Home page
> Management Advisory Committee > Organisational renewal > Research methodology
‹ Previous page

Last updated: 20 March 2003

Organisational renewal

MAC

The Management Advisory Committee (MAC) is a forum of Secretaries and Agency Heads established under the Public Service Act 1999 to advise the Australian Government on matters relating to the management of the Australian Public Service

Go to the MAC page

Appendix C: Superannuation for APS employees: Effects on organisational renewal

Superannuation - Summary and key findings
The superannuation environment
Overview of superannuation arrangements for APS employees
The Public Sector Superannuation Scheme (PSS)
The Commonwealth Superannuation Scheme (CSS)
Managing 54/11
The effect on PSS and CSS benefits of working part-time or at a reduced level towards the end of an APS career

Superannuation-Summary and key findings

The major superannuation schemes for the APS, the PSS and the CSS, provide retirement benefits from age 55. Their basic design therefore supports early retirement. This is evidenced by a sharp decline in members around age 55, with very few members working past age 60. Both schemes have other design features that may influence some older members to retire early.

In respect of the PSS, there is insufficient evidence that the provisions limiting the amount of benefits that can accrue in the scheme for some members (the Maximum Benefit Limit-MBL) are creating a significant retention problem. The scheme design allows sufficient flexibility for most employees to avoid reaching their MBL before their planned retirement age.

An actuarial analysis suggests that very few members are likely to reach their MBL (less than 2% by age 55). Should individual cases arise where a PSS member is likely to reach their MBL and this has the potential to affect retention, agencies have options to deal with this.

For the CSS, some members have been able to receive a better benefit by resigning before retirement and deferring their entitlements than if they had remained in employment until age 55 or later. This is an original design feature of the CSS that has become more attractive for some longer serving members for several reasons including the high crediting rates in recent years.

Actuarial modelling of CSS benefits shows that, for the large majority of CSS members covered by that model, there is some financial incentive to resign and take a 54/11 exit. For some members the incentive is significant.

The number of CSS members who resign at age 54 is currently about 500 to 600 annually. This is about 40% of all CSS members who reach age 55 in any given year (but is only about 20% of all APS employees of that age who were PSS or CSS members).

As the CSS has been closed to new members since 1990, the number of CSS members (including those who may have an incentive to resign before retirement) is rapidly decreasing. Also, the current new investment climate of lower interest rates could be expected to have some effect on the number of CSS members who decide to resign at age 54, given the CSS Fund zero crediting rate in 2001-02 and the current zero exit rates for 2002-03.

Where individual employees are targeted for retention, agencies have a number of options available to them, including where an employer sees a need to negate a perceived or actual disincentive to continue APS employment, such as for CSS members aged 54.

These options include increasing a member's superannuation salary (without increasing their take home pay) or allowing an employee to have more flexible working arrangements. Increasing a member's superannuation salary can negate the incentive for CSS members to resign at age 54 by raising the standard pension on retirement on or after age 55 by a negotiated amount so as to narrow or remove the gap between it and the deferred pension.

For APS employees, there is an apparent misconception that having a staged retirement by 'going part-time' or moving to a lower level of work (or both) in the years leading up to retirement from the APS has a detrimental effect on the PSS or CSS benefit paid in retirement. This is not the case and equitable arrangements apply to the calculation of PSS and CSS benefits where this occurs.

Employers are likely to need to develop more flexible employment options, to manage the incidence of valued employees resigning at age 54 or retiring around age 55. Agencies that seek to actively manage this risk by targeting relevant employees with retention strategies, should do this well before the targeted staff have planned their retirement.

An awareness-raising exercise, directed at both employers and employees, could improve the level of knowledge of the options available and their use.

The superannuation environment

Industry regulation and retirement income policy

The framework for regulation of superannuation is contained in the Superannuation Industry (Supervision) Act 1993 and regulations (SIS). Among other things, SIS prescribes standards that must be met by funds that have elected to be regulated under SIS. Complying regulated funds are eligible for concessional taxation treatment.

The PSS and CSS are regulated superannuation funds under SIS and must therefore meet the SIS requirements. Some relevant requirements are set out below.

Restrictions on benefit payment and preservation age

SIS prescribes the circumstances when a person's superannuation benefit can be received and requires that lump sum benefits must generally be preserved until preservation age.

Recent government initiatives include:

New minimum preservation ages gradually increase from 55 to 60 (for people born on/after 1 July 1960). The effect of this is that some younger PSS and CSS members will not be able to access any lump sum component of their preserved benefits until at least their preservation age.
All member and employer superannuation contributions accrued on or after 1 July 1999 must generally be preserved until preservation age unless they are paid as a pension. The limit on any lump sum benefit that can be paid in cash to a fund member prior to their preservation age is referred to as the 'SIS Upper Limit'.

Restrictions on reduction of accrued benefits

SIS imposes restrictions on altering accrued benefits. Specifically, a beneficiary's right or claim to accrued benefits and the amount of those accrued benefits must not be altered adversely except in very limited circumstances. These include the consent of the beneficiary or the consent of the Regulator or, for example, to rectify a proven mistake.

Taxation

The existing superannuation framework operates under a complex system of tax concessions designed to encourage superannuation savings for retirement and to encourage timely receipt of the benefits upon actual retirement.

An important aspect of taxation that, together with the superannuation surcharge, may be relevant to the retention of higher income earners, is the Reasonable Benefit Limit (RBL). This limits the amount of benefit on which taxation concessions are available to any individual and is a flat, indexed to Average Weekly Ordinary Time Earnings (AWOTE) limit which, for 2002-03 is $1,124,384 for a pension benefit and $562,195 for a lump sum benefit. Some PSS and CSS members may have a 'transitional RBL', higher than the flat rate RBL, as a consequence of the transition from the tiered RBL arrangements that applied previously.

Overview of superannuation arrangements for APS employees

As at 30 June 2002, superannuation arrangements that applied in respect of APS employees consisted of:

the Public Sector Superannuation Scheme (PSS) of which APS employees were members
the Commonwealth Superannuation Scheme (CSS) of which APS employees were members
superannuation guarantee type arrangements, with schemes such as Australian Government Employees Superannuation Trust (AGEST), which applied, generally, to the remaining APS workforce.

The CSS was closed to new members in 1990 and membership of the PSS continues to be mandatory for all new ongoing employees and optional for non-ongoing employees.

Figure 29, below, shows the age profiles of (APS) PSS and CSS members.

Figure 29: Age profile-APS combined PSS and CSS membership, 30 June 2002

Source: CSS/PSS Data

The Public Sector Superannuation Scheme (PSS)

Background

The PSS is a fully defined benefit scheme that commenced in 1990. Scheme membership is generally compulsory for ongoing employees (full-time and part-time) and available to certain non-ongoing staff, including casuals, and statutory office holders.

Member contributions are a minimum of 2% and a maximum of 10% of superannuation salary.

Further information on the PSS is available from the PSS Board's website at http://www.pss.gov.au, or from ComSuper, the PSS Administrator on phone number 132 366.

Benefit accrual

PSS benefits are expressed in terms of 'Benefit Multiples' which, in most cases, are derived from the member's period of membership and rate of contribution to the scheme.

Member contributions of between 2% and 10% can be varied at any stage during membership. The employer component of the benefit varies according to the level of member contributions but, generally, the more the member contributes the higher the benefit multiple.

For example:

Where the member contributions are 2% per annum, the benefit multiple that accrues for that year is 0.15.
Where the member contributions are 5% per annum, the benefit multiple that accrues for that year is 0.21.
Where the member contributions are 10% per annum, the benefit multiple that accrues for that year, in most cases, is 0.31.

However, there is a '10 year rule' that restricts the level of benefit multiple that may accrue, in certain circumstances. In other words, for a ten year period of membership in the PSS-not necessarily a continuous period or the first ten years-the maximum benefit accrual will be based on an average member contribution of 5% per annum, regardless of whether the member is contributing above that amount.

Also, the PSS benefit accrual is subject to a maximum benefit limit (MBL). This is generally 8 times the member's final average salary (FAS) for lower paid members and reducing for higher paid members.

Simply put, the benefit that accrues is a lump sum benefit of the member's Accrued Benefit Multiple (i.e. the sum of all the member's Benefit Multiples) multiplied by the member's FAS. FAS is generally the average of the member's salary for superannuation on the three birthdays preceding exit. Examples of benefits that might accrue are:

The retirement benefit of a member retiring with a FAS of $55,000 and an Accrued Benefit Multiple of 6 will be a lump sum benefit of $330,000.
The benefit of a former graduate entrant who leaves the scheme after, say, 15 years of service with a FAS of $80,000 and an Accrued Benefit Multiple of 3 will be a preserved benefit of $240,000 at the time of resignation.

The PSS offers a range of benefit options, depending upon the circumstances in which the member leaves the scheme. However, all benefits are based on the lump sum calculated from the sum of the member's benefit multiples applied to the member's FAS.

The Maximum Benefit Limit issue

The MBL is indicative of the maximum amount that the employer is normally prepared to contribute in respect of an employee. When members reach their MBL they cease making contributions to the scheme and real growth of the benefit is limited to salary growth. The '3%' employer productivity contributions also cease; however, employers continue to pay those employer contributions in respect of the employee that are directed to the Consolidated Revenue Fund.

There is some scope for individual members to 'manage' the point at which they reach their MBL. Members are advised of their Accrued Benefit Multiple in their annual PSS statement. It is open to them to reduce their rate of contribution so that the MBL is reached at, or close to, their planned date of retirement.

Actuarial data was compiled to determine if all current PSS members paid future member contributions of 5% of salary, how many are likely to reach their MBL and the age at which they might reach it. The data shows that, allowing for exits from the scheme on current exit trends, only a small percentage of PSS members are likely to reach their MBL by age 55 (less than 2% by age 56).

PSS data shows that after 12 years of scheme operation, only 123 of the 8,000 PSS pensioners were at their MBL when they retired, and of all current PSS members, there are only 131 that have reached their MBL. Of those pensioners/members who reached their MBL about two-thirds were making member contributions at the rate of 10%.

Overall, the available data shows a low incidence of PSS members who have reached or are likely to reach their MBL and the majority of those who did were making member contributions at the maximum member contribution rate. The available evidence suggests that the PSS MBL is currently not a retention issue.

Managing the Maximum Benefit Limit

Despite the fact that there is no evidence the MBL is a retention issue, there are a number of options open to employees and employers to ensure that PSS membership does not adversely impact on APS employment.

First and foremost, employees can actively monitor their Accrued Benefit Multiple to proactively manage this accrual and, assuming they do not want to reach their MBL before retirement, vary their contributions as appropriate so that they reach their MBL close to their planned retirement age.

For a very small number of employees, significant salary growth may mean that their MBL, although still relatively high, is reached earlier than for most other employees.

However, even in this circumstance, employees with, say, an MBL of 6.3 x their FAS (i.e. their average superannuation salary used to calculate this MBL would be approximately $150,000) would still require around thirty years, at an average contribution rate of 5%, to accrue their MBL.

Where an employee has reached their MBL and the employer regards this as a retention issue that should be addressed, there are options available to the employer both within and outside the superannuation framework that can be used as an incentive to encourage the employee to remain in continued APS employment. For example, the superannuation framework does not restrict employers from, say, increasing an employee's remuneration to reflect the rate of productivity contribution that had previously been paid on behalf of the employee to the PSS Fund.

Other strategies for retaining older workers in the APS

As well as the MBL issue, the PSS design may encourage APS employees to retire at any time on or after age 55. For example, PSS members who reach their minimum retirement age, generally age 55, can retire and receive a pension that is fully indexed to movements in the Consumer Price Index. This benefit may act as an incentive for early retirement.

There are options that an APS employer may wish to offer an employee who is targeted for retention. These options, which rely on changes to an employee's terms and conditions of employment, can be implemented either separately or as a package of incentives.

More specifically, the PSS facilitates more flexible arrangements that may suit those older workers who are considering retirement but who may be attracted to working fewer hours and/or taking a less demanding job. APS employers are also permitted to include superannuation in any salary sacrifice arrangement that might be developed (to an arrangement outside of the PSS, which does not accept salary sacrifice contributions).

Employees considering part-time or reduced level of work would need to ensure that their personal financial circumstances can accommodate the resulting reduction in take home pay including, where relevant, allowing for factors such as continuing to pay employee superannuation contributions on the basis of their former (higher) salary. (Member superannuation contributions are generally based on the recognised superannuation salary and where a salary reduction occurs, superannuation salary would usually continue to be the former higher salary.)

The options outlined above may rely in part on an employer's discretion to alter an employee's terms and conditions of employment including incentives such as remuneration or the form in which that remuneration is paid. There is some evidence that, while this may be possible for APS employees, there is significantly less flexibility for Secretaries and certain statutory office holders, whose remuneration and terms and conditions of employment are subject to legislation and the determinative powers of the Remuneration Tribunal.

The Commonwealth Superannuation Scheme (CSS)

Background

The CSS is a part defined benefit and part accumulation superannuation scheme that commenced in 1976. It was designed during an era of the 30 to 40 year APS career service, to meet the retirement income needs of both the employee and his or her spouse in retirement.

Scheme membership was generally compulsory for ongoing employees (full-time and, since the mid 1980's, part-time) and available to certain non-ongoing staff and full-time statutory office holders.

Member contributions are a minimum of 5% and a maximum of 10% of superannuation salary.

Further information on the CSS is available from the CSS Board's website at http://www.css.gov.au, or from ComSuper, the CSS Administrator on phone number 132 366.

Relevant design features

Resignation prior to age 55

Whenever a member resigns at any age prior to reaching age 55 and then chooses to preserve their benefit in the CSS rather than receive an immediate lump sum benefit, the member becomes a 'deferred benefits member'.

The pension benefit that is payable to a deferred benefits member, in prescribed circumstances on or after reaching age 55, is a preserved pension. For convenience, the preserved pension that is payable to a deferred benefits member is referred to here as a deferred pension.

The deferred pension is based on a multiple of (2.5 times) the member's own basic contributions (5% of superannuation salary) with interest at the CSS Fund crediting rate and multiplied by the pension conversion factor for the member's age at the point of pension commencement. These factors range from 0.0925 if the deferred pension is taken at age 55 to 0.11 if the pension is taken at age 65. For example, a deferred pension that commences at age 55 based on a member's basic contributions and interest of, say, $150,000 would be:

$150,000 x 2.5 x 0.0925 = $34,687 per annum.

As well as the deferred pension, the member's accumulated contributions (i.e. all contributions paid and interest accrued) can either be paid as a lump sum or can be used to purchase additional non-indexed pension (generally up to a maximum of a further 20% of equivalent final salary).

Similarly, members can choose to take a refund of their accumulated employer productivity contributions (comprising all employer productivity contributions and interest) or these can be used to purchase additional pension.

Standard pension

The 'normal' retirement benefit in the CSS is a standard pension that is a percentage of final salary, based on the member's age and length of service. For example, the CSS provides, for a member retiring at age 65 after 40 years service, a pension of 52.5% of their final salary.

There is a 'front end loaded' accrual rate for the standard pension, being, at age 65:

2% of final salary per complete year of scheme membership for the years 1 to 20.
1% of final salary per complete year of scheme membership for the years 21 to 30.
0.25% of final salary per complete year of scheme membership for the years 31 to 40.

There is also an additional prorated accrual if the person's last year of membership is a part year.

An APS member can retire at any time from reaching age 55 and, where this occurs, the percentage is calculated as if the person was age 65 and the percentage is then discounted for early payment. The discount rate is 2% per year for each year less than age 65, to age 60, and 3 1/3% per year for each year less than age 60. For example, the percentage of final salary used to calculate the standard pension for a member retiring at age 65 with 30 years contributory service is 50%. However, if the member had been age 63 with 30 years service at retirement, the discount would be 4% of 50%, giving a percentage of 48%.

In addition to this benefit, the member has the same options in respect of accumulated contributions and accumulated productivity contributions as apply in the case of a deferred pension.

Where an APS member retires on age retirement on or after reaching their 55th birthday, the only benefit to which they have an entitlement is a standard pension plus the relevant lump sums or additional pension. That is, they lose eligibility for the deferred pension unless they have resigned from employment before reaching age 55.

What is the CSS 54/11 issue?

Some CSS members who are approaching age 55 find that the amount of the standard pension they would receive upon retirement at that age is less than the deferred pension they would receive if they resign at age 54 and 11 months and then take the deferred pension at age 55.

The CSS was not designed with the intention that the preserved benefit should be greater than the defined benefit. The legislative provisions underlying the alternative benefits have been a design feature of the CSS for over 20 years and for most of the years of CSS operation, there has only been a small number of individuals for whom the preserved benefit was higher at age 55. The significant increase in the 54/11 benefit level started in the mid 1990s, when there was a period of high investment returns.

The deferred pension is generally higher where the member has longer service and/or has a 'high' accumulation of basic contributions and interest, relative to their superannuation salary. That is:

For longer serving members, this may be the result of growth in the comparative standard pension 'falling away' because the 'front end loading' of the pension accrual, as explained above, results in a slower rate of growth later in service.
The compounding effect of the accumulation of basic contributions plus interest (the basis for calculating deferred pensions) is magnified where there are sustained high interest earnings in later years of membership, and/or a career profile with higher salary growth, with consequential higher member contributions, in earlier years of membership.

In some cases the person may have to continue in employment significantly beyond age 55 to make up the difference. On the other hand, some members have a higher standard pension than a deferred pension and are not affected by the 54/11 issue.

Examples are set out below of two hypothetical members at age 55, with a final salary of $70,000 per annum:

	Member profile	Standard Pension at 55 Percentage of final salary - based on length of contributory membership and age.	Resign 54/11, Take Deferred Pension at 55 Member's basic contributions + interest x 2.5 x a factor relevant to age.
1	Age 55 and 30 Years Service	Percentage is 37.5%	Factor at age 55 is .0925
1	Pension Payable	$70,000 x .375 = $26,250 pa	$150,000 x 2.5 x .0925 = $34,687 pa
2	Age 55 and 20 years Service	Percentage is 30%	Factor at age 55 is .0925
2	Pension Payable	$70,000 x .3 = $21,000 pa	$85,000 x 2.5 x .0925 = $19,656 pa

In Example 1 above, the member has 30 years service and the member's own basic contributions accumulated with interest (member contributions) are $150,000. In this case, the member would be some $8,000 per annum better off with a deferred pension than with a standard pension.

In Example 2 above, the member has 20 years service and the member's contributions are $85,000. In this case, the member would be about $1,350 per annum better off with a standard pension than a deferred pension.

These examples show that members with longer service and a higher ratio of member contributions to final salary are more likely to have an entitlement to a higher deferred pension. In Example 1, with salary growth of 4%, the member would have to work almost until age 59 before the standard pension was a higher benefit than the level of the deferred pension at age 55.

In contrast, members with shorter service have the benefit of the higher CSS accrual rate of 2% of salary per annum in the first 20 years (discounted for retirement at an age below 65).

Impact of the 54/11 issue

Actuarial models

In order to compare the level of the deferred pension and standard pension for the average CSS member and for the longer-serving CSS member, a 'Typical Member' and an 'Age 23 Joiner' were actuarially derived using a range of membership data such as age, length of service and fund crediting rates (including the impact of a sustained period of low crediting rates).

These models found that, for those CSS members covered by the models, the large majority who will reach age 55 over the next 10 to 15 years are likely to have some financial incentive to leave via the 54/11 route. While a sustained period of low interest rates would reduce the financial incentive to resign at 54/11, it is still likely to leave many members who are covered by the model with some financial incentive to do so.

How many 54/11 exits are there?

Normally, data trends over recent years would be used both to determine the current rate of 54/11 exits and to predict future such exits. This was not done, primarily because the years 1997-98 to 1999-2000 were not considered representative of future trends owing to the very large number of redundancies in those years. Data for 2000-01 and 2001-02, were therefore relied on (to estimate trends for future 54/11 exits).

CSS data shows that:

In the 2000-01 year there were 1,129 CSS members who reached age 55. Of these, a total of 567 left and 562 stayed. Of the ones who left, 438 (or 38% of all members who reached age 55 during the year) resigned while they were age 54.
In the 2001-02 year there were 1,418 members who reached age 55. Of these, a total of 748 left and 660 stayed. Of the ones who left, 593 (or 41.8% of all members who reached age 55 during the year) resigned while they were age 54.

Looking forward, around 18,500 APS employees who are CSS members will reach age 55 over the next 15 years. This is about 70% of all current CSS members, many of whom may leave the APS before they reach age 54/11. Of the remaining 30% of current members, about half are already aged 55 or older and half are aged less than 40.

Based on the 2000-01 and 2001-02 data, a trendline was projected to estimate the number of 54/11 exits over that period. This data is highly sensitive to factors including future retrenchment trends, economic conditions (such as the current zero crediting rate) and any successful employer retention strategies that might be employed.

An estimate of 54/11 exits assumes that about 40%, or slightly more, of CSS members who are approaching age 55 will take a 54/11 exit. This would result in about 570 exits in 2002-03, which may rise to just above 600 in 2004-05 then gradually fall to around 300 in 2016-17.

Managing 54/11

Where a CSS member is approaching age 55 and has a financial incentive to resign at 54/11 and take a deferred pension, there are several means available to either employees or employers to manage this situation. Overall, whilst these arrangements are not directly designed to address retention issues, they do accommodate employer and employee needs in a range of circumstances.

Resign and return approach

Some CSS employees resign immediately before reaching age 55 (to obtain entitlement to a deferred pension) and at some later point return to some form of employment in the Australian workforce, on either a full-time or part-time basis. One aspect of a decision whether or not to return to employment in some form is the impact that may have on their superannuation entitlements.

Where a former employee has resigned from the APS and payment of their CSS deferred pension has commenced and they subsequently change their minds and re-enter the APS, payment of the CSS pension continues. If they re-enter as ongoing employees they become members of the PSS upon commencement. Where they re-enter as non-ongoing employees they may have the option of PSS membership or a Superannuation Guarantee type arrangement in a scheme such as AGEST.

However, where payment of a person's deferred pension has not commenced and that person returns to public sector employment in certain circumstances, for example as an ongoing employee, they will resume CSS membership and their right to a deferred pension will be cancelled.

Pre-arrangement of a return prior to resigning may, in some circumstances, result in employees being treated as if the membership had continued. That is, the employee would not have an entitlement to a deferred pension.

Where a former employee returns to APS work as an employee or contractor of a body that supplies resources to the relevant agency, their future superannuation is provided by that body and it is of no consequence whether or not they are CSS pensioners or deferred benefits members at that time.

Increase CSS salary for superannuation

There are existing arrangements which allow the employee to remain in continuing employment and retain CSS membership, whilst working on either a full-time or part-time basis, but without financial disadvantage to the employee's eventual pension. This is the ability for the employer to specify a 'superannuation salary' in the member's AWA or certified agreement that is higher than the person's salary (without increasing their takehome pay). This arrangement was introduced for a reason unrelated to the 54/11 issue but nevertheless can be used in this circumstance to raise the standard pension by a negotiated amount so as to narrow or remove the gap between the two alternative pensions.

For employers, this option will not increase the cost of salary paid to the employee but will increase employer superannuation contributions to some extent. The nominal employer superannuation contribution will increase in line with the increase in the employee's superannuation salary. Also, the contribution rate increases for an agency where its individual overall superannuation salary growth is above average. However, an agency can control this impact by limiting the use of this option to select cases in respect of individual employees. Detailed analysis of the costs an agency could incur by using this option was not conducted because an actuarial triennial review of the overall costs of the CSS, due to be completed during 2002-03, would supersede any such analysis.

For employees, consideration of this option should take into account each employee's own financial circumstances to ensure that they can afford to make contributions on the higher superannuation salary. Those contributions would most likely increase from their next birthday following the increase in superannuation salary.

The following examples illustrate how the superannuation salary could be used to narrow or negate the gap in pensions on retirement:

	Age when considering retirement / (years of membership)	Salary / Accumulated contributions	Possible CSS pension if resigned 54/11 and retired at age 55	Superannuation salary (ie not necessarily actual salary)	Age at actual retirement / years of membership	Pension on eventual retirement
3	Age 54/11 (30 years)	$70,000 pa Accumulated contributions $150,000	$34,687 pa¹⁹ (54/11 benefit possibly paid from age 55)	$92,500 pa (ie employer agrees to higher salary)	55 (30 years)	$34,687 pa
4	Age 54/11 (30 years)	$70,000 pa Accumulated contributions $150,000	$34,687 pa¹⁹ (54/11 benefit possibly paid from age 55)	$81,368 pa (ie employer agrees to higher salary)	58 (33 years)	$34,687 pa

In example 3 above, a CSS member with 30 years membership at age 54/11, a superannuation salary of $70,000 and accumulated member contributions and interest of $150,000 could have a deferred pension of $34,687 per annum, as compared to a standard pension, if they worked till age 55 and then retired, of $26,250 per annum (not shown in the table above). In this example, it would be necessary to raise the CSS superannuation salary to about $92,500 if it were intended to provide the member with a standard pension of $34,687 per annum at age 55.

Example 4 outlines an alternative option for employers where it may be desirable for an employee to continue in employment for, say three years. In this case the deferred pension payable if the member resigned before age 55 ($34,687 per annum) would be compared to the standard pension on retirement at an intended retirement age of, say, 58 (i.e. with 33 years service, this would result in a standard pension of 42.630% of final salary). Therefore if the employer increased the final superannuation salary at age 58 to $81,368 (i.e. $34687/0.42630) this would preserve the level of standard pension on retirement that would have been payable had the employee resigned at age 54 and subsequently retired.

It should be noted, however, that neither of the above examples take into account factors such as variations in the standard pension by annual indexation or changes in interest rates, the utility of a higher employment income for additional periods of employment or any value to the employee of negating or merely narrowing the gap between the standard and deferred pensions. Also, these examples do not take into account any impact superannuation salary has on benefits in the event of death or invalidity retirement while a contributor.

An employer wishing to be proactive in retaining such an employee and intending to use this option would need to obtain benefit estimates significantly before the prospective retirement is due and to negotiate retention before the employee starts implementing retirement plans.

As outlined in example 4, this arrangement may be seen to be more useful where the agency seeks to retain an employee for a significant period, such as two or three years. It also enables the agency to target individual employees for retention (i.e. avoids a 'blanket' offer to all employees who are approaching age 55).

Importantly, this increase of CSS superannuation salary strategy may be used to facilitate a staged retirement with a move to part-time employment. However, where an employee seeks (or agrees) to do this, they would need to be aware that their member contributions are generally based on the recognised superannuation salary. Therefore, where a higher superannuation salary is recognised contributions would be likely to be paid on the higher salary, as early as the birthday following the increase, resulting in the employee having less take-home pay while in employment.

Change to part-time employment

Unlike the PSS, the CSS does not generally permit membership of the scheme where a member is employed on a temporary part-time arrangement. As a result, an employee who resigns from ongoing employment before age 55 and takes up such employment would cease their CSS membership. (They would then have a choice of the PSS or a Superannuation Guarantee type arrangement with a scheme such as AGEST.)

This arrangement would not assist large numbers of employees to have a phased retirement but can be used in individual circumstances, to mutual benefit, where the employer seeks to retain an employee and the employee is financially able to work part-time.

Other strategies for retaining older workers in the APS

The above options will specifically assist employers to counter the 54/11 incentive that might otherwise apply in individual cases. However, these options and others can also be used to address the 54/11 incentive and other circumstances where the CSS design may encourage employees to retire at any time on or after age 55. For example, CSS members who reach their minimum retirement age, generally age 55, can retire and receive a pension that is fully indexed to movements in the Consumer Price Index. This benefit may act as an incentive for early retirement.

There are options an employer may wish to offer an employee under their terms and conditions of employment to counter any such incentive. The options outlined below illustrate either specific incentives available to employers or incentives which could be used as part of a package to encourage employees to continue in the APS.

The existing superannuation framework permits employer agencies to provide 'top up' superannuation through salary sacrifice arrangements as part of the overall salary packaging arrangements within the agency. These arrangements permit the payment of (additional) employer superannuation contributions to complying superannuation schemes other than the PSS or CSS.

The CSS includes other arrangements that may suit older workers who are considering retirement, especially if their main purpose is to work fewer hours or take a less demanding job. These arrangements are discussed in the next section of this Appendix.

Also, some of the options available, which rely on changes to an employee's terms and conditions of employment, can be implemented either separately or as a package of incentives, such as increasing superannuation salary, working part-time and/or working at a lower level. Employees considering any of these options would need to have regard to their own financial circumstances to ensure their income can meet their expenses and provide appropriate retirement benefits, having regard to numerous variables such as taxation and the superannuation contributions they would be required to pay.

For example, member superannuation contributions are generally based on the recognised superannuation salary and where a salary reduction occurs, superannuation salary would usually continue to be the former higher salary. Therefore contributions would be likely to be paid on a higher salary than is received, resulting in the employee having less take-home pay while in employment.

Overall, whilst the existing options are not seamless, they do generally accommodate employer and employee needs in a range of circumstances. However, many of the methods that exist do rely on an employer's discretion to alter an employee's terms and conditions of employment including incentives such as remuneration or the form in which that remuneration is paid. There is some evidence that, while this may be possible for APS employees, there is significantly less flexibility for Secretaries and certain statutory office holders, whose remuneration and terms and conditions of employment are subject to legislation and the determinative powers of the Remuneration Tribunal.

Agencies that seek to actively manage the risk of loss of skills and knowledge, would need to decide well before the targeted staff reach their decision point about retirement, whether to adopt a range of strategies available to them under existing superannuation arrangements for retaining or re-engaging key people.

An awareness-raising exercise, directed at both employers and employees, could improve the level of knowledge of the options available and their use.

The effect on PSS and CSS benefits of working part-time or at a reduced levele towards the end of an APS career

There is an apparent misconception that 'going part-time for the last few years of service' or taking a reduction in level (or both) has a detrimental effect on the PSS or CSS pension paid in retirement. This is not the case. Whilst a PSS or CSS member who moves to part-time employment cannot generally expect to accrue the identical benefit that they would have if they had continued full-time, their existing level of accrual remains and the future (part-time) service is calculated on a pro rata basis and added to that existing accrual.

The part-time benefit that accrues is a pro rata of the equivalent full-time accrual on the full-time salary. Member contributions are based on the full-time salary apportioned according to the ratio of hours worked to full-time hours.²⁰

Where a member has been employed part-time just before retirement, the superannuation salary that is used in the CSS (or that is taken into account in the PSS) to calculate the eventual benefit is the equivalent full-time salary at retirement.

By moving to part-time employment an employee may decide to retire later than they might have done had they continued full-time. In these circumstances they can 'gain' from the further growth of the salary on which their final benefit is calculated and by the reduced pension discount factor that is applied to their pension (because they are older when they retire).

Similarly, where PSS or CSS members choose to take a reduction in work level as a transition to retirement, there is no 'disadvantage' to the benefits already accrued or, in most cases, to future accruals. In most cases superannuation salary is the 'pre-reduction increment level' updated to the current salary value. Therefore, if a member of the PSS or CSS has a reduction in classification their superannuation salary continues to be updated until retirement. If it is not possible to determine an updated salary for the former level, the pre-reduction salary is updated by movements in AWOTE. However there are some exceptions, for example where a CSS member elects to have a lower salary apply, that are not detailed here.

A description of the benefit accrual for part-time and reduced level of work in each scheme, together with some examples of the effect of doing this, are set out in the table at the end of this section. Also, various examples are used throughout this appendix to illustrate how a higher level of income can be maintained through a gradual withdrawal from the workforce by deferring retirement and reducing responsibility (thereby receiving a reduction in salary) and/or decreasing the hours worked. These examples are very broad examples²¹ and if such changes to a member's terms and conditions of employment are contemplated, members and employers would need to seek further specific information that is relevant to each individual's circumstances from the PSS and CSS Boards or ComSuper at the contact points provided earlier in this appendix.

PSS members

Part-time work

For PSS members, the benefit accrual is based on a benefit multiple, which is calculated from the member's level of contribution from time to time and their FAS. When the member works part-time the benefit multiple is calculated in the normal way based on the percentage rate of member contributions and then prorated according to the fraction of full-time hours worked. Thus, assuming the contributor pays the same rate of contribution, say 5% of salary, and works half the full-time hours, the benefit multiple would be half that accrued for an equivalent full-time employee.

Any benefit that is payable to a PSS member employed part-time at retirement would be based on a FAS calculated on the basis of the equivalent full-time salary.

The following examples illustrate very broadly how a PSS member could change from full-time work to part-time work and maintain an income stream that is higher than their pension had they retired instead, while at the same time increasing their eventual superannuation pension.

	Age when considering retirement / (accrued benefit multiple or ABM)	Average salary (hours)	Maximum possible pension if retired at age 55	Actual salary / (hours) after reduction	Age at retirement (accrued benefit multiple or ABM)	Maximum possible pension on retirement
5	Age 55 (ABM = 5.25)	$70,000 pa 73.5 hours pf	$30,625 pa	$35,000 pa ²² 36.75 hours pf	58 (ABM = 5.565)	$34,171 pa ²³
6	Age 55(ABM = 6.3)	$85,000 pa 73.5 hours pf	$44,625 pa	$68,000 pa ²⁴ 58.8 hours pf	59 (ABM = 6.972)	$52,912 pa ²⁵

Examples 5 and 6 both illustrate how the PSS pension benefit could continue to increase despite a change to part-time hours in the years leading up to retirement. In these cases the accrued benefit multiple has increased (apportioned according to the ratio of part-time hours to full-time hours) and the PSS pension on retirement is also greater because it is based on a higher age at retirement. PSS members who chose to work part-time could manage the lower income by paying a lower rate of contribution although this would result in a slower rate of increase in the accrued benefit multiple.

Reduced level of work

PSS members who have a reduction in classification level also continue to have most, if not all, of their superannuation salary updated by general wage increases until retirement. (Some allowances included in superannuation salary may be maintained at the dollar amount without updating.) Therefore, in most cases the member's benefit is not affected by decreases in classification as their FAS will be the same as, or similar to, the salary that would have applied if they had continued working at the former level.

For example, if a PSS member on a salary of $60,000 per annum reduces to a classification level with a salary of $40,000 per annum, their superannuation salary on the following three birthdays is determined based on the former salary and updated using one of two methods based on whether the current equivalent of the former designation and salary is known. If it is known, the member's salary will, generally, continue to reflect the salary that would have applied had the reduction not occurred. If the current value of the former salary and designation is not known, the member's salary will be updated according to movements in Average Weekly Ordinary Time Earnings. For example, if the updated superannuation salaries were $63,000, $65,000 and $68,000, the member's FAS at their date of retirement is the average of these amounts i.e. $65,333.

The following examples illustrate very broadly how a PSS member could reduce their salary and maintain an income stream that is higher than if they had retired while at the same time increasing their eventual superannuation pension payable on retirement.

	Age when considering retirement / (accrued benefit multiple or ABM)	Average salary	Maximum possible pension if retired at age 55	Actual salary after age 55	Age at retirement (accrued benefit multiple or ABM)	Maximum possible pension on retirement
7	Age 55 (ABM = 5.25)	$70,000 pa	$30,625 pa	$60,000 pa	58 (ABM = 5.88)	$36,105 pa ²⁶
8	Age 55 (ABM = 6.3)	$85,000 pa	$44,625 pa	$70,000 pa	59 (ABM = 7.14)	$54,187 pa ²⁷

Each of the above examples illustrate how a PSS benefit increases during membership irrespective of whether a member has reduced their salary (e.g. through a reduction in classification level) and how a reduction in responsibility might be an effective alternative to retirement, while still increasing PSS benefits. PSS members considering such an arrangement may also consider paying contributions at a lower rate (to compensate for contributions being based on a higher salary that is not being received) although this would decrease the accrued benefit multiple otherwise applicable at retirement.

As outlined previously, employees can also combine reductions in salary and part-time employment as a means of gradual retirement. The following examples provide a broad illustration of how this could work:

	Age when considering retirement (accrued benefit multiple or ABM)	Average salary / hours at age 55	Maximum possible pension if retired at age 55	Actual salary / hours after age 55	Age at retirement (accrued benefit multiple)	Maximum possible pension on eventual retirement
9	Age 55 (ABM = 5.25)	$70,000 pa 73.5 hours pf	$30,625 pa	$30,000 pa ²⁸ 36.75 hours pf	58 (ABM = 5.565)	$34,171 pa ²⁹
10	Age 55 (ABM = 6.3)	$85,000 pa 73.5 hours pf	$44,625 pa	$56,000 ³⁰ 58.8 hours pf	59 (ABM = 6.972)	$52,912 pa ³¹

Both of the above examples show how the PSS benefit would continue to increase despite the member reducing their salary and hours of work.

CSS members

For CSS members, benefit accrual is based on length of service and final salary and the age at which the benefit is taken. When working part-time the benefit accrues on a pro rata basis.

Part-time work

Thus, where a full-time member on $60,000 per annum and with 25 years service works part-time (on half hours) for four years, the benefit accrual would be equal to 2 years full-time service at full pay. While the member would be paid half the salary they would have previously received (i.e. commencing at $30,000 and rising with any salary growth), they would normally pay contributions based on the full-time salary but prorated according to the fraction of full-time hours worked. If the member retires after completing four years half-time on a salary of, say, $32,500 per annum, then their pension would be calculated using the full-time salary of $65,000 and on 27 years service rather than the 29 years that they would have had if they had continued working full-time.

The following examples illustrate very broadly how a CSS member could work part-time and maintain an income stream that is higher than if they had retired, while at the same time increasing their eventual superannuation pension payable.

	Age when considering retirement / (years of membership)	Super salary / hours at age 55	Possible pension if retired at age 55	Actual salary / hours after age 55	Age at retirement / (years of membership)	Maximum possible pension on retirement
11	Age 55 (30 years)	$70,000 pa 73.5 hours pf	$26,250 pa	$35,000 pa ³² 36.75 hours pf	58 (31.5 years)	$29,620 pa ³³
12	Age 55 (20 years)	$85,000 pa 73.5 hours pf	$25,500 pa	$68,000 pa ³⁴ 58.8 hours pf	60 (24 years)	$33,660 pa ³⁵

These examples show how the CSS standard pension could continue to increase despite a change to part-time hours in the years leading up to retirement. In the above examples, the years of service (apportioned according to the ratio of part-time hours to full-time hours) and age at retirement used to calculate the pension have increased. Also, other components of the CSS benefit (e.g. the refund of member contributions and interest and the employer '3%' productivity contributions) would also have increased because of additional contributions and interest accrued before retirement.

Reduced level of work

If a full-time member of the CSS on a salary of $60,000 per annum reduced to a lower classification with a salary of $40,000 per annum, the member's superannuation salary will be determined based on the former salary and updated using one of two methods based on whether the current equivalent of the former designation and salary is known.

If the current value of the former salary and designation is known, the superannuation salary will continue to be increased to the current salary value of the increment level of the classification on which the member had attained the salary of $60,000 per annum. If the member was on the top of the range prior to the reduction in classification, the member's superannuation benefit will be exactly the same as if they had remained at that level until retirement. Therefore if the current value of the pre-reduction $60,000 per annum level is $68,000 per annum at the date the member retires, the member's pension will be calculated on $68,000 per annum.

If an updated salary is not known, the value of the former salary will be updated according to movements in AWOTE.

The following examples illustrate very broadly how a CSS member could reduce their salary and maintain an income stream that is higher than if they had retired and also increase their eventual superannuation pension payable on retirement.

	Age when considering retirement / (years of membership)	Super salary / hours at age 55	Possible pension if retired at age 55	Actual salary / hours after age 55	Age at retirement / (years of membership)	Pension on eventual retirement
13	Age 55 (30 years)	$70,000 pa 73.5 hours pf	$26,250 pa	$60,000 pa 73.5 hours pf	58 (33 years)	$29,841 pa ³⁶
14	Age 55 (20 years)	$85,000 pa 73.5 hours pf	$25,500 pa	$70,000 pa 73.5 hours pf	60 (25 years)	$34,425 pa ³⁷

Examples 13 and 14 show how the standard pension payable on retirement would continue to increase in circumstances where there is a reduction in salary ³⁸. They illustrate how a CSS standard pension could continue to increase during membership even where a member has reduced their salary (e.g. through a reduction in level) and how a reduction in responsibility might be an effective alternative to retirement, while still increasing benefits. CSS members considering such an arrangement should also have regard to the other components of the CSS benefit (e.g. the refund of member contributions and interest and the employer '3%' productivity contributions), which are also likely to increase because of additional contributions and any interest accrued before retirement.

As outlined previously, CSS members could also combine reductions in salary and parttime employment as a means of gradual retirement. The following examples provide a broad illustration of how this could work:

	Age when considering retirement / (years of membership)	Super salary / hours at age 55	Possible pension if retired at age 55	Actual salary / hours after age 55	Age at retirement / (years of membership)	Pension on eventual retirement
15	Age 55 (30 years)	$70,000 pa 73.5 hours pf	$26,250 pa	$35,000 pa ³⁹ 36.75 hours pf	58 (31.5 years)	$29,620 pa ⁴⁰
16	Age 55 (20 years)	$85,000 pa 73.5 hours pf	$25,500 pa	$68,000 pa ⁴¹ 58.8 hours pf	60 (24 years)	$33,660 pa ⁴²

In examples 15 and 16, while the pension on eventual retirement would continue to be based on the superannuation salary applicable before the reduction (and including any relevant increases) the percentage used to calculate the pension on retirement would be based on the increased years of service (apportioned for the period of part-time employment) and increased age at retirement.

Examples showing the effect of working part-time towards the end of an APS career

Scheme	Age	Planned retirement age	Current salary and length of service (CSS) or benefit multiple (PSS)	*Estimated pension entitlement if continued to work full-time to planned age	Estimated pension entitlement if changed to part-time half hours to planned age
CSS	51	55 if F/T 59 if P/T	$40,000 pa 31 years service	At age 55 would have 35 years service and a salary of about $45,000 Pension entitlement = 38.438% $45,000 x .38438 = $17,297 pa	At age 59 would have the equivalent of 35 years service and an equivalent full-time salary of about $50,000 Pension entitlement = 44.588% $50,000 x .44588 = $22,294 pa
CSS	53	57	$60,000 pa 25 years service	Would then have 29 years service and a salary of about $70,000 Pension entitlement = 39.690% $70,000 x .39690 = $27,783 pa	Would then have the equivalent of 27 years service and an equivalent full-time salary of about $70,000 Pension entitlement = .38.070% $70,000 x .38070 = $26,469 pa
CSS	56	57 or 58	$120,000 pa 31 years service	At age 57 would have 32 years service and a salary of about $126,000. Pension entitlement = 40.905% $126,000 x .40905 = $51,540 pa At age 58 would have 33 years service and a salary of about $132,000 Pension entitlement = 42.630% $132,000 x .42630 = $56,271pa	At age 58 would have the equivalent of 32 years service and an equivalent full-time salary of about $132,000 Pension entitlement = 42.420% $132,000 x .42420 = $55,994 pa If by working part-time the person decides to continue working half hours to age 60. At age 60 would have the equivalent of 33 years service and an equivalent full-time salary of, say , $140,000 Pension entitlement = 45.675% $140,000 x .45675 = $63,945 pa
PSS	54	56	$50,000 Benefit Multiple of 6 and contributing at 5%	At age 56 would have a benefit multiple of 6 + (.21x2) = 6.42 and a final average salary of about $52,000 = $333,840 or full pension of $28,291 pa	At age 56 would have a benefit multiple of 6 +(.21x.5x2) = 6.21 and an equivalent full-time final average salary of about $52,000 = $322,920 or full pension of $27,366 pa
PSS	56	60	$120,000 Benefit Multiple of 5.5 and contributing at 10%	At age 60 would have a benefit multiple of 5.5 + (.31x4) = 6.74 and a final average salary of about $132,000 = $889,680 or full pension of $80,880 pa	At age 60 would have a benefit multiple of 5.5 + (.31x.5x4) = 6.12 and an equivalent full-time final average salary of about $132,000 = $807,840 or full pension of $73,440 pa

19 Had the member continued in employment and retired at age 55 the standard pension in this case with 30 years service would have been 37.5% of final salary or $26,250 per annum.

20 Transitional issues about changing from full-time to part-time (or vice versa) or doing this for short periods of time are not covered here. Rather, only a broad description of the principles is set out, for simplicity.

21 Variables not taken into account in all examples include (but are not limited to):

the utility to the employee of a higher income as a result of remaining in employment
the PSS or CSS pension not paid if retirement is deferred
the updated value of such a pension (e.g. based on increases in the Consumer Price Index)
the impact of taxation on various income streams and eventual retirement benefits
the impact of ongoing superannuation contributions if remaining in employment.

Also, the examples used are simple illustrations of the possible impact of reductions in salary and/or part-time employment and do not reflect the exact impact of such an arrangement. For example, transitional arrangements apply for members who move from full-time to part-time employment. Also PSS and CSS rules provide for the superannuation salary prior to a reduction in salary to continue to apply and be updated in accordance with those rules.

22 Based on the full-time salary of $70,000 per annum apportioned by ratio of part-time hours to full-time hours

23 Pension at age 55 is based on 5% employee contributions for 25 years (i.e. which if retired at age 55 would result in a pension of:

(5.25 (i.e. 0.21 x 25) x final average salary) /12 (i.e. the pension conversion factor for age 55)
If the employee continued in part-time employment (50% full-time hours) until age 58, the pension would be:
(5.25 + (0.21 x 3 x 36.75 / 73.5)) x final average salary /11.4 (i.e. the pension factor for age 58)

24 Based on the full-time salary of $85,000 per annum apportioned by ratio of part-time hours to full-time hours.

25 Pension at age 55 is based on 5% employee contributions for 30 years (i.e. which if retired at age 55 would result in a pension of:
(6.3 (i.e. 0.21 x 30) x final average salary) /12 (i.e. the pension conversion factor at age 55)
If the employee continued part-time at 80% full-time hours until age 59, the employee's benefit would be:
(6.3 + (0.21 x 4 x 58.8 / 73.5)) x final average salary /11.2 (i.e. the pension factor at age 59)

26 Pension at age 55 is based on 5% employee contributions for 25 years resulting in a pension of:
(5.25 (i.e. 0.21 x 25) x final average salary)/ 12 (i.e. the pension conversion factor at age 55)
If salary is reduced and employee continues in employment until, say, age 58, the pension would be:
(5.25 + (0.21 x 3) x final average salary) /11.4 (i.e. the pension conversion factor at age 58)
Note that in this example the final average salary at retirement is still based on $70,000 although the average salary in all such examples may have increased according to PSS rules in which case the pension on retirement could be higher.

27 Pension at age 55 is based on 5% employee contributions for 30 years resulting in a pension of:
(6.3 (i.e. 0.21 x 30) x final average salary) /12 (i.e. the pension conversion factor at age 55)
If salary is reduced and employee continues in employment until, say, age 59, the pension would be:
(5.25 + (0.21 x 3) x final average salary /11.2 (i.e. the pension conversion factor at age 59)

28 Based on a full-time salary of $60,000 per annum apportioned by ratio of part-time hours to full-time hours.

29 Same assumptions apply as for examples 5 and 7 above.

30 Based on a full-time salary of $70,000 per annum apportioned by ratio of part-time hours to full-time hours.

31 Same assumptions apply as for examples 6 and 8 above.

32 Based on the full-time salary of $70,000 per annum apportioned by ratio of part-time hours to full-time hours.

33 Standard pension at age 55 with 30 years service is 37.5% of final salary. If the member worked part-time (50% full-time hours) until age 58, the member would accrue a further 1.5 years service resulting in a standard pension at age 58 of 42.315% of final salary.

34 Based on the full-time salary of $85,000 per annum apportioned by ratio of part-time hours to full-time hours.

35 Standard pension at age 55 with 20 years service is 30.0% of final salary. If the member worked part-time (80% full-time hours) until age 60, the member would accrue a further 4 years service resulting in a standard pension at age 60 of 39.6% of final salary

36 Standard pension at age 55 with 30 years service is 37.5% of final salary. If the member reduced their salary (and did not elect to contribute at the lower salary) the standard pension at age 58 with 33 years service would be 42.630% of final salary.

37 Standard pension at age 55 with 20 years service is 30.0% of final salary. If the member reduced their salary (and did not elect to contribute at the lower salary) the standard pension at age 60 with 25 years service would be 40.5% of final salary.

38 Examples 11 and 12 assume that the CSS members do not choose to pay contributions on the lower superannuation salary and do not take into account various factors such as any increases to the former salary (for example, because amount paid at the former level has increased because of general wage increases).

39 Based on the full-time salary of $60,000 per annum apportioned by ratio of part-time hours to full-time hours.

40 Same assumptions as for examples 9 and 11 apply.

41 Based on the full-time salary of $70,000 per annum apportioned by ratio of part-time hours to full-time hours.

42 Same assumptions as for examples 10 and 12 apply.