The federal government's recent decision to postpone drawing from the Future Fund to help finance its unfunded employee superannuation liabilities is welcome news for current and future members of its defined benefit funds.
If the Future Fund, now standing at around $140 billion, continues to earn a higher return than the cost of federal borrowings, more money will be available to help fund future lump sum and pension payments when the burden of unfunded liabilities peaks around 2050.
Taxpayers facing higher annual tax bills to meet current annual defined benefit pension and lump sum payments of about $10 billion annually lose from this decision. Unfortunately for taxpayers also facing higher bills to fund the national disability insurance scheme, the outstanding unfunded super liabilities will continue to increase faster than the earnings of the Future Fund.
For some time now the official actuaries have considerably underestimated the accruing liabilities of the defined benefit pension funds. They have been caught out by faster than expected improvements in mortality rates, the introduction of the same sex partnership changes and the 1999 changes limiting the scope for cashing out superannuation benefits before retirement.
The estimates of future liabilities have also been artificially reduced by using a 6 per cent discount rate which is far higher than the bond rate previously used. For all these reasons, the decision to delay drawing down money from the Future Fund to help pay future benefits greatly helps federal defined benefit fund members.
At an individual level, the government's future funding problems highlight just how valuable the retirement benefits on offer are. Previously, the federal government saved billions by allowing and even encouraging fund members to cash out their benefits as a lump sum on retirement or on changing jobs.
Now public servants are more aware of the value of their defined benefit entitlements and how they have become even more valuable because of improved longevity and the lower and more volatile investment returns on lump sum investments.
The government's plan to save money when it changed pension benefits for new employees in 1990 by indexing their preserved employee benefits only for inflation has been largely negated by the increased value of taking preserved benefits as pensions in retirement. For example, at age 60, the preserved lump sums can be exchanged for an indexed pension yielding 9 per cent annually.
No private sector annuity or investment can match this and even higher returns from taking pension benefits at a later age. The government's decision to delay accessing the Future Fund to help finance these benefits is thus reassuring news for recipients of these pension and their survivors. The money will be there to fund their pension benefits for as long as they live.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
