Defined Benefit Scheme

A defined benefit scheme is one in which the benefits which accrue on resignation, retirement or death are predetermined according to a formula established in the scheme rules. In many public sector schemes, these rules may be specified in an Act, regulations made under that Act or in a Trust Deed. Depending on the design of the scheme, the employee, as well as the employer, may be required to contribute to the scheme.

As the end benefits are calculated in accordance with the scheme rules and the employee pays a set proportion of salary into the scheme, the employer's actual contribution to the scheme will vary depending on such factors as the earning rate on investments, the longevity of superannuants and the salary of employees immediately before the benefit is calculated.

Within the Tasmanian public sector, the RBF defined benefit scheme, the Parliamentary Superannuation scheme, the Parliamentary Retiring Benefits scheme and the Judges’ scheme are all defined benefit schemes.

Accumulation Scheme

An accumulation scheme is one in which the employer's contribution is fixed according to the scheme rules. Under such a scheme, the end benefit represents the accumulation of contributions made by the employer and employee (if any), together with the investment earnings on those contributions less fees and charges.

The end benefit received by an employee will vary depending on the level of employer and employee contributions and the earning rate on investments over the period of membership of the scheme.

It is generally not compulsory for members to contribute to their accumulation scheme.

The Tasmanian Accumulation Scheme (TAS) is the principal accumulation scheme for Tasmanian public sector employees.

Funded and Unfunded Schemes

A superannuation scheme may be unfunded, partially funded or fully funded.

An unfunded scheme is one in which the employer-financed benefit component is paid on an 'emerging cost' basis when the employee retires, resigns or dies. That is, the employer does not set money aside within the scheme for the individual employee's benefit. In these schemes, the employee would not be required to pay contributions into the scheme. Judges’ schemes in other jurisdictions are unfunded schemes.

By contrast, a funded scheme is one in which the employer makes a contribution to the superannuation fund, reflecting the liability in respect of each individual employee. The employer contribution may be made every pay period, but must be made to an accumulation scheme at least every quarter.

Some schemes are partially funded such that there are both funded elements (usually relating to employee contributions) and unfunded elements (usually relating to employer contributions). In the past, most major public sector schemes within Australia have been unfunded in respect of employer contributions, and are therefore partially funded schemes.

Both TAS and the Parliamentary Retiring Benefits schemes are fully funded schemes. The other schemes are partially funded schemes, as they are unfunded in respect of employer contributions.

Open and closed schemes

A scheme is an 'open' scheme if new employees are generally able to join the scheme. Conversely, a 'closed' scheme is one that is generally no longer open to new employees.

When a new superannuation scheme is introduced, existing members are usually entitled to remain in the scheme in which they started, even if it is closed to new employees. In such cases, these members would obtain a benefit as determined in accordance with the scheme rules. In some cases, a transfer option to the new arrangements may be provided.

Table 18 outlines the open and closed scheme status of the various Tasmanian public sector schemes for which the Treasurer has Ministerial responsibility.

Lump Sum Scheme

A lump sum scheme is one in which the default arrangements provide for the payment of entitlements as a one-off lump sum payment. That is, there is a single payment of the entitlement to a member, with no ongoing obligations from the superannuation scheme to pay benefits to the member. A lump sum scheme may, however, permit a member to elect to convert some or all of the lump sum entitlement to a stream of payments over a period, with the remaining lump sum being reduced accordingly.

The Tasmanian public sector lump sum schemes are as follows:

A pension scheme is a scheme in which the default arrangements provide for the benefit to be paid as a regular periodical stream of payments over a period. The payment period may:

• be for the remainder of the life of the member (ie cease on the death of the member);
• extend, at a reduced rate, for the remainder of the life of the widow or widower of the member (ie cease on the death of the member’s widow or widower); or
• in the case of an allocated pension, cease when the regular payments exhaust the amount in the account.

The Tasmanian public sector pension schemes, namely the Parliamentary Superannuation Fund (PSF) scheme and the Judges’ scheme, both provide an opportunity for members to convert all of their pension to a lump sum.

Allocated Pension

An allocated pension is a pension purchased by payment of a lump sum. The lump sum payment earns investment earnings and the member nominates the amount of pension that he or she wishes to receive within the maximum and minimum amounts established under Commonwealth legislation. An allocated pension ceases when the funds are extinguished or upon the death of the member (primary pensioner). In the latter situation, the balance of the account at the time of death is paid to the member’s widow, widower or legal personal representative. The widow or widower may then be entitled to use this lump sum to purchase a further allocated pension in his or her own right.

Life Pension

A life pension is a pension, including a reversionary pension, that is payable for the life of the recipient. RBF pensions, other than allocated pensions and children’s pensions, are life pensions.

Children’s pensions may, depending upon the scheme rules, be payable on the death of a member. However, these are not life pensions, generally ceasing to be paid once the child reaches age 18, unless the child continues to study full time, in which case the pension ceases on the child reaching age 25. The RBF defined benefit scheme does not provide children’s pensions, except in those circumstances where an anti-detriment benefit is payable in respect of a member who joined the scheme prior to 1 July 1994.

Reversionary pension

A reversionary pension is a pension paid to the widow or widower on the death of the member. In most Tasmanian public sector superannuation schemes, the value of a reversionary pension is two-thirds that of the primary pension. Thus the entitlement to a pension in relation to a member does not cease on the death of the member (primary pensioner), but rather on the death of the member’s widow or widower.

A reversionary benefit is not paid automatically. For example, RBF members who commenced in the RBF defined benefit scheme after 1 July 1994 are required to choose, upon retirement, to take a non-reversionary pension or a reversionary pension. A pensioner with a non-reversionary pension receives a higher pension per fortnight than one who received the same lump sum benefit but has a reversionary pension, as non-reversionary pension payments cease on the death of the pensioner.

Preservation Age

The preservation age is established in regulations made under the Commonwealth Government’s Superannuation Industry (Supervision) Act 1993 (SIS Act). The preservation age is the age at which a person who has retired from the workforce with preserved benefits can, ordinarily, access those benefits. However, a life pension may be paid to an RBF defined benefit scheme member who retires on or after age 55, regardless of his or her preservation age.

The current preservation age is outlined in Table 1.

Table 1 Preservation Age