Updated Estimates of the Costs of Alternative Indexation Arrangements for Commonwealth Superannuation Pensions
This section updates tables J2 to J5 of Appendix J of the Matthews Review, based on a commencement date of 1 July 2011.
Assumptions
The actuarial advice of Mercer (Australia) Pty Ltd (Mercer) and Australian Government Actuary (AGA)
(MSBS, DFRDB, DFRB) set out the assumptions used in their calculations. The estimates are based on membership data for the relevant civilian and military superannuation schemes as at 1 July 2009 and economic and demographic assumptions from the 2008 Long Term Cost Reports for the Commonwealth Superannuation Scheme (CSS) and Public Sector Superannuation Scheme (PSS) and the military schemes [
].
The Long Term Cost Reports are prepared on the basis that superannuation pensions will be indexed by the Consumer Price Index (CPI) (as required by legislation). In this regard, they assume that the long term average pension indexation rate will be 2.5 per cent per annum. For the alternative indexation costings, Mercer and AGA have assumed a long term indexation rate of:
- 4.0 per cent per annum if superannuation pensions are indexed at the same rate as the base rate of the Age Pension; and
- 4.6 per cent per annum if superannuation pensions are indexed by the higher of CPI, the Pensioner and Beneficiary Living Cost Index (PBLCI) and increase in Male Total Average Weekly Earnings (MTAWE).
These are the same rates that were used in calculating the estimates contained in the Matthews Review.
At the time of the Matthews Review, the PBLCI was not in place and CPI was being used for the purposes of indexing Age Pensions. Even though both Mercer and AGA have taken into account the PBLCI in determining the above assumed indexation rates they have decided to leave the rates unchanged from those used in the Matthews Review because of the lack of historical data regarding the PBLCI.
As indicated by Mercer, it is possible that the PBLCI will exceed the CPI in the future. If the PBLCI is higher than CPI or the increase in MTAWE, the costs of indexing by the higher of CPI, PBLCI or MTAWE would be higher than currently estimated. Since the PBLCI began being used as an index for the Age Pension in September 2009, it has grown by 3.8 per cent compared to a growth of 2.8 per cent for the CPI.
Mercer and AGA have assumed that more members of the PSS and Military Superannuation and Benefits Scheme (MSBS) would take some or all of their benefits as a pension benefit, rather than a lump sum, under the alternative indexation arrangements. This is because enhanced indexation arrangements increase the value of a pension relative to a lump sum.
Mercer have assumed that an additional 10 percentage points of PSS benefits would be taken as a pension rather than a lump sum under both alternative indexation arrangements.
AGA have assumed that under both alternative indexation arrangements an officer would take 90 per cent of their MSBS employer component as a pension and other ranks would take 80 per cent of their employer component as a pension. This compares with the current assumed rates of 75 per cent and 60 per cent respectively. (Note that the MSBS also provides a separate lump sum of the accumulated member contributions).
Financial Impacts
As shown in the following diagram, the civilian and military unfunded defined benefit superannuation arrangements affect the Commonwealth’s underlying cash balance, fiscal balance and net worth.
Text Description of the diagram above
Unfunded Superannuation Liabilities
Unfunded superannuation liabilities at a particular date represent the present value of expected superannuation benefit payments from Consolidated Revenue in respect of superannuation entitlements accrued to that time, less the accumulation of member and productivity contributions (where relevant). Changes in unfunded superannuation liabilities affect the Commonwealth’s net financial worth.
Table J2 shows the immediate increase in unfunded superannuation liabilities if a change to adopt alternative indexation methodologies was made from 1 July 2011. The table also shows the expected amount of that increase at 2020.
Table J2: Increases in unfunded superannuation liabilities for the civilian and military schemes using a wage based pension indexation methodology
| Indexation Methodology | 1 July 2011 | 1 July 2020 | ||||
|---|---|---|---|---|---|---|
| Civilian | Military | Total | Civilian | Military | Total | |
| Age Pension | $20.6b | $12.3b | $32.9b | $35.6b | $25.4b | $61.0b |
| Higher of CPI, PBLCI or MTAWE | $29.9b | $17.9b | $47.8b | $51.0b | $36.8b | $87.8b |
Cash Payments
The estimated increase in annual benefit payments to civilian and military pensioners if alternative indexation methodologies were adopted from 1 July 2011 is shown in Tables J3 and J4 below. Changes in pension payments affect the Commonwealth’s underlying cash balance.
Table J3: Increases in cash payments if Age pension indexation methodology is applied to civilian and military pensions
Year |
Civilian |
Military |
Total |
|---|---|---|---|
| 2011-12 | -$38m |
-$7m |
-$45m |
| 2012-13 | $19m |
$16m |
$35m |
| 2013-14 | $83m |
$39m |
$122m |
| 2014-15 | $145m |
$65m |
$210m |
| 2019-20 | $534m |
$212m |
$746m |
Table J4: Increases in cash payments if indexation by the higher of CPI, PBLCI and MTAWE is applied to civilian and military pensions
Year |
Civilian |
Military |
Total |
|---|---|---|---|
2011-12 |
-$25m |
- |
-$25m |
2012-13 |
$56m |
$33m |
$89m |
2013-14 |
$145m |
$66m |
$211m |
2014-15 |
$235m |
$104m |
$339m |
2019-20 |
$795m |
$326m |
$1,121m |
Notional Employer Contribution Rates
The notional employer contribution rates (NECRs) are the employer contribution rates that would be necessary to fully fund accruing employer financed benefits. They are analogous to the rate of employer contributions in an accumulation fund. For example, the employer contribution rate for the Public Sector Superannuation Accumulation Plan (PSSAP) is 15.4 per cent.
Table J5: Comparison of NECRs and NECRs that would apply under wage based indexation methodologies
CSS |
PSS |
DFRDB |
MSBS |
|
|---|---|---|---|---|
30 June 2009 |
20.8% |
16.9% |
33.3% |
28.9% |
Age Pension |
23.4% |
20.7% |
41.4% |
38.7% |
Higher of CPI, PBLCI or MTAWE |
24.1% |
21.9% |
45.6% |
43.0% |
Note – CSS, PSS, DFRDB and MSBS rates include productivity contributions.
Clawback
Appendix J of the Matthews Review noted that if enhancements are made to indexation of pensions, there would be related savings through reduced Age Pension payments and increased taxation. The Review reported on some estimates that had been made of these effects.
The Department of the Treasury has undertaken analysis, based on the Treasury tax microsimulation model, of the potential tax and Age Pension clawback associated with changes in the indexation arrangements for Commonwealth superannuation pensions. This analysis shows that the overall clawback (combined for civilian and military schemes) is in the order of 30 per cent. The level of clawback will vary between individual scheme members. The clawback estimate is sensitive to the assumptions used and should therefore be treated with some caution.
Other Financial Impacts – Superannuation Expenses
In addition to updating the estimates contained in the Matthews Review, Finance sought information from Mercer and AGA on the estimated increase in the Commonwealth’s superannuation expenses, that is, the impact of the fiscal balance. These comprise annual additional employer superannuation costs (as reflected by the increase in notional employer contribution rates) and notional interest that would be payable on the increased unfunded superannuation liabilities.
The estimated increase in the superannuation expenses if alternative indexation methodologies were to be adopted from 1 July 2011 is shown in Tables J6 and J7 below.
New Table J6: Increases in superannuation expenses if Age Pension indexation methodology is applied to civilian and military pensions
Year |
Civilian |
Military |
Total |
|---|---|---|---|
2011-12 |
$1,570m |
$1,155m |
$2,724m |
2012-13 |
$1,672m |
$1,243m |
$2,914m |
2013-14 |
$1,708m |
$1,336m |
$3,043m |
2014-15 |
$1,837m |
$1,434m |
$3,271m |
| 2019-20 | $2,357m | $1,999m | $ 4,356m |
New Table J7: Increases in superannuation expenses for indexation by the higher of CPI, PBLCI and MTAWE is applied to civilian and military pensions
Year |
Civilian |
Military |
Total |
|---|---|---|---|
2011-12 |
$2,244m |
$1,678m |
$3,922m |
2012-13 |
$2,370m |
$1,804m |
$4,175m |
2013-14 |
$2,440m |
$1,939m |
$4,377m |
2014-15 |
$2,601m |
$2,078m |
$4,678m |
| 2019-20 | $3,312m | $2,890m | $6, 202m |
Contact for information on this page: superbranch@finance.gov.au