Pension Indexation Review Hearings - Session 2, Thursday 24 July 2008
Trevor Matthews: Thank you very much Peter for coming along and for your submission.
It’s a very interesting topic that we are researching under this enquiry.
Perhaps I will give you a bit of my background. My name is Trevor Matthews. I am an
Australian actuary who has been living overseas for ten years. I grew up and lived through
the developments in superannuation policy that took place in this country. I used to run Legal
& General Life Insurance Company and then went to National Australia Bank in retail
banking for a couple of years in Melbourne followed by overseas stints in Canada and Japan.
I was in Canada for three years and Japan for three and a half years then Scotland for another
three and a half years and now I have just moved to London where I am taking up the position
of Chief Executive of Friends Provident, another life insurance company, next week after six
months “gardening leave”.
So, I have a reasonable background to the issues that are being discussed and I am lucky that I
have lived in these different countries. I have seen some of these issues from a different
perspective and I am very interested in the issues so very happy to do the enquiry. Also
helping us in the enquiry is David Harris. David is a principal at TOR Financial Consulting.
Perhaps, David, you could introduce yourself.
David Harris: Hi. Thanks again also Peter for attending. My background is I’m a former
public servant and with the Insurance and Superannuation Commission in the mid ’90s.
Worked on the then SIS legislation and then worked with the ACCC on competition and
consumer protection issues linked with financial services. Subsequently, spent three years in
the United States with Watson Wyatt Worldwide a consulting firm and four years in the UK
looking at various pension reform issues, principally on the development and growth of
mandated retirement systems like Australia and globally.
So, like Trevor, I share the passion of watching cricket from afar in the UK. But more
importantly, looking at this issue, declaring to be a PSS member, deferred. I think it’s
important to stress that this issue is not also isolated to Australia but it’s also included in
various other OECD nations which we are looking at closely. So, thanks for your time.
Trevor Matthews: And then helping us here in Canberra is the Department of Finance and
Deregulation Team, Sandra Wilson, whom you may already know, Devi Kemp and Nhat
Nguyen over there. Our meeting doesn’t need to be very formal, but we are recording the
proceedings and we will be making a transcript and putting it on the website in due course.
So it would help us if you could take us through your submission or any other prepared
comments that you have. Then we will have a discussion.
Peter Feltham: Thank you. I should start with my interests as well. I’m a current contributor
to the PSS. I’m also a Director on the board of ARIA which is the board that administers the
CSS, PSS and the PSSAP schemes so I, and as well as that, had primary responsibility in the
CPSU for the development of our superannuation policy for about the last three or four years.
So, I didn’t have an involvement at the time when the PSSAP was established in 2005. I
actually became involved almost immediately after that. So my interest in superannuation has
been on a very steep learning curve over the last 3 years given that the SIS requirements, the
APRA requirements and all those other things that I need to do to actually satisfy that I’m a fit
and proper person. So thank you for the opportunity to appear.
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The CPSU has a very strong interest in this matter. I suppose over the years we worked very
closely with the Superannuated Commonwealth Officers Association. I’m aware of the
SCOA submission and from a CPSU viewpoint we actually support that submission and
support very strongly its recommendations. We have worked with SCOA for a number of
years on this as well as other superannuation reform issues over the last few years.
We sort of note that the Ministers announcement of this enquiry was on the basis of an
undertaking that he gave during the election campaign. I’d like to sort of, if it is possible, just
present a document, I’ll apologise for the quality of it in advance, but it is actually a letter that
was provided from the then leader of the opposition to a CPSU member who has agreed that I
could provide this letter. We had an acknowledgment. So how many and who do I hand
them to? I’ve got four copies there if that helps. Okay, there you go. So as I said, I apologise
for the quality, it didn’t survive the scanner or the photocopier too well. There’s probably
three paragraphs that I would like to draw the attention to, they’re the 3rd, 4th and 5th
paragraphs.
In this letter, dated the 12 October 2007, from Kevin Rudd, who was then the Leader of the
Opposition, he acknowledges the 2001 Senate Select Committee report recommendation. In
paragraph 4, he acknowledges the failure of Comsuper pensions to gain a CPI increase in
July 2007 because of the CPI based methodology and in paragraph 5 acknowledges the, what
I would describe as, inequity in comparison to the increases that were provided to Age
Pensions.
So, I understand that this advice, or a similar advice, was provided to a public sector worker
from Julie Gillard who had already been referenced here, so I thought I’d provide a copy from
the now Prime Minister as well just to put it into its proper context. Over the page you will
note that Kevin Rudd also commits to conduct this review. So, we are pleased that this
review is being conducted.
I suppose we do express some frustration at the number of times that this matter has been
raised, but I think that significantly the environment changed on the 1 July 2005 with the
closure of the PSS defined benefits scheme to new contributors. I think that prior to that there
had been ongoing debates about the growing Government liability and in regard to the defined
benefits schemes and in regard to any changes in superannuation PSS or CSS pensions going
forward also growing.
I think that from the establishment of the PSS accumulation plan on the 1 July there is now a
quarantining clearly in regard to new contributors and there should be a farm, oh sorry I’ll
withdraw the word farm, but there should start to be a discernable reduction in those costs
going forward given that the PSS accumulation plan does not provide a pension option and
given that the Government’s liability in regard to the PSSAP is nil on the basis of it being a
fully funded superannuation scheme. That scheme was established with the support of the
CPSU and the support of the ALP and the minor parties in the Senate on the basis of that
scheme providing the same level of employer contribution that was nominally attributed to
the PSSDB at that point in time, which was a nominal contribution of 15.4%. So, the PSS
accumulation plan went forward with an employee contribution of 15.4 and retains that as the
nominal employer rate today.
So from the Union’s viewpoint, we were party and supportive of the closure of that defined
benefit scheme and the quarantining of that future Government liability to therefore be to
those current contributors of the CSS or PSSBD up to 30 June 2005. So, I thought that is an
important sort of point from the CPSU’s perspective.
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I note the sort of terms of reference and I don’t think the CPSU is qualified, I note that the
SCOA submission provides some data and some analysis. I don’t think the CPSU is in a
position to actually provide much above and beyond what SCOA provided and I am sure that
other organizations have provided too.
I think we can focus as an organization on the occupational nature of the schemes. The CSS
and the PSSDB and the PSSAP are closed schemes. They are not open to people other than
serving public servants.
They have also been historically closed to previous public servants when organizations were
privatized, and the most recent example of that is Telstra. Where Telstra employees were
ineligible to contribute to the CSS scheme when the Government lost control of Telstra and it
was effectively 100% privatized. The PSS is irrelevant in that regard because Telstra
established their own scheme in lieu of the CSS back in 1990. So, it is very much an
occupational scheme for the Australian Public Service and for the great bulk of the Federal
public sector.
There are some Federal public sector agencies, like Australia Post for example, who have
their own scheme like the Civil Aviation Authority and Air-Services which have their own
different superannuation schemes other than the PSS. So I think that there are a range of
other funds now operating and I think that the CSS and the PSS have become schemes which
have increasingly concentrated on the public service and those Federal public sector
employers that want to be part of the PSSAP going forward.
A recent example is the ACT Government who actually withdrew from the PSSAP scheme
and established their own default 9 per cent scheme for new public sector employees here in
Canberra. So, I think that is still evolving but it is very much an occupational scheme that is
based on the Federal public sector. In the same way that, you know Cbus is the occupational
superannuation scheme for the building industry, for example.
I think, other than that, our submission does focus a fair bit on the previous recommendations
of previous enquiries and I think specifically cites the April 2001 Senate Select Committee
report which was focused on the Federal public sector and the Defence schemes. Some data
is provided in our submission in regard to data that was provided at that point in time from
SCOA. I was able to provide, as part of our submission, updated data in regard to a
breakdown of CSS and PSS pensioners and what they currently earn in regard to those
pensions, updated as at 14 July 2008. So, I was able to get very current data and we assert
pretty strongly that there hasn’t been much change since what was established in the SCOA
material that was provided to the 2001 Senate report. So, eight years on there has really only
been arguably CPI movement in regard to the rate those pensions have gone up.
We then refer to the December 2002 Senate Select Committee report and the very
comprehensive report that it was and again the issue being raised about indexation of Federal
public sector and Defence force superannuation and the recommendation there was cited
specifically. The committee recommends the Government consider indexing Commonwealth
funded superannuation benefits to male total average weekly earnings or the CPI, which ever
is higher, in order that recipients share in increases in living standards enjoyed by the wider
community.
Significantly, I think both those reports raise the issue of the Government at the time’s change
to age index, sorry, Age Pension indexation from both a CPSU viewpoint and I understand
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the SCOA viewpoint. What we are seeking is the same, no more, no less, than the indexation
arrangements that apply to Age Pensions. We then took another opportunity in the 2007
report into Better Super and again had that raised and again the unanimous committee of,
sorry, the unanimous decision of the Senate Economics Committee in the 2007 report for the
Government to look at changing indexation arrangements. So, I think we have had a number
of pushes over a number of years to pursue this politically. The CPSU has been active in
trying to gain support amongst the ALP and we’ve sought meetings with Minister Minchin to
actually raise this issue over the years.
We’ve also been in discussions with the Department of Finance as this is about reforms to
Federal public sector superannuation. Our submission includes, I suppose, other areas where
we believe there is a very clear inequity that is provided to Federal public sector workers in
regard to a denial to have Federal public sector workers access transition to retirement, which
is generally available. A denial of employees in the CSS or PSSDB to be able to salary
sacrifice into those schemes.
We note the changes were introduced on the 1 July that allows employees in the CSS to zero
out their contributions and in the PSSDB to zero out their contributions and where they
choose to move to another scheme. As we understand, from the discussions with the
Department of Finance, those were based on providing those employees with choice in regard
to if they want to salary sacrifice then they can move to another scheme, if they want a
transition they can move to another scheme. Salary sacrifice is valid going forward but you
can’t really transition to retirement if you have got zero funds to actually start and the money
that is in the PSSDB is, in fact, preserved within that scheme.
One item that has also been touched upon in the past is portability being able to be provided.
And a third item, which I suppose is probably more topical, is the Better Super, simplified
super changes in regard to the ten percent tax rebate that is provided to employees in untaxed
superannuation funds like the CSS and the PSS and that being identified as an inequity as well
in regard to the lack of differentiation between the superannuation salary and any other
earnings that a pensioner receives.
So, for that whole range of reasons the CPSU believes that the time has come to actually start
to improve the conditions that superannuation pensioners have to bring that up to a
community standard and we don’t believe there is any better community standard than in the
context of an Age Pension having indexation based on an equitable arrangement. So, I think
that twenty minutes concludes my sort of comments and observations.
Trevor Matthews: Thank you very much. That’s very lucid and very helpful. I have a
couple of questions. Could you please tell me more about the zeroing out of contributions?
This is the freedom of choice, is it?
Peter Feltham: Yes, it is. From 1 July 2008, as a result of legislation which was introduced
by the Coalition Government, and gone through Parliament, I think, September 2007. That
allowed, from the 1 July 2008, a number of changes. One of those changes was to bring the
CSS and PSS schemes into line with the general early release provisions. Prior to that there
had been different rules that applied to the CSS and PSS in regard to early release.
The other changes, I have forgotten one, but the other changes were primarily in the CSS
about the ability to abolish the compulsory employer contribution, sorry employee
contribution, so there is no compulsion for an employee to contribute going forward.
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In the PSS there were two changes. One change to allow them to also zero out what was their
two percent to ten percent employee contribution but in addition to that there was an ability of
them to leave the PSS scheme, move to the PSS accumulation scheme, effectively get a
15.4% employer contribution in that scheme, and then exercise superannuation choice and
move into any other scheme of their choice. Now, that was to allow them to be able to salary
sacrifice into the PSSAP or any other scheme they chose.
It also was at the time seen as a way to allow people in a same-sex relationship to be able to
have modern superannuation arrangements in regard to that. Now, it wasn’t touched on our
submission, but there is a CPSU submission that is going into the Senate enquiry that is
currently looking at amending the superannuation legislation to allow for same-sex partners to
be able to receive reversionary benefits which is currently excluded under both the CSS and
PSS defined benefits scheme.
So, that one there was also explained to us by the Department of Finance at the time to be an
option to be available to people if they wanted to move out of the PSS scheme and be able to
move into a scheme which did allow a reversionary benefit to apply. So, it was actually to
move out of what were my words, described as old fashioned defined benefit schemes into a
modern accumulation type scheme with flexibility that provided in regard to things like salary
sacrifice in regard to things like reversionary pension entitlements and in regard to things like
transition to retirement. But as I said, the issue of offering transition to retirement for
somebody that hasn’t got any money in the fund is a bit of a hollow promise.
Trevor Matthews: And then the other issue is the new plan doesn’t have the pension option.
How do you and your members feel about not having a pension option? Is that not a
problem?
Peter Feltham: Well, I suppose it depends on which hat I am wearing here. I suppose I have
got those sort of two hats. From a CPSU viewpoint we would like to provide a pension
option but more importantly, I think, is that our members make informed decisions about
what they do with the amount of money they get at the point they retire. From an ARIA
viewpoint the issue of being able to provide information and advice and options to people, I
suppose, like other superannuation funds is something we are looking at and something we
are in discussions with the Department of Finance about and have been for a couple of years.
Trevor Matthews: And what would you be seeking? That they would have the option?
Peter Feltham: I am not sure what we’ve handed down. In the context of the CPSU
submission it would be inappropriate for me to do that and I think we are working with
Finance and through that a submission to Government as to what we would like to see going
forward into the PSSAP.
Trevor Matthews: Well, I think that is all pretty straightforward. Your key argument is that
your pension should be indexed the same as the Age Pension. Why should it be the same as
the Age Pension?
Peter Feltham: I think other submissions have talked about the words fairness and equity
and I think they are the same words that we would actually use, that the Government, in the
lead up to the 1998 Federal election, made a commitment to alter the indexation
arrangements. That was on the basis of the time and the Government stating that CPI was not
the best measure that could be used to adjust. Notwithstanding that, ten years later we still
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have, within the CSS and PSS pension arrangements, the methodology that the Government
claimed ten years ago was not the most accurate and valid measure.
We aren’t seeking anything more than what was provided to aged pensioners ten years ago. If
you look at the money that CSS and PSS pensioners get, in the main, it is a pretty modest sort
of pension that they are receiving. I suppose there are some that are getting a very generous
pension out of this process, but that is based on them actually contributing to their own
pensions, as well, over a period of years. In the CSS the mandatory 5% and in the PSS from
1990 the mandatory 2-10%, so they have actually been contributing to their own retirement as
well, I suppose, which makes it very different from the accumulation type scheme and, on that
basis, the argument of equity with aged pensioners in regard to a proper indexation
methodology that actually can measure changes in costs and compensate people more
accurately than the CPI alone, is something we strongly support.
Trevor Matthews: Are you suggesting that the CPI doesn’t do a good job in terms of
reflecting living costs?
Peter Feltham: I think the Government stated that in 1998 when it actually announced the
change in indexation arrangements. It indicated that there were better methods than to have it
linked to a cost index that is to have it also, in some ways, relate to a wage index like
MTAWE for example.
Trevor Matthews: In other words, sharing in national productivity gains, as well as price
movements?
Peter Feltham: Correct, that’s right, as well as price movements, yes. I think that the claims
of eighteen billion dollars in the past are something that from CPSU viewpoint we would be
very keen with your professional expertise to actually do some sums as to what figure is going
forward and what is an accurate offset that as well because I believe that there are offsets to
that. It isn’t just a cost to Government. It is offset by increased tax contributions from those
people. It is also an increase in spending power for those people which feeds into the
economy more broadly.
Trevor Matthews: Well, that’s good. David, have you got any questions?
David Harris: I was just interested. We have heard a lot about the old Age Pension and also
how it’s upgraded, or if you like, moved up. But, the CPSU would acknowledge, that it’s a
payment, if you like, for some citizens’ benefit, a recognition of covering a persons pension
needs in old age whereas the pension paid to public servants is a recognition of an
occupational pension scheme or an occupational link. How do you feel? Do you think the
two are aligned or do you see a distinction because it is a payment from the Government but it
is a very different payment, if you like?
Peter Feltham: Well, I think personally that one compliments the other. I think given the
pensioners on the CSS and PSS and the data provided by ARIA as to the sort of breakdown of
those, there are certainly a number of people on CSS PSS pensions who would also be relying
on a proportion of the Age Pension, the health benefit card. So, I think that the two, firstly,
work hand in hand. I also believe that the issue of the quantum is different from the
methodology that is being used. Our submission is based on having the same methodology
being used for the Age Pension as what should be used to index the CSS and PSS pensions. I
don’t think the issue of how much money that is part of that consideration other than, as I said
earlier, that one compliments each other.
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Trevor Matthews: Thank you. Is there anything else, Sandra? Thanks very much for going
to all this trouble. It’s a well written submission and you’ve explained it clearly to us. So, we
do thank you for that and that’s the end of the session.
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