Bills Digest No.15 2001-02
Superannuation Legislation Amendment (Indexation) Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details
Superannuation Legislation Amendment
(Indexation) Bill 2001
Date Introduced: 28 June 2001
House: House of Representatives
Portfolio: Finance and Administration
Commencement: The amendments outlined in this
Digest commence on the day on which the Bill receives Royal Assent.
However, where the proposed Superannuation Legislation
(Commonwealth Employment) Repeal and Amendment Act 2001 (this Act
will repeal the Superannuation Act 1922 and the
Superannuation Act 1976) commences before this Bill, the
amendments proposed by this Bill will continue to apply under the
proposed Superannuation Legislation (Commonwealth Employment -
Saving and Transitional Provisions) Act 2001.
To provide for
the twice yearly indexation of pensions payable under the
Superannuation Act 1922 and the Superannuation Act
1976.
The Commonwealth Superannuation
Scheme
The Commonwealth Superannuation Scheme (CSS) is
an employer-sponsored superannuation scheme. It covers certain
employees of the Australian Public Service and related
participating employers. It was compulsory for most employees
permanently appointed before 1 July 1990 to become members of the
CSS. Full-time temporary and contract employees could also have
joined the scheme before that date as long as they satisfied a
qualifying period.
The CSS is established under the
Superannuation Act 1976, which replaced the
Superannuation Act 1922. The Superannuation Act
1922 was closed to contributors on 1 July 1976 and the
Superannuation Act 1976 was closed to contributors from 1
July 1990. The Superannuation Act 1922 and
Superannuation Act 1976 continue to provide for the
payment of pensions to retired members and reversionary
beneficiaries.
The CSS provides members with benefits
including:
- automatic death and invalidity cover at no extra cost
- substantial employer contributions
- a fully indexed pension for life (on retirement), and
- low-cost home loans.
Unlike most other Australian superannuation
schemes, the CSS doesn't charge its clients administration
fees.
As at 30 June 2000 the CSS had:
- 48 552 contributors
- 109 045 pensioners
- contributions received totalled $216 908 000 in
1999-2000
- benefits paid by way of lump sums totalled
$641 515 000 in 1999-2000, and
- benefits paid by way of pensions totalled
$1 956 598 000 in 1999-2000.(1)
The CSS is what is termed a split benefit
scheme, by reason of how benefits are generally made up. Under the
CSS benefits comprise:
- a member component - comprising basic and supplementary
contributions (if any), plus accumulated interest (paid as a lump
sum)
- an employer component (funded on an emerging cost basis) -
which is a defined amount paid as a CPI indexed pension, the size
of which depends on the reason for exit, final salary, length of
contributory service, prospective (i.e. potential) membership and
age at exit. In the case of invalidity retirement, calculation of
the member's pension benefit also takes into account a period of
prospective membership to age 65, and
- an employer productivity superannuation component (funded on an
accrual basis) which also accumulates at the crediting rate of the
CSS Fund.
Compulsory basic member contributions based on 5
per cent of salary for superannuation purposes are required but
optional supplementary contributions of up to a further 5 per cent
of salary are allowed.
Standard pensions (i.e. the employer - financed
part of a CSS pension) are subject to automatic adjustment each
year in accordance with upwards percentage changes in the Consumer
Price Index (CPI) for the 12 months ended 31 March. The adjustment
is paid on the first pension payday in July each year. Standard
pensions which were paid for the whole financial year (either to a
pensioner or a surviving spouse) before a July adjustment are
varied by the full percentage movement as described above. However,
if a standard pension for less than the whole financial year after
retirement is receive the initial adjustment is varied
proportionately in relation to the number of months that a person
has been receiving pension up to 30 June. If a person retires on or
before the 15th day of a month (14th day for February), that month
is counted as a complete month for pension increase purposes.
Rationale for amendments
The amendments proposed by the Bill amend the
Superannuation Act 1922 and the Superannuation Act
1976 to provide for the twice yearly indexation of pensions
paid under those Acts.
The amendments proposed by the Bill give effect
to a 2001-02 Budget announcement. The explanation for the
amendments provided by the Government at Budget time was:
The Government has decided to introduce twice
yearly indexation of Commonwealth superannuation pensions under the
Commonwealth Superannuation Scheme (CSS) and the Public Sector
Superannuation Scheme (PSS). This indexation will occur twice
yearly on 1 July and 1 January for movements in the Consumer Price
Index for the previous half year. This will reduce the delay
between inflation effects faced by superannuation pensioners and
income adjustments. This change will commence from 1 January
2002.(2)
The rationale for the amendments is as stated by
the Parliamentary Secretary to the Minister for Finance and
Administration, the Hon. Peter Slipper, in the Second Reading
Speech, namely:
The amendments in this Bill will increase the
purchasing power of some 100,000 Commonwealth civilian
superannuation pensioners, by reducing the delay between price
increases and compensatory adjustments to their superannuation
pensions. The new pension indexation arrangements are in addition
to other initiatives announced by the Government in the 2001-02
Budget for self-funded retirees and age pensioners which may also
benefit Commonwealth civilian superannuation
pensioners.(3)
It is estimated in the Government's Explanatory
Memorandum to the Bill that the amendments will cost $30 million
per annum.(4)
Senate Select Committee on
Superannuation and Financial Services
In April 2001 the Senate Select Committee on
Superannuation and Financial Services tabled its report 'A
Reasonable and Secure' Retirement? - The benefit design of
Commonwealth public sector and defence force unfunded
superannuation funds and schemes. The report made
recommendations to implement immediately a bi-annual adjustment of
scheme pensions in line with CPI increases and to consider a
phased, alternative indexation method.
The Committee noted that superannuants found
that the present annual adjustment of benefits by the CPI can delay
increases to their pensions by some 12 to 15 months, resulting in
an indexation lag which reduces the purchasing power of their
benefits considerably.(5)
Committee member Senator Lyn Allison tabled a
'Minority Report' on behalf of the Australian Democrats. While
supporting the general thrust of the majority recommendation that
indexation should occur more than annually, the Australian
Democrats recommend that public sector superannuation pensions be
indexed quarterly to movement in the CPI, and investigations be
conducted on identifying an index that better reflects the cost of
living for aged pensions.(6)
Amendments to the Superannuation
Act 1922
Part XI of the Superannuation Act 1922
deals with pension increases on an after 1 July 1976. The major
amendments proposed by Schedule 1 of the Bill
(items 1-33) provide for twice yearly increases in
pensions in line with increases in the CPI. It is stated in the
Government's Explanatory Memorandum to the Bill that increases will
be paid where the CPI "measured in the March quarter is higher than
the highest of any index measured in a previous March quarter since
1985".(7) Under the amendments pensions will be able to
be increased either in January or July each year. Items
15 and 16 ensure that pension increases
flow to reversionary benefits following the death of a pensioner on
30 June or 31 December. Item 31 is a key operative
provision in relation to twice yearly pension increases and ensures
that increases become payable on the first pension payday after the
end of either 30 June or 31 December. Item 33
applies the amendments for the half-year commencing on 1 January
2002 and each subsequent prescribed half-year.
Amendments to the Superannuation
Act 1976
Part X of the Superannuation Act 1922
provides for annual increases in pensions payable under the Act in
line with increases in the CPI. The major amendments proposed by
Schedule 2 of the Bill (items
11-32) provide for twice yearly increases in pensions in
line with increases in the CPI. It is stated in the Government's
Explanatory Memorandum to the Bill that increases will be paid
where the CPI "measured in the March quarter is higher than the
highest of any index measured in a previous March quarter since
1985".(8) Under the amendments pensions will be able to
be increased either in January or July each year. Items
21 and 22 ensure that pension increases
flow to reversionary benefits following the death of a pensioner on
30 June or 31 December. Item 29 is a key operative
provision in relation to twice yearly pension increases and ensures
that increases become payable on the first pension payday after the
end of either 30 June or 31 December. Item 32
applies the amendments for the half-year commencing on 1 January
2002 and each subsequent prescribed half-year.
- http://www.comsuper.gov.au/pss/index.htm.
- Budget Measures 2001-02, Budget Paper No. 2, p.
134.
- House of Representatives, Hansard, 28 July 2001, p.
28819.
- Superannuation Legislation Amendment (Indexation) Bill 2001,
Explanatory Memorandum, p. 2.
- Senate Select Committee on Superannuation and Financial
Services, A 'Reasonable and Secure' Retirement? - The benefit
design of Commonwealth public sector and defence force unfunded
superannuation funds and schemes, April 2001, p. 45.
- Ibid., p. 63.
- Ibid., p. 4.
- Ibid., p. 7.
Ian Ireland
7 August 2001
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ISSN 1328-8091
© Commonwealth of Australia 2000
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