An end to exclusivity: public sector funds contemplate exposure to choice

Australia’s public sector funds will ultimately have to be prepared to deal with the new choice of fund environment, according to the chief executive of the Commonwealth Superannuation Scheme/Public Sector Superannuation Scheme (CSS/PSS), Steve Gibbs.

“The impact of choice won’t be any different for public sector funds than it will be for industry or corporate funds,” he said. “Business will continue as normal for us. Choice merely brings into focus the need to remain competitive and attractive to employees.”

The chief executive of the big NSW-based First State Super, Michael Dwyer, said that if there was any difference in the impact of choice of fund to be found, then it was in employer relations and education.

“Corporate and industry funds have to educate a larger number and wider variety of employers. There is a very real need that those employers be equipped to navigate the new superannuation system that Australia finds itself in,” he said. “On the other hand, the only employer for public sector funds is the government, which makes things a lot easier.”

In the run-up to the new choice of fund environment there was plenty of debate about which funds represented the best option for employees, and public sector funds were not excluded from that analysis. But when it comes to making comparisons, neither Dwyer nor Gibbs feel any concern.

“Public sector funds have a lot of the best, industry leading attributes,” Dwyer said. “At First State, we have competitive returns, low costs, a good choice of investments, and excellent internet and telephone services combined with daily unit pricing.”

Of course, for many public sector funds, the increased focus choice of fund brings won’t necessarily bring about the same physical impact that it will for corporate and industry funds. Many state-based public sector superannuation schemes have sought government exemptions from the choice legislation and have had those exemptions approved. The more pressing question lies in how events will play should choice be widened to include public sector funds unequivocally.

According to Dwyer, employer and employee relationships are key.

“When it comes to older public servants, employee loyalty may put public sector funds ahead,” he said. “Quite often, there will be a long history of service involved as well as a consistency of good returns, low costs and overall reassurance.”

Previously, one of the best weapons in the public sector fund arsenal was the high proportion of members within defined benefit schemes. However, issues such as the level of unfunded liabilities means that virtually all the defined benefits schemes have been closed to new members, and are being progressively phased out.

John O’Flaherty, general manager of SuperSA, points to the fact that there are only a few states left that have defined benefits schemes operational.

“SuperSA closed their defined benefits scheme in 1988, and we certainly feel that they are a thing of the past,” he said. “Instead, we are offering options such as post retirement packages, which are akin to defined benefits schemes in terms of income stream.”

O’Flaherty’s opinion is one shared by most industry experts to differing extents. Dwyer concurred, saying: “There is no doubt that defined benefits schemes still exist, but I would have to agree that the industry direction is towards accumulation schemes.”

So, if choice includes public sector funds in the near future, what will be the result? That, according to Gibbs, is the key question that all public sector schemes are asking themselves.

“Will new public servants retain their former superannuation arrangements, or will they be attracted enough to their new employer’s scheme to be tempted to change?”

However, for O’Flaherty, that same question gives him cause to worry that should choice be introduced to the public sector, many state super funds will lose members without gaining new employees outside of those entering the public service.

Dwyer does not share O’Flaherty’s concern. He believes that the level of benefits and services provided by public sector funds such as First State make it difficult to persuade members to leave.

“Anyone trying to entice a member away from First State Super, or any other public sector fund, would have a hard task ahead of them. It wouldn’t be easy to convince an employee that membership of an alternate fund would benefit them significantly,” he said.

With the Federal Department of Finance and Administration already canvassing the manner in which the major Commonwealth public sector funds will be exposed to choice, it appears only a matter of time before public sector funds in other jurisdictions are also required to face the choice equation.

O’Flaherty believes that in the short to medium term, at least, public sector funds should remain excluded from the choice regime at least until they can be guaranteed a level playing field.