Several questions following last week's column on the value of public sector superannuation benefits illustrate the risks of not paying attention to the details of your employer's super scheme. An excellent example concerns the benefits of contributing after-tax dollars as a member contribution to the PSS and CSS defined benefit funds.
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Not contributing means more money in your pocket to spend or invest elsewhere. The extra money could go towards paying off a mortgage, gain tax advantages from negative gearing or be salary sacrificed as pre-tax dollars to a second fund. But both the CSS and PSS have costly traps for those who choose not to contribute.
For many years, the CSS forced members to contribute 5 per cent of their salary after tax as a condition of fund membership. They could contribute more but this generated no additional employer benefit and served only as an easy low-cost way of saving. More recently, the government dropped the requirement for CSS members to contribute without reducing the employer benefit for people retiring from the fund.
On the surface, this appeared to be a major improvement for members. But as with other policy changes, there was a money-saving sting in the tail of this improvement. Not contributing the basic 5 per cent contribution to the fund reduced the preservation pension benefits for the many public servants who leave before 55 or obtain a redundancy benefit after that age. The clear message for all current CSS members is to be sure that ceasing contributions doesn't reduce their employer benefits from the fund.
The PSS which replaced the CSS in 1990 for new employees and for CSS members opting to switch funds is even harsher on members who choose not to contribute or make only a small contribution to the fund.
From day one, the PSS was designed to provide larger matching employer benefits for contributions above 5 per cent of salary up to a maximum of 10 per cent of salary. This proved to be a successful way of reducing the budget costs of the PSS.
Nevertheless, PSS members who understood how the fund operated were and are still able to obtain very attractive returns from contributing the maximum 10 per cent of salary. Compared with paying off a mortgage where the annual return is a tax-free interest saving of about 5 per centa year, contributing an additional 5 per centof salary to the PSS effectively doubles the value.
It also allows access on retirement or redundancy to a much larger indexed pension benefit. While it may be superficially attractive for PSS members to pay off their mortgage as quickly as possible, further research may well demonstrate that maximising their member contribution is a better option.
*Daryl Dixon is the executive chairman of Dixon Advisory
