City of Melbourne Annual Report 2015-16


Note 36. Superannuation funds



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Note 36. Superannuation funds

Local Authorities Superannuation Fund

Council makes the majority of its employer superannuation contributions in respect of its employees to the Local Authorities Superannuation Fund (the Fund). This Fund has two categories of membership, accumulation and defined benefit, each of which is funded differently. Obligations for contributions to the Fund are recognised as an expense in Comprehensive Income Statement when they are made or due.



Accumulation

The Fund’s accumulation categories, Vision MySuper/Vision Super Saver, receives both employer and employee contributions on a progressive basis. Employer contributions are normally based on a fixed percentage of employee earnings (for the year ended 30 June 2016, this was 9.5% required under Superannuation Guarantee legislation (2015: 9.5%).



Defined Benefit

Council does not use defined benefit accounting for its defined benefit obligations under the Fund's Defined Benefit category. This is because the Fund's Defined Benefit category is a pooled multi-employer sponsored plan.

There is no proportional split of the defined benefit liabilities, assets or costs between the participating employers as the defined benefit obligation is a floating obligation between the participating employers and the only time that the aggregate obligation is allocated to specific employers is when a call is made. As a result, the level of participation of Council in the Fund cannot be measured as a percentage compared with other participating employers. Therefore, the Actuary is unable to allocate benefit liabilities, assets and costs between employers for the purposes of AASB 119.

Funding arrangements

Council makes employer contributions to the defined benefit category of the Fund at rates determined by the Trustee on the advice of the Fund's Actuary.

As at 30 June 2015, an interim actuarial investigation was held as the Fund provides lifetime pensions in the Defined Benefit category. The vested benefit index (VBI) of the Defined Benefit category of which Council is a contributing employer was 105.8%. To determine the VBI, the Fund Actuary used the following long-term assumptions:


  • Net investment returns 7.00% pa

  • Salary inflation 4.25% pa

  • Price inflation (CPI) 2.50% pa.

Vision Super has advised that the VBI as at 30 June 2016 is 102.0%

The VBI is to be used as the primary funding indicator. Because the VBI was above 100%, the actuarial investigation determined the defined benefit category was in a satisfactory financial position and that no change was necessary to the defined benefit category’s funding arrangements from prior years.



Employer contributions

Regular contributions

On the basis of the results of the 2015 interim actuarial investigation conducted by the Fund Actuary, Council makes employer contributions to the Fund’s Defined Benefit category at rates determined by the Fund’s Trustee. For the year ended 30 June 2016, this rate was 9.5% of members' salaries (9.5% in 2014- 2015). This rate will increase in line with any increase to the SG contribution rate.

In addition, Council reimburses the Fund to cover the excess of the benefits paid as a consequence of retrenchment above the funded resignation or retirement benefit.

Funding calls

If the Defined Benefit category is in an unsatisfactory financial position at an actuarial investigation or the Defined Benefit category‘s VBI is below its shortfall limit at any time other than the date of the actuarial investigation, the Defined Benefit category has a shortfall for the purposes of SPS 160 and the Fund is required to put a plan in place so that the shortfall is fully funded within three years of the shortfall occurring. The Fund monitors its VBI on a quarterly basis and the Fund has set its shortfall limit at 97%.

In the event that the Fund Actuary determines that there is a shortfall based on the above requirement, the Fund’s participating employers (including Council) are required to make an employer contribution to cover the shortfall.

Using the agreed methodology, the shortfall amount is apportioned between the participating employers based on the pre-1 July 1993 and post-30 June 1993 service liabilities of the Fund’s defined benefit category, together with the employer’s payroll at 30 June 1993 and at the date the shortfall has been calculated.

Due to the nature of the contractual obligations between the participating employers and the Fund, and that the Fund includes lifetime pensioners and their reversionary beneficiaries; it is unlikely that the Fund will be wound up.

If there is a surplus in the Fund, the surplus cannot be returned to the participating employers.

In the event that a participating employer is wound-up, the defined benefit obligations of that employer will be transferred to that employer’s successor.

2015 interim actuarial investigation surplus amounts

The Fund’s interim actuarial investigation as at 30 June 2015 identified the following in the Defined Benefit category of which Council is a contributing employer:


  • A VBI surplus of $130.8 million

  • A total service liability surplus of $239 million.

The VBI surplus means that the market value of the fund’s assets supporting the defined benefit obligations exceed the vested benefits that the defined benefit members would have been entitled to if they had all exited on 30 June 2015.

The total service liability surplus means that the current value of the assets in the Fund’s defined benefit category plus expected future contributions exceeds the value of expected future benefits and expenses.

Council was notified of the 30 June 2015 VBI during August 2015.

Superannuation contributions

Contributions by Council (excluding any unfunded liability payments) to the above superannuation plans for the financial year ended 30 June 2016 are detailed below:



Scheme

Type of scheme

Rate

2016

000’s


2015

000’s


Vision Super

Defined benefits

9.5%

170

138


Vision Super

Accumulation

9.5%

8,003

7,418

Other funds

Accumulation

9.5%

2,844

2,530

Melbourne City Council Superannuation Sub Plan (CMSSP) Members

A separate plan is operated for Council’s defined benefit members under the Local Authorities Superannuation Fund (the Fund). This separate plan (the CMSSP) is a multi-employer sponsored plan and was closed to new members on 23 December 1993. The majority of the members in the CMSSP are employees of the participating employers that are wholly owned subsidiaries of Council.

As provided under paragraph 34 of AASB 119, Council does not use the defined benefit accounting for its defined benefit obligations under the CMSSP at the individual entity level. This is because the CMSSP is a multi-employer sponsored plan.

As a multi-employer sponsored plan, the CMSSP is a mutual scheme between participating employers to allow for the mobility of the workforce between the participating employers without attaching a specific CMSSP liability to employees and their current employer. There is no proportional split of the CMSSP defined benefit liabilities, assets or costs between the participating employers as the CMSSP defined benefit obligation is a floating obligation between the participating employers and the only time that the aggregate CMSSP obligation is allocated to specific employers is when a funding call is made.

As a result, the level of participation of Council in the CMSSP cannot be measured as a percentage compared with other participating employers in Council’s individual entity level financial statements. While there is an agreed methodology to allocate any CMSSP shortfalls identified by the Fund Actuary for funding purposes, there is no agreed methodology to allocate CMSSP benefit liabilities, assets and costs between participating employers for accounting purposes. Therefore, the Fund Actuary is unable to allocate CMSSP benefit liabilities, assets and costs between employers on an individual entity basis for purposes of AASB 119 because of the pooled nature of the CMSSP’s defined benefit category.

However, as the majority of the members of the CMSSP are employees of the Council group, the surplus or deficit of the CMSSP is recorded in accordance to AASB119 at the consolidated level for reporting purposes.

CMSSP member profiles are reviewed periodically to determine if and when reporting at the individual entity level is appropriate.


Funding arrangements

Council makes employer contributions to the CMSSP at rates determined by the Fund’s Trustee on advice of the Fund’s Actuary.

The CMSSP’s latest actuarial investigation was as at 30 June 2014. As at 30 June 2015, the CMSSP’s VBI was 117.8%, and at 30 June 2016 it was 119.6%.

The Australian Prudential Regulation Authority (APRA) superannuation prudential standard (SPS 160)

- Defined Benefit Matters determines the requirements for actuarial investigations and the funding requirements of a defined benefit (DB) arrangement. Under this standard:


  • The VBI is the measure to determine whether there is an unfunded liability; and

  • Any unfunded liability that arises must be paid within three years.

Under SPS 160, the VBI is to be used as the primary funding indicator. Because the VBI was above 100% at 30 June 2014, the Fund Actuary determined that no change was necessary to the Defined Benefit category’s funding arrangements from prior years, As the 30 June 2015 VBI was above 100%, the CMSSP was still in a satisfactory financial position as at 30 June 2015 under SPS 160.

The CMSSP’s employer funding arrangements comprise of three components as follows:



  1. Regular contributions – which are ongoing contributions needed to fund the balance of benefits for current members and pensioners

  2. Funding calls – which are contributions in respect of each participating employer’s share of any funding shortfalls that arose

  3. Retrenchment increments – which are additional contributions to cover the increase in liability arising from retrenchments.

Council is also required to make additional contributions to cover the contribution tax payable on the components 2 and 3 referred to above.

Employees are also required to make member contributions to the CMSSP. As such, assets accumulate in the CMSSF to meet member benefits, as defined in the Trust Deed, as they accrue.


Employer contributions

Regular contributions

On the basis of the results of the most recent full actuarial investigation conducted by the Fund’s Actuary as at 30 June 2014, Council makes employer contributions to the CMSSP at rates determined by the Fund’s Trustee. For the year ended 30 June 2016, this rate was 13 per cent of salary for active defined benefit members.

In addition, Council makes top-up payments to the CMSSP for exiting members equal to the exiting member’s benefit payment less the existing member’s vested benefit adjusted for the CMSSP’s vested benefit index (VBI) where the VBI is less than 100%.

Funding calls

The Fund’s Trustee is required to comply with the superannuation prudential standards. Under the superannuation prudential standard SPS 160, the Fund’s Trustee is required to target full funding of its vested benefits for each of its sub-plans (including the CMSSP). There may be circumstances where:



  • a sub-plan is in an unsatisfactory financial position at an actuarial investigation (i.e. its vested benefit index (VBI) is less than 100% at the date of the actuarial investigation); or

  • a sub-plan VBI is below its shortfall limit at any time other than at the date of the actuarial investigations.

If either of the above occur, the sub-plan has a shortfall for the purposes of SPS 160 and the Fund Trustee is required to put a plan in place for the sub-plan so that the shortfall is fully funded within three years of the shortfall occurring. There may be circumstances where the APRA may approve a period longer than three years.

The Fund’s Trustee monitors the CMSSP’s VBI on a quarterly basis and the shortfall limit for the CMSSP is set at 98%.

In the event that the Fund Actuary determines that the CMSSP has a shortfall based on the above requirement, the CMSSP’s participating employers (including Council) are required to make an employer contribution to cover the shortfall. The methodology used to allocate a shortfall should result in a fair and reasonable apportionment of the shortfall between the participating employers. A number of factors are taken into consideration when determining the fairness/reasonableness of the apportionment including:


Due to the nature of the contractual obligations between the participating CMSSP employers and the CMSSP, it is unlikely that the CMSSP will be wound up. In the unlikely event the CMSSP is wound up and there is a surplus in the CMSSP, the surplus cannot be applied for the benefit of the CMSSP employers where there are on-going defined benefit obligations. The surplus would be transferred to the fund accepting the defined benefit obligations of the CMSSP.

In the event that a participating CMSSP employer is wound up, the CMSSP defined benefit obligations of that CMSSP employer will be transferred to that employer’s successor.



Difference between calculations

The CMSSP surplus or deficit (i.e. the difference between the CMSSP’s assets and liabilities) is calculated differently for funding purposes (i.e. calculating the required contributions), for the calculation of accrued benefits as required in AAS 25 and for the values needed for the AASB 119 disclosures in Council’s financial statements. AAS 25 requires that the present value of the defined benefit liability be calculated based on benefits that have accrued in respect of membership of the CMSSP up to the measurement date, with no allowance for future benefits that may accrue.



Retrenchment increments

During 2015 -16, Council was required to make a payment of $50,564.26 to the CMSSP in respect of retrenchment increments (no payments required in 2014 -15). Council’s liability to the CMSSP as at 30 June 2016 for retrenchment increments, accrued interest and tax is $0 (2015: $0).


Latest actuarial investigation surplus amounts

The CMSSP’s latest actuarial investigation was as at 30 June 2014. This investigation identified the following in the defined benefit category:


  • A VBI surplus of $6.5 million; and

  • A total service liability surplus of $11.4 million.

The VBI surplus means that the market value of the CMSSP’s assets as at 30 June 2014 supporting its defined benefit obligations exceeded the vested benefits that the defined benefit members would have been entitled to if they had all exited on 30 June 2014.

The total service liability surplus means that the current value of the assets in the CMSSP’s defined benefit category plus expected future contributions exceeded the value of expected future benefits and expenses as at 30 June 2014.

Council was notified of the results of the actuarial investigation during January 2015.

Accrued benefits

The CMSSP’s liability was determined in the 30 June 2014 actuarial investigation pursuant to the requirements of the Australian Accounting Standard AAS 25 as follows:



Item

30 June 2014

$ Million



Net market value of assets

60.9

Accrued benefits (per Accounting Standards)

48.7

Difference between Assets and Accrued benefits

12.2

Vested benefits

54.4


Vested benefits index

112%

The financial assumptions used to calculate the accrued benefits of the CMSSP as at 30 June 2014 were:

  • Net investment return 7.5% pa

  • Salary inflation 4.25% pa

  • Price inflation 2.75% pa.

The Fund Trustee has begun to de-risk the investment portfolio of the CMSSP because of its VBI position. This has resulted in a change of its underlying strategic asset allocation. As a result the financial assumptions from 30 June 2015 are:

  • Net investment return 6.0% pa.

  • Salary inflation 4.25% pa.

  • Price inflation 2.5% pa.

Favourable or unfavourable variations may arise should the experience of the CMSSP differ from the assumptions made by the Fund’s Actuary in estimating the CMSSP’s accrued benefit liability.

The next full actuarial investigation of the CMSSP’s liability for accrued benefits will be based on the CMSSP’s position as at 30 June 2017.


Superannuation contributions

The total amount of superannuation contributions paid by Council (inclusive of its wholly-owned subsidiaries Citywide Service Solutions Pty Ltd and Queen Victoria Market Pty Ltd) during the year was $1.898 million (2015: $2.251 million).

Citywide Service Solutions Pty Ltd contributes in respect of its employees to the following sub-plans of the Local Authorities Superannuation Fund:


  • The Melbourne City Council sub-plan

  • The Defined Benefits plan

  • The Accumulation plan.

The expected contributions to be paid to the defined benefit category of Vision Super for the year ending 30 June 2017 is $1.945 million ($2.313million in 2016).

Melbourne City Council Superannuation Sub Plan

2016

000’s


2015

000’s


Asset/(Liability) Recognised in Balance Sheet

(555)

1,195

Total amount recognised in Comprehensive Income Statement

(1,089)

863


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