Detailed advice about the UniSuper issues that have appeared in the media this week is below, for your information.
It has also been posted on the Union's web site at www.nteu.org.au.
GENERAL SECRETARY LETTER TO ALL NTEU MEMBERS – URGENT ADVICE ON UNISUPER
15 December, 2011
Dear Colleague,
Recent media coverage concerning the financial health of UniSuper has caused widespread concern amongst NTEU members and University staff more generally. Unfortunately, the public discussion has generated much heat but little light. While there are some important long-term policy and financial issues to be resolved, members should not be alarmed and should certainly not assume that UniSuper is facing a fundamental financial crisis or that there is an imminent prospect of current and future entitlements being seriously eroded.
For most people superannuation entitlements (together with housing) are the assets which provide security and certainty, and the Union fully appreciates why the spate of media commentary has caused such anxiety. The Union will take all measures necessary to ensure that our members’ current and future superannuation entitlements and benefits will be protected and well managed into the future, including:
Requesting the UniSuper Board to convene a national meeting of all stakeholders with a view to agreeing on changes to the UniSuper Trust Deed to ensure that any changes to UniSuper Defined Benefit scheme arrangements do not involve reductions to employee benefits, and allow for the Board to consider other options.
Proposing to remove university employers as the sole shareholders of UniSuper’s Trustee company – which currently gives employers the right to ratify (and therefore veto) the appointment of UniSuper Board Directors – as part of a wider review of UniSuper governance and consultation processes.
Using the upcoming 2012 Collective Bargaining round negotiations to pursue these matters if a proper stakeholder consensus cannot be developed.
Details of the Union’s proposals are set out in the last section of this letter.
I want to reassure NTEU members that the Union is fully across the issues affecting UniSuper. While the Union cannot provide financial advice (this is legally and ethically the province of qualified financial consultants) it can give members clear advice on the policy and industrial dimensions of UniSuper’s structure, management and superannuation benefit profile.
UniSuper at a glance
UniSuper is not an industry fund based on the now widespread joint union/employer management and administration model. It is a not for profit hybrid model where the Fund is managed by a Board comprising eleven Directors – two nominated by employer organisations, two nominated by unions, two elected by employers, two elected by employee members of the scheme, and three independent Directors. NTEU is only able to nominate one Director.
UniSuper is recognised as one of the best managed and run funds across the whole superannuation industry with assets of $30 billion, investment returns which have consistently been above the average of industry and retail funds, a good diversity of investment and superannuation product options, and very low administration costs.
In simplified terms UniSuper provides three core superannuation schemes – a Defined Benefit Pension Plan (which was the original foundation of UniSuper in 1982 and was closed to new entrants in the 1990s), a Defined Benefit Lump Sum Plan and an Accumulation Plan. Since the 1990s full-time employees are able to exercise a choice between the Defined Benefit Lump Sum and Accumulation Plans. For those in the Defined Benefit Plans, the required Defined Benefit contributions are 14% (employer) and 7% (employee), with a further 3% employer contribution to the Accumulation Plan. For those who chose the Accumulation option, the required employer contribution is 17%.
The Defined Benefit Plans provide a defined pension or lump sum upon retirement which is broadly based on a combination of years of service or final average salary. The benefits are not directly calculated by reference to the contributions made. The overall financial benefits and sustainability of the UniSuper Defined Benefit schemes are therefore principally determined by the level of contributions, the long-term rate of investment return in financial markets and wages growth in the university sector.
On the other hand, the Accumulation Plan provides a lump sum based on the contributions made by the employer and the employee and the long-term investment return on these contributions.
There are around 80,000 members in UniSuper’s Defined Benefit schemes (including around 6,000 Defined Benefit pensioners) and around 450,000 holding Accumulation accounts.
As the dominant Union in the industry, NTEU’s Collective Agreements with each University employer provide a legal guarantee of the 17% employer contribution and give UniSuper standing as the sole provider of superannuation benefits for university staff. This NTEU policy has and will continue to serve the best interests of our members – the ability to pool all superannuation contributions through UniSuper maximises returns and minimises risks. The only circumstance which would cause this policy to be reviewed would be demonstrated poor financial and administrative management by UniSuper or the failure of the Board of Directors to properly look after the interests of the scheme members. In its nearly thirty year history UniSuper has established a strong reputation against both of these criteria.
What is going on?
The recent press commentary concerning UniSuper’s financial position has raised issues which are relevant to the 80,000 members of UniSuper’s Defined Benefit schemes. There are no issues which directly affect the 450,000 members holding Accumulation plans.
The principal, but not exclusive, driver of UniSuper’s current financial health is the well-reported down turn in investment markets following the global financial crisis. This has affected all superannuation funds and shows up for those in accumulation schemes as very low or negative investment returns. It shows up in defined benefit schemes as a possible actuarial shortfall.
The UniSuper Board has an obligation to monitor the financial health and sustainability of the Defined Benefit schemes and regularly receives actuarial reports which guide its ongoing assessment. The actuarial reports measure the future ability of the Fund to pay the defined benefits using a range of known data and future assumptions. This includes but is not limited to current and projected investment returns, current and projected wage growth, current and projected distribution of employees by age and salary level, and assumptions about exit and entry rates of employees into the Defined Benefit schemes.
Where such reports raise any serious doubt about the sustainability of the defined benefits, the Board is required to issue what can be simply described as "early warning". This triggers a four year assessment period during which a more rigorous and detailed monitoring takes place. The first time the Board issued an early warning was in 2002-2003, but subsequent actuarial assessment confirmed that there was no requirement to consider any possible changes to scheme arrangements. So members need to understand that the use of the early warning provision is neither unprecedented nor unusual, but is a legally required step. It does not mean there is an automatic requirement to increase contributions or to reduce benefits.
In 2009 the Board issued a new early warning and will be required to consider possible measures to change scheme arrangements in early 2013 if the early warning is confirmed by a further actuarial report to be an ongoing issue.
There are two technical composite measures of the actuarial health of the Fund – a Vested Benefit Index (VBI) and an Accumulated Benefit Index (ABI). Where either of these indices falls below 100% the Board needs to consider the possibility of issuing an early warning. On the best advice available, the Union understands that the VBI is sitting at around 85% and the ABI is sitting at around 98%. In the past these two indices have been as high as 110% and 135% and as low as 83% and 94%.
The distinction between these two indices is fundamental to understanding the present UniSuper position.
A VBI is a measure usually used for single employer defined benefit schemes and calculates whether a scheme is expected to have sufficient funds to cover all superannuation entitlements in the event of a catastrophic event such as the liquidation or bankruptcy of the employer concerned. The big majority of defined benefit schemes are for single employers and the superannuation industry regulator – Australian Prudential Regulatory Authority (APRA) – typically looks at a VBI when assessing the proper administration of such schemes of relevant trustee boards.
An ABI is a measure which assesses the adequacy of funds using assumptions which do not contemplate a catastrophic single employer event, and is the better measure of the health of a multi employer defined benefit scheme. NTEU strongly supports the UniSuper Board view that the ABI is the best method of assessing the UniSuper Defined Benefit scheme sufficiency, and has reasonable confidence that in the event that any restructuring of scheme arrangements takes place, that this would be accepted by an objective regulatory authority assessment.
Simply put NTEU believes that on a proper measure that there is a current 2% shortfall in the Defined Benefit schemes against an index of 100%. While this can change over short and medium time frames, it illustrates that while there is cause for some concern, it is far from catastrophic and quite manageable with proper policy adjustments.
What should happen now – the NTEU position
The real problem that needs to be dealt with is what measures should be taken if any Defined Benefit Fund shortfall persists. Until 2006 the UniSuper Trust Deed provided that employers could be called upon to meet such a shortfall (but only if all individual universities and higher education institutions unanimously agreed) and also contemplated a possible reduction in benefits. Following the 2002-2003 early warning, it became obvious to the Board that there was no current or future prospect of ever achieving unanimous employer support to meet any shortfall.
On this basis, the Board sponsored the removal of the reference to a unanimous employer guarantee from the Trust Deed and this was approved by the 140-member (50% employee and 50% employer) UniSuper Consultative Committee. As a result, the only funding shortfall option currently available to the Board is a reduction in employee benefits.
NTEU was and remains concerned that universities acted to make the original employer guarantee unenforceable. This placed the Board and the Consultative Committee over a barrel but in amending the Trust Deed it is clear that there was insufficient attention was given to the more important question of what new options might be included in the Trust Deed to meet any potential shortfall. NTEU members should note that there is nothing which prevents further amendments to the Trust Deed within the life of the current four year early warning period to ensure that other options are made available to the Board.
The Board will be required to consider funding shortfall options (if the relevant indices remain significantly below 100%) at the end of 2012 and again at the end of 2014.
NTEU will be advising the UniSuper Board that it should convene a national meeting of all UniSuper stakeholders (above and beyond the internal UniSuper stakeholder consultation processes) to discuss alternative measures to any reduction in employee benefits. This should include, but not be limited to, a requirement that all employers guarantee any shortfall, the possibility of increased employer and employee contributions in the ratio of 2-1 (the current ratio for the Defined Benefit and Lump Sum schemes) and possible changes to the internal design of the current Defined Benefit schemes. With the possibility of permanent long-term declines in investment market returns, all stakeholders need to reach agreement on measures which can underwrite the sustainability of the Defined Benefit schemes.
The Union will also agitate for the abolition of university employers as the shareholders of the Trustee company which oversees the scheme. If university employers are not guarantors of the scheme there is no basis for them to have the key prerogatives of shareholders – ratifying (and therefore having the ability to veto) the appointment of Board Directors and to approve the financial statements of the Trustee company. This change needs to be accompanied by a wider review of internal UniSuper governance and consultation processes.
With the next Collective Bargaining round negotiations commencing in mid 2012, NTEU is well placed to defend our members’ superannuation benefits and entitlements, and we will use the Collective Bargaining round to ensure that both university employers and the UniSuper Board deal with any future funding shortfall problem on terms which protect the interests of our members and all university staff in the UniSuper scheme.
I will keep you posted.
Please pass this letter on to non-union colleagues and CPSU members for their attention and information.
