The AFR has an update on this story that we’ve covered before here and here.
So what is happening? A lot of academics are still in “defined benefit” superannuation schemes. I have put the words defined benefit into scare quotes for a good reason. Normally when such a fund faces a shortfall, it goes to the employer to top up the fund. In other words financial risk is borne by the employer and not the employee. But Unisuper doesn’t work like that. As Judith explained before:
there seems to have been an alteration made to the Trust Deed, and approved by the Trustees in 2006, that universities would not be required to top up the Defined Benefit Fund in the event of a shortfall.
This is in marked contrast with DB schemes run by private companies; APRA insists that these funds are topped up by companies – and immediately – in the event of any shortfall that would prevent the promises being met.
So what does this mean? My view:
The Unisuper scheme is not really a defined benefit scheme as it has been described. It is a capped defined contribution scheme. So members get the defined amount in good states of nature, but bear the financial risk in bad states of nature. So all risk is borne by members without any of the upside potential.
To put this into context I point to this snippet in the AFR:
The scheme’s trust deed states that the 129 employer members – including universities and research bodies – must contribute the equivalent of 14 per cent of staff salaries. Employees may contribute a further 7 per cent of their salaries into the fund.
In my case, for example, I have contributed 21 per cent (14+7) to super since I joined. This was explained to me as a condition of employment. In those days there was no choice and no salary sacrifice. So the standard amount (now 9 per cent) got taken pre-tax and the remainder after-tax. While academics have a generous super scheme by community standards, they have also paid a lot of money to get it.
So what is happening now?
Unisuper has written to 38 universities to gauge their willingness to inject more money into the superannuation fund’s $10 billion defined benefit scheme if it does not have enough money to meet its obligations.
This is going to be interesting to watch. I would have thought that most Uni’s first instinct would be to say “No”. I’m also surprised there hasn’t been more fuss about this within the university sector.
I imagine “interesting” is something of an understatement given what you’ve contributed, Sinc. Any chance of moving to a retail fund in these days of Super Choices, or are these types of funds still a special case?
Also, would the threat of an academic brain drain have an effect on the position of the Unis?
Steve D
27 Nov 12 at 9:32 pm
What I don’t understand about this is why the Trustees signed such an agreement? They are supposed to act entirely in the interests of the members and if they signed off on a valuable consideration (ie: the requirement for universities to top up any shortfall) what was the consideration (if any) that was paid?
Samuel J
27 Nov 12 at 9:33 pm
I’m not sure about how far you can move. The last time I looked (the first time it was offered) the choices were quite limited. I imagine, however, it would all depend on the exit formula. If everyone tried to move now the fund may not have enough money to cover it, but I actually don’t know.
Sinclair Davidson
27 Nov 12 at 9:53 pm
Surely the trustees will be individually liable for making that amendment. Not in the interest of the members whom they held the funds in trust for and all that. Though they probably don’t have personal assets to the tune of $10B.
Tim
27 Nov 12 at 9:56 pm
Managed to get mine out and into a SMSF with a lot of kicking and screaming. Of course, now that I’m back at Uni, they’ve opened it up again.
Not nearly as bad a situation as the state and Federal schemes, but not good for those in them.
Driftforge
27 Nov 12 at 10:10 pm
Managed to get mine out and into a SMSF with a lot of kicking and screaming. Of course, now that I’m back at Uni, they’ve opened it up again.
Not nearly as bad a situation as the state and Federal schemes, but not good for those in them.
Driftforge
27 Nov 12 at 10:10 pm
I’m so glad I left the higher ed sector. I was in UniSuper once and got my money out of there as soon as I could.
tbh
27 Nov 12 at 10:21 pm
Sinclair, sorry that you’ve been caught short, but a wiser move might have been investing your own money in a SMSF. We have done it with our money and the funds for our kids, and it’s making good returns even in the present investment situation.
Dibbing off other people’s money in the public sector has never impressed me. I resent the fact that my children’s future taxes will be paying the pensions of people who have lived their lives on the public purse.
Unfortunately, it’s almost impossible now to found a business in Australia to fund one’s own retirement, due to the disgraceful cost of government regulation.
mareeS
27 Nov 12 at 10:26 pm
MareeS – I’m not short yet. In the grand scheme of things I’m a high-income earner within the uni-system. But there are a lot of others who earn low incomes who stand to lose a lot.
Sinclair Davidson
27 Nov 12 at 10:30 pm
I am fortunate enough to have the lot in an SMSF, and everyone should have that option.
Am I a brilliant investor?
No.
I am just as capable of losing money as anyone ….. I just don’t charge myself a shitload of fees to do it.
Leigh Lowe
27 Nov 12 at 10:43 pm
Yes, I understand, which is why I pulled my husband’s money out of Unisuper years ago and set up a SMSF that incorporates his and mine and the offsprings’ super investments. We’re also high-order investors. But there are many people who will be losing out on super if they haven’t done due diligence.
mareeS
27 Nov 12 at 10:52 pm
An unsuccessful job interview taught me they have programmers “who aren’t programmers”. They were considerate in letting that known though, and that you’d be expected to assist them.
Harold
28 Nov 12 at 12:54 am
I am, unfortunately, on a pension from Uni Super. As far as I can see I can do nothing about the situation. Worst case scenario, all my pension will be lost and I will end up on an aged pension. I will cope, but it will hurt after all the money that was poured in. I would have been better investing it all myself, but that was not an option at the time.
Cynic
28 Nov 12 at 6:08 am
Isn’t UniSuper a big supporter of Al Gore? I think I remember their logo plastered over the promotional material when Gore visited Australia a few years back.
johno
28 Nov 12 at 6:38 am
Downsizing the tertiary education sector by 95% would be a net benefit to the country. Replace with trade schools for lawyers and doctors and engineers. Eliminate “humanities” faculties entirely. That’s just a goddamn hobby.
Eyrie
28 Nov 12 at 10:21 am
I’ve said it here before, if marginal tax rates were below 15% Superannuation would be obsolete.
Forester
28 Nov 12 at 11:03 am
tsk tsk Mr Davidson. We all know that the “higher” contributions were so the taxpayer wouldn’t see the actual salary received by university public servants. The fact the climate has changed today doesn’t change the original intent. Sir Humphrey Appleby would have approved of the UniSuper scheme.
One expects, by today’s standards, employees contributing to UniSuper wouldn’t have received the extra “14%” top up (note the scary quotes). Don’t forget, the 14% doesn’t come anywhere close to covering the cost of providing the guarantee to cover benefits on retirement as well as the considerable insurance benefits.
In fact, most employees of a University in Australia don’t get access to the UniSuper defined benefit scheme these days. There is a real class warfare on campus and it is marked by membership of the UniSuper DFB scheme. Many are members of the lowly FSS.
Also, let us not forget the major break UniSuper members receive on Concessional Contribution limits for super which have been lowered to $25,000 per annum for everyone else but government employees who are members of Defined Benefit Schemes.
Going by the returns in the private market, members of UniSuper should count themselves lucky. If they are concerned about losing benefit they should trigger early retirement (after seeking independent financial advice of course).
There is a parallel to be drawn between the strife UniSuper members are in and the public sector schemes which are sending counties broke in California. University management is to be commended to be actually addressing the problem of what was an over-privileged scheme in the first place.
Scott
28 Nov 12 at 11:36 am
Normally it’s pretty difficult to change the terms of a DB scheme unless every single member agrees. Not sure the Trustees were entitled to do what they done.
Could get interesting.
Bill
28 Nov 12 at 12:14 pm
“In fact, most employees of a University in Australia don’t get access to the UniSuper defined benefit scheme these days.”
This is not correct.
“The terms of your employment mean that you are eligible to join the Defined Benefit Division (DBD).
You’ll initially join UniSuper as a DBD member, and you can transfer to Accumulation 2 at any point within the first 24 months of your DBD membership. Once you have made your decision, you cannot change your mind.”
And it is not a Defined Benefit scheme where you get a pension for life. It is more similar to an accumulation fund, the difference is your payout is based on some formula rather than risking whatever happens to the share market or wherever accumulations funds are deposited.
In 1998 the old Defined Benefit scheme where you get a pension for life was replaced by a scheme where your payout is based on a formula.
But it looks like if there are insufficient funds to cover your payout Unisuper will not make any top ups.
You may be better in an accumulation fund.
Neil
28 Nov 12 at 12:54 pm
Not related to State Super buying into Fairfax, I hope.
tom harley
28 Nov 12 at 12:55 pm
At the risk of showing my ignorance here does “good states of nature” mean smart investments and “bad states of nature” mean bad investments or is it just to do with how many people are cashing out at any given period (i.e. lots of the top paid people leaving at the same time).
Simon
28 Nov 12 at 2:23 pm
I would be talking to the legal academics. I’m pretty sure you could sue the Trustee for their failure to act in the best interests of the DB members.
It’s all very well talking about the generosity of the scheme – and don’t count me here as bleating because I got out – but there was always a trade-off with lower current remuneration. And it is a contract between worker and employer.
I know Cats believe in freedom of contract – both the freedom bit and the contract bit.
By the way, cashing out balances from the DB scheme is generally a pretty dud financial transaction unless you are pretty young or if you have a view that the promise will be seriously underdelivered.
Judith Sloan
28 Nov 12 at 3:16 pm
I have been involved with the smaller end of the superannuation industry for 40+ years and observed closely, many and various competitors in that time. The defined benefit funds were the darlings of the 60′s, 70′s and 80′s until some of the treatment meted out to members ,similar to that which happened at Unisuper recently, rose to the surface.
My opinion has been; unless the DB fund has a bottomless pit of money, always available in the event of investment or market failure, that fund structure probably is doomed to failure, long term.
Hence the moves made on many DB funds to become accumulation style where the employer has to make only the required guarantee charge contributions, without meeting future unfunded liabilities. Funds such as Unisuper could not sustain the huge unfunded liabilities out into the future,especially as the growth of tertiary education has been exponential over the past three decades.
However, we know this fail-safe mechanism is available to the funds for many public servants, particularly those in Canberra. One day this will need addressing. Although the Future Fund is there to meet the unfunded liabilities of Commonwealth Government employees, this may prove impossible to sustain forever.
Hubert East
28 Nov 12 at 5:41 pm
Neil 28 Nov 12 at 12:54 pm said
““In fact, most employees of a University in Australia don’t get access to the UniSuper defined benefit scheme these days.”
This is not correct.”
Not true Neil. Most employees on campus are casuals or work for the state government. Mainly full time “official” academics get access these days (on this we can agree). I am very aware of how the DBD works. Here in NSW many academics still are members of the State Super Scheme (DBF pension/lump sum) and some even SASS (DBF lump sum) as a consequence of universities operating under the purview of the state in the olden days. Many are members of First State Super. This would be the janitors, and other ancillary staff.
As for “Defined Benefit Schemes being pensions” this is a straw man argument. Whether or not a scheme pays a Pension has nothing to do with it being a Defined Benefit Scheme. A Defined Benefit Scheme is what it says it is Defined. Benefit. Scheme.
Final entitlements are based on a formula usual based on a multiple of salary. Great if you can get one. People start young picking up entitlements costed on their current salary which is usually low. The fund bit is when their wages go up in later years then, woosh, up the benefit ratchets. It is very good scheme to be a member of.
I won’t bother going into the insurance side, too complicated and not enough space. Suffice it to say, the UniSuper scheme is very generous.
Scott
28 Nov 12 at 6:39 pm
Special Report: How a vicious circle of self-interest sank a California city | Reuters
FYI. Not quite UniSuper but it probably wasn’t that bad in the beginning either.
Scott
28 Nov 12 at 8:58 pm
“Most employees on campus are casuals or work for the state government.”
I would find this hard to believe. All academics are full time workers. Research scientists on contracts are also full time for the length of their contract and can enter the DBD. Most administration staff are full time. I would doubt that most employees on campus are casuals.
According to the link i gave all new workers at Universities are put into the DBD. You actually have to opt out to get out of it.
“You’ll initially join UniSuper as a DBD member, and you can transfer to Accumulation 2 at any point within the first 24 months of your DBD membership. Once you have made your decision, you cannot change your mind.”
In 1998 they changed the DBD scheme.
Defined Benefit Indexed Pension
A Defined Benefit Indexed Pension is only available to Defined Benefit Division members who joined the Fund before 1 July 1998.
Presently your payout is based on a formula which looks like they will not top up if UNISUPER does not have the money
Neil
29 Nov 12 at 11:43 am
what i dont understand about defined schemes is, what happens when the government super contribution goes up? For example I know of one that is 15% of final salary for each year worked. Yet 12% government mandated invested with a return of 5% ends up being alot more.
ironically – some buisness may find the defined schemes actually make them a profit, as the ageing work force tends to have most employees stuck in their current positions with no chance of promotion or increased salary beyond inflation.
the defined scheme i am in is topped up every year and must have enough at all times to pay out everyone as if they all stopped working. once it dips below the government is meant to step in and shut it down before it ends up a ponzi scheme.
MundiM
30 Nov 12 at 3:07 pm
I was in the Defined Benefit Scheme until the GFC hit and Unisuper advised members that it was introducing the “wait and see if it hits the fan” provisions of the Trust Deed. That was a good enough warning for me so I moved it all into the Accumulation account. I managed to move it around every so often into cash when the market was bad then into higher yield categories as it’s improved.
Tony
18 Jan 13 at 5:56 pm
UniSuper’s DBS issues are among the consequences of a vicious cycle initiated and sustained by University policies.
As University administrations have increased their share of resources in order to fund expanding central bureaucracies, the teaching and research departments have found themselves in a steep decline, to the extent that in my previous university the departments were relegated to non-budgeted status.
When I queried this, I was told, with all seriousness, that T&R are a cost to the university whereas administration provides all the services. The evidence is that University Councils approve of this attitude.
As teaching and research staff have less and less say, a typical university administration engages in self-congratulatory group-think, handing out bonuses to its clerical staff while it downsizes the faculties so it can take the tuition fees to itself.
Since the NTEU represents clerical as well as academic staff, most of their members are now clerks so it’s no longer in the union’s interest to question the universities’ academic decline.
Since universities are established and controlled at the highest level by governments, it does seem that only a high-level intervention can arrest what I see as the looming collapse of the tertiary sector.
An acquaintance of mine who works for the Productivity Commission said that university cost structures were not on their radar at present, so I urged that they examine them at the earliest opportunity.
Geoffrey Tobin
7 Feb 13 at 10:42 pm