Rolled-gold retirement ... Lecturers and other university staff may receive a far small pension than they had banked on. Photo: Glen Hunt
Whatever decisions UniSuper's defined-benefit fund trustees announce shortly, its 80,000 members and 6000 lifetime indexed pension recipients face a very uncertain future. The immediate threat is that, under actuarial advice, trustees may implement action (permitted under clause 34) to reduce the benefits originally promised to members on a fair and equitable basis.
The trustees are considering this action because of a shortfall in the funding of the promised benefits. This results from insufficient investment returns to offset faster-than-expected salary growth and increasing longevity of its pensioners. The recent jump in investment returns may provide some relief in reducing the extent of the shortfall.
Why are the universities persisting in forcing many of their full-time employees to join the defined-benefit fund?
But unless the federal government is prepared to help meet the funding shortfall, the universities will not be able to deal with the defined-benefit fund's increasingly serious funding problems in a responsible way. Worse still, if UniSuper starts reducing the benefits promised to members, including to lifetime-indexed pension recipients, this will create an unacceptable precedent for all remaining employer-sponsored defined-benefit funds.
The universities are largely funded by federal and state governments and are widely considered to be public entities. For the federal government to stand by and allow lump-sum and indexed-pension benefits to be decreased without allowing the affected fund members any redress would be a blot on Australia's enviable superannuation record.
The most serious question to be answered is why the universities are persisting in forcing many of their full-time employees to join the defined-benefit fund. With few exceptions, state and federal governments and large corporate employers, including Telstra, closed their defined-benefit funds to new members long ago.
Why, it is reasonable to ask, did the universities collectively decide against doing so? Such action has the advantage of limiting future super costs, leaving only the problem of meeting funding shortfalls for existing members.
While inertia and unwillingness to admit to the seriousness of the funding problem may be contributing factors, independent actuarial advice confirms that the defined-benefit fund is relying on the contributions of new younger members to help fund the larger benefits promised to older members. This easy source of funds would be closed off if the defined-benefit fund were closed to new members. The size of the subsidy from young to old can be seen from the lump-sum benefit accrual formula.
All members contribute the same amount: 7 per cent of salary from the employee and 14 per cent of salary from the employer. After deducting the 15 per cent contributions tax, the total annual contribution amounts to 18.9 per cent of salary. But up to age 40, the lump-sum benefit accrues at 18 per cent of final average salary per year of service. After 40, the benefit accrual rate increases by 0.2 per cent of final average salary per year. At 45, the accrual rate is 19 per cent of final average salary, marginally above the contribution rate. At age 65, the benefit accrual rate peaks at 23 per cent of final average salary.
Given that older members have the option to access their larger benefits by retiring or taking redundancy, this benefit accrual structure increases the risks that the money remaining will be insufficient to pay all the benefits promised to remaining members when they exit the fund. Yet unless they opt to leave the defined benefit fund within the first 24 months, the universities force all employees to remain in the defined-benefit fund until they leave university employment.
This is not the case with other defined-benefit funds, which typically allocate benefits on an equitable basis over all age groups. For example, a 5 per cent employee contribution to the Public Sector Superannuation Scheme generates an annual benefit of 21 per cent of final average salary at all age groups. There is no cross-subsidy from the young to the old, and the employer sponsor of the fund meets any unfunded liabilities as and when required.
Compared with the PSS and similar funds, the UniSuper defined-benefit fund is a blot on our super landscape for both promising benefits that might not ultimately be paid in full, and favouring older members in its benefit allocation formula.
Daryl Dixon is the executive chairman of Dixon Advisory.