How to fix the Commonwealth Superannuation Scheme

As a CSS Pensioner receiving $80,000 per year after tax and paid fortnight into my bank account, plus a very small part Age Pension from Centrelink I have no complaints. This includes a non indexed pension but where else would you get 9.25% return on the $200k I commuted 20 years ago. The CSS closed to new members for a reason. I was middle management not SES level. Knowing that money will be there every fortnight until I die gives me peace of mind

I should add that I am part of a couple. We are Income Tested by Centrelink, not asset tested as are most retired CSS members, my Transfer Balance amount ($1.2m) is not treated as an Asset by Centrelink. We would not be remotely interested in transferring to any Private Sector fund where our money could run out. Yes there is no residual capital to our Estate but my Spouse is well taken care of with 67% reversionary pension.

My understanding is that for age pension purposes the CSS pension has a nil asset value, not the TSB value suggested. That’s because it can’t be cashed in. The untaxed portion of the income stream is counted towards the income test and this may affect age pension entitlement.

Superannuants who rely on account-based pensions need to manage a number of retirement risks that members of the CSS, and recipients of the age pension, do not. They include longevity risk, investment risk, inflation risk, sequencing risk and legislative risk. Therefore, comparing the two is like comparing apples with bananas.

We know that investors should be rewarded with a higher return to compensate them for the risk they take but it is difficult to quantify retirement risk of an account-based pension in monetary terms. However, we know that annuity style pensions such as the CSS are no longer offered to members simply because they represent unacceptable risks to providers. In addition, when members are given the option of converting the certainty of an annuity style pension to an account - based one, they almost always choose certainty.

The certainty of a guaranteed income stream, indexed to inflation, paid for the life of the surviving spouse without any concerns about market crashes is clearly valuable. What is that certainty worth?

As a CSS pension recipient, I was unaware that I am being disadvantaged. I was still working in the private sector at age 55 when I invoked a CSS pension. I got all my contributions and earnings back tax free (minus QLD Flood Levy, because "a levy is not a tax"). The CSS then pretended there was 250% of that payout still in the fund and paid me an initial (indexed) pension of 9.5% p.a. of that fictitious balance. i.e. about 24% p.a. of the accumulated contributions and earnings prior to pension commencement, 66% reversionary to my wife when I pass. Because I only worked for the Commonwealth for about 5 years, I see CSS as a bit of a lurk that funds a luxury car, private health insurance and a few club memberships for life. Everything else comes out of my defined contribution superannuation.

Although I am not a member of the CSS, I have a recently retired mate who is. He retired and understands the fund. I asked him and he explained the following.

The CSS has 2 components. 1) A Government (employer) contribution which must be taken as an indexed pension 2) A lump sum which is the employees (compulsory) contributions over the years plus interest. This lump sum can be converted to a non-indexed lifetime pension, or you can use the lump sum to roll over into a SMSF or retail fund, or to pay your mortgage, buy a car, contribute to your spouse’s super (subject to the contribution rules), etc.

As far as taxing is concerned, Bruce is right the indexed pension portion is fully taxable (but subject to a 10% tax offset once you turn 60). If you chose to convert your lump sum to a non indexed pension this is not taxed once you turn 60. If you choose to roll-over to a retail or Self Managed Super Fund, this is taxed just like every other fund.

My friend also told me many years ago they were given the opportunity to move from the CSS to the inferior (his words) but more flexible PSS.
My friend chose not to and he does not regret it.

The real undiscussed problem with the CSS is the unfair rules which stop some people getting a part age pension. I had a friend (now deceased) who lost his part age pension because of a law change. He elected to convert his lump sum to a non-indexed pension. Of his total pension roughly 25% was simply his after tax contributions being returned to him. This used to be excluded for the age pension income test. Thanks to a law change only 10% of his pension would be excluded (even though 25% was simply his post tax contributions being returned to him).

In his case this law change meant he lost his small part age pension. This change was unfair to CSS pensions who converted their lump sum to a non-indexed pension and should be changed back.

I am only a member of industry funds, not the CSS, but I am very familiar with the CSS because my 96 year old father is a very happy CSS pensioner, having retired 37 years ago and now receives a considerable fortnightly pension in addition to a part Age Pension (btw it's 'Age Pension' not 'Aged Pension'). Yes, he (and his wife, my mother) gets a part Age Pension too, so I can only think that those CSS members who do not qualify for a part Age Pension must have plenty of assets and/or other income that preclude them from getting some Age Pension - which is exactly what the Age Pension is about, it is a means tested entitlement, not an absolute entitlement.

I won't get into all the issues mentioned, as I don't know enough about them. But the indexation one has been raised over many years, and rejected by government for good reason in my view. If the scheme had been established with indexation at a higher rate than CPI, the government of the day (and with actuarial costing advice) is likely to have set the pension accrual rates for each year of membership at lower rates. They would have designed the whole scheme with an expected long term actuarial cost in mind. It's just like annuities - if you want to purchase an annuity from an insurer that is indexed at (say) 5%pa, the annual annuity rate will start off lower than if you request an indexation rate of (say) 4%pa. Basic maths for any actuary. In other words, you can't have your cake and eat it too, as the saying goes.

What Bruce is trying to do is ignore the good features (e.g. good pension accrual rates) and focus only on what he thinks is the poor feature (the indexation rate). The fact is that the total benefit (accrual rates plus indexation) is what matters and you cannot now only focus on one aspect and ignore the other associated components.

The CSS provides excellent long term pensions when you take account of the total pension amount received for each year of membership, all paid for by the member's past employer (Government). Much better than the SG contribution rate that non-public sector employees receive from their employer, so bear that in mind too.

I am particularly interested in the very last few words of the article - why should indexation "greater than" the Age Pension be even considered - on what basis is there any argument for that?

My father has repeatedly stated to me that the push by some CSS members for indexation at a rate greater than CPI ignores the full picture (as I have stated above). That is the scheme he agreed to as part of his employment arrangement when he joined the public sector, so he does not support pushing for a greater level of indexation as it is an integral feature of the whole scheme design. Imagine if Challenger annuitants who chose to take up an annuity, with terms agreed in advance such as CPI indexation, later pushed for greater indexation because the CPI was as good as they like! I doubt Challenger would give it even one second's thought, and nor should they. The terms are the terms, sorry, but get over it.

John - CSS Pensioners are taxed at the marginal rate for their total taxable income which includes their CSS pension. The 10% is a tax rebate equal to 10% of the untaxed element of the CSS pension component.

The matter of the CSS pension’s indexation, and more broadly the Age Pension’s too, is an interesting and in my view vexed issue.

I wonder if a more balanced and equitable solution, for both, is to adopt something akin to the UK’s “triple lock” system, whereby the state pension (largely equivalent to our Age Pension in utility) increases each April in line with whichever of these three measures is highest:

• inflation in the September of the previous year, using the Consumer Prices Index (CPI)
• the average increase in total wages across the UK for May to June of the previous year, or
• a minimum 2.5%.

It was designed to ensure the value of the state pension was not overtaken by the increase in the cost of living or the incomes of working people.

The triple lock was introduced by the UK’s Conservative government in 2010, however, it has enjoyed by and large bipartisan support since, including both major parties having pledged to maintain it at the most recent general election.

Food for sustainable, equitable, pension thought.

The tax on pension payments is because no tax was paid on contributions and earnings. The rest of us have a 15% tax on these as we accumulate our super over 45 years. I don't know which system is more generous, but the idea is they give people a similar outcome.
The argument that CSS shouldn't be included in any Div 296 could also be applied to most people under 65 in other super funds who can't access their super yet.
The valuation for any Div 296 should be the same for any option to roll money from CSS to other super funds. I expect CSS members would be happy if the Div 296 value was used to allow rollouts, while the rest of us taxpayers might then view the valuation as too high. A fair value for both is the right answer.

I believe you are incorrect in the statement "tax was paid on contributions". In my case I paid full marginal tax on my compulsory contributions. The contribution was calculated as 5% of the gross salary before tax and that dollar figure was deducted after tax was paid. I can prove this because when I retired I rolled over my contributions to an accumulation super fund and it was classed as fully tax paid. I don't know if tax was paid on the earnings but the earnings were so low that it would be trivial. No tax was paid on the employers cotribution because there was no contribution.

What a whinger.

As someone who knows a fair bit about the scheme, there is no mention of the significant benefits eg the conversion rate to pension at retirement especially for those who did the 54/11 trick (and you would have been stupid not to in the vast majority of cases).

If you don't receive enough pension from CSS, the age pension fills the gap. In addition there was nothing stopping a member saving either in their own name or in a retail super fund. Many CSS pensioners who don't get an age pension qualify for the CSHCC, so get some of the age pension benefits (given their generous limits and no assets test).

If the CSS was such a horrible deal, then you could always take the money before age 55 and invest it yourself (but you would have been silly to do so, as you would almost certainly be worse off, but you might get the age pension, which seems to be one of the writer's main gripes).

The only thing I agree with us the use of 16 as the factor for determining the notional value as it takes no account of life expectancy.

Not sure I can feel sorry for CSS members. The fund has been closed a long time and was always known as a generous fund. Pension members for the most part are likely to be quite elderly now and have done very nicely thank you.

The fund is partly "unfunded" so those contributions were never subject to any 15% contributions tax. The combination of tax free portion and the tax rebate in the pension is still pretty generous tax wise in my opinion. Yes other pensions are tax free after age 60, but is that really affordable for Australia in these times?

The concern about lack of investment choice and no residual value on death ring hollow as well. Members are only concerned about receiving the pension and every member understands they are taking a punt on beating their life expectancy when their pension commences. Do you want a clawback from the estate on any member who lived for longer than their life expectancy?

The biggest risk overall might be the Government defaulting on pension payments. Heaven help us all if that ever happened. While I am at it can you please encourage the media to stop calling the Future Fund our Sovereign Wealth Fund. It is clearly not.

I am not a member of any Government fund but I feel this article is more about self interest. I think if the public were told how much the average member is receiving from the CSS there would be a rush of offers from people wanting to take their place!

Thank you for highlighting these issues Bruce but I fear I will have died before any changes are made to this most unsatisfactory scheme. I am in the DFRDB scheme (having been previously with CSS) with the same disadvantages.

Bruce, a very thoughtful and useful article on topics that is not much talked about in this forum. You raise some great points that should be considered, including resolving the sword of Damocles hanging over the Future Fund. That needs to be resolved one way or the other; either the Future Fund is our permanent sovereign wealth fund or it pays out the unfunded Cth pension liabilities. It is one or the other, but not both. I personally favour the former outcome because the Cth can easily meet those liabilities and the FF serves other useful purposes, including the recent expansion of its mandate.

Jeremy. Hopefully the next Government will resolve the role of the Future Fund. If it decides that it should be a sovereign wealth fund the government should offer to pay out any CSS pensioners who request it their notional balance.
From the comments on my article it would appear few CSS pensioners are likely to request their balance be transferred to a modern superannuation fund and therefore the impact on the budget would be minimal, while allowing the Future Fund clean air to serve as a sovereign wealth fund.

Thank you Bruce - at last a well presented and descriptive article on the shortfalls of the 1976 CSS Scheme and which explains as to how these CSS pensions are grossly inferior to the schemes that service the pension entitlements of the current PM and the Opposition Leader.

Also and notably there are many former politicians who make public statements regarding superannuation benefits and tax, that are beneficiaries of a Scheme which superseded the CSS and which left many public servants ( actually their co workers and/or employees ) behind.

The conflict is clear to see and you also rightly question the inaction of the directors of the CSS. What are they doing to fix the issue?

I would ask - if possible - for you to clarify the taxation rates on CSS pensions ( you state 10%) and the proposed tax changes under div 296 ( you state greater than 50%).

Thank you to FirstLinks for covering this issue.

It certainty exposes the mainstream press who remain numb on these important issues and their failure to cover the massive blackhole ( unfunded defined benefit pensions) hidden in the Federal Budget.