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Bills Digest No. 51  2001-02
Parliamentary Contributory Superannuation Amendment 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
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

Parliamentary Contributory Superannuation Amendment Bill 2001

Date Introduced: 27 June 2001

House: House of Representatives

Portfolio: Finance and Administration

Commencement: Royal Assent

Purpose

To amend the Parliamentary Contributory Superannuation Act 1948 to:

• defer the payment of parliamentary pensions for new Members and Senators that join the Parliament at or after the next general election until they reach the age of 55, become invalid or die, and
• provide for the payment of the deferred benefit in circumstances where the retired Member or Senator finds themselves in financial hardship.

Background

The Parliamentary Contributory Superannuation Act 1948 (the Act) provides a contributory superannuation scheme under which benefits are paid to former members of Parliament, their spouses, and orphan children.

The Parliamentary Contributory Superannuation Scheme (PCSS) is administered under the direction of the Parliamentary Retiring Allowances Trust (the Trust) which consists of five trustees: the Minister for Finance and Administration, plus two Senators and two Members of the House of Representatives. The PCSS is administered by the Department of Finance and Administration.

Membership

Membership of the PCSS is compulsory for all Senators and Members.

Contributions

Contributions are a fixed percentage of the parliamentary allowance (ie. backbench salary) and any additional salary payable for service as an office holder of the parliament. These rates are:

• 111/2 per cent of parliamentary allowance until the completion of 18 years service, and
• 53/4 per cent of parliamentary allowance after the completion of 18 years service.

These rates also apply to any additional salary.

Benefits

If retirement is voluntary, a Senator or Member is entitled to a retiring allowance (ie. parliamentary pension) after completing 12 or more years service or if he or she has ceased to be a member on 4 occasions. (An "occasion" occurs on the dissolution or expiration of the relevant House or the expiration of a Senator's or Member's term of office.) If retirement is involuntary (eg due to the loss of preselection or loss at an election), a Senator or Member is entitled to a retiring allowance if he or she has 8 or more years' service or if he or she has ceased to be a member on 3 occasions. (Senators who have 6 year terms achieve an "occasion" after the completion of 3 years of that term, as well as when the term expires.)

Senators and Members who do not qualify for a retiring allowance under these conditions may be entitled to a retiring allowance if the Parliamentary Retiring Allowances Trust (the Trust) is satisfied that the retirement is due to ill-health.

Where a Senator or Member does not become entitled to a retiring allowance he or she is entitled to a lump sum comprising the higher of:

• a refund of contributions plus a supplement;

• for voluntary retirement the supplement is 1 1/6 times the contributions, and where it is involuntary, the supplement is 2 1/3 times the contributions: or;

• a lump sum representing the Superannuation Guarantee minimum.

Benefits are reduced to take account of the superannuation contributions surcharge.

Rates of Retiring Allowance

The rate of retiring allowance is a function of years of service, as shown in the following table.

Between the completion of 8 and 18 years service each additional day's service attracts an additional retiring allowance of 0.00685 per cent of the parliamentary allowance.

Additional retiring allowance in respect of office holder service accrues at the rate of 6.25 per cent of the additional salary for each year the office is held, up to a maximum of 75 per cent for the highest paying office held, ie each day as an office holder attracts a benefit of 0.0171 per cent of additional salary.

Retiring allowances are increased in line with increases in parliamentary salaries.

Commutation

Former Senators and Members who become entitled to a retiring allowance, except by reason of ill health, may commute up to 50 percent of the retiring allowance to a lump sum. The lump sum is equal to the annual amount of retiring allowance commuted multiplied by the commutation factor. The commutation factor for ages up to and including 65 years is 10. The commutation factor reduces by 0.5 per year and reduces to zero at age 85. Examples of the commutation factor applicable at various ages are set in the following table.

Spouse Benefits

An annuity is payable to the spouse of a Senator or Member who dies in service irrespective of length of service. Spouse benefits are not payable to the surviving partner in a same sex couple. An annuity is payable to the spouse of a former Senator or Member if the marital relationship commenced before retirement from the Parliament. An annuity is also payable where the marital relationship commenced after retirement from the Parliament provided that it commenced before the former member was aged 60 or at least 5 years before his or her death. A spouse's annuity is 5/6 of a former member's retiring allowance. Where the annuity becomes payable to the spouse of a serving Member or Senator who died with less than 8 years service, the spouse's annuity is based on the benefit which would have been payable had 8 years service been completed.

Special Provisions

Where former Senators and Members who are entitled to a retiring allowance or their spouses who receive an annuity hold an office of profit under the crown, their benefit may be reduced. The retiring allowance or annuity is reduced above a threshold of 20 per cent of backbench salary at the rate of 50 cents in the dollar. A maximum reduction of 50 per cent of the retiring allowance before commutation applies.

Special provisions also apply to former Senators and Members who are re-elected to the Commonwealth Parliament or are elected to State or Territory legislatures, and to current Senators and Members who have received, or are entitled to receive, lump sum benefits under other superannuation schemes (including State or Territory parliamentary schemes).

PCSS Compared With Other Superannuation Schemes

The level of superannuation contributions made for members of Parliament by the Commonwealth is set under the Parliamentary Contributory Superannuation Act 1948. The above summary of the scheme only mentioned the member's contribution, which is equivalent to 11.5 per cent of the member's Parliamentary Allowances for the first 18 years of membership.

The PCSS is an unfunded defined benefit scheme. 'Unfunded' means that the scheme funds its benefit payments from annual appropriations as part of the Commonwealth Budget. 'Defined Benefit' means that the member's entitlement is, in general, a multiple of years of service and a percentage of salary.

The Australian Government Actuary provided details of the cost to the Commonwealth of funding the Parliamentary Contributory Superannuation Scheme. In such a defined benefit scheme, the employer is responsible for providing the difference between the benefit actually paid and what the member has contributed toward the benefit. The certainty comes from the fact that the employer is prepared to accept uncertain cost.

The Australian Government Actuary reported to the Department of Finance on the long-term cost of benefits provided under the PCSS in February 1997, based on data as at 30 June 1996. This advice is normally provided every three years, which is in accordance with common practice. The Department of Finance has provided no later figures to the Parliament.

At each of these reviews, the notional employer contribution rate is reported. This rate illustrates the effective cost of the Parliamentary Contributory Superannuation Scheme benefits as a percentage of the total salaries of scheme members, and was 69.1 per cent calculated as at 30 June 1996.

The significance of this figure should not be underestimated. In essence, this means that in order to fund a politician's superannuation benefit, the Commonwealth contributes the equivalent of 69.1 per cent of politician's total salary. In comparative terms, this level of employer funding of a superannuation benefit is very generous. The generosity of the scheme is demonstrated by comparing it with other superannuation schemes operated by the Commonwealth for its public servants.

This table shows how the level of employer assistance for the PCSS is 3 times the level of support for the CSS and 5.3 times the level of support of the PSS. This discrepancy is more apparent when compared with the level of compulsory superannuation paid by most employers under the Superannuation Guarantee scheme and industrial awards. The level of superannuation support an employer is required to provide to employees is prescribed under Federal and State industrial awards and the Commonwealth's superannuation guarantee (SG) scheme. Under award superannuation, the parties (generally unions and employers) are bound by an industrial agreement (or award) to make superannuation contributions to a superannuation fund nominated in the agreement. The level of support is normally not greater than 3 per cent of ordinary time earnings (although this varies between awards). The SG scheme requires all employers to provide a minimum level of superannuation support in each financial year for employees (with limited exceptions). The SG scheme operates in conjunction with award superannuation so that contributions made by an employer in conjunction with an industrial award may be counted towards the employer's superannuation guarantee obligations.

The table below shows the minimum level of employer support.

Is the PCSS Contribution Rate Excessive?

It is not the purpose of this paper to comment on the merit of the level of Commonwealth support for members of the PCSS, or on the more general issue of the adequacy or otherwise of the remuneration for elected federal officials. Others have made these arguments elsewhere.⁽¹⁾

There are arguments both for and against the current level of Commonwealth support. Some of these are discussed in this section. Although this is not a comprehensive summary of all of the arguments, in the interest of being balanced and fair, it does attempt to provide a response to the often-made criticism that the benefits provided in the PCSS are excessive.

It could be argued that, when compared with the SG, the level of support for politicians appears very generous. The following chart shows the rate of Commonwealth support for the PCSS, CSS and PSS compared with the statutory minimum level of support that must be provided to employees.

A direct comparison shows that the level of support to PCSS members greatly exceeds the level of employer for members of the two Commonwealth civilian superannuation schemes (PSS and CSS), as well as the statutory minimum level of support that must be provided to employees under SG.

A contrary view is that the level of support is not excessive since many of the tax concessions available to members of the public are not available to members of the PCSS. For example:

• Salary sacrificing up to 50 per cent of salary into superannuation is possible in both the public and private sectors, but not to Members and Senators. Salary sacrifice is a very effective way to maximise retirement income, but is not available to members of the PCSS.

• A contrary view is that membership of the PCSS is a de facto compulsory form of salary sacrifice.

• Members of the PCSS can not make unlimited un-deducted contributions to the scheme.

In addition, if it is inappropriate for elected officials to receive superannuation support in excess of the statutory SG minimum, it should also be inappropriate for anyone to have employer support in excess of this minimum. Few would argue that the statutory SG minimum is an adequate contribution rate for anyone.

PCSS Member Access to Superannuation Prior to the Age of 55

In 1994, the PCSS was amended to make it subject to the same preservation rules applying to all members of superannuation funds.

Section 26B of the Parliamentary Contributory Superannuation Act 1948 makes members of the scheme subject to the preservation rules that apply to the public in general (under the Superannuation Industry (Supervision) Act 1993). Section 26B is included below.

The section was inserted by the Superannuation Laws Amendment Act 1994, which received Royal Assent on 29 June 1994.

This section means that the superannuation benefits paid to members of the PCSS are subject to the same preservation laws that apply to the rest of the population. The Explanatory Memorandum to the Superannuation Laws Amendment Bill 1994, circulated by the then Minister for Finance, the Hon. Kim Beazley, MP stated:

If the PCSS is subject to the same preservation rules as applies generally, how is it possible for members to gain access to their superannuation prior to the age of 55 years? The answer is provided in the preservation rules, which are summarised below.

Preservation Rules

Preservation refers to the prudential regulatory requirement under the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations that certain superannuation benefits be maintained either in a superannuation or roll-over fund until permanent retirement or after the member reaches preservation age.

New preservation rules took effect from 1 July 1999 where all superannuation contributions (including member contributions) and superannuation fund investment earnings, from that date forward, are to be preserved till the member's preservation age. Pre-1 July 1999 non-preserved components of a member's superannuation entitlement generally retain their non-preserved status.

Preservation age is the age at which a fund member can gain access to benefits that have accumulated in a superannuation fund or Retirement Savings Account, provided the member has permanently retired from the workforce. The Government announced in the 1997 Budget that the preservation age would be increased from 55 to 60 years on a phased-in basis. By 2025, the preservation age will be 60 years for anyone born after June 1964, with the age 60 years preservation age being reduced by one year for each year that the person's birthday is before 1 July 1964. This means that persons born before 1 July 1960 will continue to have a preservation age of 55. The following table summarises the phase-in schedule:

Under the new preservation rules, a person will continue to be allowed to have early access to preserved benefits where the benefits are taken in the form of a non-commutable lifetime pension or lifetime annuity on termination of gainful employment, subject to the governing rules of the fund or Retirement Savings Account. Preserved superannuation benefits can be accessed on compassionate grounds and severe financial hardship.

This is the key: a person will continue to be allowed to have early access to preserved benefits where the benefits are taken in the form of a non-commutable lifetime pension or lifetime annuity on termination of gainful employment.

Despite making the PCSS subject to the generally applicable preservation rules, members can get access to their superannuation before reaching the age of 55 years. The level of funding of the scheme provides a substantial benefit (compared with a benefit comprised of only the SG minimum).

The PCSS enables members to commute the benefit (ie. convert the benefit from a pension to a lump sum). Although the preservation rules only apply to non-commutable pensions, through a legal technicality, PCSS members are able to commute. This legal technicality relates to the rules of statutory interpretation that provide that a specific provision (in relation to politicians pension) overrides a more general provision (in relation to the preservation rules that apply generally).

Recent Public Debate on Parliamentary Superannuation

This section details recent developments in the public debate on parliamentary superannuation.

In 1997, the 25^th Report of the Senate Select Committee on Superannuation examined the PCSS. The report is titled The Parliamentary Contributory Superannuation Scheme & The Judges' Pension Scheme. No changes were made to the PCSS following the release of that report.

On 5 March 2001, the Independent Member for Calare, Mr Peter Andren, MP introduced a private members bill to reform the PCSS. His Bill, the Parliamentary (Choice of Superannuation) Bill 2001 was introduced into the House of Representatives on 5 March 2001. On 27 March 2001 the Senate referred Mr Andren's Bill to the Senate Select Committee on Superannuation and Financial Services for examination and report. Mr Andren's Bill intends to amend the Parliamentary Contributory Superannuation Act 1948 to give Senators and Members of the House of Representatives the freedom to opt out of the PCSS.

Mr Andren's Bill received considerable media coverage. For example, on 17 May 2001, the Channel 9 TV program "A Current Affair" canvassed community views on the parliamentary superannuation. The Senate Select Committee on Superannuation and Financial Services subsequently received more than 2,500 submissions, 35 petitions with nearly 1500 signatures, as well as nearly 700 e-mails and other items of correspondence in relation to Mr Andren's Bill.

On 9 August 2001, the Senate Select Committee on Superannuation and Financial Services tabled Report on the Provisions of the Parliamentary (Choice of Superannuation) Bill 2001. The Committee recommended that "the issue of parliamentary superannuation be considered by the Remuneration Tribunal as part of a consolidated package comprising salaries, superannuation and allowances."⁽²⁾

Mr Andren's Bill has not been debated.

Basis of Policy Commitment

On 3 June 2001, the Minister for Finance and Administration, the Hon. John Fahey, MP announced that the Government was considering the future of the PCSS.⁽³⁾

In the face of considerable public and press editorial criticism of the PCSS, the Prime Minister announced that he would support amending the PCSS to prevent access to benefits prior to the age of 55 years.⁽⁴⁾

On 26 June 2001, the Minister for Finance and Administration, the Hon. John Fahey, MP announced that the Government would be amending the PCSS in the manner outlined below.

ALP's Position

When asked about the ability of Members and Senators to access their superannuation prior to the age of 55, the Leader of the Opposition responded as follows:

Australian Democrats' Position

The Australian Democrats criticised the Government's proposals as being "too little, too late."⁽⁷⁾ Senator Lyn Allison stated:

• the Howard Government fails to tackle the enormous generosity of taxpayers' contributions which are still far higher than they should be.
• The Government Bill does not address the high contribution made by taxpayers and does not apply to current parliamentarians.
• It is an outrageous double standard to suggest that this group of Members and Senators can deny new parliamentarians, who come in at the next election, the generous benefits that they themselves are not prepared to forego.

The Australian Democrats have proposed an alternative to the Government's approach in the form of amendments to the Superannuation Legislation Amendment (Post-Retirement Commutations) Bill 2000, that would:

• give MPs the choice of 'opting out' of the PCSS and into an accumulation scheme, recommended by the Democrats in the report of the 1997 Senate Inquiry into Parliamentary Superannuation and more recently by Mr Peter Andren's Private Member's Bill;
• reduce benefits to match public service pension rates. While the highest level of a parliamentary pension is currently 75 per cent of final salary, the Democrats would cut it to a maximum of 52.5 per cent which matches the highest public service pension rate reached after 40 years service. Other rates would be cut proportionately;
• preserve benefits until age 55;
• apply to current Members and Senators; and
• remove discrimination against same sex partners of politicians.

Australian Greens' Position

The Australian Greens criticised the Government's proposal as a "feeble attempt to reform superannuation" and "hugely controversial."⁽⁸⁾

The Australian Greens support amending the Government's proposal to:

• ensure present politicians are subject to the provisions requiring politicians to reach the age of 55 before they can claim their superannuation, and
• give politicians the choice to opt out of the generous politics scheme and opt for a regular scheme of their choice.

They also propose that the Government's Bill be referred to the Select Committee on Superannuation and Financial Services.

Main Provisions

The Bill is quite short amounting to a total of 8 pages. All of the amendments are in Schedule 1.

Item 3 inserts a new Part VA into the Act. The new rules are designed to ensure that the payment of a retiring allowance to an elected representative on cessation of membership of the PCSS will be deferred until the person has reached the age of 55. There are some exceptions to this deferral. The new rules apply to persons who become members of the PCSS after the first general election after the Bill commences or subsequent to that election. The new rules do not generally apply to existing Members and Senators when they cease being members of the PCSS, but could apply in certain circumstances if they are subsequently re-elected. For example, the new rules will apply to a person who is currently in receipt of retiring allowance or who has received a lump sum benefit from the PCSS and who again becomes a Member or Senator at the next general election or subsequent to that election.

The following amendments to the Parliamentary Contributory Superannuation Act 1948 are inserted by item 3.

Proposed section 22DA inserts definitions of new terms that are needed for introducing deferred retiring allowances. The new definitions include deferral day, deferral period, deferring member, and transitional general election.

Proposed new section 22DB describes when a person is a deferring member and subject to the deferral of the payment of retiring allowance. With certain exceptions the section describes a person who is elected to Parliament at the transitional general election or who becomes a Senator or Member by any means after that time.

The section also clarifies the persons who are subject to deferral by stating circumstances where a person is not a deferring member, namely, persons entitled to a parliamentary allowance immediately before the "transitional general election," who are re-elected at that election and are Senators or Members continuously until they were no longer an elected representative. That continuity is not broken where a person resigns from, or otherwise ceases to be a member of, one House and is elected to the other House within a period of 3 months.

Proposed Section 22DC states that a retiring allowance (other than an invalidity benefit) becomes payable from the PCSS member's 55^th birthday. The person will also not be entitled to make an election for commutation of their retiring allowance until age 55. A surviving eligible spouse or eligible children will, however, be able to receive an annuity following the death in service of a Senator or Member or where a Senator or Member dies prior to their 55^th birthday.

Proposed Section 22DD states that where a Senator or Member covered by the deferral provisions can receive their retirement allowance prior to the age of 55 when they become invalid (ie, meet the invalidity provisions for members under the Act). An invalidity determination of the Trust under this section is subject to a review by the Trust at least every 2 years that may result in the revocation of the determination and the further deferral of the payment of the retiring allowance.

Proposed sections 22DF, 22DG and 22DH mirror other provisions of the Act in relation to the procedures for invalidity retirement of a person who is still a member and related reviews.

Proposed Section 22DI states that the PCSS Trust may authorise the early payment of a portion of the retirement benefit on the grounds of "severe financial hardship" and "compassionate grounds." This decision will be in the form of a determination that also reduces the deferred benefit to become payable at age 55 as a consequence of the early release of part of the benefit.

The proposed section also provides a regulation making power to prescribe grounds for the payment of part of the retiring allowance that has been deferred. Before the regulations are made, the Minister must be satisfied that the grounds for payment are substantially similar to the conditions of release provided for under the Superannuation Industry (Supervision) Regulations 1994 in relation to "severe financial hardship" and "compassionate ground."

Concluding Comments

The provisions of this Bill significantly tighten the ability of a future member of Parliament to receive a parliamentary pension. Once a new member of the PCSS serves the required number of years in the Parliament, they will have to wait until the age of 55 years until they are eligible to receive their parliamentary pension. Existing Members of Parliament are quarantined from the effects of this Bill, thereby enabling them to continue to be eligible to receive a parliamentary pension before the age of 55 if they qualify for a pension.

It should be noted that this Bill imposes a higher standard of preservation on members of Parliament than applies to other Australians who receive superannuation pensions or annuities. With the passage of this Bill, future Members and Senators that are members of the PCSS will be the only superannuation fund members in the country that re not eligible to receive a non-commutable lifetime pension or lifetime annuity on termination of gainful employment.

Some members of the public may be tempted to indulge in a little scepticism about the application of this Bill, in particular, the decision not to apply the provisions to existing Members and Senators. Sceptics tend to paraphrase the concupiscent St. Augustine in The Confessions (where he prays "give me chastity, but not now") by claiming that the Bill requires future Members and Senators to be more moderate, but not existing ones.

Endnotes

2. See The Australian, "No respect for MPs without super reform," 7 June 2001; Australian Financial Review, "Super stains salary strike," 5 June 2001; The Courier Mail, 'Hypocrisy on MP super," 9 March 2001.

3. Senate Select Committee on Superannuation and Financial Services, Report on the Provisions of the Parliamentary (Choice of Superannuation) Bill 2001, Canberra, 9 August 2001, p. 21.

4. The Sydney Morning Herald, "Fahey signals review for MPs' super benefits,' 4 June 2001.

5. The Hon John Howard, MP, Media Interviews, "Transcript of he Prime Minister The Hon. John Howard, MP: Television interview with Mike Munro, 'A Current Affair' Channel 9," 4 June 2001.

6. The Hon. John Fahey, MP, Minister for Finance and Administration, Parliamentary Superannuation Amendments, Media Statement 31/01, 26 June 2001.

7. The Hon. Kim Beazley, MP, Doorstop Interview, Parliament House, Canberra 5 June 2001.

8. Senator Lyn Allison, Last Ditch MP Super Bill Inadequate, Press Release Number: 01/377, 27 June 2001.

9. Senator Bob Brown, Government Ambush on Politicians' Superannuation, Media Release 28 June 2001.

Contact Officer and Copyright Details

David Kehl
12 September 2001
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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and their staff but not with members of the public.

ISSN 1328-8091
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Published by the Department of the Parliamentary Library, 2001.

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