SUPERANNUATION LEGISLATION AMENDMENT BILL
Second Reading
The Hon. M. R. EGAN (Treasurer, Minister for State Development, and Vice-President of the Executive Council) [7.49 p.m.]: I move:
That this bill be now read a second time.
I seek leave to have the second reading speech incorporated in Hansard.
Leave granted.
The Superannuation Legislation Amendment Bill 1998 introduces a number of miscellaneous amendments to the New South Wales public sector superannuation statutes that have been agreed with the Labor Council of New South Wales, for the purposes of removing longstanding anomalies from some provisions and making some important improvements. Most of the proposed changes have been the subject of close examination by a consultative committee set up under the auspices of the Director-General of the Premier’s Department and the Treasury to consult with the Labor Council and the superannuation trustees on appropriate changes in these
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important employee benefit provisions. Their cost has been the subject of report by the Treasury and confined to an acceptable, modest level, and the proposals have sought to address, appropriately, issues of inequity in entitlements.
I will outline in brief detail the various elements of the legislation for the benefit of members, in their order of appearance in the bill. In the First State Superannuation Act 1992 amendments were made by the Superannuation Legislation Further Amendment Act 1997 in relation to the provision of benefits on financial hardship and compassionate grounds, where the scheme member had not become entitled to payout. This benefit payout was made available in the New South Wales public sector schemes only to those who had a preserved benefit in a scheme. In First State Super (the FSS scheme), this amendment inadvertently took away an existing right, for in that scheme continuing members already had access to payout on financial hardship and compassionate grounds. The purpose of the present amendment is to correct the error and restore the rights of continuing members. To cover the intervening period since commencement of the 1997 amendment the Government had arranged for the making of a transitional and savings regulation. But it will now be necessary also to ensure that newly joined members since the amendment have rights to claim benefit payouts covering the intervening period.
Major amendments are being made by this proposed legislation to aid the implementation of part-time work in the police force. The proposed amendments are being made to the Police Superannuation Scheme, PSS, under the Police Regulation (Superannuation) Act 1906. Introduction of part-time provisions will create improved access by police to flexible work practices by enabling part-time employees to contribute at proportional rates and by amending the leave- without-pay provisions already in the Act. This would put police on an employment footing comparable with other sectors of public employment. In PSS, which has a strictly service-based benefit structure, the approach adopted for a benefit apportionment is based on "equivalent full-time service". This is similar to the approach adopted for the State Authorities Superannuation Scheme, SASS, which also provides coverage for police.
Issues associated with scheme equity in relation to the treatment of leave without pay, LWOP, have also been addressed in the context of the amendments for part-time work in the PSS, using the approach proposed for part-time work. In SASS no distinction is made between part-time work and part-time LWOP. It is proposed, therefore, in PSS to concurrently amend LWOP provisions so that part-time LWOP is treated in the same manner for part-time employment, as is currently the case in SASS. The actual amendments to introduce provisions for part-time work in PSS will pro-rate contributions by the use of a salary ratio, and will pro-rate benefits by converting length of service to ‘equivalent full time service’ using formulae inserted into provisions for benefits. As I have said, no distinction is to be made between part-time work and part-time LWOP. The various formulae enable adjustment of entitlements to correctly reflect the member’s actual and potential service at the time of exit. These new provisions represent a very important improvement in superannuation scheme design for police, which will enable better career planning and more flexible working arrangements particularly for women police.
A simple amendment is made at the request of the Labor Council in the State Authorities Superannuation Scheme (SASS). This relates to improved provisions for continuity of service in the scheme on changing employers. SASS provides contributors with rights to continue scheme membership as long as they resume employment with a scheme employer before the end of the next month after leaving. This will occur provided the contributor does not apply for a benefit from the scheme, and allows the contributor between four and eight weeks in which to be re-employed with membership continuity. For example, if the employee ceased employment on 31 January, he or she would only be able to continue in the scheme if re-employed before 28 February. This compares unfavourably with State Superannuation Fund, SSF, provisions which allow a break of up to three months.
At the request of the Labor Council, it is proposed that the contributor be allowed a break in service of up to three calendar months, if a benefit has not been applied for. Thus, if the contributor ceased employment on 10 January, he or she would have until 9 April to be re-employed and elect to resume contributions. Employer contributions for the intervening contribution periods - using the example I quoted, from 31 January to 30 April - would be made by the employer with whom the contributor resumed employment. This would bring the provisions for SASS in line with those for SSF.
In this bill there are a number of amendments made at the request of the Labor Council to remove anomalies in the State Superannuation Fund, SSF, which was closed to new members in 1985. I will deal with each in turn. In the SSF the benefit from the scheme on withdrawal, dismissal or discharge consists of a refund of contributions to which is added interest where service exceeds five years, and a supplement plus interest where service exceeds 10 years. The interest rates applying before 1 July 1990 were set statutory rates which were usually exceeded by the actual fund earning rate. The rates are: before 1 July 1972, 3.5 per cent per annum; and from that date to 30 June 1990, 4.5 per cent per annum. The rate applied from 1 July 1990, in accordance with Commonwealth regulations, is set having regard to the actual fund earning rate.
At the request of the Labor Council, it is proposed to improve benefits by replacing the statutory interest rates from 1 July 1972 with rates set having regard to fund earning rates. The Government Actuary has advised that the resulting benefit could be larger than the retirement benefit for some long-serving members. This is not intended and would encourage, in some cases, premature terminations of employment. As a result, the Premier’s Department has proposed that a cap be applied to the extent of the possible benefit increase. The improved withdrawal benefit will not be allowed to exceed the lump-sum benefit applicable on early or normal retirement, in each individual case. If the improved withdrawal benefit were not capped in this way, the retirement benefit would be increased - in a scheme which was closed because of its high costs. It should be noted that the proposed capping does not eliminate this effect but serves to reduce the associated financial incentives for premature resignations.
At the request of the Labor Council it is proposed that the discount rate used in the scheme’s retrenchment formula - to account for the early payment of the accrued benefit - be reduced. From the Labor Council’s perspective, this benefit in the SSF for those offered voluntary redundancy compares unfavourably with the benefits being paid to SASS members, sometimes with less service. While SASS members have generally made higher contributions to achieve the higher benefits being paid, this is causing SSF employees to refuse redundancy offers and exercise their right to redeployment. Employers with significant numbers of these excess employees can face industrial and financial difficulties as a result.
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The triennial actuarial valuations of the scheme for 1987, 1991 and 1994 recommended a 1 per cent reduction in this discount factor from 8 per cent to 7 per cent per year. Case studies showed that an appropriate discount rate of 4 per cent, which was subsequently agreed by the consultative committee, should be adopted, and is put in place by these proposed amendments. The Labor Council also recommended a change in the provisions in SSF for commutation of pension for pensioners who had exited the scheme before 1 July 1985. Commutation is the technical term in superannuation for the conversion of a pension to a lump-sum payment which exhausts the pension rights. Since 1 July 1985, an anomaly was created by giving new SSF pensioners the right to exchange all or some of their pension rights for a lump sum at age 60. This right will shortly also be available at age 55 for women who elected to retire at that age, on proclamation of commencement of antidiscrimination amendments following their recent passage through Parliament.
However, for those whose pensions commenced before 1 July 1985, only part of the pension could be commuted. Single pensioners must retain a minimum of $20 pension per fortnight and all subsequent CPI increases. Married pensioners must retain a minimum of $34 pension per fortnight and all subsequent CPI increases. As well, any part of the pension relating to abandoned units cannot be commuted. It is proposed that SSF pensioners whose pensions commenced before 1 July 1985 be subject to the same provisions as those whose pensions commenced after 1 July 1985. This would flow on to any reversionary spouse benefits so that spouse benefits could be fully commuted to a lump sum as well.
In terms of these proposals all pre-1 July 1985 breakdown pensioners who subsequently reach age 60 - or 55, if applicable - after the commencement of the amendment would be allowed six months to commute all of their pensions. All pre-1 July 1985 pensioners, breakdown and retirement, who have already commuted all but the amount not allowed under the Act as it currently stands, will have a limited time - six months - from the commencement date to commute the remaining pension. The factor to be used for commutation will be that applicable to their age at the time the new commutation takes effect. This proposal is expected to generate initial cash-flow requirements of approximately $111 million in the first year but generate substantial long-term savings. Particular reference is made to the potential financial impact on individual employers of this proposal in my later comments on the cost of these proposals.
The last amendment that I want to speak about is made at my request to the Superannuation Administration Act 1996, which comes within my ministerial responsibility. The proposed amendment relates to the powers of the FSS Trustee Corporation to appoint external funds managers for the superannuation funds under its administration, and were sought by the trustee corporation. Under the Public Authorities (Financial Arrangements) Act 1987, the trustee, which is a scheduled body under that Act, must have the approval of the Treasurer for any proposed funds manager appointment. My departmental officers have recommended that this requirement be dispensed with in the case of the FSS Trustee Corporation. This recommendation was made having in mind the arm’s length relationship to the Government of the trustee, its level of expertise in funds management, and the impediment to the decision-making powers and performance of the trustee represented by the need to seek approval for every change in funds manager. Other requirements of the Public Authorities (Financial Arrangements) Act will continue to apply to the trustee.
I wish now to undertake a brief examination of the cost consequences for the amendments proposed. The Treasury was closely consulted on the cost consequences of the proposals and provided a cost analysis. In the view of my officers, the package provided either procedural changes to the structure of the State public sector superannuation schemes with no significant costs, or changes to alter the timing of payment, form of payment, or rate of growth of some retirement benefits. These latter changes would result in some significant costs to be borne from the employer reserves within the schemes. Overall, this analysis recognised that there is a net advantage to be gained by bringing payment of relatively few long-term benefits forward in time, thus reducing long-term accrual of those benefits and creating very large savings in debt-raising costs which would otherwise be deferred. In relation to the specific proposals where significant additional costs or cash flows will be incurred, Treasury officers commented as follows:
The proposal to improve interest earning provisions for the SSF withdrawal benefit, when taken with the capping of the benefit, is expected to result in an increase in the unfunded liabilities of no more than $60 million in net present value terms.
The proposed improvement in the retrenchment benefit in the SSF by reducing the discount factor from 8 per cent to 4 per cent would cost $45 million per 10,000 redundancies, in net present value terms. These costs are based on the assumption that the profile of retrenched members would approach that of existing contributors.
Commutation of residual pensions in the SSF emerging before 1 July 1985 is estimated to result in savings of the order of $200 million in net present value terms in relation to those pensioners turning 60 after commencement of the legislation. An additional saving could be expected for those who have already turned 60 and elect to commute their compulsory residual pensions.
However, the new provisions would also bring forward future cash flows. As of 31 December 1997, there were 5,929 retirement pensioners or their spouses over the age of 60 in receipt of residual pensions after their commutation. Making assumptions about the rate of commutation applied and the number of pensioners who would take up the fresh offer to commute, the immediate cash-flow impact of this proposal would be $147.6 million. In addition, there is the staggered cash flow associated with the 75 pre-1 July 1985 pensioners who will turn 60, or 55 for certain female contributors, after commencement of the amendment. The combined cash-flow effect in the first year could, therefore, be around $150 million, less the pensions paid, which brings about an additional $111 million to be drawn from scheme reserves.
By way of general comment, my officers stated that the total package of measures is expected to result in a net saving over the life of the State Superannuation Fund. This saving will be reflected as reduced unfunded superannuation liabilities reported at 30 June 1999. However, attention needs also to be focused on whether the cash flows that the proposals generate in the first one to three years can be supported by the existing reserves in the affected scheme without requiring additional funding by employers beyond their existing funding plans. The conclusion reached with regard to employers generally was that the increased cash flows generated by the package of proposals could be met from existing employer reserves.
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This package of amendments consists of, principally, a number of measures requested by, and agreed to with, the Labor Council, to redress significant anomalies in the closed public sector employee superannuation schemes. In this regard the Government has welcomed the valuable opportunity of close consultation with the Labor Council and its representatives. The present measures will be beneficial to many scheme members and former members, by reducing and relieving inequities that, no doubt, have acted as a constant irritant for them over many years. The amendments to provide for part-time employment in the police superannuation scheme represent, as I have remarked already, a significant improvement, allowing the scheme adequately to provide for modern employment conditions. I feel that many serving police who are members of the scheme will welcome these improvements. I commend the bill to the House.
The Hon. J. P. HANNAFORD (Leader of the Opposition) [7.49 p.m.]: The coalition will not oppose this bill. As the Minister said in his second reading speech, the objects of the bill are to enable additional persons to receive a benefit on compassionate grounds or on grounds of severe hardship under the First State Superannuation Scheme; to recognise, for the purposes of contributions and benefits under the Police Superannuation Scheme, police officers who work part time; to extend the maximum period after leaving employment within which a person may resume employment with an employer and resume contributions under the State Authorities Superannuation Scheme; to remove the requirement placed on the FSS Trustee Corporation to obtain the Treasurer’s approval to the appointment of a funds manager; to enable certain pensions under the State Superannuation Scheme to be commuted, and to improve withdrawal and retrenchment benefits under that scheme; and to make consequential amendments and necessary provisions of a savings and transitional nature.
Clearly, anomalies have arisen from earlier changes aimed at bringing the cost of superannuation under control. The Government has said that these amendments will deal with those anomalies. I note that the Minister said in his second reading speech that the proposal is expected to generate initial cash-flow requirements of approximately $111 million in the first year but to generate substantial long-term savings. However, the Minister has not given a clear statement of what will be the total cost to Treasury of these changes. The Minister said later in his second reading speech that the combined cash-flow effect in the first year could be about $150 million, less the pensions paid. Again, it is not clear what will be the impact on Treasury of these changes. The Opposition has made a commitment to try to bring under control the burgeoning cost of the many State superannuation schemes. Indeed, when I was Minister for Industrial Relations I initiated changes to bring that burgeoning cost under control. That area of superannuation administration now falls under the control of the Treasurer.
The Hon. M. R. Egan: No, it has always come under the Premier. I have responsibility as the shareholder for the statutory-owned corporations.
The Hon. J. P. HANNAFORD: Under the coalition Government the Minister for Industrial Relations had that responsibility. The Treasurer indicates that under this administration the Premier has that responsibility. However, the Treasurer will have to bear the financial burden of any changes to State superannuation legislation. It would have been beneficial to the Parliament to know the long-term cost of these changes. The long-term cost burden of superannuation has reduced significantly, and these provisions will lessen the controls that are in place. I recognise the need to change the police superannuation scheme because many police officers will be allowed to engage in permanent part-time work.
Under the coalition’s policy proposals, retired police officers will be encouraged to engage in permanent part-time work so that their significant skills are not lost. Clearly, that will have a cost impact under this proposal, and the extent of that impact needs to be understood. As I have said, the Opposition does not object to the policy approach in this legislation, but the community should have some understanding of the annual cost of these changes and of the impact upon those schemes, which until now have been closed but which effectively will be partially reopened under this legislation.
Reverend the Hon. F. J. NILE [7.56 p.m.]: The Christian Democratic Party supports this bill, which covers a number of persons involved in superannuation. The bill will enable additional persons to receive a benefit on compassionate grounds or on grounds of severe hardship under the First State Superannuation Scheme; it will recognise for the purposes of contributions and benefits under the Police Superannuation Scheme police officers who work part time; and it will extend the maximum period after leaving employment within which a person may resume employment with an employer and resume contributions under the State Authorities Superannuation Scheme. There are also other positive provisions that amend various public sector superannuation Acts.
Motion agreed to.
Bill read a second time and passed through remaining stages.
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