January 2012
Letter to DominionPost 9 January 2012
Your feature ‘Who tops the superannuation charts’ was short on facts and failed to acknowledge the part
superannuation plays in an employee’s remuneration. A balanced article would have painted a much more complete picture of government employee retirement provision in the context of remuneration. Perhaps the article was an oblique attack on the remuneration of the highest paid government employees, as assessed by the Remuneration Authority? There is no doubt that the manner of evaluating the worth of senior government employees, such as local authority chief executives, cries out for examination, but that is a different issue from superannuation.
The feature on the ‘fat cats’ and superannuation ignored the predominant group of government employees who are members of the ‘general’ scheme of the Government Superannuation Fund and the National Provident Fund (as distinct from the State Services Retirement Superannuation Scheme SSRSS and KiwiSaver). There are 53,200 retired government employees who have a lifetime contract with their employer: contributing typically 6.5% of their salary throughout their working life to receive an agreed annuity in retirement. This annuity at the median is a modest $12,500 after tax and is made up of contributions from both the employer and employee, a joint contribution basis that continues to apply to retirement savings schemes including KiwiSaver.
Far from being generously subsidised from the ‘taxpayer purse’ as your article implies, annuities received by government employees have been seriously eroded as they continue to be taxed at 33% when tax rates typically are now 10.5% and 17.5%.
Jim Turner, President
November 2011
Craig Foss wrote acknowledging that Peter Dunne had confirmed with him that the reduction factor was to be reviewed within 2-3 years of its introduction, but reiterated that the Government had no plans to review the decisions made in 1990.
The GSA Board will consider the GSA position at its next meeting in February 2012.
October 2011
The Commerce Committee decides not to hear oral submissions on the GSA petition. It is not known whether the committee has deliberated on the petition or whether it has taken steps to carry it over to the next parliament.
14 September 2011: The GSA met Craig Foss MP deputising for minister English. While Mr Foss reiterated: 'At this time, the National Government has no plans to revisit these decisions' (on the reduction factor), he made no attempt to answer the points made by the GSA to the Commerce Select Committee supporting the GSA petition.
Government MPs have put the following to GSA members:
Why the annuity was reduced
If annuities had not been reduced there would have been a large, unintended windfall gain to superannuitants, and in the case of the GSF, a large cost to the government.
GSA: When the tax arrangements for super were changed in 1990, the Government also decided unilaterally to reduce annuities - so that 'the cost to the Government not increase and that the reductions were fair to annuitants'.
The annuity reduction was a substitute for tax
The 30% reduction finally applied to post-1990 GSF annuities was not based on personal taxation rates in 1990.
GSA: This assertion is simply wrong. Each annuity being paid in 1990 was reduced by the individual's G-code tax. For future annuities, the 30% reduction (fully applied from 1999) was based on an actuarial model that assumed everyone paid tax at a rate of 33%.
The arbitrary 30% reduction The approach finally adopted took into account detailed actuarial advice, and the views expressed by a Parliamentary Committee, to which submissions were made by many interested parties, including the Government Superannuitants Association.
GSA: MPs considering the GSF Amendment Bill in 1990 (Commerce Select Committee) believed the 30% reduction would need to be reviewed sometime in the future; they did not see the 30% reduction factor as set in concrete .
The Actuary and the 30%
The original proposals for post-1990 annuities involved a 40% across-the-board reduction, which was lowered to a maximum 30% in the final arrangements, following re-consideration. This represented a very substantial easing of the original proposals, at an estimated cost of $900 million in 1990 terms.GSA: The 40% reduction was based on a notional fully-funded GSF; the 30% was based on the reality of a part funded scheme (the GSF comprising mainly employee contributions).
A one-off historic adjustment?In essence, the reductions operated as a one-off historical adjustment. It is for this reason that GSF annuities do not rise in times of tax cuts, but also do not fall in the event tax rates are increased. In this respect members of the GSF are being treated on the same basis as members of any other pension scheme.
GSA: The historic adjustment can only be a ‘one-off' if it remains demonstrably fair. A universal tax rate of 33% in 2011 is manifestly not fair.
The 30% annuity reduction exceeded reductions made to most annuities from private sector schemes.
What does it take to revisit the reduction factor?At this time, the National Government has no plans to revisit these decisions, however if Labour wins the upcoming election, and does follow through with their proposed $5000 tax free zone, I (Ms Parata MP) would expect that the concerns you raise will need to be considered.
GSA: Why would a $5000 tax exemption justify a review of the reduction factor but not the October 2010 tax cuts?
GSA petition tabled in Parliament on 14 July 2011:
That the House of Representatives call on the Government in its role as employer to adjust the annuities payable to members of the Government Superannuation Fund and the National Provident Fund to reflect taxes applicable in 2011 rather than the currently reduced annuities that reflect 1990 taxes.
That the House of Representatives call on the Government in its role as employer to adjust the annuities payable to members of the Government Superannuation Fund and the National Provident Fund to reflect taxes applicable in 2011 rather than the currently reduced annuities that reflect 1990 taxes.
Following the recent income tax cuts, the Association is seeking to persuade the Government to follow through on its 2010 tax reforms and also cut the GSF and NPF annuity reduction factor set in 1990 when the annuity became tax-paid. The annuity reductions of up to 40% were based on a tax rate of 33% while the comparable rate is now 28%.
After repeated rebuffs by the Government to a request to review the GSF and NPF reduction factors in the light of reduced tax rates, the GSA is now appealing to Parliament for attention to be given to the excessive reductions to annuities.
What is happening?
What is happening?
- The Prime Minister has declined to meet the Association.
- The Minister of Finance has agreed to meet on 14 September.
- The Prime Minister has referred all enquiries to the Minister of Finance.
- The Minister of Finance has ignored an invitation to speak to the GSA Council
- The Association has met the Labour Party, Green Party, United Future, Maori Party and New Zealand First. All parties were sympathetic to the GSA case.
- The Association has also being sought sought a commitment from ACT, Progressive Party and Mana Party.
- A letter mailed to each GSA member on 28 July encouraged members to raise the tax issue with their election candidates.
- The GSA petition has been referred to the Commerce Select Committee, which has called for submissions by 29 August.
Next steps:
- GSA branches are meeting local election candidates to secure a commitment to review the effect of tax cuts on the annuity and apply a remedy
- The response of candidates and parties will be reported to members in the October GSA Newsletter.
Summary of the GSA submission
Around 70,000 government employees past and present are receiving an annuity from the Government Superannuation Fund (GSF) or the National Provident Fund (NPF), or are still contributing to these schemes. Membership of these schemes was encouraged and for a period was compulsory, and the existence of the schemes was taken into consideration in setting pay in the State sector. Membership represents a lifetime contract between the individual contributor and his/her employer, the Government.
The taxation of superannuation schemes was changed in 1990 so that contributions and investment earnings became fully taxed and the annuity exempt. This can be described as a ‘tax paid' annuity.
Annuities were (permanently) reduced from 1 April 1990 by a factor in substitution for the tax payable on annuities before that date.
The Superannuation Schemes Act was amended to allow annuities from private sector schemes to be reduced, and the Government decided the principles to be applied to private sector schemes would also be applied to the government employee schemes so that annuitants would not receive a ‘windfall gain' from the annuity becoming tax free. Annuities in comparable private sector schemes were commonly reduced by 15% while the reductions of 30% and 40% to GSF and NPF annuities were among the highest.
The Government Actuary was asked to propose reductions to the GSF annuity which would result in a cost of the scheme to the employer (the Government) which was no greater as a result of the tax changes, while being fair to members of the scheme.
For annuities being paid on 31 March 1990, the Government decided to reduce them by the tax rate applying to the individual, an average reduction of 19%.
For future annuities, the Actuary devised a notional fully funded model for the GSF scheme using a tax rate of 33%, from which a 40% reduction for those retiring from 1 October 1999 was calculated. As the GSF scheme was not fully funded, the Government decided the appropriate reduction was 30%. The National Provident Fund reduced its annuities by 40%.
The cumulative effect of tax reductions applied since 1996 has been seriously to undermine the value of GSF and NPF annuities.
A recent actuarial review of the reduction factor calculates the reduction would be lowered from 30% to 25% if a tax rate of 28% was used instead of the 33% assumed in the 1990 calculation.
A practicable remedy is to lower the annuity reduction factors by 15%. This corresponds to the lowering of the tax on investment earnings from 33% in 1990 to 28% in 2011.
This remedy would be simple to apply and fair to all annuitants.
Around 70,000 government employees past and present are receiving an annuity from the Government Superannuation Fund (GSF) or the National Provident Fund (NPF), or are still contributing to these schemes. Membership of these schemes was encouraged and for a period was compulsory, and the existence of the schemes was taken into consideration in setting pay in the State sector. Membership represents a lifetime contract between the individual contributor and his/her employer, the Government.
The taxation of superannuation schemes was changed in 1990 so that contributions and investment earnings became fully taxed and the annuity exempt. This can be described as a ‘tax paid' annuity.
Annuities were (permanently) reduced from 1 April 1990 by a factor in substitution for the tax payable on annuities before that date.
The Superannuation Schemes Act was amended to allow annuities from private sector schemes to be reduced, and the Government decided the principles to be applied to private sector schemes would also be applied to the government employee schemes so that annuitants would not receive a ‘windfall gain' from the annuity becoming tax free. Annuities in comparable private sector schemes were commonly reduced by 15% while the reductions of 30% and 40% to GSF and NPF annuities were among the highest.
The Government Actuary was asked to propose reductions to the GSF annuity which would result in a cost of the scheme to the employer (the Government) which was no greater as a result of the tax changes, while being fair to members of the scheme.
For annuities being paid on 31 March 1990, the Government decided to reduce them by the tax rate applying to the individual, an average reduction of 19%.
For future annuities, the Actuary devised a notional fully funded model for the GSF scheme using a tax rate of 33%, from which a 40% reduction for those retiring from 1 October 1999 was calculated. As the GSF scheme was not fully funded, the Government decided the appropriate reduction was 30%. The National Provident Fund reduced its annuities by 40%.
The cumulative effect of tax reductions applied since 1996 has been seriously to undermine the value of GSF and NPF annuities.
A recent actuarial review of the reduction factor calculates the reduction would be lowered from 30% to 25% if a tax rate of 28% was used instead of the 33% assumed in the 1990 calculation.
A practicable remedy is to lower the annuity reduction factors by 15%. This corresponds to the lowering of the tax on investment earnings from 33% in 1990 to 28% in 2011.
This remedy would be simple to apply and fair to all annuitants.