected. This has lead to the overall level of salary increases being
higher than expected. However, as discussed above, the assumed rate of future general
salary increases remains at 4.0% per annum.
4.21. The actual promotional salary increase experience of members of the PSS and CSS over
the three years from 1 July 2008 to 30 June 2011 has broadly been in line with the rates
of promotional salary increase assumed for the report as at 30 June 2008. Therefore the
same assumptions for future promotional increases have been adopted for the report as
at 30 June 2011.
Mortality (Contributors and Preserved Members)
4.22. The overall rate of mortality experience of contributors and preserved members has been
slightly lower than expected. We have therefore revised both the male and female
mortality assumptions to reflect general mortality improvements since the previous report.
Invalidity Retirements
4.23. The number of male contributors and preserved members retiring from the PSS due to
invalidity has been slightly lower than expected. The number of female contributors and
preserved members retiring from the PSS due to invalidity has been slightly higher than
expected. We have retained the assumption from the previous report.
4.24.
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The number of contributors and preserved members (both male and female) retiring from
the CSS due to invalidity has been slightly lower than expected. We have not revised
these assumptions.
14
Retirement Assumptions
4.25.
Between the ages of 55 and 63, the retirement experience has been broadly in line with
that expected and as a result the assumptions in this report have not been changed. At
age 64 member retirements have been significantly higher than expected and we have
adjusted the retirement assumption (in both the CSS and PSS) to reflect this experience.
4.26. We have also extended the retirement assumptions to age 75 for PSS and CSS.
Resignation
4.27. For PSS members, resignation experience has been slightly higher than expected for
males and slightly lower than expected for females. For CSS resignation experience has
generally been slightly lower than expected (including 54/11). However, we have
retained the resignation assumptions from the 2008 Report for these categories of
members as the actual experience may reflect short term economic conditions.
Retrenchments
4.28. While there have been fewer retrenchments than expected, we have left the
retrenchment assumptions unchanged.
PSS Members ’ Option to Cease PSS Membership in Order to Join PSSap
4.29. Since 1 July 2008, PSS members have been able to elect to cease PSS membership in
order to join PSSap. In the 2008 Report calculations included assumptions for a certain
portion of members exercising this option.
4.30. However, the experience over the period from 2008 to 2011 showed that few PSS active
members exercised this option. We have therefore reduced the assumption to nil.
Mortality
4.31. For the purposes of this report allowance for future improvements in the mortality rates of
age pensioners has been made in accordance with the short and long term rates derived
by the Australian Bureau of Statistics in conjunction with the Australian Government
Actuary (as published in the Australian Life Tables 2005-07). Note the 2008 Report used
the improvement rates from the latest Australian Life Table that was available at that time
(Australian Life Tables 2000-02).
4.32. Short term rates of mortality improvement relate to mortality improvements measured
over the last 25 years. Long term rates relate to mortality improvements measured over
the last 100 years. Short term rates are significantly higher than the long term rates.
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15
4.33. Our analysis of the experience of the PSS and CSS as well as other public sector
schemes shows that recent mortality improvements have exceeded the short term rates.
Due to this, we have extended the period of short term improvements from 2015
(assumed in the 2008 Report) to 2018.
4.34. The analysis of experience over the three years to 30 June 2011 suggests that the
mortality of age pensioners is slightly lower than expected. We have revised the
assumptions to reflect the general mortality improvement since the last report (using the
previous improvement assumptions).
4.35. For invalidity pensioners, the experience analysis suggests that the mortality of invalidity
pensioners with duration less than three years is lower than expected (although the
number of members is not necessarily significant). The ultimate mortality experience of
the invalidity pensioners are broadly consistent with that expected. We have revised the
assumptions to reflect the general mortality improvement since the last report (using the
previous improvement assumptions).
4.36. The assumptions for dependent pensioners remain unchanged except that we have
revised the assumptions to reflect the general mortality improvement since the last report
(using the previous improvement assumptions).
Retention of Benefits
4.37. The proportion of benefits retained within the schemes on resignation and retrenchment
has broadly been as expected. Therefore the same assumptions as for the 2008 Report
have been adopted for the 2011 Report.
Pension Option in the PSS
4.38. The proportion of benefits taken as a pension from the PSS continues to be higher than
expected. While some of this increase may be due to short term factors like investment
volatility highlighting the benefits of a defined benefit pension, we expect that over time
the pension option will be an increasingly attractive option to members due to increasing
life expectancy (and fixed pension conversion factors). We have therefore increased the
assumed proportion of benefits taken as a pension from 60% to 70% to reflect the actual
experience and our view of the longer term trend.
Member Contributions to the PSS
4.39. Members of the PSS are able to contribute at any whole percentage rate from 2% to 10%
of superannuation salary (or not to contribute at all) and the rate of increase in the Benefit
Multiple is dependent on this contribution rate. As at 30 June 2011 the average
contribution rate to the PSS was 6.3%.
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16
4.40. In the 2008 Report we reduced the assumed PSS contribution from 5.0% to 4.75% to
reflect the introduction of the ability of members to not contribute to the scheme. While
the actual experience shows that some members did choose to cease contributing to the
scheme, the number was much smaller than expected and in fact, there has been a trend
to higher rates of contribution (with a particular increase in members contributing at the
full 10% rate).
4.41. We have therefore increased the member contribution rate assumption to 6.0% to reflect
this experience and also our view that as the average age of members increase, the
average rate of contributions will generally increase.
Family Law
4.42. It is assumed for this report that benefits subject to Family Law splitting orders or
agreements that have already been implemented as at 30 June 2011 have been allowed
for in the data as at 30 June 2011. The member spouse has had their benefit reduced
due to the split. The Family Law spouse is included as a dependent pensioner.
Co-contributions
4.43. Co-contributions are treated as fully funded additional member accounts and have no
effect on the Unfunded Liability or Notional Employer Contribution Rates.
Spouse Assumptions
4.44. The experience analysis indicated the proportion of members in a marital or couple
relationship was broadly aligned with that assumed for the 2008 Report.
4.45.
For the 2008 Report it was assumed that male members were three years older than
their spouse and that female members were two years younger than their spouse.
4.46. The experience analysis indicated that the assumption was broadly reasonable. There
has been no change to our assumptions.
Future New Entrants
4.47. The PSS has been closed to new members since 1 July 2005. The CSS has been
closed to new members since 1 July 1990. This report assumes that there are no future
new entrants to either the PSS or CSS. In practice there may be some new entrants to
the schemes in the future – for example members who had previously left employment
with the Australian Government returning to work. However the level of future new
entrants is not material.
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17
5
Unfunded Liability
5.1.
The Unfunded Liability is the total accrued superannuation liability in respect of service
up to 30 June 2011 for which no assets are held.
5.2.
The Unfunded Liability represents an estimate of the schemes’ superannuation liabilities
and represents the total discounted value of all future (net) payments that will be made
from the CRF in respect of scheme membership accrued to 30 June 2011.
Valuation Methodology
5.3.
The approach used in this valuation is the actual accrual or projected unit credit method
approach. This approach to measure the Unfunded Liability is consistent with Australian
Accounting Standards.
For example, for the PSS retirement benefit, this involves determining the total benefit
using:
Accrued Multiple
(calculated using
membership to the date
of the valuation)
×
Final Average Salary
at future date
The benefit is then adjusted to be the unfunded benefit by deducting accumulated
member and productivity contributions.
5.4.
The steps involved in the adopted method are as follows:
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
The membership of each scheme as at 30 June 2011 is projected into the future
based on assumptions relating to future salary growth and rates of exit of members
(as set out in Section 4).

The total value of unfunded benefits payable to the projected exits and pensions in
each future year are determined (using the accrual approach) taking into account
salary growth in each future year but members’ service to 30 June 2011 only.

The Unfunded Liability as at 30 June 2011 is determined as the sum of the present
values of the unfunded benefits payable to the projected exits over all future years.
18
Unfunded Liability as at 30 June 2011
5.5.
The accrued Unfunded Liability as at 30 June 2011 for current members in respect of
service up to 30 June 2011, preserved members and pensioners has been calculated to
be $93.0 billion. A breakdown of this estimate is outlined in the table below. The results
calculated in 2005 and 2008 are also shown for comparison purposes.
Estimate of Unfunded Liability for the PSS and CSS as at 30 June ($ billions)
Liability for
2005
2008
2011
– Contributors
22.6
26.5
30.5
– Pensioners
35.2
44.6
53.8
– Preserved Members
6.6
9.0
8.7
64.4
80.1
93.0
Unfunded Liability
7.8%
6.6%
6.3%
Total Unfunded Liability
(as a percentage of GDP)
Note:
5.6.
The prior year figures have not been adjusted to 2011 dollars.
The table below shows the total Unfunded Liabilities as at 30 June 2011 split between the
PSS and CSS:
Estimate of Unfunded Liability for the PSS and CSS as at 30 June 2011 ($ billions)
Liability for
PSS
CSS
Total
– Contributors
– Pensioners:
1922 Pensioners
1976 Pensioners
1990 Pensioners
– Preserved Members
Unfunded Liability
19.9
9.4
9.4
3.8
33.1
10.6
44.4
1.0
43.5
4.9
59.9
30.5
53.8
1.0
43.5
9.4
8.7
93.0
Summary of Changes in Unfunded Liability
5.7.
The 2008 Report projected that the Unfunded Liability would be $88.1 billion as at
30 June 2011, approximately $4.9 billion less than the current estimate of $93.0 billion,
due to factors including:
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
fewer than expected contributors ceasing employment;

average investment returns (credited to members’ accounts) being lower than
expected for both the PSS and CSS;

salary increases being higher than expected;

the take-up rate of PSS pensions being higher than expected; and

PSS members contributing at rates higher than assumed (increasing the value of
benefits accruing).
19
In addition part of the difference between the projected and actual unfunded liabilities is
due to the assumptions adopted for the 2011 report being different from those adopted
for the 2008 Report. In total the changes in assumptions have resulted in an increase in
the combined Unfunded Liability of the PSS and CSS of approximately $1.27 billion as at
30 June 2011. This amount included a decrease in the combined Unfunded Liability of
the PSS and CSS of approximately $0.83 billion at 30 June 2011 due to changes to the
schemes’ benefit designs since 1 July 2008 (refer Section 2).
5.8.
The table below shows the projected Unfunded Liability separately for the PSS and CSS
and for the two schemes combined. It also reflects the combined Unfunded Liability as a
percentage of future GDP.
Projected Unfunded Liability
Nominal Costs
As at
($ billions)
30 June
PSS
CSS
Total
2011
33.1
59.9
93.0
2012
36.1
60.1
96.2
2013
39.1
60.2
99.4
2014
42.3
60.2
102.5
2015
45.6
60.1
105.6
2016
48.9
59.8
108.7
2017
52.3
59.4
111.7
2018
55.8
58.9
114.7
2019
59.4
58.2
117.6
2020
62.8
57.5
120.3
2021
66.4
56.6
123.0
2022
70.0
55.6
125.6
2023
73.5
54.5
128.1
2026
83.7
50.7
134.4
2031
98.5
42.6
141.1
2036
108.4
33.2
141.6
2041
109.9
23.5
133.5
2046
102.1
14.8
116.9
2051
86.4
8.0
94.4
Discounted Costs ($ billions)
PSS
33.1
34.0
34.8
35.5
36.1
36.5
36.9
37.1
37.2
37.2
37.1
36.9
36.5
34.9
30.7
25.2
19.1
13.3
8.4
CSS
59.9
56.7
53.6
50.6
47.6
44.7
41.9
39.1
36.5
34.0
31.6
29.3
27.1
21.1
13.3
7.7
4.1
1.9
0.8
Total
93.0
90.7
88.4
86.1
83.7
81.2
78.8
76.3
73.8
71.2
68.7
66.2
63.6
56.1
44.0
33.0
23.2
15.2
9.2
Nominal
Costs as
% of GDP
6.31%
6.16%
6.04%
5.91%
5.77%
5.63%
5.50%
5.36%
5.23%
5.09%
4.95%
4.81%
4.67%
4.22%
3.46%
2.71%
2.00%
1.38%
0.88%
Note: The discounted figures in the above table have been adjusted to 2011 dollars using the discount rate of
6% per annum, which has been used to calculate the present value of the liability at each date.
5.9.
The total Unfunded Liability is expected to reduce as a percentage of projected GDP from
6.3% as at 30 June 2011 to 0.9% as at 30 June 2051. This is mainly due to the schemes
being closed to new members and the ageing of the membership.
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20
6
Projected Outlays
6.1.
The projected outlays in each year are calculated as follows:

productivity superannuation contributions paid by the employer to the PSS and CSS
Funds; plus

benefit payments made from the CRF (including payments made under the
Superannuation Act 1922); less

payments made from the PSS and CSS Funds to the CRF.
6.2.
When a member becomes entitled to a benefit from the PSS or CSS, the member's
accumulation accounts (i.e. funded member and productivity contributions plus interest)
are paid from the PSS or CSS Funds to the CRF. The total benefit payment to the
member is then made from the CRF.
6.3.
The indexed pension benefit from the CSS is therefore financed from the CRF on an
unfunded basis. Similarly the benefit from the PSS after deducting the accumulated
value of the member contributions and productivity superannuation contributions is also
financed from the CRF on an unfunded basis.
6.4.
We have projected the outlays for the next 40 years. This has been done by projecting
the membership into the future based on the assumptions for the level of future salary
increases, and the timing and nature of exits from the schemes based on the
assumptions set out in Section 4. The table below summarises the projected outlay
separately for the PSS and CSS and for the two schemes combined.
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21
Projected Future Outlays
Year
ending
30 June
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2026
2031
2036
2041
2046
2051
Nominal Outlays ($ millions)
Discounted Outlays ($ millions)
PSS
CSS
Total
PSS
CSS
Total
771
809
874
944
1,026
1,121
1,232
1,351
1,489
1,636
1,800
1,983
2,613
3,903
5,457
7,111
8,527
8,854
3,532
3,607
3,709
3,803
3,889
3,968
4,038
4,105
4,165
4,219
4,266
4,305
4,368
4,282
3,936
3,328
2,523
1,670
4,303
4,416
4,582
4,746
4,915
5,089
5,270
5,456
5,654
5,855
6,066
6,288
6,981
8,185
9,394
10,439
11,050
10,525
749
742
755
770
789
814
844
873
908
940
976
1,015
1,122
1,253
1,309
1,275
1,142
886
3,431
3,305
3,206
3,101
2,992
2,880
2,765
2,651
2,538
2,425
2,313
2,203
1,877
1,375
944
597
338
167
4,180
4,047
3,961
3,871
3,782
3,694
3,609
3,524
3,446
3,366
3,290
3,217
2,999
2,628
2,253
1,871
1,480
1,053
Nominal
Outlays as
% of GDP
0.29%
0.28%
0.28%
0.27%
0.27%
0.26%
0.26%
0.26%
0.25%
0.25%
0.24%
0.24%
0.23%
0.21%
0.19%
0.16%
0.14%
0.10%
Notes:
1. The discounted outlays have been adjusted to 2011 dollars using the discount rate of 6% per annum.
2. The projected future outlays include productivity superannuation contributions by approved agencies to
schemes outside the CSS.
6.5.
Future outlays are expected to reduce as a percentage of projected GDP from 0.29% in
the year ending 30 June 2012 to 0.10% in the year ending 30 June 2051. The main
reason for the decline over the next 40 years is that the schemes are closed to new
entrants and the membership is ageing.
6.6.
The main reason for the initial decline in outlays and then eventual increase in outlays
compared with the 2008 projections is due to the change in assumption in relation to
increased take-up rate of PSS pensions (which means fewer lump sum payments initially,
replaced by a longer stream of pension payments).
6.7.
Taking into account the credit rating of the Australian Government, and the level and
trend of projected outlays as a percentage of GDP, we consider that the schemes have
sufficient liquidity and financial resources to provide for pensions as they become due,
taking into account the risk of longevity.
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22
7
Notional Employer Contribution Rates
7.1.
The Notional Employer Contribution Rates (NECRs) represent the estimated contribution
rate that would be required to fund the benefits accruing to contributors over the next
three years (from 30 June 2011 to 30 June 2014) based on current projections. That is, if
the scheme was fully funded at the valuation date and contributions were made at the
NECR, then the scheme would be expected to be fully funded at the end of the period.
The employer contributions (excluding the productivity component) are not held within the
schemes, but returned to the CRF.
7.2.
The calculation of the NECR takes into account (by reducing the Unfunded Liability for
the purposes of the calculation) any additional lump sums paid in the previous three
years under the Agency Assessment Framework, under which agencies pay additional
lump sums for employees with large salary increases.
7.3.
The cost of the productivity component of approximately 3% of superannuation salaries is
added the NECR.
7.4.
The table below sets out our estimate of the NECRs as at 30 June 2011. The
corresponding rates calculated at previous reports have also been shown for comparison
purposes.
Notional Employer Contribution Rates
(Including the Approximate 3% Productivity Component) (% of Superannuation
Salaries)
Report as at
PSS
CSS
Combined*
30 June 1999*
14.2
21.9
17.2
30 June 2002*
15.4
28.3
19.3
30 June 2005*
15.6
28.2
18.3
30 June 2008
16.3
21.4
17.1
30 June 2011
18.8
20.3
19.0
* Old methodology. The methodology was changed in the 2008 Report to bring calculations more in line with
the approach used in Australian Accounting Standards and the Budget process.
*The combined rates are weighted average rates based on the superannuation salaries of the members of
the two schemes.
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23
7.5.
The contribution rate for the PSS as at 30 June 2011 has increased by 2.5 percentage
points of superannuation salaries compared to the rate as at 30 June 2008. The
contribution rate for the CSS as at 30 June 2011 has decreased by 1.1 percentage points
of superannuation salaries compared to the rate as at 30 June 2008.
7.6.
The significant increase of NECR for the PSS is primarily due to the change in
assumptions, based on observed behaviour, relating to:
7.7.

Increase in the average PSS member contributions from 4.75% to 6%. Higher
member contribution rates lead to a higher accrual of benefits and therefore more
valuable benefits.

Increase in the proportion of PSS benefits taken as a pension from 60% to 70%.
Under the assumptions made in this actuarial investigation, a member electing to
take their benefit as a pension leads to a more valuable benefit.
The decrease of NECR for the CSS is due to nature of the benefits design whereby the
rate of benefit accrual declines with length of membership.
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24
8
Sensitivity Analysis
Economic Assumptions
8.1.
The sensitivity of the estimated Unfunded Liability and NECRs as at 30 June 2011 to the
key economic assumptions was tested by measuring the effect on the Unfunded Liability
of varying each key assumption in turn by plus or minus 1% whilst keeping all other
assumptions unchanged. The alternative assumptions used were:


Investment Returns / Discount Rate plus 1%; increased to 7% per annum (nominal).
Investment Returns / Discount Rate minus 1%; reduced to 5% per annum (nominal).


General Salary Increases plus 1%; increased to 5% per annum (nominal).
General Salary Increases minus 1%; reduced to 3% per annum (nominal).


CPI Increases plus 1%; increased to 3.5% per annum.
CPI Increases minus 1%; reduced to 1.5% per annum.
For the CPI analysis we have assumed that the nominal rates of return remain
unchanged i.e. the nominal rate of Investment Returns / Discount Rate remains at 6.0%
per annum and the nominal rate of General Salary Increases remains at 4.0% per
annum.
8.2.
The table below shows the Unfunded Liability of the PSS and CSS at 30 June 2011
under each of the above alternative assumptions.
Sensitivity of Unfunded Liability to Key Economic Assumptions ($ billions)
Assumption
Change
PSS
CSS
Combined
Investment
plus 1%
26.2 (-6.9)
54.0 (-5.9)
80.2 (-12.8)
Returns /
minus 1%
42.1 (+9.0)
67.1 (+7.2)
109.2 (+16.2)
Discount Rate
plus 1%
35.9 (+2.8)
60.2 (+0.3)
96.1 (+3.1)
General Salary
Increases
minus 1%
30.7 (-2.4)
59.7 (-0.2)
90.4 (-2.6)
plus
1%
38.7
(+5.6)
66.9
(+7.0)
105.6
(+12.6)
CPI
Increases
minus 1%
28.5 (-4.6)
54.1 (-5.8)
82.6 (-10.4)
The impact of the change in assumption on the Unfunded Liability is show in brackets.
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25
8.3.
The table below shows the NECRs of the PSS and CSS at 30 June 2011 under each of
the above alternative assumptions.
Sensitivity of NECRs to Key Economic Assumptions
(Including the Approximate 3% Productivity Component)
(% of Superannuation Salaries)
Assumption
Change
PSS
CSS
Investment
plus 1%
14.4 (-4.4)
18.1 (-2.2)
Returns /
minus 1%
24.7 (+5.9)
23.1 (+2.8)
Discount Rate
plus 1%
21.2 (+2.4)
20.5 (+0.2)
General Salary
Increases
minus 1%
16.8 (-2.0)
20.1 (-0.2)
plus 1%
21.7 (+2.9)
22.9 (+2.6)
CPI
Increases
minus 1%
16.4 (-2.4)
18.2 (-2.1)
The impact of the change in assumption on the NECR is show in brackets.
Demographic Assumptions
8.4.
The sensitivity of the estimated Unfunded Liability as at 30 June 2011 to certain
demographic assumptions was tested by measuring the effect on the Unfunded Liability
of varying each assumption in turn whilst keeping all other assumptions unchanged. The
assumptions considered were: retrenchment rates; resignation rates in the CSS at age
54; and pension take-up rate in the PSS. The alternative assumptions used were:
Retrenchments

Zero retrenchments.

Double the rate of retrenchments.

Zero retrenchment for CSS aged 55 and over (but maintaining the retrenchments
assumption for CSS under age 55 and all ages in the PSS).
CSS Age 54 Resignation

Increasing the rate of resignation in the CSS at age 54 by 25%.

Reducing the rate of resignation in the CSS at age 54 by 25%.
PSS Pension Take-Up Rate

Increasing the proportion of PSS members who elect a pension from 70% to 80%.
Mortality Improvements
MERCER

Decreasing the rate of mortality improvement by applying the 100 year mortality
improvement trend from the Australian Life Tables 2005-07 (ALT), from 1 July 2011,
rather than applying the 25 year mortality improvement trend (faster) for seven years
and the 100 year mortality improvement trend (slower) thereafter (see page 43
regarding improvements in pensioner mortality assumptions).

Increasing the rate of mortality improvement by extending the application of the 25
year mortality improvement trend (faster) to cover the period 1 July 2011 to 30 June
2021 (10 years), rather than over seven years. The 100 year mortality improvement
trend (slower) is applied thereafter.
26
8.5.
The table below shows the Unfunded Liability of the PSS and CSS at 30 June 2011
under each of the above alternative assumptions.
Sensitivity of Unfunded Liability to Demographic Assumptions ($ billions)
Assumption
Change
PSS
CSS
Combined
Retrenchments
CSS Age 54
Resignation
PSS Pension
Take-Up Rate
Mortality
Improvement
Zero
Double
Zero for CSS 55
and over
plus 25%
minus 25%
32.7 (-0.4)
33.3 (+0.2)
59.5 (-0.4)
60.1 (+0.2)
92.2 (-0.8)
93.4 (+0.4)
33.1 ( – )
59.5 (-0.4)
92.6 (-0.4)
33.1 ( – )
33.1 ( – )
60.0 (+0.1)
59.8 (-0.1)
93.1 (+0.1)
92.9 (-0.1)
Increase to 80%
34.6 (+1.5)
59.9 ( – )
94.5 (+1.5)
32.7 (-0.4)
59.2 (-0.7)
91.9 (-1.1)
33.2 (+0.1)
60.1 (+0.2)
93.3 (+0.3)
Slower
improvement
Faster
improvement
The impact of the change in assumption on the Unfunded Liability is show in brackets.
8.6.
The table below shows the NECRs of the PSS and CSS at 30 June 2011 under each of
the above alternative assumptions.
Sensitivity of NECRs to Demographic Assumptions
(% of Superannuation Salaries)
Assumption
Change
PSS
Retrenchments
CSS Age 54
Resignation
PSS Pension
Take-up Rate
Mortality
Improvement
CSS
Zero
Double
Zero for CSS 55
and over
Plus 25%
minus 25%
18.4 (-0.4)
19.0 (+0.2)
17.5 (-2.8)
21.7 (+1.4)
18.8 ( – )
18.0 (-2.3)
18.8 ( – )
18.8 ( – )
21.3 (+1.0)
19.4 (-0.9)
Increase to 80%
19.9 (+1.1)
20.3 ( – )
18.6 (-0.2)
20.1 (-0.2)
18.9 (+0.1)
20.4 (+0.1)
Slower
improvement
Faster
improvement
The impact of the change in assumption on the NECR is show in brackets.
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27
Martin A Stevenson
Fellow of the Institute of Actuaries of Australia
Partner
Mercer Consulting (Australia) Pty Limited
Darren Wickham
Fellow of the Institute of Actuaries of Australia
Partner
Mercer Consulting (Australia) Pty Limited
14 April 2012
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28
APPENDIX A
Summary of Benefit Provisions
THE SUPERANNUATION ACT 1990 (PSS)
1. Membership
The PSS was closed to new entrants from 1 July 2005.
Superannuation Salary
Generally, superannuation salary is basic salary plus any recognised allowances.
Superannuation salary is the salary on commencement subject to adjustment on each birthday.
Final Average Salary
Final Average Salary (FAS) is generally the average superannuation salary on the three
birthdays before leaving the PSS.
Member Contributions
Members can choose to contribute at any rate between 2% and 10% of superannuation salary.
Members can also choose not to contribute to the PSS. The rate of contribution can be varied
at any time.
Benefits
The benefits from the PSS consist of three parts:

the employer-financed component is determined as the Total Benefit net of the productivity
and member component. This component is an untaxed benefit.

the productivity component is made up of accumulated productivity contributions. This is a
"taxed benefit". Any unfunded productivity component is an “untaxed benefit”.

the member-financed component is made up of accumulated member contributions. The
investment earnings are a "taxed benefit".
MERCER
29
THE SUPERANNUATION ACT 1990 (PSS) continued
Total Benefit
A member's Total Benefit is calculated by multiplying the member's Benefit Multiple by his or her
FAS. A member's Benefit Multiple increases with each contribution made. The Benefit Multiple
consists of the Member's share and the Employer's share.
Total Benefit Multiple = Member's share of Benefit Multiple + Employer's share of Benefit
Multiple.
Member's share of Benefit Multiple = Member Contribution Rate (per year of service).
Employer's share of Benefit Multiple = Member Contribution Rate + 0.11 (per year of service).
10 year Rule – Restriction on Employer's Share of Benefit Multiple
Employer's share of Benefit Multiple cannot be greater than that which would have accrued if
member contributions had been made at 5% for 10 years (or total membership if less) and 10%
for any membership in excess of that 10 years.
On death or disablement the 5% maximum average applies to prospective service until the 10year period is notionally completed.
Maximum Benefit
The maximum benefit allowable under the PSS is known as the Maximum Benefit Limit (MBL).
For most members the MBL is 10 times the member’s Final Average Salary. On reaching the
MBL, a member will cease contributing to the scheme.
Retirement Benefits
Retirement benefits are payable upon retirement on or after minimum retiring age (usually age
55), subject to general superannuation preservation rules.
The four options on retirement are as follows:

Total pension – The benefits can be taken in the form of a total pension.

Lump sum benefit – The three benefit components can be taken as a lump sum.

Lump sum plus pension benefit – The benefits can be taken as a pension (subject to a
minimum of 50% of the total benefit) and a lump sum.
MERCER
30
THE SUPERANNUATION ACT 1990 (PSS) continued

Preserve total benefit – The total benefit can be preserved in the PSS and later taken as a
lump sum, indexed pension or a combination of both.
While a benefit is being preserved in the PSS, member and productivity components are
increased at the Scheme allocation rate and the employer-financed component is adjusted
annually in accordance with changes in the CPI.
Invalidity Retirement
The following benefit choices are available on retirement on medical grounds:

Invalidity pension with no lump sum – This option provides for the payment of the three
benefit components as an indexed pension. Under this option, the total benefit is calculated
based on potential service to age 60 (assuming that the member will continue to contribute
at their rate at retirement or 5% if more, but subject to a maximum average contribution of
5% for the first 10 years of service, actual or potential).
The total benefit is converted to an indexed pension using the same factors used to convert
a lump sum to a pension on age retirement but assuming that the member is aged 60 at the
time of invalidity retirement.

Invalidity pension with a lump sum – Under this option, the member component can be taken
as a lump sum. The remainder must be taken as an indexed pension.
The total benefit is calculated based on potential service to age 60 and the amount in excess
of the member component is converted to an indexed pension.
Death of a Contributor

Full pension with no lump sum
A pension payable at the rate of 67% of the invalidity pension that would have been payable
to the deceased plus 11% of the invalidity pension for each eligible child (until age 16 or if a
full-time student, until age 25) with total pension limited to 100% of the invalidity pension.

Part pension and part lump sum
The spouse can convert up to half of the pension to a lump sum. The lump sum value of any
children's pensions for children not living with the spouse is deducted from the lump sum.
The benefits for the children are paid as a pension.
MERCER
31
THE SUPERANNUATION ACT 1990 (PSS) continued

Maximum lump sum and no pension
This allows the spouse to take the benefit wholly as a lump sum except for the lump sum
value of any pension payable to children who are not living with the spouse.
Death of a Pensioner
Pension payable based on the percentages that apply in respect of the death of a contributor,
but using the pension payable to the deceased at the time of death. Therefore, if the retirement
benefit was taken wholly as a lump sum then no further benefit is payable to the spouse or
children.
Resignation
The three benefit options are as follows:

Preserve all benefits in the PSS.

Immediate refund of member-financed benefit and preserve all employer-financed benefits in
the PSS. Note that due to general superannuation preservation rules and the Scheme Rules
under most circumstances all post 1 July 1999 contributions will be preserved within the
scheme.

Transfer all benefits to an eligible superannuation scheme.
Retrenchment
On retrenchment, a PSS member has the option of:
(a)
taking his/her personal contributions and interest in cash, up to the limit allowed under
general superannuation preservation rules, and preserving the rest of the benefit in the
PSS; or
(b)
preserving the whole of the benefit in the PSS; or
(c)
transferring his/her benefit to another complying superannuation scheme; or
(d)
transferring his/her benefit to an eligible superannuation scheme; or
(e)
taking his/her personal contributions and interest in cash, up to the limit allowed under
general superannuation preservation rules, and taking the rest of the benefit as an
immediate, non-commutable, indexed pension; or
(f)
taking the whole benefit in the form of an immediate, non-commutable, indexed
pension that has reference to a person’s age.
Indexation
Pensions are indexed twice yearly in line with changes in the Consumer Price Index.
MERCER
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THE SUPERANNUATION ACT 1976 (CSS)
Membership
The CSS has been closed to new entrants since 1 July 1990.
Salary
The salary used for contribution purposes is, in most cases, the annual rate of salary.
Generally, the annual rate of salary is basic salary plus any recognised allowances on a
member’s last birthday.
Final Salary
The salary used for calculating benefits is, in most cases, the annual rate of salary on a
member's date of exit.
Member Contributions
Basic contributions are 5% of salary. Supplementary contributions of up to a further 5% may be
made. Contributions are accumulated with interest based on the crediting rates of the CSS
Fund. Members can also choose not to contribute to the CSS. Any period where the member
does not contribute does not count towards their contributory service.
Retirement Benefits
Retirement benefits are payable upon retirement at maximum retirement age (usually age 65) or
early retirement at ages 55 or above.
The amount of retirement benefit is the sum of:

employer-financed indexed pension being a percentage of final salary based on
the period of contributory service and discounted for early retirement before age
65;

productivity component made up of accumulated productivity contributions or if a member
elects can be taken as a non-indexed pension; and

member-financed benefit made up of accumulated basic and supplementary
contributions or an equivalent non-indexed pension.
Employer-financed indexed pension
The employer-financed pension is calculated as a percentage of final salary based on the period
of contributory service and discounted for early retirement before age 65.
MERCER
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THE SUPERANNUATION ACT 1976 (CSS) continued
The discount factors for retirement prior to age 65 are age-dependent. They reduce at the rate
of 0.02 per year from 1 at age 65 to 0.90 at age 60 and then at the rate of 0.03 per year to 0.75
at age 55.
The accrual rates are based on years of contributory service and on whether the member:

transferred from the 1922 Scheme (the scheme established under the Superannuation Act
1922) to the CSS;

transferred from a former Provident Account; or

joined the CSS after 30 June 1976.
Generally, the accrual rates are 2% per annum for the first 20 years of active membership, 1%
per annum for the next 10 years, and 0.25% per annum for each of the next 10 years. The
maximum percentage is 52.5% of salary.
Invalidity Retirement
The following benefits are payable on invalidity retirement:

an employer-financed indexed pension being a percentage of final salary based
on the period of prospective service to maximum retirement age (usually 65).

a lump sum of accumulated basic contributions or an additional non-indexed pension being a
percentage of final salary based on the period of prospective service to maximum retirement
age (usually age 65).

a lump sum of accumulated supplementary and productivity contributions.
Death of a Contributor
A pension payable at the rate of 67% of the invalidity pension that would have been payable to
the deceased, plus 11% of the invalidity pension for each eligible child (until age 16 or if a fulltime student, until age 25) with total pension limited to 100% of the invalidity pension.
The accumulated productivity contributions and any supplementary contributions are also
payable.
Death of a Pensioner
A pension payable based on the percentages that apply in respect of the death of a contributor,
but using the pension payable to the deceased at the time of death.
MERCER
34
THE SUPERANNUATION ACT 1976 (CSS) continued
Resignation
A lump sum benefit of accumulated member and productivity contributions is payable on
resignation. A minimum employer-financed benefit of the SG contributions, accumulated with
investment earnings is payable.
Alternatively, the member may elect to receive a preserved benefit. Under this option, generally
on reaching age 55 and having retired from the workforce, the member will receive the following:

an indexed pension based on 2.5 times the basic contributions accumulated to the date of
payment converted to a pension;

productivity contributions accumulated to the date of payment or if the member elects can be
taken as a non-indexed pension; and

member contributions (basic and supplementary) accumulated to the date of payment or an
equivalent non-indexed pension.
Alternatively, the member can choose to take a transfer value of 3.5 times the accumulated
basic contributions plus supplementary and productivity contributions, to an eligible
superannuation scheme.
Retrenchment
The benefit options available to a CSS member who is retrenched are similar combinations of
pension (based on age) and lump sum as are available on age retirement.
In addition, the member may choose to preserve all benefits in the scheme, roll over the accrued
benefit to a preservation fund if aged less than 55, or take the accrued benefit as a cash lump
sum if aged 55 or more. For the purposes of rollover the accrued benefit is a lump sum of 2.5
times personal basic (5%) contributions together with all personal contributions and interest and
any productivity contributions plus interest. Where the rollover is chosen the member may take
their member contributions and interest in cash up to the limit allowed under the superannuation
regulatory regime.
Indexation
Pensions are indexed twice yearly in line with changes in the Consumer Price Index. Pensions
purchased with accumulated member contributions and productivity contributions are fixed in
dollar terms and not subject to indexation.
MERCER
35
APPENDIX B
Detailed Assumptions
Economic Assumptions
The following table summarises the key economic assumptions adopted for this report.
Item
CPI Increases
Investment Returns / Discount Rate
General Salary Increases
Assumption
2.5% per annum
6.0% per annum (nominal)
3.5% per annum (real)
4.0% per annum (nominal)
1.5% per annum (real)
GDP Growth Rate
GDP at 30 June 2011 was $1,475 billion.
The table below reflects a sample of the expected nominal and real rates of GDP growth over
the next 40 years (based on Department of Treasury estimates):
Year
2011/2012
2012/2013
2016/2017
2021/2022
2026/2027
2031/2032
2036/2037
2041/2042
2046/2047
2051/2052
Rate per annum
(nominal)
6.1%
5.7%
5.3%
5.0%
5.0%
5.0%
5.0%
4.9%
4.8%
4.7%
Rate per annum (real)
3.6%
3.2%
2.8%
2.5%
2.5%
2.5%
2.5%
2.4%
2.3%
2.2%
The average assumed GDP growth rate over the forty year period from 30 June 2011 is 5.1%
(nominal) or 2.6% (real) per annum.
Taxation
Allowance has been made for 15% tax payable on superannuation productivity contributions.
Superannuation Guarantee
At the time this report was prepared, a bill was before parliament to increase the level of SG
from 9% to 12%. Despite the bill subsequently being passed, any impact on the increase in
MERCER
36
minimum benefits as a result of the SG level increasing above 9% is not taken into account in
this report.
Demographic Assumptions
Promotional Salary Increases
The following tables show examples of the annual assumed percentage increase in salary due
to promotion (excluding general salary increases due to inflation). Promotional salary increases
are assumed to depend on both age and years of membership for the first 8 years of service
and on age only thereafter.
Promotional Salary Increase Assumptions – Males
(% per annum at age and membership shown)
Age
Membership
Membership
Attained
Less than 4 Years
4 to 8 Years
20
8.0%
4.0%
25
5.3%
3.1%
30
3.5%
2.2%
35
2.8%
1.6%
40
2.8%
1.0%
45
1.3%
0.5%
50
0.4%
0.4%
55
0.4%
0.4%
60
0.4%
0.4%
65
0.4%
0.4%
Membership
Greater than 8 Years
–
4.2%
2.7%
0.9%
1.5%
1.0%
0.0%
0.0%
0.0%
0.0%
Promotional Salary Increase Assumptions – Females
(% per annum at age an membership shown)
Age
Membership
Membership
Attained
Less than 4 Years
4 to 8 Years
20
9.9%
2.6%
25
5.1%
1.8%
30
4.0%
1.3%
35
3.3%
1.1%
40
3.3%
1.0%
45
2.2%
1.0%
50
1.0%
1.0%
55
1.0%
1.0%
60
1.0%
1.0%
65
1.0%
1.0%
Membership
Greater than 8 Years
–
2.4%
2.1%
1.8%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
For example a male aged 30 with 4 years of membership is assumed to have a promotional
salary increase in the following year of 2.2% together with a general salary increase of 4.0%.
MERCER
37
Death and Invalidity Assumption
Death and Invalidity Assumptions
(per 1,000 contributors at age shown)
Age
PSS and CSS
PSS
Attained
Deaths
Invalidities
Males
Females
Males
Females
25
0.09
0.09
0.23
0.11
30
0.18
0.19
0.30
0.14
35
0.35
0.41
0.38
0.20
40
0.57
0.71
0.47
0.26
45
1.16
1.06
0.63
0.41
50
2.21
1.49
0.88
0.62
55
3.40
2.88
1.24
1.06
60
n/a
3.34
1.83
1.73
64
n/a
n/a
2.53
2.43
CSS
Invalidities
Males
Females
0.18
0.12
0.32
0.32
0.57
0.61
0.79
1.03
1.27
1.64
1.94
2.55
3.05
4.26
6.01
6.46
6.93
8.04
Age Retirement Assumptions
Age Retirement Assumptions – PSS
(per 1,000 contributors at age shown)
Age
Contributors
Attained
Males
Females
55
70
80
56
55
70
57
55
68
58
55
70
59
70
75
60
140
150
61
92
130
62
90
200
63
80
100
64
120
200
65
200
200
66
200
200
67
200
200
68
200
200
69
200
200
70
200
200
71
200
200
72
200
200
73
200
200
74
200
200
75
1,000
1,000
Preserved Members
Males
Females
240
290
60
60
55
60
52
50
55
60
118
120
75
80
82
80
95
100
150
150
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
Age Retirement Assumptions – CSS
MERCER
38
(per 1,000 contributors at age shown)
Age
Contributors
Attained
Males
Females
55
40
80
56
30
40
57
39
49
58
39
58
59
57
67
60
180
199
61
93
152
62
98
157
63
116
171
64
174
215
65
200
200
66
200
200
67
200
200
68
200
200
69
200
200
70
200
200
71
200
200
72
200
200
73
200
200
74
200
200
75
1,000
1,000
MERCER
Preserved Members
Males
Females
740
740
240
160
190
150
190
140
240
120
450
270
350
200
330
200
350
300
400
500
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
39
Contributor Exits by Resignation
Resignation Assumptions – PSS
(per 1,000 contributors at age shown)
Age
Males
Attained
Membership 0 Membership 10
years
years
20
0.0
109.7
25
121.0
60.1
30
106.4
53.1
35
93.1
46.7
40
81.3
41.1
45
69.3
32.7
50
60.2
29.6
Factor*
0.86
0.89
Females
Membership 0 Membership 10
years
years
104.1
0.0
125.7
36.8
108.9
61.2
90.0
43.9
75.9
33.8
66.6
27.6
61.0
26.9
0.92
0.95
Resignation Assumptions – CSS (Age less than 54)
(per 1,000 contributors at age shown)
Age
Males
Females
Attained
Membership 0 Membership 10 Membership 0 Membership 10
years
years
years
years
20
86.2
0.0
59.2
0.0
25
84.0
45.5
62.2
30.7
30
71.5
35.5
49.3
43.3
35
70.3
30.8
47.1
36.5
40
74.0
29.4
41.1
30.2
45
74.9
28.7
33.0
24.4
50
81.7
31.2
30.1
23.2
Factor*
0.88
0.91
0.90
0.95
* These factors are used to determine rates for membership periods other than 0 and 10. The rate for membership
period “y” where “y” is in the range 0-9 is derived by multiplying the membership 0 rate by the membership 0 factor
raised to the power of “y”. For membership periods greater than 10 the rate for membership 10 is multiplied by the
membership 10 factor raised to the power of “y-10”.
Resignation Assumptions – CSS (Age 54)
(per 1,000 contributors at membership shown)
Age
Males
Females
Attained
54
600.0
600.0
MERCER
40
Retrenchments
The table below shows the retrenchment rates assumed for PSS and CSS members.
Retrenchment Assumptions
(per 1,000 contributors at age shown)
Age
Males
Attained
PSS
CSS
20
2.3
0.0
25
3.2
38.4
30
5.2
29.6
35
7.5
16.9
40
9.6
15.3
45
12.6
15.3
50
17.4
27.8
55
26.1
67.8
60
42.9
96.8
Females
PSS
1.0
3.3
7.4
9.1
9.0
9.1
11.1
22.3
31.0
CSS
0.0
18.9
18.7
11.1
9.5
11.9
19.0
36.7
55.1
PSS Members Election to Cease PSS Membership in Order to Join PSSap
No PSS members are assumed to exercise this option.
Preservation on resignation or retrenchment
Members are generally required to retain their employer-financed benefits within the schemes.
Members who join the PSS after 1 July 1999 are required to retain all their benefits within the
scheme. For members who joined the PSS before 1 July 1999 the member-financed benefits
may be taken as a lump sum on termination of service (subject to general preservation rules) or
retained within the scheme. CSS members who elect not to retain their member-financed
benefit within the CSS on termination of service forfeit a significant part of their employerfinanced benefit.
In the PSS it has been assumed that 60% of male and female members that joined the scheme
before 1 July 1999 and resign will also retain their member accumulations within the PSS. Of
the members who retain their member-financed benefits within the scheme it has been assumed
that 70% of the lump sums will be converted to pensions.
In the CSS, it has been assumed that 90% of all benefits are retained within the scheme.
MERCER
41
Rate of take-up of pension
It has been assumed for the PSS that 70% of lump sum entitlements of age retirees and
spouses of deceased contributors and 70% of the lump sum entitlements of members, who
resign and preserve their entire benefit, will be converted to pensions. Invalid retirees must take
a pension and members who do not preserve their member accumulations on resignation
cannot take a pension.
Generally in the CSS, the employer component of the benefit must be taken as a pension.
We have assumed that no members in the CSS elect to convert their funded benefits to a non
indexed pension.
Pensioner Mortality
The table below shows the mortality rates assumed for normal and dependent pensioners in the
year 1 July 2011 to 30 June 2012.
Pensioner Mortality Assumptions
(per 1,000 pensioners at age shown)
Age
Males
Attained
Age Retired
Widower
20
0.39
0.82
30
0.55
1.15
40
0.65
1.34
50
1.17
2.62
55
1.79
4.36
60
3.14
7.38
65
6.30
12.66
70
11.90
22.14
75
22.59
35.76
80
45.37
60.39
90
155.35
167.08
100
370.09
364.34
MERCER
Females
Age Retired
Widow
0.19
0.26
0.24
0.33
0.46
0.62
1.03
1.52
1.69
2.49
2.69
3.84
4.42
6.00
8.25
10.02
14.89
17.13
28.89
32.08
117.21
113.72
353.11
343.49
42
The graph below indicates the proportion of pensioners aged 65 at 30 June 2011 surviving to
different ages, based on the given assumptions.
Female
Male
65
70
75
80
85
90
95
100
105
Age at Death
50%
25%
15%
5%
1%
The table below shows the mortality rates assumed for invalid pensioners with duration less
than 3 years. The duration refers to the time since the member became an invalid pensioner.
Invalid Pensioner Mortality
(per 1,000 pensioners at duration shown)
Duration
Males
Females
(Years)
0–1
86.45
43.70
1–2
42.75
24.70
2–3
28.50
23.75
MERCER
43
The table below shows the mortality rates assumed in the 1 July 2011 to 30 June 2012 year for
invalid pensioners with duration greater than three years.
Invalid Pensioner Mortality – Duration Greater than 3 Years
(per 1,000 pensioners at age shown)
Age
Males
Females
Attained
20
0.72
0.40
30
0.95
0.52
40
1.21
0.97
50
2.21
2.20
55
3.54
3.77
60
6.37
6.17
65
11.90
10.18
70
20.60
17.13
75
33.80
27.97
80
60.04
44.81
90
164.43
149.87
100
364.34
361.57
Improvements in Pensioner Mortality
Improvements in mortality for age dependent pensioners, dependent pensioners and invalid
pensioners with duration greater than three years have been taken from Australian Life Tables
2005-07. The 25 year experience trend in the Australian Life Tables 2005-07 has been used for
the period 2011-2018 and the 100 year experience trend has been used for beyond 2018.
No improvements in mortality are assumed in respect of invalid pensioners with duration less
than three years.
The following table summarises the assumed rates of improvement in future pensioner mortality.
Assumed Rates of Mortality Reduction
(% per annum)
Age
Short Term
Attained (1 July 2011 to 30 June 2018)
Male
Female
60
3.34
2.52
70
3.08
2.45
80
2.21
2.07
90
1.07
1.04
100
0.51
0.47
MERCER
Long Term
(1 July 2018 onwards)
Male
Female
1.27
1.47
1.16
1.44
0.87
1.12
0.53
0.61
0.26
0.25
44
Member Contributions to the PSS
Members of the PSS are assumed to contribute at the rate of 6.0% of superannuation salary
throughout their future membership.
New Entrants
The PSS has been closed to new members since 1 July 2005. The CSS has been closed to
new members since 1 July 1990. This report assumes that there are no future new entrants to
either the PSS or CSS.
Spouse Assumptions
It has been assumed that the proportion of males who are in a Marital or Couple Relationship at
30 June 2011 (or at the commencement date of their pension if later) will gradually increase with
age to 60% at age 42; remain constant to age 69; increase to 75% for ages 70 to 72 and then
reduce.
It has been assumed that the proportion of females who are in a Marital or Couple Relationship
at 30 June 2011 (or at the commencement date of their pension if later) will gradually increase
with age to 44% at age 27; remain constant to age 62; and then reduce.
It has been assumed that 1% of males and females are in same sex relationships.
It is assumed that male members are 3 years older than their spouses, and that female
members are 2 years younger than their spouses.
MERCER
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APPENDIX C
Actuary’s Certification

This report has been carried out by Martin Stevenson FIAA FIA and Darren Wickham FIAA,
of Mercer Consulting (Australia) Pty Limited at the request of the
Department of Finance and Deregulation.

Mr Stevenson and Mr Wickham carried out the previous actuarial investigation of the
schemes as at 30 June 2008. The results of that investigation were set out in the 2008
Report.

This report satisfies the requirements of Professional Standard No. 400 of The Institute of
Actuaries of Australia. Professional Standard No. 400 relates to the preparation of reports
commenting on the financial condition of defined benefit superannuation funds.
Use of report

This report should not be relied upon for any other purpose or by any party other than the
Department of Finance and Deregulation and the schemes’ trustee. Mercer is not
responsible for the consequences of any other use. This report should be considered in its
entirety and not distributed in parts.

The advice contained in this report is given in the context of Australian law and practice. No
allowance has been made for taxation, accountancy or other requirements in any other
country.
Actuarial Uncertainty and Assumptions

An actuarial investigation report contains a snapshot of a scheme’s financial condition at a
particular point in time, and projections of the scheme’s estimated future financial position
based on certain assumptions. It does not provide certainty in relation to a scheme’s future
financial condition or its ability to pay benefits in the future.

Future funding and actual costs relating to a scheme are primarily driven by the scheme’s
benefit design, the actual rate of salary increases and any discretions exercised by the
trustee of the scheme or the Australian Government. The scheme’s actuary does not
directly control or influence any of these factors in the context of an actuarial investigation.

The schemes’ future financial position and the estimated long term cost depend on a number
of factors, including the amount of benefits the scheme pays, the cause and timing of
member withdrawals, the level of taxation and the amount earned on any assets invested to
pay the benefits. These amounts and others are uncertain and unknowable at the valuation
date, but are predicted to fall within a reasonable range of possibilities.

To prepare this report, assumptions, as described in Section 4, are used to select a single
scenario from the range of possibilities. The results of that single scenario are included in
this report.

However, the future is uncertain and the schemes’ actual experience may differ from those
assumptions. These differences may be significant or immaterial. In addition, different
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assumptions or scenarios may also be within the reasonable range and results based on
those assumptions would be different. For this reason this report also shows the impact on
the results of certain changes in assumptions (see Section 8).

Actuarial assumptions may also be changed from one valuation to the next because of
mandated requirements, experience of the schemes, changes in expectations about the
future and other factors. We did not perform, and thus do not present, an analysis of the
potential range of future possibilities and scenarios.

Because actual experience of the schemes may differ from the assumptions, decisions about
benefit related issues should be made only after careful consideration of alternative future
financial conditions and scenarios, and not solely on the basis of a set of valuation results.

If the data is not accurate and complete, the valuation results may differ significantly from the
results that would be obtained with accurate and complete information; this may require a
revision of this report.
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