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Department of Finance Annual Report 2017/18

Superannuation

Notes to and forming part of the financial statements

C. General Business Disclosures

C3.1 Overview of schemes

Finance administers the following defined benefit superannuation schemes on behalf of the government:

Commonwealth Superannuation Scheme (CSS), including the 1922 Scheme;
Public Sector Superannuation Scheme (PSS);
Parliamentary Contributory Superannuation Scheme (PCSS);
Governor-General Pension Scheme (G-GPS);
Judges' Pensions Scheme (JPS), and
Federal Circuit Court Judges Death and Disability Scheme (FCCJDDS).

The CSS, PSS and PCSS are closed to new members.

Finance recognises an administered liability for the present value of the Australian Government's expected future payments arising from the PCSS, JPS, G-GPS and FCCJDDS and the unfunded components of the 1922 Scheme, CSS and PSS. These liabilities are based on an annual actuarial assessment. The funded components of these schemes are reported in the financial statements of the respective schemes. Finance also has the responsibility to record the Australian Government's transactions in relation to the above schemes.

Policy and measurement

Actuarial gains or losses are recognised in equity in the year in which they occur. Interest on the net defined benefit liability is recognised in the surplus/(deficit); the return on plan assets excluding the amount included in interest income is recognised in equity.

Superannuation liabilities are calculated annually as the present value of future benefit obligations less the fair value of scheme assets. The rate used to discount future benefits is determined by reference to the government bond rate at the reporting date.

Amounts recognised in the Schedule of Comprehensive Income and Schedule of Assets and Liabilities

			Other
	CSS	PSS	PCSS	G-GPS	JPS	FCCJDDS	Total
	$'000	$'000	$'000	$'000	$'000	$'000	$'000
30 June 2018
Revenues	87,592	1,125,818	628	-	-	-	1,214,038
Expenses	2,551,579	5,777,690	45,821	744	82,735	893	8,459,462
OCI	(1,379,037)	(5,248,775)	(25,436)	(957)	(134,461)	804	(6,787,862)
Liabilities	82,895,248	97,480,728	1,167,342	22,188	1,500,165	1,362	183,067,033
30 June 2017
Revenues	102,724	1,171,578	655	-	-	-	1,274,957
Expenses	2,449,306	6,381,040	40,642	577	88,722	925	8,961,212
OCI	2,625,127	18,929,411	102,364	(851)	71,762	606	21,728,419
Liabilities	82,539,357	87,317,499	1,138,463	22,036	1,333,185	1,728	172,352,268

C3.2 Scheme information

The funding arrangements for the various schemes are as follows:

Scheme	Funding arrangements
1922 Scheme	Unfunded. There are no longer any members contributing under this Act. Benefits are paid to members from the Consolidated Revenue Fund (CRF).
CSS and PSS	Partially funded. Contributions generally comprise basic member contributions and employer productivity (up to three per cent) contributions. Benefits are paid to members from the CRF.
PCSS	Unfunded. Member contributions are a fixed percentage of: parliamentary allowance; salary for Ministers of State; and allowance by way of salary for office holders, which is paid into the CRF. Benefits are paid to members from the CRF.
G-GPS, JPS and FCCJDDS	Unfunded. Members are not required to contribute towards the cost of their benefit during their term of appointment. Benefits are paid to members from the CRF.

The nature of the benefits provided under the schemes are as follows:

Scheme	Benefits Paid
1922 Scheme	The benefit payable is a lifetime indexed pension (indexed in January and July) in line with changes in the CPI. The payments and liabilities in respect of these members are included in the CSS amounts.
CSS	The types of benefits payable are a lifetime indexed pension (indexed in January and July) in line with changes in the CPI, a lifetime non-indexed pension and a lump sum payment. The main retirement benefit is the employer-financed indexed pension that is calculated by a set formula based on a member's age, years of contributory service and final salary. Where a member has preserved their benefit in the scheme, when the benefit becomes payable the employer financed indexed pension is calculated by applying age-based factors to the amount of two and a half times the member's accumulated basic member contributions and interest. Member’s basic contributions, employer productivity contributions and interest can be taken as a lump sum or an additional non-indexed lifetime pension. This benefit is determined by the value of contributions and investment returns, and in the case of the non-indexed pension by applying age-based factors.
PSS	The types of benefits payable are a lifetime indexed pension (indexed in January and July in line with changes in the CPI) and lump sum. On retirement a lump sum benefit is payable which is calculated based on the member’s length of contributory membership, their rate of member contributions and final average salary (average of a member’s superannuation salary on their last three birthdays). Where a member preserves their benefit in the scheme, generally the member’s lump sum benefit at that time is crystallised with the funded component of the benefit accumulating with interest and the unfunded component accumulating with changes in the CPI, until the benefit becomes payable. Generally members can convert 50 per cent or more of their lump sum to a lifetime indexed pension. The indexed pension is calculated by applying age-based factors to the amount of lump sum to be converted to a pension.
PCSS	The benefit payable is a lifetime pension or lump sum depending on length of service and additional offices held. Where a retiring member has sufficient parliamentary service to meet the pension qualification period for a lifetime pension (which is payable as set out in the Act), pension benefits are expressed as a percentage of the superannuation salary applicable for the PCSS and are indexed by movements in that superannuation salary. A PCSS member who qualifies for a pension can also elect to convert up to half of their benefit to a lump sum. Lump sum benefits are payable to PCSS members who do not have sufficient parliamentary service to qualify for a lifetime pension.
G-GPS	The benefit payable is a lifetime pension equal to 60% of the salary of the Chief Justice of the High Court of Australia. There is no minimum qualification period.
JPS	The benefit payable is a lifetime pension equal to 60% of the judicial salary, payable where a judge has 10 or more years’ service and is 60 years of age or older. Provisions are made for part pension (pro-rated based on length of service) where a judge retires on reaching the maximum retirement age with at least 6 years but less than 10 years service.
FCCJDDS	Federal Circuit Court Judges who retire due to permanent disability are provided with a pension equal to 60% of the salary the Judge would have received if they had not retired, and is payable until the earlier of the Judge attaining age 70, or his/her death. In addition, a Judge continues to receive employer superannuation contributions in respect of this pension until they reach age 65.

Generally, benefits may also be payable to any surviving eligible spouse and children on the death of a member or pensioner.

Regulatory Framework

The following table details the enabling legislation for each of the individually disclosed defined benefit schemes and whether the scheme must comply with the requirements of the Superannuation Industry (Supervision) Act 1993, as well as a number of other Acts.

Scheme	Enabling Act	Period open to new members	Regulatory requirement
CSS	Superannuation Act 1976	1 July 1976 to 30 June 1990	Compliance with the Superannuation Industry (Supervision) Act 1993 required for these schemes.
PSS	Superannuation Act 1990	1 July 1990 to 30 June 2005
1922 Scheme	Superannuation Act 1922	1 July 1922 to 30 June 1976	These schemes are exempt from Superannuation Industry (Supervision) Act 1993.
PCSS	Parliamentary Contributory Superannuation Act 1948	Up to 8 October 2004
G-GPS	Governor-General Act 1974	To present
JPS	Judges’ Pensions Act 1968	To present
FCCJDDS	Federal Circuit Court of Australia Act 1999	To present

Governance

The Commonwealth Superannuation Corporation (CSC) was established under the Governance of Australian Government Superannuation Schemes Act 2011 and is the trustee for the CSS and PSS. CSC is responsible for:

providing administration services for each scheme;
management and investment of scheme assets;
compliance with superannuation taxation and other applicable laws; and
compliance with relevant legislation including the Governance of Australian Government Superannuation Schemes Act 2011.

CSC is supported by a custodian and other specialist providers.

The PCSS is administered by the Department of Finance on behalf of the Minister for Finance. The Parliamentary Retiring Allowances Trust (the Trust) has responsibility for matters where discretion has been given under the Parliamentary Contributory Superannuation Act 1948. The Trust consists of five trustees - the Minister for Finance (or a Minister authorised by the Minister for Finance) who is the presiding trustee, plus two Senators and two Members of the House of Representatives appointed by their respective Houses.

The enabling Acts for the ‘other’ defined benefit superannuation schemes confer certain powers to the Secretary of Finance in relation to administration of each scheme. Day-to-day administration of the schemes is undertaken by Finance.

C3.3 Risks and assumptions

The schemes are exposed to interest rate risk, investment risk, longevity risk and salary risk. The following pages identify and explain the amounts reported in these financial statements and detail the principal actuarial assumptions underpinning each of the major schemes, including an analysis of the sensitivity of changes in these assumptions to the amounts reported in the financial statements.

Composition of scheme assets

The fair value of scheme assets for CSS and PSS at 30 June 2018 is $21.5 billion (30 June 2017 was $20.4 billion). The assets are diversified in the following sectors: Australian equity 24%; International equity 25%; Property 8%; Private capital 6%; Infrastructure 3%; Corporate bonds 4%; Alternative strategies 15% and Cash and sovereign bonds 15%. This includes $345.3 million (2017: $287.1 million) of Commonwealth Government Bonds.

Key judgements and estimates

Principal actuarial assumptions are as follows:

	2018	2017
Discount rate
CSS and 1922 scheme	2.9%	3.0%
PSS and Other Schemes	3.1%	3.5%
Expected salary growth rate (CSS/PSS)	2.0%pa to June 2022 3.5%pa thereafter +promotional increase	2.0%pa to June 2019 3.5%pa thereafter +promotional increase
Expected pension increase rate (CPI)	2.5%	2.5%

Other material assumptions

CSS, PSS, and PCSS

Assumptions have been made regarding rates of retirement, death (for active, preserved and pension members), mortality improvements, invalidity, resignation, retrenchment, retention and take up rates of pensions in the scheme. Assumptions have also been made for the ages of spouses and rates of member contributions. These assumptions are consistent to those used within the 2017 Long Term Cost Reports (LTCRs).

Membership data as at 30 June 2017 has been rolled forward to 30 June 2018 by making allowance for estimated investment earnings, contributions, salary increases, benefit payments and benefit accruals, using the actuarial assumptions from the LTCRs where other information is not available. The defined benefit obligation calculated is based on the rolled forward membership data that was then adjusted to reflect the difference between expected benefit payments and actual benefit payment to 30 June 2018.

The fair value of scheme assets as at 30 June 2018 (CSS and PSS only) were estimated using the unaudited net scheme assets available to pay benefits at 31 May 2018 rolled forward to 30 June 2018 with cash flow items provided by the CSC. An estimate of the actual rate of investment return earned by the scheme during June 2018 was used in determining the fair value of scheme assets.

Other Schemes – G-GPS, JPS and FCCJDDS

Membership data as at 31 May 2018 has been rolled forward to 30 June 2018. Other actuarial assumptions are consistent to those used within the 2017 LTCRs.

Sensitivity analysis for significant actuarial assumptions

The impact of a change in the defined benefit obligation reported as at 30 June 2018 under several scenarios is presented below. The defined benefit obligation has been recalculated by changing the assumptions as outlined below, whilst retaining all other assumptions.

	Impact on defined benefit obligation
	0.5% increase			0.5% decrease
Assumption	Movement in $'000			Movement in $'000
	CSS	PSS	Other	CSS	PSS	Other
Discount rate ¹	(5,055,026)	(10,401,332)	(185,991)	5,602,173	11,988,381	208,045
Salary growth rate	91,525	2,425,198	198,619	(86,385)	(2,276,857)	(179,675)
Pension increase rate	4,945,957	8,563,797	n/a	(4,519,458)	(7,681,024)	n/a

¹ An increase in the discount rate between financial years generates a decrease in the provision and a gain in other comprehensive income. Conversely, a decrease in the discount rate between financial years causes an increase in the defined benefit obligation (liability) and a loss to other comprehensive income.

C3.4 Commonwealth Superannuation Scheme (CSS)
Employer productivity contributions
The expected employer productivity contribution for 2019 is $10.4 million (2018 actual $12.3 million).
Maturity profile of defined benefit obligation
The weighted average duration of the defined benefit obligation is 13.0 years for CSS 1976 and 7.2 years for CSS 1922.

Reconciliation of the:	Present value of the defined benefit obligation		Fair value of the scheme assets		Net defined benefit liability
	30 June	30 June	30 June	30 June	30 June	30 June
	2018	2017	2018	2017	2018	2017
	$'000	$'000	$'000	$'000	$'000	$'000
Value at beginning of the year	85,330,627	89,197,538	2,791,270	3,072,920	82,539,357	86,124,618

Current service cost	137,970	177,183	-	-	137,970	177,183
Interest cost	2,490,486	2,344,345	-	-	2,490,486	2,344,345
Interest income	-	-	76,877	72,222	(76,877)	(72,222)
Total expense	2,628,456	2,521,528	76,877	72,222	2,551,579	2,449,306
Actual return on scheme assets less interest income	-	-	154,293	162,175	(154,293)	(162,175)

Actuarial (gains) / losses adjusted in other comprehensive income arising from
Changes in demographic assumptions	161,056	-	-	-	161,056	-
Changes in financial assumptions	945,300	(3,031,074)	-	-	945,300	(3,031,074)
Liability experience	426,974	568,122	-	-	426,974	568,122
Total other comprehensive income	1,533,330	(2,462,952)	154,293	162,175	1,379,037	(2,625,127)
Contributions by scheme participants	43,528	56,426	43,528	56,426	-	-
Productivity contributions	12,319	14,041	12,319	14,041	-	-
Net appropriation from CRF	-	-	3,574,725	3,409,440	(3,574,725)	(3,409,440)
Benefits paid	(4,031,319)	(3,993,754)	(4,031,319)	(3,993,754)	-	-
Taxes, premiums and expenses paid	(1,934)	(2,200)	(1,934)	(2,200)	-	-
Value at end of the year	85,515,007	85,330,627	2,619,759	2,791,270	82,895,248	82,539,357

The fair value of scheme assets relates to investments in the Pooled Superannuation Trust (PST). These are disclosed as level 2 in the fair value hierarchy, where the net market value is derived from observable inputs (other than quoted prices) such as prices or derived from prices.

C3.5 Public Sector Superannuation Scheme (PSS)
Employer productivity contributions
The expected productivity contributions for 2019 is $162.6 million (2018 actual $182.6 million).
Maturity profile of defined benefit obligation
The weighted average duration of the defined benefit obligation is 20.4 years.

Reconciliation of the:	Present value of the defined benefit obligation		Fair value of the scheme assets		Net defined benefit liability
	30 June	30 June	30 June	30 June	30 June	30 June
	2018	2017	2018	2017	2018	2017
	$'000	$'000	$'000	$'000	$'000	$'000
Value at beginning of the year	104,949,301	117,145,347	17,631,802	16,532,797	87,317,499	100,612,550

Current service cost	2,746,886	3,672,212	-	-	2,746,886	3,672,212
Interest cost	3,639,645	3,147,248	-	-	3,639,645	3,147,248
Interest income	-	-	608,841	438,420	(608,841)	(438,420)
Total expense	6,386,531	6,819,460	608,841	438,420	5,777,690	6,381,040
Actual return on scheme assets less interest income	-	-	1,018,529	1,056,557	(1,018,529)	(1,056,557)

Actuarial (gains) / losses adjusted in other comprehensive income arising from
Changes in demographic assumptions	(947,376)	-	-	-	(947,376)	-
Changes in financial assumptions	6,750,306	(20,058,075)	-	-	6,750,306	(20,058,075)
Liability experience	464,374	2,185,221	-	-	464,374	2,185,221
Total other comprehensive income	6,267,304	(17,872,854)	1,018,529	1,056,557	5,248,775	(18,929,411)
Contributions by scheme participants	551,536	520,909	551,536	520,909	-	-
Productivity contributions	182,610	172,842	182,610	172,842	-	-
Net appropriation from CRF	-	-	863,236	746,680	(863,236)	(746,680)
Benefits paid	(1,919,616)	(1,810,227)	(1,919,616)	(1,810,227)	-	-
Taxes, premiums and expenses paid	(27,650)	(26,176)	(27,650)	(26,176)	-	-
Value at end of the year	116,390,016	104,949,301	18,909,288	17,631,802	97,480,728	87,317,499

The fair value of scheme assets relates to investments in the PST. These are disclosed as level 2 in the fair value hierarchy, where the net market value is derived from observable inputs (other than quoted prices) such as prices or derived from prices.

C3.6 Other Schemes
For the purposes of disclosure, the smaller schemes have been grouped under "other":

			PCSS	G-GPS	JPS	FCCJDDS
			$'000	$'000	$'000	$'000
Expected benefit payments for 2019			42,784	1,612	53,819	662
			Years	Years	Years	Years
Maturity profile of defined benefit obligation			15.6	9.2	14.6	1.5

Reconciliation of the:	Present value of the defined benefit obligation		Fair value of the scheme assets		Net defined benefit liability
	30 June	30 June	30 June	30 June	30 June	30 June
	2018	2017	2018	2017	2018	2017
	$'000	$'000	$'000	$'000	$'000	$'000
Value at beginning of the year	2,495,412	2,630,370	-	-	2,495,412	2,630,370

Current service cost	44,515	61,087	-	-	44,515	61,087
Interest cost	85,678	69,779	-	-	85,678	69,779
Total expense	130,193	130,866	-	-	130,193	130,866

Actuarial (gains) / losses adjusted in other comprehensive income arising from
Changes in demographic assumptions	16,165	-	-	-	16,165	-
Changes in financial assumptions	150,415	(210,924)	-	-	150,415	(210,924)
Liability experience	(6,530)	37,043	-	-	(6,530)	37,043
Total other comprehensive income	160,050	(173,881)	-	-	160,050	(173,881)
Net appropriation from CRF	-	-	94,599	91,943	(94,599)	(91,943)
Benefits paid	(94,599)	(91,943)	(94,599)	(91,943)	-	-
Value at end of the year	2,691,056	2,495,412	-	-	2,691,056	2,495,412

C4: Restructuring

	DTA¹	PM&C²	IPEA³	DTA¹	IPEA⁴	IPEA⁴
	30 June	30 June	30 June	30 June	30 June	30 June
	2018	2018	2018	2017	2017	2017
	$'000	$'000	$'000	$'000	$'000	$'000
FUNCTIONS RELINQUISHED
Assets relinquished
Cash and cash equivalents	96,063	-	-	-	-	-
Trade receivables	68,937	28	-	3,443	1,027	107
Accrued revenue	174	-	-	-	-	-
Land	-	44,000	-	-	-	-
Buildings	-	5,811	-	-	-	-
Total assets relinquished	165,174	49,839	-	3,443	1,027	107

Liabilities relinquished
Payables	9,590	-	-	807	-	3,945
Unearned revenue	130,416	-	-	-	-	-
Employee provisions	-	28	2,769	2,636	1,027	617
Total liabilities relinquished	140,006	28	2,769	3,443	1,027	4,562

Net assets/(liabilities) relinquished	25,168	49,811	(2,769)	-	-	(4,455)

¹ Whole of Australian Government Information and Communications Technology (WoAG ICT) policy, procurement and strategy-related functions transferred to the Digital Transformation Agency (DTA) following an administrative arrangements order on 27 October 2016. Relevant staff, appropriations, assets and liabilities were transferred in
2016-17, with a final transfer of assets and liabilities occurring on 1 July 2017 following the establishment of the DTA ICT Coordinated Procurement Special Account.

² Ownership and property management of the Prime Minister's official establishments transferred to the Department of Prime Minister and Cabinet (PM&C) following an administrative arrangements order on 30 November 2017.

³ Administration of the Parliamentary Retirement Travel Act 2002 (formerly the Members of Parliament (Life Gold Pass) Act 2002) transferred to the Independent Parliamentary Expenses Authority (IPEA) on 1 January 2018 following commencement of the Parliamentary Business Resources Act 2017.

⁴ Finance transferred functions for: auditing, reporting, providing advice and processing claims relating to travel expenses and allowances of parliamentarians and MOP(S) Act staff to IPEA following a restructure of administrative arrangements on 3 April 2017.

Functions Assumed

There were no functions assumed in 2017-18. In 2016-17, Finance recognised net assets of $14 million for the transfer of shared services from the Education and Training and Employment portfolios.

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