Introduction to a complex issue

Taxed-source pensions of the Electricity Industry Superannuation Scheme

This is an online resource dealing with an unusual superannuation matter.

From around 2005 PS Superannuants (the Association) has been working with two members of the pension division of the Electricity Industry Superannuation Scheme (EISS) who believe that one category of defined benefit pension being paid by EISS is calculated by a method that is invalid. These pensions are called taxed-source pensions and they began to be paid in late 2002 following a change in the taxation status for EISS that took effect from 1 July 2000. The first pensions paid under the new tax arrangements were all taxed-source pensions but currently members have a choice between the taxed-source pension and a larger untaxed-source pension. The larger untaxed-source pension is the pension that would have been paid to all EISS pension division members had the change in tax status of EISS not occurred.

The online resource was first posted on 31 January 2015 and has since then been altered to take account of views obtained from the parties that have been involved in the EISS matter. For example, EISS contacted us to express concern about their perception that the online resource ‘does not represent a balanced analysis of the issues’.

EISS has posted, on its website, some documents dealing with the taxed-source pension issue. Most of the documents are found under the heading ‘Important Information’. They can be viewed on the EISS website now by clicking here. It is recommended that readers of the online resource go to the  the EISS website and read the documents posted there before going to the next, and major part, of this online resource.

The Association reached the conclusion several years ago that the EISS taxed-source  pensions are indeed being calculated by a method that is invalid. The Association’s position is that the method has been designed to reduce pensions by more than the tax cost to the scheme of operating under the new taxation arrangements. The saving made has been passed to the scheme’s employers. What should have happened is that the tax advantage inherent in the new tax arrangements applying to EISS since 1 July 2000 should have flowed to its pension division members. This is what did happen with similar schemes in other Australian jurisdictions.  

This passing of tax savings to employers rather than to pension division members does not  appear to be a matter of an authority (the State Treasurer) having exercised a lawful discretion to favor one party (the employer) over another party (the employee). The preference appears to have been exercised contrary to law.  

When a pension fund changes from being an untaxed fund to being a taxed fund (as EISS did in 2000) it is to be expected that the taxed-source pension it pays to each member will be smaller in gross value than the untaxed-source pension that the fund could pay to the same person. This is because tax must be paid on the contributions and assets backing the taxed-source pension but not on those backing the untaxed-source pension.

It is fair that the cost to an employer, of taxed-source pensions, should not be significantly more than the cost of the untaxed source pensions that could have been paid to the same people making up membership of a pension scheme. This fair arrangement requires that the reductions to pensions should closely match the amount of tax that had to be paid on the contributions and assets backing them.

The striking thing about EISS taxed- source pensions is that they have been determined without taking account of the amount of tax paid by EISS on the contributions and assets backing the pensions. This is sufficient to make any prudent and reasonable person suspect that EISS taxed-source pensions are being determined by a method that is not likely to be valid.

Later in this online resource a method for calculating taxed-source pensions that is used in New South Wales is described. This method does take account of the tax that is being paid on pensions, and reduces pensions only to the extent that keeps employer costs unchanged.  When pensions in New South Wales became taxed-source pensions the large majority of members ended up with improved net incomes at no extra cost to the NSW government. This improvement did not come out of thin air. It was paid for by the Federal Government in the form of tax it was prepared to forego in the move to a universal, and taxed, superannuation system for the nation.

The NSW method, or something very similar, is what the State Treasurer should have authorised, in 2002, for use by EISS. Had this been done there would be no controversy and until it is done the controversy will continue.   

Representations made by the Association, and the two EISS members, to the effect that EISS pensions are being excessively and unlawfully reduced eventually saw the matter referred by the South Australian Legislative Council to the then-State Ombudsman, Mr Richard Bingham, for his investigation and report. The investigation was carried out and a report tabled in the Legislative Council on July 2, 2014. The Association, working closely with Mr Richard Vear, one of the two EISS members, made a substantial submission to Mr Bingham’s investigation.

Even after Mr Bingham’s investigation the question of whether EISS pensions are being validly determined has not been properly considered and his report has features that have  added to the controversy.

After about eight years of fruitless attempts to get to the truth of this matter using conventional channels the Association, and the two EISS members with whom it is working,  have decided to create an online resource which will allow individuals and relevant authorities to decide if there is a sound basis for the claim that EISS pensions are being excessively and unlawfully reduced. The online resource has been given the title ‘You shall know them by what they do’. The ‘them’ in this title refers to the full set of parties involved in the EISS pension controversy including PS Superannuants and the two EISS members it is supporting.

EISS has told us that it considers our arguments about the invalidity of the rule it is using to calculate its taxed-source pensions are ‘erroneous’ but it has not been prepared to specify a particular error in support of this claim.

We acknowledge that this matter has gone before independent authorities in the form of the Superannuation Complaints Tribunal and the South Australian State Ombudsman. The former entity ruled that it could not review matters occurring before EISS entered its jurisdiction in 2008. The State Ombudsman ruled that the questions of the effect of the EISS method for calculating its taxed-source pensions on employer costs and compliance of the method with legislation were outside his jurisdiction. The Ombudsman’s report and our analysis/critique of the report form part of the online resource.

We acknowledge that both EISS and State Treasury have obtained a lot of legal advice about the rule changes made in response to the EISS change in taxation status. We refer to this saying, in the case of the EISS advice, that it was advice addressing questions that are different from the crucial question of whether the rule for determining the amount of taxed-source pensions was validly made. In the case of the Treasury advice from Crown law, it was advice confirming our own position that rules could not be valid if they reduced employer costs.

We acknowledge that there have been communications between EISS and its pension division members over the years. Information about these communications is available on the EISS website that is accessible using the link above. Another source of information about these communications is to be found in an appendix to the Ombudsman’s report which is accessible from a later part of this online resource.

It will be for readers of the online resource to decide for themselves whether our claims about EISS taxed-source pensions have a sound basis or whether we are simply a group of people who refuse to accept the umpire’s decision.

To proceed to the rest of the online resource click here