Updated Estimates of the Cost of Alternative Indexation Arrangements for Commonwealth Superannuation Pensions - Summary
Appendix J of the “Review of Pension Indexation Arrangements in Australian Government Civilian and Military Superannuation Schemes” (the Matthews Review) estimated the financial impacts of two alternative pension indexation methodologies, namely indexation:
- at the same rate as that for the base rate of the Age Pension (Age Pension methodology).
- by the higher of the Consumer Price Index (CPI) or the increase in Male Total Average Weekly Earnings (MTAWE).
The estimates in the Matthews Review were based on a commencement date of 1 July 2009.
Updated Cost Estimates
The Department has updated the estimated financial impacts based on a commencement date of 1 July 2011. These estimates are based on actuarial advice from Mercer (Australia) Pty Ltd (Mercer), the actuary for the Australian Government defined benefit civilian superannuation schemes, and from Australian Government Actuary (AGA), the actuary for the military superannuation schemes (MSBS, DFRDB, DFRB).
Snapshot of Updated Financial Impacts
- Cash cost of indexing military and civilian pensions by the Age pension methodology would be $322 million for the period 2011-12 to 2014-15 with an immediate increase in unfunded superannuation liabilities of $32.9 billion.
- Cash cost of indexing military and civilian pensions by the higher of CPI, the Pensioner and Beneficiary Living Cost Index (PBLCI) and increase in MTAWE would be $614 million for the period 2011-12 to 2014-15 with an immediate increase in unfunded superannuation liabilities of $47.8 billion.
Peer Review of Actuarial Advice
Mercer and AGA comply with the Institute of Actuaries of Australia’s Professional Standards in the provision of any actuarial advice. Notwithstanding this, Finance engaged Cumpston Sarjeant, an actuarial firm independent of the scheme actuaries, to undertake a third party peer review of the actuarial advice provided by Mercer and AGA.
Snapshot of Peer Review Advice
“The estimates of the financial impacts of changes to indexation arrangements within the Australian Government’s civilian and military superannuation schemes are reasonable."
Clawback
Appendix J of the Matthews Review noted that there would be reductions in other Commonwealth expenditure (such as the Age Pension) and increases in Commonwealth taxation revenue that would result from adopting alternative indexation arrangements. This effect is referred to as “clawback”.
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.
Snapshot of Estimated Amount of Clawback.
It is estimated that the overall clawback is in the order of 30 per cent.
Questions and Answers Paper
Contact for information on this page: superbranch@finance.gov.au