No mention of BPB in this issue but enough excitement about superannuation for everyone.

Also in this issue:

• LGSS increases "compulsory employer contributions" by 240%

LGSS increases "compulsory employer contributions" by 240%

Not for everyone - just for those 7000 or so employees in councils who remain members of the LGSS Defined Benefits Scheme (also known as the Retirement Scheme, “the old State Super” etc) and only for five years.

This decision needs to be explained because many people in the industry who should know better are going completely gaga because they don't understand it.

1 An explanation of the two types of schemes

There are two superannuation schemes offered by LGSS, which cover most local government employees.

The most recent scheme is known as the Accumulation Scheme and it's called that because the contributions, which are made by councils on an employee’s behalf, accumulate with investment returns to a final amount of money on retirement. It is also described as a Defined Contribution scheme because the contribution to be made by employers is defined by legislation.

Members of this scheme will have 9% contributed by the council as a result of the Superannuation Guarantee charge. When an employee in this scheme retires, they receive whatever has accumulated over that time and the investment return on that money during the employee's membership of the scheme. This means that the investment risk is entirely the employee’s.

If you were employed in local government after 1992 you will be a member of this scheme and the issue about increased costs won’t effect you. Except in the broad sense as councils wonder how to find the money.

The Defined Benefits Scheme is called that because the benefit on retirement is based on a multiple of the employee's final average salary. Fairly complicated and requiring the accumulation of points each year, a defined benefit scheme is a fairly old-fashioned scheme predominantly available for public servants, teachers, local government employees etc and closed by the NSW Government in 1992 because it was regarded as too good and too expensive.

In a Defined Benefits Scheme, the investment risk is entirely the employers because they have to pay the benefit regardless of the investment performance of the scheme. A defined benefit scheme is the safest for employees because they can retire on a guaranteed entitlement regardless of investment returns.

If you were employed in local government in 1992 you will be a member of this scheme.

2 Who works out how much employers pay?

Actuaries do. Defined Benefit schemes have a contribution calculated to be made by employers based on actuarial estimates of investment returns and taking into consideration when employees will retire and how much money needs to be available to pay their defined benefit. If investment returns exceed expectations, then the scheme will develop a surplus and if investment returns are below expectation, the scheme can fall into deficit.

That all seems very logical.

3 Wasn't the fund in surplus for years?

When LGSS separated from State Super in 1997 it was discovered that there was a surplus in the Defined Benefit scheme. From 1989 to July 2008, a contribution holiday was implemented by the LGSS because there was sufficient in the surplus that councils could partially reduce, and for a period of time even reduce entirely, their contributions. This meant that over that period of time councils saved (or didn't have to spend) more than $630 million.

Yes, that's right, councils did not have to contribute more than $630 million because their contributions were effectively made from the surplus. Every year when the LGSS Board made the decision to continue the contribution holiday, the LGSS wrote to councils reminding them that this money should not be regarded as income, nor spent as consolidated revenue but be treated as a bonus which could not continue indefinitely. Invariably, nearly all councils ignored this advice and spent it on normal operating expenses.

4 What's happened to the surplus?

Everyone knows that 2008 and 2009 have been dreadful times for investment. You can't have a drop of 40% in the value of Australian Shares without an impact on superannuation - both in terms of individual accounts and also, obviously enough, any surplus.

Councils were advised in November 2008 that the investment losses (losses comparable to all other superannuation schemes and investors) meant that the surplus was depleted and, if there wasn't a bounce-back fairly soon, the scheme would be in deficit and councils may have to increase their contribution.

The LGSS Board met on 25 February 2009 to consider this. Members of the Board were provided with a report and recommendation from the Scheme’s Actuary five days before the meeting. The Actuary attended the meeting, spoke to his report and answered questions from members of the Board.

The Actuarial report noted a deficit of $300 million and, while it included three options for recouping that deficit by increasing employer contributions, a clear recommendation was made to increase the compulsory employer contribution effectively by 240% to 4.56 instead of 1.9. This would see the deficit redressed over five years if investment returns bounced back to the actuarial expectation of 7% per year in 2009/2010.

5 Everyone goes gaga

It is hard to understate the reaction of the industry. While it is abundantly clear and logical to everyone that a surplus allows councils to have a contribution holiday, it remains incomprehensible to many that a deficit can only be removed by councils paying more. Durr.

But everyone is up in arms. Councils which have profited from the surplus now seem incapable of understanding that the deficit needs to be redressed.

Clearly the Board understood that there would be a significant impact on councils but there was no alternative. It is a high-risk activity to ignore the recommendation of your Actuary, directors on the Board had the documentation well before the meeting for their consideration (certainly the employee representatives discussed it together) and there was full discussion with the Actuary present about the recommendation and the impact on the industry.

The decision to increase the multiplier to 4.56, thereby increasing a council’s contribution to the Defined Benefits scheme by 240%, was a unanimous resolution of the Board and, just to make it clear everyone knew what they were doing, the resolution was moved and seconded by two employer representatives.

There has been considerable pressure from councils for the Board to reconsider its decision but, when you think of it, how could it? Directors of a board of any organisation can’t be faulted if they take prudent advice from professionals they employee to provide it. As soon as directors start tampering with that advice and their fiduciary responsibilities by worrying about political pressure or other considerations, then they fail the "prudent person" test. And what possible confidence could members of the Fund have in decisions of the Board that are based on considerations other than fiduciary?

The primary responsibility of directors on the LGSS Board is to the LGSS.

As one of the directors on the Board, I won't be supporting rescission of that resolution.

6 How will this affect employees?

Plenty of people who should know better, like general managers who are mostly accountants (no offence) and managers of finance (who are meant to be financial professionals) think that employees on contract, whether Award-based or Senior Staff, could be made to pay that increase in the employer contribution affecting their entitlements under a TRP even though superannuation is defined as "a compulsory employer contribution". These people could not be more wrong.

So, for employees on contracts, there may be some issues as managers at some councils try to make the employee pay. We will oppose this at every opportunity and encourage members who are being approached in this way to contact us immediately.

Together with the LGEA, we met with representatives of the Local Government and Shires Association on 12 March. From that meeting it was clear that Award-based employees with a salary identified in the salary system cannot have that salary reduced by any increase in superannuation.

Similarly, and somewhat ironically, the employees who are best protected in this exercise are those senior staff who are employed under the Department of Local Government’s Standard Contract for general managers and/or senior staff. They are best protected because the contract at 8.2 makes it clear that the superannuation component in the TRP is "any contributions required to be paid for an employee under a superannuation arrangement entered into by Council for that employee." And that includes the full amount based on the new 4.56 multiplier from 1 July 2009.

depa and the LGEA/APESMA are encouraging the LGSA to approach this as a joint exercise where guidelines can be provided to councils about what they can and can't do. That should hold back the lunatics, the misunderstanding and the ignorant.

7 Does this mean hard financial times ahead for councils?

Let's take Baulkham Hills as an example. In 2004 when their entire obligation under the Defined Benefit scheme was paid from the surplus, they saved (or didn't spend) around $750,000. As there was a 100% contribution holiday for four years, that means they saved (or didn't spend) more than $3 million.

And there were two years when the contribution holiday was 50%, and this means they saved (or didn't spend) around $375,000 per year or $750 000 over the two years. There were also a couple of periods of a holiday of less than 50%.

This is a total over the life of the contribution holiday of around $4 million not spent by Baulkham Hills Council and those savings were accompanied by warnings that it should not be incorporated into consolidated revenue but should be treated differently.

If the Council’s total obligation was around $750,000 a year then a 240% increase means that the council will now have to pay around $1.8 million in 2009/2010. These are rough calculations but you get the picture.

Sydney City Council is looking at paying around $4 million, Great Lakes around $1 million, Blacktown around $3 million etc etc.

The ramifications on the industry are going to be considerable. How the NSW Government regards this increase when considering rate pegging remains to be seen. And the Local Government (State) Award will expire in November and is up for negotiation this year. Just as well the 3.2% is locked in to apply from the first pay period after 1 November.

Update on drug and alcohol policies

We were fairly active in 2008 discouraging a number of councils from introducing zero tolerance alcohol policies (because they are simply impractical) and random drug and alcohol testing.

We were able to discourage Hornsby from their enthusiasm for random drug and alcohol testing and were able to work with other councils like Lake Macquarie to reach agreement on a drug and alcohol policy supporting reasonable cause testing.

We were able to discourage Sutherland from a zero, and then blanket 0.02% alcohol testing regime, because we could convince the Council that there were far too many practical problems like alcohol in mouthwashes and homeopathic medicines and that it made no sense to introduce levels different to those that existed in the Motor Traffic Act. So what if there's a residue in the morning as long as you are under PCA levels established in the Motor Traffic Act etc?

At Sutherland we agreed to random alcohol testing but at the minimum PCA level established in the Motor Traffic Act. It makes sense, seeing that all our members drove council cars to work, that members do so under a limit that would have had them charged and potentially lose their licences on the drive.

Sometimes councils slip between our fingers. Apparently Sydney Council introduced a zero tolerance policy years ago and we will need to address that with Sydney and suggest a review this year.

And Wollongong Council, despite the opposition of our representative on the Consultative Committee, has just resolved to introduce random testing and 0.02 tolerance. All this does is pander to wages staff pressure that the same rules apply to everyone. Members at Wollongong are meeting to consider that this development this week. We expect them to request the council to review this policy and we will file a dispute in the NSW Commission if they don't.

The problem about councils slipping through our defences is that other councils think that if one Council can get away with it, then perhaps another can as well. Nambucca has now prepared a draft policy using Wollongong as a model. We will oppose that as well.

Please keep us in the loop if your Council is considering either zero alcohol levels and/or random drug and alcohol testing.

Bankstown wins depa/LGSS Golf Day again!

2009 was the sixth golf day run by depa at Blackheath on union picnic day under the Local Government (State) Award. Over the previous five years the trophy has been won by Blacktown, Penrith, North Sydney, Bankstown, Lithgow but it was only a matter of time before one of the previous winners won it again.

And Bankstown did precisely this on 13 March. There were two Bankstown teams and Bankstown 1, comprising Peter Duncan, Daniel Bushby, Gavin May and Adam Richardson won and won handsomely.

And don't the winners look happy! They are pictured here with LGSS CEO Peter Lambert being awarded the depa Cup. The day receives sponsorship from LGSS. When Bankstown won in 2007, Bankstown Mayor Councillor Tania Mihailuk presented the depa Cup at a special lunch to which she invited all our members. We have high expectations that Tania will do this again as a proper recognition of Bankstown's triumph.

You can use this link to check out all the teams - including the intrepid travellers who came all the way from Bega Valley and were appropriately awarded a special "longest drive" prize.

Is it time to review gradings of positions at your council?

depa has been involved for some time in negotiations with Taree City Council over our conviction that positions were never properly evaluated when the "new" Award was established in 1992. That's a long time between drinks (whoops, we had better stop saying things like that) but the Council agreed to have 00Soft (who operate the old Wyatt job evaluation system) re-evaluate positions and we were right.

All of our jobs at Taree (we have 23 members there) will now go up one grade in the Council's seven grade salary system. We are continuing discussions with the Council about placement in the new grades.

Jobs that have experienced significant change should always be re-evaluated to make sure that the grading is accurate. It is unlikely that there are many (or even any, apart from some building surveyor jobs at Hastings) where grades are historically inaccurate, but you never know.

Got any councillors behaving badly?

Before the confused environment about whether we were, or were not, affected by WorkChoices, there was a fairly standard way of dealing with offensive, bullying or abusive councillors or developers. Members had a meeting and put a ban on them.

It is not acceptable for councillors in public meetings and council meetings to personally attack employees and we took successful action at Parramatta, Mudgee and Eurobodalla. And while bans were a bit risky during the confusion of WorkChoices we had other options - calling in the Department of Local Government to straighten out the General Manager and the Mayor at Snowy River Shire when they failed to control outbursts by a councillor who should have been charged with breaches of the Code of Conduct.

A couple of years ago there were amendments to the Local Government Act to introduce a "sin-binning" arrangement for councillors who behave badly, there is a new Model Code of Conduct which is very prescriptive about what councillors can or can't do in relation to staff and the Department of Local Government is very strong on ensuring that councillors behave properly.

Remember that we have an important role here to protect employees and ensure that councillors understand the limitations of their role.

Yours etc

 

Ian Robertson

Secretary