Economic management is emerging as the key issue in the Victorian election campaign and “Glenn Moore” reckons there is no problem with the way the Bracks government is handling unfunded superannuation for public servants.

Amazing what a Google search can turn up on the web, but back to the issue.

The super schemes in question are defined benefit schemes. That means that pension benefits payable at retirement age are related to the employees salary on retirement. The future liability for pension and other benefits payable is actuarially calculated each year and is normally funded by member and employer contributions at a rate calculated to provide, after assumed investment returns, sufficient funds to meet the liabilities when they fall due.

The unfunded (future) liability was $13.4 billion as at 30 June 2002, and according to the Auditor-General:

The liability represents employer superannuation contributions yet to be paid by the Government to superannuation schemes for services previously provided by government employees net of the market value of assets held by the respective superannuation funds. The liability has resulted from decisions of previous governments to progressively meet the employer share of superannuation benefits when, or after, employees retire (i.e. on a pay-as-you-go basis) rather than as benefit entitlements accrue over the working lives of employees.

These schemes have been closed to new members since 1994, so changes to the unfunded liability only arise from rises and falls in either the estimated future liabilities or the current value of the long-term investment portfolio.

During 2001-02, the unfunded liability increased by $1.5 billion. Of this, $1.1 billion was due to negative investment returns on the investment portfolio. An investment performance comparable with that of the entire funds management industry and not attributable to any action or inaction of the State Government.

The State Superannuation Fund (SSF), in common with all large investment funds, manages some investments itself but the vast majority of investment management is outsourced to private sector funds managers. Reputable global funds managers such as Citigroup, Credit Suisse, Maple Brown Abbott, Deutsche Bank, Rothschilds and UBS Warburg to name a few.

Most of the increase in the unfunded liability during 2001-02 was therefore due to the free market operations of private sector funds managers investing in private sector companies.

In response to my previous analysis, Crikey said:

“A responsible government would allocate enough from the budget each year to see unfunded superannuation liabilities fall.”

Since 1999, the Labor Government has put in place a program to manage the unfunded liability.

One component is the Beneficiary Choice Program (BCP), which allows superannuation fund members to commute their pension benefits for lump sums. Since the amounts of the lump sums are less than the present value of the members future pensions, every commutation reduces the unfunded liability. In the two years since its introduction, the BCP has contributed $538 million to the liability reduction.

The second component is a program of additional contributions from Consolidated Revenue, based on independent actuarial advice, which will progressively eliminate the unfunded liability by 2035.

Due to current Australian Accounting Standards (AAS 25), the present value of these future additional contributions cannot be recognised as assets in the SSFs accounts, even though the present value of the future liabilities they will fund are reported as liabilities.

During 2001-02, in addition to the amount due under this program, an additional $250 million contribution was paid. The A-G said:

Should the State also continue to make additional contributions, the unfunded liability may be fully extinguished prior to the current projection of 2035.

Having put in place a program of regular payments to reduce the unfunded liability in an orderly manner, how to spend windfall budget surpluses becomes a matter of political choice. The Kennett Government chose to use current revenue to reduce future superannuation liabilities of public servants rather than spend the money on essential services such as health and education for the benefit of the whole community. And it paid the price at the ballot box.

Since 1999, the Labor Government has chosen to spend current revenue to improve public services, while reducing the unfunded, future liability in an orderly manner and still retaining the option to make windfall reductions if it cant think of anything better to spend the money on.

Crikey also said:

“unfunded superannuation liabilities are forecast to keep rising.”

This is untrue. According to the A-G:

“The most recent actuarial projections indicate that the States unfunded superannuation liability will peak in nominal terms at $13.9 billion in 2011 and then gradually reduce until the liability is eliminated by 2035.”

Like all incoming governments, Labor had to deal with the situation left to it by previous administrations, of whatever political flavour. In the case of the unfunded superannuation liability, which it did not create, I suggest it has taken a highly responsible approach to managing the problem without diverting scarce current revenue away from critical spending on government services.

Crikey said:

“The Queensland Labor government insists on having a fully funded scheme and if investment returns falls short of forecast they plug the gap directly through the budget.”

The logic of this, if true, is highly questionable.

The liabilities of a superannuation scheme are long term and are funded by long-term investment performance. As I quoted previously from the A-Gs report:

“Equity investments are held to fund longer-term liabilities, with the ultimate value of these investments crystallising upon their realisation. However, the short-term volatility in investment markets can significantly impact on the reported financial performance of investing agencies and consequently, the operating results of those agencies and the State in any one financial year.”

“Equity investments are subject to the volatility of equity markets in the short to medium-term. However, over the longer-term, equity investments have provided significant returns to the above investing agencies [including the SSF] through increasing share values.”

Using current revenue to fund short-term fluctuations in the market value of a long-term investment portfolio is poor economic management.

To give a domestic analogy, its like telling your daughter you cant afford to send her to university because the market value of your home, which you dont intend to sell, has temporarily fallen and you must make a lump-sum repayment of the mortgage that the bank hasnt asked for. But she can go to uni next year if property prices rise again and you can redraw on the mortgage.

The Rodent only wants to take us back to the ’50s – the 1950s – this sort of nineteenth century economic thinking surely went to the grave with Scrooge.

Earlier debate between Moore and Crikey over unfunded super

By Glenn Moore

Today’s summary of the Auditor’s General’s annual report in the sealed
section (Oct 31) was simply a biased piece of election propaganda.

Crikey said:

“On the budget front, Victoria’s auditor general Wayne Cameron delivered
a pretty heavy blow to the Bracks government’s financial management with
his annual report yesterday.”

The Auditor General’s report actually said:

“My analysis of the State’s overall condition shows that it remains
strong. However, there are a number of vulnerabilities and emerging
pressures which require careful management.”

“The Government has achieved its short-term financial objectives and is
progressing towards the achievement of its broadly stated longer-term
financial objectives. The financial position of the State continues to
remain sound, with net assets of $49.4 billion, an increase of $5.2
billion since the prior year.”

Crikey said:

“Victoria is facing a pincer movement from sweetheart pay deals with
public sector unions and plunging world equity markets.”

“The auditor general revealed that public sector wages spiralled 9 per
cent in 2001-02 which cost $962 million but the full year cost of the
deals struck over the past couple of years will rise to $1.47 billion in
2003-04.”

The Auditor General actually said:

“Costs associated with employee entitlements comprising salaries, wages
and on-costs, amounted to $9.4 billion in 2001-02, an increase of 8.9
per cent or $768 million on the previous financial year.”

The $962 million is the estimated additional cost for 2001-02 of recent
major public sector industrial settlements and additional permanent
staffing decisions. Of this $227 million relates to improving services
through the additional employment of: 1,150 health sector staff; 2,000
education sector staff and 800 additional police.(And the Libs think the
state is still 1,050 short!)

The remainder is the net cost of public sector pay deals, about which
the A-G said:

“…for the year ended 30 June 2002, wage rate growth in Victoria was on
par with the Australian average but below the wage rate growth for New
South Wales and Queensland. However, the percentage change increase in
Victoria of 3.7 per cent from the corresponding quarter of the previous
year was the highest of the jurisdictions …and above the Australian
average percentage change for the period of 3.2 per cent.”

Crikey said:

“The budgeted $500 million surplus in 2002-03 is predicated on the
assumption of a 7 per cent return on investment markets but the AG has
revealed that Victoria’s investment funds dropped $461 million in the
September quarter and unfunded superannuation liabilities rose $384
million.”

Commenting on the $461 million unrealised revaluation loss, the Auditor
General also said:

“Equity investments are held to fund longer-term liabilities, with the
ultimate value of these investments crystallising upon their
realisation. However, the short-term volatility in investment markets
can significantly impact on the reported financial performance of
investing agencies and consequently, the operating results of those
agencies and the State in any one financial year.”

“Equity investments are subject to the volatility of equity markets in
the short to medium-term. However, over the longer-term, equity
investments have provided significant returns to the above investing
agencies [i.e. Transport Accident Commission, Victorian Workcover
Authority, Victorian Managed Insurance Authority and the State
Superannuation Fund] through increasing share values.”

Crikey said:

“With the smoking ban wiping out another $100 million of budgeted
revenues this year, Victoria is definitely in deficit as we speak.”

Maybe, but other income items are consistently under forecast, such as
conveyancing revenue, about which the A-G said:

“In each of the past 3 years, the impact of property price increases and
the sustained strength of the property market on the State’s Budget
Estimates have been under-estimated. It should, however, be acknowledged
that the difficulty of forecasting conveyancing duty is not confined to
Victoria.”

Without a comprehensive analysis of all current revenue and expense,
Crikey cannot possible justify a statement that “Victoria is definitely
in deficit.”

Crikey responds

Bring on the budget update, I say. I’ll bet you $100 that Victoria will report a deficit this financial year. Another small example is the forecast revenues from Crown casino, which the Bracks government is tipping will rise from $92.4 million in 2001-02 to $110 million in 2002-03. Crown last week said revenues were down, partly thanks to the smoking ban.

The Seal Rocks payout will also hit the budget and I’m very doubtful that they will meet stamp duty forecasts given the slowdown in the property market. There was no specific budget allocation for the Commonwealth Games which will cost taxpayers more than $500 million.

Similarly, there is no specific allocation for the Spencer Street redevelopment in the last budget and only a mention of an investment of between $200 million and $300 million. Lo and behold, the government then does a deal to pump in $1 billion over 30 years.

After a blowout of almost $1 billion in 2001-02, superannuation is looking like a potential $500 million blowout in 2002-03 and then you’ve got the issue of election promises.

Even if they do scrape through with a surplus, it is hard to get away from the argument that the Bracks government is an old-fashioned tax and spend operation. Tax revenue is forecast to rise 10 per cent on the 2001-02 budget forecast to $8.75 billion.

After Jeff Kennett froze water prices for a couple of years, Bracks went back to the old annual increase and then jacked up dividends from water from $265 million last year to a forecast $304 million this year.

Bracks also abolished the winter energy concession which saved him more than $50 million a year.

And how can anyone claim a deficit when unfunded superannuation liabilities are forecast to keep rising. Unfunded super peaked at about $19 billion in 1993 but then came down every year under the Kennett government to almost $11 billion.

The final months of Kennett saw some big contributions into super with a total of $2.2 billion being pumped in back in 1999-2000, but this fell to $1.44 billion in 2000-01 as the unfunded liabilities started rising again.

The latest forecast is that unfunded super liabilities will hit $12.76 billion in 2003, rising to $13 billion in 2004, $13.5 billion in 2005 and $13.6 billion in 2006.

A responsible government would allocate enough from the budget each year to see unfunded superannuation liabilities fall. The Queensland Labor government insists on having a fully funded scheme and if investment returns falls short of forecast they plug the gap directly through the budget.

That’s all for now but please send in your thoughts as we want to have a healthy debate about economic and budgetary management over the next four weeks.

Peter Fray

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