EXPLANATORY STATEMENT

ISSUED BY AUTHORITY OF THE MINISTER FOR FINANCE AND ADMINISTRATION

SUBJECT:   TWENTY-FOURTH AMENDMENT TO THE DEED TO ESTABLISH AN OCCUPATIONAL SUPERANNUATION SCHEME FOR COMMONWEALTH EMPLOYEES AND CERTAIN OTHER PERSONS PURSUANT TO SECTION 5 OF THE SUPERANNUATION ACT 1990

Authority

The Minister for Finance, for and on behalf of the Commonwealth, established an occupational superannuation scheme to provide benefits for certain of the Commonwealth’s employees and for certain other people by a Deed dated 21 June 1990 under section 4 of the Superannuation Act 1990 (the 1990 Act).  In this statement the Deed is called “the Trust Deed”.  The occupational superannuation scheme is known as the Public Sector Superannuation Scheme (PSS).

2.                  Section 5 of the 1990 Act provides that the Minister for Finance and Administration may amend the Trust Deed by signed instrument, subject to obtaining the PSS Board’s consent to the amendment where necessary.  Section 5A of that Act provides that amendments may be made to the Trust Deed under section 5 in relation to actions taken under the Family Law Act 1975 (the FL Act).  These amendments may provide for the Rules to determine benefits for the non-member spouse (that is the former spouse of a person with a superannuation interest in the scheme) and the subsequent reduction of benefits for a member spouse (that is a person with an interest in the scheme).

3.                  The Minister has amended the Trust Deed and the Rules for the Administration of the Superannuation Scheme set out in the Schedule to the Trust Deed by the following signed instruments:

4.                  On                  the Minister for Finance and Administration amended the Trust Deed and the Rules for the Administration of the PSS set out in the Schedule to the Trust Deed by signed instrument.  That instrument is called the Twenty-fourth Amending Deed in this statement.

5.                  Sections 5 and 5A of the 1990 Act deal with amendments made to the Trust Deed.  Those sections allow the Minister to amend the Trust Deed provided that the PSS Board has consented to the amendment.

6.                  Paragraph 5(1A)(b) of the 1990 Act, however, prescribes a number of exemptions where the PSS Board’s consent is not required to an amendment to the Trust Deed.  Subparagraph 5(1A)(b)(i) exempts an amendment that relates to a payment that will, after the making of the amendment, be required, or permitted, to be made under the 1990 Act by an employer-sponsor (within the meaning of the Superannuation Industry (Supervision) Act 1993 (the SIS Act)).  Subsection 5(1B) provides that for the purposes of that subparagraph a payment under the Trust Deed or the Rules is taken to be a payment by an employer-sponsor. 

7.                  As described below, the amendments included in the Twenty-fourth Amending Deed affect benefits that are payable under the Trust Deed or the Rules and are paid by the Commonwealth (the employer sponsor) and therefore do not require the consent of the PSS Board.

Purpose of the twenty-fourth amending deed

8.                  Part 16 of the Rules makes specific provision for the splitting of a superannuation interest under the Act when the PSS Board is served with an agreement or order in relation to that interest as a result of actions taken under the FL Act.  Part 16 allows for a separate interest to be created in the PSS for the former spouse of a PSS member who has been allocated a part of the member's interest in the PSS under such an agreement or order.

9.                  Rule 16.1.2 defines a number of terms used in Part 16, including the term scheme value.  The definition of scheme value refers to the amount determined under Rule 16.2.2 which provide methods and/or factors that are to be used to calculate the relevant amounts in relation to this definition.

10.              Scheme value is one of the items taken into account in the calculation of the separate interest for a former spouse and the reduction of the member's benefits as a result of the splitting of the interest.

11.              The principal purpose of this amending Deed is to amend the Rules to take into account the existence of a surcharge debt in respect of a PSS member when calculating the scheme value of the member’s interest in the scheme.

12.              The Superannuation Contributions Tax (Assessment and Collection) Act 1997 provides for a superannuation surcharge regime in relation to the employer superannuation contributions for high-income earners.  In the PSS the superannuation surcharge is usually accumulated in the member’s surcharge debt account until the member’s benefit is paid. It is then paid to the Australian Taxation Office by the PSS Board and the member’s benefits are reduced to have regard to that payment. 

13.              An order or agreement to split a superannuation interest considers the interest net of surcharge and therefore does not allocate the surcharge debt between the parties. Prior to these amendments the Rules did not adequately take this into account with the effect that, in respect of the interest for a PSS member with a debit in their surcharge debt account the separate interest transferred to the former spouse may be greater than it should be and the consequent reduction of the member's interest may be greater than it should be.

14.              When a separate interest is created under the Act for the former spouse of a member as a result of a superannuation split in a property settlement, that interest is based on a separation amount.  The term separation amount is defined in Rule 16.1.2.  The amount arises from the splitting agreement or order that may require the transfer of a percentage of the member’s interest or a specified (base) amount or a method of calculating such an amount.  The definition requires that, where the order or agreement specifies a percentage, that percentage must be applied to the greater of the family law value or the scheme value.  Where the order or agreement specifies, or provides a method of calculating, a base amount then the member interest must be valued.  In such cases if the family law value is greater than the scheme value the separation amount is the base amount.  Alternatively if the scheme value is greater than the family law value then the separation amount is calculated by applying to the scheme value the proportion that the base amount is to the family law value.

15.              The term family law value is defined in Rule 16.1.2 to be the amount that is the value of a superannuation interest as determined under the FL Act and regulations under that Act (FLA).  The FLA values an interest in the PSS as net of any amount in the member's surcharge debt account, that is FLA value is net of surcharge.  That debt is therefore not split between the member and their former spouse.

16.              The term scheme value is defined in Rule 16.1.2 to be the amount determined under Rule 16.2.2.  The methods and factors provided under that Rule to calculate the scheme value do not contain any reference to the member's surcharge debt account and therefore provide a value that includes the amount in the surcharge debt account, that is, scheme value is gross of surcharge.

17.              The member's interest is reduced by the application of a separation factor to the various components of the interest.  The term separation factor is defined in Rule 16.1.2 to be the number calculated by dividing the separation amount by the scheme value.

18.              Actuarial advice received by the Department of Finance and Administration is that to achieve equity between the member and the former spouse where the member has a surcharge debt, it is necessary to use the scheme value net of surcharge to calculate the separation amount and the scheme value gross of surcharge to calculate the separation factor.  The Rules prior to the Twenty-fourth Amending Deed did not provide for the use of net and gross scheme values in this way. 

19.              The operation of the Rules prior to the Twenty-fourth Amending Deed can be demonstrated through considering the following case:

A member has an interest in the PSS that has a value of $110,000 and has a surcharge debt of $10,000.  This interest has an FLA value of $100,000 being the net value. 

All things being equal the Rules would provide that the scheme value of that interest, being a gross value, is $110,000 which is higher than the FLA value. 

An agreement or court order specifies that a base amount of $100,000, being 100% of the FLA value, should be transferred to the former spouse. 

Under the definition of separation amount, used in the calculation of the former spouse’s separate interest, the amount transferred to the former spouse would be recalculated as 100% of the scheme value giving the former spouse an interest of $110,000. 

The separation factor used to reduce the member's benefits would be 100% which would reduce the member's benefit to zero.  As a result of the split of the interest there would be no money left in the member’s account to pay the surcharge debt of $10,000. 

20.              In respect of the case above, if the operative time of the agreement or order is after the commencement of the Twenty-fourth Amending Deed the provisions will operate as follows:

The FLA value of the member’s interest would remain at $100,000 (ie, net of the member’s surcharge debt of $10,000)

The scheme value used to calculate the separation amount would be net of the surcharge debt, that is $100,000, the same value as the FLA value.  The amount transferred to the former spouse would be 100% of that value or $100,000. 

The scheme value used to calculate the separation factor for the purposes of reducing the member's interest would be the gross amount giving a separation factor of 90% reducing the interest by $100,000, making the member's benefit immediately after the interest split $10,000.  If the member’s benefit was to become payable to the member at that time it would be sufficient to pay the surcharge debt attached to the interest that has been split between the member and the member’s former spouse. 

21.              In cases where the operative time is before the commencement of the Twenty-fourth Amending Deed the provisions inserted by the Amending Deed will operate to ensure that no amounts transferred to a former spouse will be subject to retrospective reduction.  However where the member's interest has been overly reduced, the provisions will allow for a recalculation. 

22.              The Twenty-fourth Amending Deed amends the Rules to ensure that the process of creating the separate interest for a former spouse and subsequent reduction of the member's interest works equitably from the date of effect of that Deed when the member has a debit in his or her surcharge debt account.

23.              The Twenty-fourth Amending Deed also amends the Rules to ensure that where a case has already been dealt with prior to the making of that Deed, there will be no impact on any separate interest set up for the former spouse but there will be a recalculation of the reduction of the member's interest to ensure that reduction is not higher than intended.

24.              The Twenty-fourth Amending Deed has been prepared in consultation with an actuary, ComSuper who administer the PSS for the Board and the Office of Legislative Drafting and Publishing. 

25.              The instrument is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

26.              The amending Deed will commence on the day after it is registered on the Federal Register of Legislative Instruments. 

Date of Effect of the twenty-fourth Amending Deed

27.              Clause 1 specifies that the amendments of the Rules made by the Twenty-fourth Amending Deed come into effect on the day after the Amending Deed is registered on the Federal Register of Legislative Instruments.      

28.              Clause 2 puts this Deed in context with the Trust Deed and allows words or phrases in the Deed to have the same meaning as in the Trust Deed where appropriate.

Amendments to the Rules

Detailed description

29.  Clause 3 provides that the following provisions amend the Rules.

30.  Clause 3.1 inserts a definition of family law commencement day into Rule 1.2.1.  That day is 18 May 2004 being the day on which the Superannuation Legislation Amendment (Family Law and Other Matters) Act 2004 took effect.  That Act amended the Superannuation Act 1990 (the Act) to provide that the Trust Deed and Rules could be amended to provide for the creation of a separate interest for a former spouse of a PSS member and the subsequent reduction of a member’s interest where a splitting order or agreement is served on the PSS Board.

31.  Part 16 of the Rules provides for two separate valuations of a member's interest in the PSS for the purposes of determining the separation amount.  The first of these is the family law value which is the amount determined under the FLA.  The other valuation is the scheme value that is defined to mean the amount determined under Rule 16.2.2.  The separation amount will be based on whichever is the greater of these two valuations.

32.  The FLA provides default methods and factors for determining the value of a defined benefit interest such as is available to members of the PSS.  However, on 2 March 2004, the Attorney-General approved specific methods and factors to determine the value of an interest that a person has in the PSS for the purposes of the FLA. 

33.  Both the default and the scheme specific methods and factors ensure, where there is a debit in the member's surcharge debt account at the time of valuation, that the family law value of a member's interest is net of the amount of the debit, that is the family law value is net of surcharge.  This is necessary to ensure that the member is left with sufficient funds in the PSS to reimburse the Board for the payment of the surcharge when a benefit becomes payable if, for example, the splitting order or agreement required the transfer of 100% of the interest to the former spouse.

34.  Prior to the amendments Rule 16.2.2 provided for the calculation of the scheme value in a number of circumstances.  Paragraph 16.2.2(a) provided that if the operative time of an agreement or order served on the PSS Board was before the commencement of Part 16 of the Act, the scheme value is the family law value. 

35.  Subparagraph 16.2.2(b)(i) provided that, if the operative time is on or after the commencement of Part 16, the scheme value is to be determined by using the methods and factors set out in Division 8 of Part 16.  The methods are the same as those used to obtain the family law value under the specific process approved by the Attorney-General on 2 March 2004 however they do not provide for the reduction of the amount where there is a debit in the member's surcharge debt account.  The factors provided in Division 8 of Part 16 reflect the different actuarial assumptions that apply to the PSS.  (In this respect they differ from any factors determined under the FLA which are based on general assumptions.)

36.  Subparagraph 16.2.2(b)(ii) provided that, in the case where the operative time is on or after the commencement of Part 16, the scheme value is to be determined by an actuary if it is not able to be determined under subparagraph 16.2.2(b)(i). 

37.  Subclause 3.2 substitutes Rule 16.2.2 with new Rules 16.2.2, 16.2.2A, 16.2.2B, 16.2.2C, 16.2.2D, 16.2.2E, 16.2.2F and 16.2.2G. 

38.  New Rule 16.2.2 provides that Rule 16.2.2A applies for the calculation of the scheme value where the member does not have a debit in his or her surcharge debt account.  New Rule 16.2.2A essentially replicates the effects of Rule 16.2.2 as previously drafted.

39.  New Rule 16.2.2B provides that Rules 16.2.2C to 16.2.2G apply where the member does have a debit in his or her surcharge debt account.  New Rule 16.2.2C is similar in effect to Rule 16.2.2A but is subject to Rules 16.2.2D to 16.2.2G.

40.  New Rule 16.2.2D provides that, for cases that occur after the commencement of the Rule, where scheme value is to be used to calculate the separation amount it should be reduced by the amount in the surcharge debt account.  This ensures that the amount transferred to the former spouse does not include the amount by which the member's benefit will be reduced as a result of the surcharge debt.

41.  New Rule 16.2.2E provides that, for cases that occur after the commencement of the Rule, where scheme value is to be used to calculate the separation factor it should not be reduced by the amount in the surcharge debt account.  This ensures that the member's benefit will not be over reduced.

42.  New Rule 16.2.2F applies to cases that were finalised before the family law commencement day and provides for the recalculation of the separation factor to ensure that the reduction of the member benefit reflects the provisions in new Rule 16.2.2E.  Although there will be no recalculation of the amount transferred to the former spouse, the member's reduction will be less than previously calculated.

43.  New Rule 16.2.2G applies to cases that were finalised after the family law commencement day but before the commencement of the Rule.  This provision will also recalculate the separation factor for the member to ensure that the reduction of their benefit will be less than previously calculated.  There will also be no impact on the amount transferred to the former spouse.