Federal government employees who joined the CSS or PSS before entry was closed off in 2005 now find themselves in the box seat when funding their retirement. Whereas previously many were tempted to withdraw their own contributions and where permitted their employer contributions as a lump sum on exit, more than 85 per cent of fund members now choose the indexed or unindexed pension options.
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This trend is likely to continue because of the volatility of financial markets and historically low interest rates. Especially with the pension payments indexed half yearly by increases in the CPI, investors would be hard pressed to match that fortnightly income.
At age 60, for example, the PSS annual indexed pension is calculated by dividing the alternative lump sum by 11. This equates to an annual yield of 9.1 per cent increased by the rate of inflation each year. The yield available on Commonwealth CPI indexed bonds is around 1.5 per cent annually meaning that there's compensation of around or above 7 per cent a year for giving up access to any capital remaining at death of both the member and surviving spouse.
Given that the expected life span at 60 is 20 years or longer, the attractions of a non-commutable indexed pension offered on the above and similar terms at different ages is irresistible. A further attraction is that the value of any capital used to acquire an indexed or unindexed pension is ignored by Centrelink in accessing the age pension assets test.
Non-commutable annuities purchased from the private sector are subject to both the Centrelink income and assets tests. The annual income yields from private sector annuities are considerably lower and there's also uncertainty about the ability of the provider to honour the commitment over an extended life span.
The federal government miscalculated when it replaced the CSS by the PSS in 1990 by assuming many members would take their benefits as a lump sum. Changes forcing members to preserve super benefits till 55 or 60 have also resulted in more CSS and PSS members being eligible for a pension benefit on retirement.
The PSS also aimed to save the employer money by allowing members to reduce their own contributions and thereby lower the matching employer contribution. However, increasing numbers of members have realised this isn't a good deal because additional contributions up to the maximum 10 per cent of salary also increases the employer contribution thus causing the PSS to become a costly scheme for the employer.
However, PSS members have the advantage of being able to take their contributions as an indexed pension in retirement whereas the only option available for this component of the CSS benefit is an unindexed pension.
Daryl Dixon is the Executive Chairman of Dixon Advisory
