Mandarins’ super bonanza requires a fair-minded inquiry

Top public servants who have been awarded pay rises of up to $300,000 over the past decade have seen the value of their superannuation benefits balloon by as much as $3 million, blowing out the cost of the government’s public service pension scheme, which ­already has an official shortfall of at least $200 billion.

Actuaries say the real shortfall is between $400bn and $600bn and is increasing by about $6bn a year. And most of the shortfall problem is among public servants at the top levels — the people who received the big pay hike.

The public servants’ superannuation bonanza comes as Scott Morrison tries to win backbench support for his reforms of non-public servant Australians’ superannuation, designed to save the government about $6bn a year, about the same as the public service scheme increases are costing.

The public service superannuation schemes are in two parts: one is for those who joined the service after June 30, 2005 and is similar to the private sector accumulation schemes — so there is no shortfall.

The second is for those who joined the public service before June 30, 2005, and provides a pension based on either the final salary or the average salary over the final three years.

Most of the funding for that pension will have to come from ­future tax revenue, hence the massive shortfall.

The escalation of top public servant salaries over the past decade has ballooned this future bill more than anyone thought possible.

Former treasurer Peter Costello put $120m aside in the Future Fund to meet the shortfall but the escalation has made it inadequate.

In the private sector, the value of employees’ superannuation is based on the money they have in their account.

In valuing the public servants superannuation, actuaries estimate the market value of the pensions they are to receive. Actuaries say a $300,000 salary increase creates an extra pension worth $3m.

If that salary increase takes the public servant’s salary to $1m, it produces a lifetime-indexed pension of $600,000, which would be worth at least $10 million for anyone seeking to buy it from an annuity provider.

And at this stage, the worth of the public servants pensions is still rising along with their salaries.

This is in stark contrast to what the government plans for the private sector.

Tax paid contributions are to be limited to $500,000 and annual tax-deductible contributions limited to $25,000. The measures mean that, increasingly, non-public servant Australians who have not invested in superannuation will have to rely on the Age Pension.

It is possible some public servants who have superannuation funds worth close to $10m were advising the Treasurer on cutbacks to non-public servant ­Australians.

In my view, Australia needs a parliamentary inquiry (some would say a royal commission) into how the salary-setting system has been manipulated in a way that is costing the nation hundreds of billions of dollars.

Part of that inquiry must look at why Reserve Bank officials and university vice-chancellors have been given special superannuation treatment in their ability to make contributions to their funds.

Both Telstra and Qantas, on privatisation, had an executive staff riddled with executives on bonanza super schemes. As they went public, they found that paying new people much less than the superannuation-boosted older ­executives created an impossibly discriminatory situation. That’s exactly what is happening in the public service and is contributing to waste and duplication, and to the fact the public service is falling behind in global technology.

Telstra overcame the problems by refusing to grant salary rises to those in the bonanza public service scheme. From time to time, those people received bonuses.

Newcomers received higher salaries but did not participate in the bonanza.

Qantas went further and effectively froze the defined benefits. Parliament should follow either Telstra or Qantas.

The parliamentary inquiry needs to look at these points:

• Why were huge salary rises given to top older public servants when they boosted the public service pension deficit so dramatically, establishing the basis for pay discrimination against much-needed newcomers?

• Why have these huge salary rises not been factored into the ­actuarial deficit which bases its predictions on the normal average rises in salary? (I emphasis that the vast majority of public servants have seen nothing like the mandarin ­increases.)

• How was the scheme amended so that after retirement a public servant whose spouse has died can partner with another person (male or female) and on the public servant’s death the new partner receives just over 67 per cent of the public servant’s pension (it’s 80 per cent for politicians)? Nothing like that is available in the private sector annuity market because it would cost a fortune.

Original actuarial calculations assumed about 10 per cent of public servants were gay or for some other reason would not have a dependent on retirement. The new situation allows for same-sex partners, which boosts the shortfall.

The expected life span of retired public servants, like the rest of the community, has become much longer, so the actuarial sums must take account of this.

Back in 2007, all members of the defined benefits funds were exempted from a penalty tax on contributions. This year, that exemption was lifted (from July 2017) but only for members of unfunded defined benefit funds. The exemption still applies to funded schemes. Why should there be a difference between funded and unfunded schemes?

Unlike the public service scheme, the Reserve Bank scheme is fully funded, as are most university funds, so members of these funds are not covered by the new rules.

People in these organisations on top salaries, like vice-chancellors and top Reserve Bank executives, are the winners. Any royal commission needs to probe deeply to discover the motivations behind these exemptions, although I am not alleging improper practices.