Service Pensions as identified in World Bank research
There are separate pension schemes for public sector workers (as in the case of Australian Government civil servants and the military) in about half of the world’s countries, including some of the largest developing economies, such as Brazil, China and India. In the higher income OECD countries, spending on pensions for public sector workers makes up one quarter of total pension spending on pensions. In less developed countries, this proportion is usually higher. Yet very little has been written on the design and reform of civil-service pension plans, especially when compared with the voluminous literature on national pension programs (such as that for private sector employees” (Palaceios and Whitehouse 2006, p2).
The rationale of pension funds for the public sector
Civil servants and the military have proved powerful in protecting their interests and consequently many governments (including in Australia) have attempted to remedy the shortcomings of the political process through the promotion of the independence of public servants by:
· Making a career in public service attractive
· Shifting cost of remunerating public servants into the future; and
· Retiring older public servants in a politically and socially acceptable way (Palacios and Whitehouse 2006, p7)
World Bank (2006) data finds that the vast majority of civilian and military service pension schemes throughout the world (and this would include Australia) are consequently of the defined-benefit type and also that the main pension age for men in the civil service and military is 58.6 years of age. Eligibility to receive a pension is usually determined by length of service but this situation could be changing for equity reasons (Palacious and Whitehouse 2006, p17).
In OECD countries indexation of pensions in the public sector (to adjust pensions in due to fluctuations due to fluctuations in the cost of living) tends to be more favourable in the civil service and military schemes than those applied in the private sector. The method chosen for adjustment of civilian and military pensions in the case of OECD countries is usually based on prices. Actual rates for adjustment purposes are on average more than twenty percent lower for private sector workers (Palacios and Whitehouse 2006, pp 17-20). This is of course of immense political and public importance for any community and often overlooked.
Civilian and military pensions are known to have a heavy government financed component, but many of these delivered benefit schemes are funded on a pay as you go or adhoc basis. For example World Bank data of 2006 found that less than one in four public sector pension plans in OECD countries had accumulated any reserves (Palacios and Whitehouse 2006, p 20). Consequently the determination of unfunded liabilities for public sector pensions has become the focus of much controversy and investigation by governments.
There are other areas where public sector pension policy needs urgent attention. It is widely recognised, for example, that given the experience of many countries, present pension systems penalize mobile workers. This is first through the vesting periods. People who leave the civil service before their pension rights are vested (such as women prematurely leaving the workforce for family reasons) often receive nothing from the system. The minimum length of service for a pension benefit, as shown in World Bank data of 2006 for a range of countries, varied enormously from one year or less to twenty-five years (Palacious and Whitehouse 2006, p43). For some countries the portability of pensions from one level of government to another remains to be corrected but this was attended to in the 1970s in Australia.
Commonwealth superannuation
Arrangements were first in 1922 when the Melbourne based Superannuation Board was created which pioneered the first superannuation scheme for government employees. In 1930 the Board moved to Canberra and it changed its name to the Superannuation Board. Due to the emergency of the depression there was much drama and controversy surrounding entitlements. For example pensions were reduced by 20% and the Provident Account scheme was introduced for returned soldiers and public servants who could not meet medical standards. In 1948 the Defence Force Retirement was introduced for the military. The scheme was transferred to the Superannuation Board in 1959. In 1973 the Superannuation Board was renamed the Australian Government Retirement Benefits Office (Comsuper, 2007).
In 1976 the Commonwealth Superannuation Scheme (CSS) was established. In 1990 the Australian Government Retirement Benefits Office shortened its name to the Retirement Benefits Office and at that time the Public Sector Superannuation (PSS) was introduced (Comsuper, 2007). The Superannuation Act 1990 led to the closure of CSS, the opening of PSS to new members and the tightening of invalidity provisions of both PSS and CSS. In addition all new members were required to join PSS, and existing CSS members could choose either the CSS or PSS. In 1991 the Military Superannuation and Benefits Act was established to introduce the Military Superannuation and benefits scheme and the DFRB scheme (the earlier superannuation program for the military) was closed (Comsuper, 2007). In 1994 the Retirement Benefits Office changed its name to Commonwealth Superannuation (ComSuper). ComSuper then administered complex benefit provisions for nine Public Service and Australian Defence superannuation Schemes. In 1994 it is estimated that there were 135 benefit options in the CSS and PSS alone (ComSuper, 2007).
In more recent years superannuation benefits military employees are administered under the banner of the Australian Reward Investment alliance (ARIA). In 2005 the Public Sector Superannuation Scheme Accumulation Scheme, and membership of the PSS was also closed, (membership to CSS having closed earlier). This scheme is an accumulation fund only, based on private sector models, which are successful in a high-risk environment. The scheme also provides opportunities to purchase death, disability cover, and income protection, for example.
Two current issues
Australian authorities have overlooked the possibility of advancing cheap home loans based on eligible members superannuation funds. This proposition has not been given significant time for debate in federal parliament or the media. There is therefore a significant moral and policy deficit in this area that should be rectified.
The resultant lumps sum for a retiree from the Public Sector Superannuation Scheme is reliant on good returns from investment of the funds accumulated – an area of success dependent on risk management and leadership skills possibly beyond most eligible members and fund managers especially in today’s circumstances. The scheme needs much closure scrutiny and monitoring if its effectiveness is to be achieved and any changes found necessary.
The method relied on by the Australian Government to adjust CSS, PSS and military pensions has principally been the prices based CPI index produced by the Australian Bureau of Statistics as required by legislation to determine entitlements after review every six months. This has been found less than adequate by many commentators – especially the principle lobbyist organisation for Australian Government employees – the Superannuated Commonwealth Officers Association.
For example 2006 data clearly demonstrated that the average civilian/military superannuation pension was only $20, 649 pa (importantly SCOA advises the family unit concerned was usually only one pension beneficiary). The 2006 data also showed that if a civilian or military pensioner had commenced on a pension of $20,000 after twenty years, using the current CPI method the resulting pension was $7000 pa less than if it were indexed using a wage based index as used for the age pension. This is a clear case of inequity and social justice concern. In addition SCOA have clear trend data that age and other pensions have grown by nearly 100% from 1990 and 2007 but Commonwealth superannuation pensions have grown by only 60% in the same period – clearly an unacceptable outcome.
Consequently it also appears to be appropriate that the Australian authorities, remedy clearly unsatisfactory equity and social justice concerns (stemming clearly from the data and therefore adjust CSS and PSS and military entitlements choosing (a) the well proven method of adjustments to the old age pension using (male consumption patterns) to estimate CPI changes (as administered by Centrelink) or by choosing the changes to male average weekly earnings whichever is greater.
There is clear professional interview and survey data collected by SCOA over many years supportive of male based adjustments, stemming from the problems women experience in seeking advancement to higher salaries, and in their need to support family life by leaving the workforce, which has the consequence of very low salaries, with the pension entitlements thus being considerably less than male counterparts.
These particular controversies still remain to be addressed by Australia.
References
ARIA 2007, PSSap, ‘Your Quick Guide to the PPSap’ [on line] http://www..PSSap.gov.au/ [accessed 23 October 2007].
Comsuper 2007 ‘A History of Commonwealth Superannuation, [on line] http:// www.comsuper.gov.au/pages/about/history.htm [accessed October 23 2007].
Palacios R and Whitehouse E 2006, Service Pension Schemes Around the World, Social Protection- The World Bank, May.
SCOA 2006. Key Facts about Your Superannuation, newsletter available from SCOA in Canberra, 1 May.
(Dr Annette Barbetti of the Superannuated Commonwealth Officers Association assisted the preparation of this article she is a distinguished and former senior staff member of the Australian Bureau of Statistics.)
