Part I - The treatment of superannuation in GFS
In GFS employment related superannuation schemes are classified to the public sector. Employment related superannuation schemes are a type of social insurance scheme that provides post-retirement entitlements for employees as part of their conditions of employment. For GFS purposes, it is only the financial obligations of public sector employers for superannuation that are recorded. By definition, public sector superannuation schemes are contributory and serve to provide post-employment benefits to government employees and their dependants. The provision of superannuation entitlements by government is considered to be part of an actual or implicit contract between the government (as employer) and their employees to compensate them for the provision of labour services.
Public sector superannuation schemes in Australia are structured into defined contribution schemes, defined benefit schemes and hybrid schemes (which include elements of both defined contribution and defined benefit schemes). The following entities are usually associated with the operation of a general government superannuation scheme in Australia:
- General government employer unit(s) - the unit who establishes a superannuation scheme on behalf of their employees and retains responsibility for pension liabilities.
- Superannuation scheme administrative unit - the unit involved in providing administrative services to superannuation scheme members for their participation in the scheme, including their choice of contribution and investment options and arrangements for the payment of superannuation benefits. In some Australian jurisdictions, the administrative unit is financed by the employer (the general government sector) and is contained within the general government sector, either as a separate government unit or as part of another (i.e. the parent). In others, it is financed by the members through cost recoveries and set up as an integral part of the superannuation fund which is not deemed to be under government control.
- Board of trustees (or equivalent) for the scheme - a separate legal body that is created responsible for administering the superannuation scheme on behalf of the superannuation scheme members in an autonomous superannuation fund.
- Superannuation fund under the management of the board of trustees - a separate legal entity responsible for administering the superannuation scheme on behalf of the superannuation scheme members that is managed by a board of trustees.
Autonomous and non-autonomous superannuation funds
Some Australian jurisdictions have established superannuation funds for the benefit of their employees that are separate institutional units from the government employer. Legislation places responsibility for the day-to-day operation of the superannuation funds with a board of trustees that is created as a separate legal entity. These superannuation funds are referred to as autonomous superannuation funds, and they have the characteristics of an institutional unit in the corporate sector (i.e. it must be able to operate independently of its owners, and be able to acquire assets and incur liabilities in its own right, have a separate set of accounts, and provide its services at economic significant prices). These entities are considered to provide financial services (i.e. superannuation benefits) to the household sector, and are therefore classified to the financial corporations sector. They are viewed as non-profit institutions (NPIs) and hence out of the scope of GFS, and because the costs of the funds' operations are recovered from the pool of contributions the funds are treated as market NPIs and are included in the private financial corporations institutional sector.
There are two types of autonomous superannuation funds:
- where the employer retains responsibility for pension liabilities, and the funds are operated by a pension administrator in the private financial sector; and
- where the pension fund itself is responsible for the liabilities and these are generally multi-employer funds.
Some Australian jurisdictions establish special accounts or notional funds within the general government sector, rather than establishing a separate institutional unit that is responsible and accountable for the decisions and actions regarding the return on superannuation fund assets. These types of superannuation funds are called non-autonomous superannuation funds.
A non-autonomous pension fund for employees in the public sector does not meet the criteria to be considered an institutional unit. These funds are classified within the unit that controls them, and they accumulate assets to cover outstanding unfunded superannuation liabilities. The economic flows and stock positions of non-autonomous superannuation funds are integrated with those of the controlling employer. All of the assets, liabilities, transactions, and other economic events of the fund are combined with the corresponding items of the employer operating the scheme, which may be a general government unit or a public corporation. The treatment of the assets, liabilities, transactions, and other economic events related to the non-autonomous superannuation fund is similar to that of an autonomous superannuation fund.
Defined contribution superannuation schemes
A defined contribution superannuation scheme is one where the benefits payable to the employee on retirement are determined by the funds that have accumulated from employer and employee contributions over the working life of the employee, together with income and capital gains / losses arising from the investment of the accumulated funds. The funds are accumulated in a separate superannuation fund managed by a board of trustees or guardians of the scheme (autonomous fund). The public sector employer has a responsibility to make the regular agreed contributions to the fund, but then has no further superannuation liability towards their employees.
Defined benefit superannuation schemes
A defined benefit superannuation scheme is one where the benefits payable to the employee on retirement are determined by a formula, usually based on a combination of final salary (or final average salary), age at retirement and the number of years of membership in the scheme. For defined benefit schemes, the employer (or an autonomous pension fund) has a liability to ensure that the superannuation entitlements of its employees are fully met on their retirement. Defined benefit schemes may be funded in a variety of ways. In the past, the most common method in the Australian public sector was for the employer to meet the funding requirements on an emerging cost basis, with a separate fund established to accumulate and invest any member contributions. Most public sector employers only operate defined contribution pension schemes for new employees, and have closed new membership to defined benefit schemes. Many public sector employers have also established special accounts or funds within the general government sector to progressively cover their unfunded liabilities or are making additional payments to autonomous funds to reduce their outstanding liabilities to those defined benefit schemes.
When accounting for defined benefit superannuation schemes, the public sector employer is required to record the value of the benefits accruing to employees for employment services provided by them in the current period, and also the total level of the outstanding liability to be shown on the balance sheet. This process can be complex because the benefits to the employee are determined in terms of the anticipated level of the benefits that will ultimately be received by the employee on retirement or resignation. While the formula for calculating the benefits is known, the future benefits payable cannot be specified precisely until the retirement or exit of the employee from the scheme.
A number of factors can affect an employer's defined benefit superannuation liability. These include:
- Current service cost (current service increase) - the increase in entitlements associated with the employment services provided by employees in the current period;
- Interest cost (past service increase) - the increase in the liability due to the fact that, for all participants in the scheme, retirement (and death) is one year nearer, and so one fewer discount factors must be used to calculate the present value of the benefits for each future year;
- Benefit payments on retirement or exit - the decrease in entitlements due to the payment of benefits during the period; and
- Changes arising because of changes to the discount rate, other actuarial assumptions and/or the rules governing entitlements under the scheme.
The Projected Unit Credit Method (which is equivalent to the Projected Benefit Obligation (PBO) method referenced in Chapter 17 of the 2008 SNA) is the actuarial method recommended by the Australian Accounting Standards (AASB 119) for calculating the present value of defined benefit obligations. This method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
Present value calculations require the use of discount rates that represent the time value of money. Ideally the discount rate should be a weighted average reflecting the timing of future benefit payments; market rates of the appropriate term should be used to discount shorter term payments; and estimates made of the discount rates for longer term maturities by extrapolating current market rates along the yield curve. However, for practical reasons many Australian jurisdictions use the 10-year Commonwealth Government bond rate or the government bond rate with the longest available maturity as a proxy for the discount rate. Paragraph 6.117 of the IMF GFSM 2014 states that over time, the total liability of a defined benefit pension scheme will change because of the receipt of additional contributions and property income, the payment of benefits, changes in the actuarial assumptions, and the passage of time. The property expense attributed to members is equal to the increase in the liability resulting from the property income accruing on the pension fund’s assets held on behalf of the beneficiaries and the passage of time, which occurs because the future benefits are discounted over fewer reporting periods.
For those defined benefit schemes where an autonomous superannuation fund has been established to hold employee and / or employer contributions, the fund has a liability to the household sector equal to the discounted value of the defined benefit obligations. If the fund has insufficient assets to meet this liability, the public sector employer has a liability towards the fund that is equal to the shortfall. Conversely, if the fund has more than sufficient assets to meet this liability, the public sector employer has an asset with the fund that is equal to the difference between fund assets and the current value of the defined benefit obligations. Therefore, where an autonomous superannuation fund exists, the provisions for unfunded superannuation for a public sector employer are equal to the present value of defined benefit obligations less the market value of fund assets.
The increase in superannuation liability that results from employment services provided in the current period is calculated using the Projected Unit Credit Method. This method views each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. For most defined benefit superannuation schemes in the public sector, employees are required to make a regular contribution towards their own superannuation entitlements. This contribution reduces the current cost of the scheme to the employer.