You shall know them by what they do
Introduction and tips on navigating through this online resource
This document serves as the ‘HUB’ to which all the other documents making up the online resource are connected. Moving between documents will require you to pass through the HUB and you will be able to do this using links that it contains to go from the HUB to the document. For most documents in the online resource you will usually be able to come back to the HUB using your browser’s ‘back’ button. Once back at the HUB you can use the links it contains to go to other documents.
As an alternative to using your browser’s back button to go back to the HUB there are links at the beginning of nearly all the other documents in the online resource. One link will take you back to the beginning of the HUB document and the other link will take you back to your previous position in the HUB.
There are two documents that contain links inside them allowing you to move around within the document. These are:
Primary Document and
What Consultation was there on the method for reducing pensions?
Moving around within these two documents involves clicking on a link and at the end of the section to which you are moved there will be another link that takes you back to your previous place when clicked.
Note: some documents have a large file size and may take a minute or two after you click on the link to appear on your screen.
Taxed-source Pensions of the Electricity Industry Superannuation Scheme
This online resource provides access to a set of documents dealing with a controversy surrounding taxed-source pensions being paid by the Electricity Industry Superannuation Scheme (EISS). This is an exempt public sector superannuation scheme established under South Australian Legislation. EISS changed in its taxation status, effective from 1 July 2000, from an untaxed-source (constitutionally-protected) scheme to a taxed-source scheme. The relationship between untaxed-source and taxed-source superannuation schemes is discussed briefly in the Overview Document to which access is provided below.
The pensions of its members are untaxed-source pensions but SA Superannuants has had an interest in taxed-source pensions since about 2000 and well before it became aware of what EISS is doing with its taxed-source pensions. The interest was based partly on the knowledge that New South Wales government pensions increased in their net value when they became taxed-source pensions. This improvement occurred as a result of NSW pension recipients having a significant fraction of their service completed before 1 July 1988 and this is also the case for the members of SA Superannuants and EISS pension division members. The overview document gives an account of how member service completed before 1 July 1988 can reduce tax payable by a fund when it loses constitutional protection.
When EISS pensions are converted to taxed-source pensions there is no improvement in after-tax value even though members of its pension division have a significant fraction of their service occurring before 1 July 1988.
The controversy over EISS taxed-source pensions has two aspects:
1. the lawfulness of the method that connects the gross value of an EISS taxed-source pension to that of the corresponding untaxed-source pension.
SA Superannuants and two members of EISS, Richard Vear and Barry Foster, believe that the method is unlawful because it reduces the value of the taxed-source pension to an extent that reduces its employer cost compared to that of the corresponding untaxed-source pension. Legislation only allows for reductions that ‘avoid or reduce an increase’ in employer costs arising from the change in taxation status. If the method does go beyond the point needed to just cover the employers’ tax cost it is a method that unlawfully passes an advantage to EISS employers when that advantage should have gone to members. In his report the State Ombudsman expressed the view that the legislative stipulation that reductions were to ‘avoid or reduce an increase’ in employer costs does not preclude a reduction in employer costs. This view of the Ombudsman is discussed in the material that is accessible via links contained in the primary document to which access is provided below.
Readers please note: There is no claim made in this online resource that EISS is incorrectly applying the rule for the calculation of its taxed-source pensions. The claim is that the rule itself is invalid. In other words EISS is calculating the gross values for its taxed-source pensions using a rule that is not valid for the purpose.
2. the credibility of an Ombudsman’s investigation into EISS taxed-source pensions
The South Australian Legislative Council referred the method for calculation of EISS taxed-source pensions to the State Ombudsman for investigation. Relevant extracts from the Legislative Council Hansard, and comments of SA Superannuants, Richard Vear and Barry Foster on the extracts, can be viewed by clicking here.
The report of the investigation eventually conducted by the Ombudsman was tabled in the Legislative Council on 2 July 2014. The report has a number of features that raise concerns about its credibility. Among these features are:
- a decision to interview a key witness without putting that witness on oath or recording the interview;
- the advancing, by the Ombudsman, of an interpretation of legislation that seems highly implausible;
- a lack of interest shown by the Ombudsman in making further inquiries when they were needed to resolve inconsistencies in evidence or to follow up on evidence;
- a view expressed by the Ombudsman that a superannuation fund trustee is under no obligation to maintain the interests of fund members paramount when it has discretion to do so.
The question of the lawfulness of a method that reduces a superannuation entitlement in response to changes in tax payable by a superannuation fund is a matter of general public interest. No citizen would find acceptable a reduction in his/her superannuation benefit, made for a tax reason, that went past the point of meeting the tax cost involved. This appears to have happened with EISS taxed-source pensions.
The office of the South Australian State Ombudsman serves all citizens of the state and where there is the credible suggestion, or appearance, of an Ombudsman not acting consistently in the conduct of investigations this is a matter of general public interest.
The purpose of this online resource is to provide a means by which individuals, particularly the 400 members of the EISS pension division, and authorities can decide for themselves if there is a reasonable basis for saying that the changes made to EISS pensions in 2002 are not lawful and that the State Ombudsman’s investigation of the matter is not credible.
This online resource was first posted on 31 January 2015. Earlier, on or about 8 December 2014 the Association provided a full copy of an initial version of the online resource, on disc, to various interested parties. This initial version was very similar to the version that was posted on 31 January. The interested parties were:
Electricity Industry Superannuation Scheme
The Hon Tom Koutsantonis MP, South Australian Minister for Finance
The Hon John Rau MP, South Australian Attorney-General
Mrs Megan Philpott, Acting Ombudsman, OmbudsmanSA
Mr Richard Bingham
Each of the above was invited to examine the online resource and to provide comment or criticism of any part of it. A commitment was given that any comment or criticism would, if the party wished, be added to the resource at the appropriate location. Where one of the above parties responded to this invitation the response is included, or described, in a document that can be read by clicking here.
Documents accessible from this page
Readers please note: some of the documents below may be difficult to read as they first appear on downloading. This is due to them being scanned documents. To make these documents more easily read you should be able to enlarge the print size.
A. Introductory Documents
1. The Overview Document: this provides an account of the origin of taxed-source and untaxed-source superannuation funds. It also describes concisely the features of the EISS pension division that explain why the method for calculating the value of EISS taxed-source pensions is a method that reduces the pensions by more than the tax cost of paying them from the taxed superannuation environment. Click here to open the Overview Document
2. What Consultation was there on the method for reducing pensions? This document sets out, and comments on, some facts about the consultation that took place between Treasury and EISS prior to the method for reducing pensions being put in place on 28 June 2002. Consultation between EISS and its pension division members is also dealt with. Click here to open this document
3. A Credible formula for calculating EISS taxed-source pensions: Click here to open this document
4. Have EISS pension division members experienced a detriment? Click here to open this document
5. Clause 11 of Schedule 1 of the Electricity Corporations Act 1994: Click here to open this document
Sub-clause 11(2) is of crucial importance. SA Superannuants, Richard Vear and Barry Foster claim that this precluded the Treasurer from inserting a rule for reduction of pensions that would have the effect of reducing employer costs for the pensions compared to what the cost would be if EISS had continued as a constitutionally protected scheme.
EISS and Treasury appear to have the view that the rules inserted by the Treasurer are valid as long as they satisfy sub-clause 11(3). SA Superannuants, Richard Vear and Barry Foster say that even when 11(3) is being complied with a rule is not valid unless 11(2) is also complied with.
6. Rule 29 inserted by the Treasurer, June 28 2002: Click here to open this document
Sub-rules 29(4) and 29(5) apply to pensions. They require that the taxed-source pension have an after-tax value equal to that of the corresponding untaxed-source pension. This prevents pension recipients from getting any advantage from the move to the taxed superannuation environment. Clause 11 of Schedule 1 of the Electricity Corporations Act 1994 only required that the after-tax value of the taxed-source pension be no less than that of the untaxed-source pension and allowed for the after-tax value to be greater. In this way the rule inserted by the Treasurer has diverted the financial advantage that is intrinsic to paying pensions from the taxed superannuation environment away from members, who were entitled, under sub-clause 11(3) to receive the advantage, to employers when sub-clause 11(2) makes clear that employers were not to receive such an advantage.
7. Heads of Government Agreement on Superannuation (HOGAS): Click here to open this document. The HOGAS sets out an agreement between the Commonwealth and all state governments on the running of superannuation schemes under state legislation without direct supervision by the Australian Prudential Regulation Authority (APRA). EISS is subject to the HOGAS even though the EISS employers are private sector entities.
B. The Primary Document
The Primary Document: this is an adaptation of the Ombudsman’s Report tabled in the Legislative Council on 2 July 2014. It includes the entire report with hyperlinks inserted that take a reader to comments made about that part of the report where the hyperlink has been placed. The document is labelled ‘The Primary Document’ because it contains material provided by, or attributed to, all parties to the EISS controversy.
All the documents listed below, and accessible from this page, are referred to in the material connected to the hyperlinks of the primary document. Click here to open the primary document.
Note: the Ombudsman’s original report can be opened by clicking here.
C. Documents referred to in the primary document
Mercer Documents: there are 4 documents that were produced by Mercer for the South Australian Department of Treasury and Finance. Two of these documents are credible but the other two are not.
Click here to view just the section of the document dealing with the effect that the method being used to reduce EISS pensions would have on employer costs, if applied to the state pension scheme.
This 1998 document is credible because it gives detailed consideration to pensions and sets out how the EISS method would bring about a reduction in employer costs for the pensions of the state pension scheme.
2. June 27, 2002 Explanatory Memorandum Amendments to the rules of the Electricity Industry Superannuation Scheme Reduction of benefits on account of taxation. Prepared by Allan Archer. To open this document click here.
This is not a credible document as far as the effect of EISS rule changes on employer costs for pensions goes. It says that the rule changes will not affect employer costs thereby implying that this includes costs for pensions, but it contains very little about pensions that is specific. The author of this document, Mr Allan Archer (who is, regrettably, deceased), was a co-author of the 1998 document. The fact of him making no reference to his earlier work in 1998 on the state pension scheme heightens concerns about the credibility of this 2002 document. One would expect Mr Archer to have given some explanation for why a method he had said, in 1998, would reduce employer costs for state scheme pensions was not going to have the same effect when it was applied to EISS pensions in 2002.
The 27 June 2002 explanatory memorandum is also not credible as a document that was used by the then-Treasurer Kevin Foley when he made his decision to authorise the rule for calculation of EISS taxed-source pensions. Mr Foley authorised the rule on 28 June 2002 and there is no evidence that he had even seen this memorandum by that date.
3. September 5, 2002: Tax Reductions To Benefits June 2002 Electricity Industry Superannuation Scheme. Prepared by Allan Archer. To open this document click here.
This is another Mercer Document, for which the late Mr Allan Archer was the sole author. It is also not credible for reasons that include most of those given for the lack of credibility of his June 27, 2002 document.
In addition the document is one obtained via a Freedom of Information (FOI) application. This application sought ‘actuarial worksheets’ that back the June 27, 2002 explanatory memorandum and that were made available to Treasurer Foley to assist him with his 28 June 2002 decision authorising rules for tax reduction to EISS benefits. The FOI application included reference to the part of the Ombudsman’s report where the Ombudsman had said that a witness (whose evidence was given without being on oath and without the evidence being recorded) had shown him such worksheets. It appears that the Ombudsman did not retain a copy of the worksheets and he did not include any details of the document in either his provisional or final report.
This document, from the title on the cover sheet, might be mistaken for a document that had been produced in June 2002, and referred to by the Treasurer before he made the rule changes on June 28. This is the impression created by the Ombudsman’s report but the actual date of the document is given on its page 23 as September 5, 2002. It could not have been given to Treasurer Foley in June 2002.
4. September 23, 2004: Review of the taxation status of the SA Government superannuation funds. Prepared by Mr Martin Stevenson. Click here to view the section of the document dealing with the effect that the method being used to reduce EISS pensions would have on employer costs, if applied to the state pension scheme.
This is a credible document because like the other credible document of 1998 it gives detailed consideration to pensions and sets out how the EISS method would bring about a reduction in employer costs for the pensions of the state pension scheme. Furthermore, its discussion of pensions in Appendix A (section A4 on page 10) includes a reference to ‘EISS experience’. It seems unlikely that Mr Stevenson would have made this reference to EISS if the method he was saying would produce savings for employers when applied to state scheme pensions had not achieved the same result for EISS employers. If this was the case one would expect Mr Stevenson to have made a highlight of this and explained why.
Something else noteworthy about this document is the omission of any reference to either of the 2002 documents prepared by Mr Archer. This suggests the possibility that Mr Stevenson was not aware of the existence of 27 June, 2002 and September 5, 2002 documents prepared by Mr Archer.
Note: these are scanned documents that may be difficult to read. To assist with this increase the size of the printing.
29 June 2005: Discussion paper prepared for the EISS board by the executive officer. To open this document click here. The document has some hand-written additions made by Richard Vear.
In Appendix 2 on page 11 a calculation is set out showing that the reduction of a pension would be 18.78% of its original gross amount. This would be the case even if the pension recipient had a large fraction of his/her eligible service completed before 1 July 1983 and had funded part of the pension with personal contributions made from after-tax income. The Executive Officer made no comment on this in his paper and it would appear that the Board did not see anything odd about such a large reduction being made to pensions when Board members must have known that lump sums were rarely, if ever, reduced by as much as 15% and by much less than 15% in most cases.
On pages 7 and 8 there is a strong indication that the Executive Officer is aware of the possibility that the rule for reducing pensions is passing a financial advantage to employers but that he considers this does not matter as long as the pension’s net value is not reduced.
This letter gives a strong indication that the Board Chairman is aware of the possibility that the rule for reducing pensions is passing a financial advantage to employers but that he considers this to be a matter that the Board need not be involved in because the responsibility for the validity of the rules rests with the Treasurer. To open this document click here.
2 August 2007: Letter of the EISS Board Chairman to Treasurer Foley.
In this letter the Board Chairman says that EISS had no responsibility for the rule changes made by the Treasurer. To open this document click here.
This summarises activities at EISS related to the rule changes of 2002 over the period 2 July 2000 – 31 July 2002. In a numbered point 66 on the first page of this extract it is stated that ‘As the history below shows, there was discussion between the EISS Board, Treasury and Mercer on the tax offset rules from 2000 onwards.’ However, there is nothing in the outline for the 21 month interval 16 August 2000 – 28 May 2002. There is a reference to the fact that a communication from the Under-Treasurer dated 5 July 2000 stating Treasury’s intention for the tax offset did not refer to pensions. One might expect the Board to have taken the initiative needed to determine what was intended for the reduction of pensions. To open this document click here.
7 June 2002: Letter purporting to be from EISS to the Under-Treasurer. This letter expresses support from the EISS Board for the 2002 rule changes developed by Mr Allan Archer of Mercer and recommends their adoption. It is of dubious authenticity because it would appear to have been sent without its dispatch having been formally endorsed by the EISS Board and without the knowledge of the Board Chairman who, in a letter to the Treasurer dated 2 August 2007, said that the Board was not responsible for the rule changes.
One might expect a letter from a superannuation fund trustee expressing support for, and recommending adoption of, rules for reducing benefits to be more elaborate than this letter. One might also expect there to be evidence of such a letter having been formally authorised for dispatch by the trustee. It appears that no formal authorisation was ever given.
30 June 2002: Appendix 4 from a report on financial position of part of EISS relating to ETSA utilities. This reports that in the 2001/2002 financial year the scheme investment return was -7.7%, about 15% less than expected, and yet the financial position of the scheme improved. The reason given was that the tax changes made to the scheme had reduced benefits, particularly pension benefits, by more than they had reduced assets. One might expect this to have led the EISS Board to suspect that the Treasurer’s rule changes were reducing employer costs. To open this document click here.
SA Superannuants’ documents:
Submission on the referral of October 2012 (the lapsed referral). To open click here.
Submission on the referral of September 2013. To open click here.
Letter to Treasurer Foley expressing concerns about EISS pensions. To open click here.
Letter and paper sent to EISS Chairman expressing concerns about EISS pensions. To open click here. No response or acknowledgement of receipt was obtained.