Report to LGSS meeting on 25 March 2005

"Superable Salary"

There are three issues which need to be resolved by the LGSS. The Board in May 2004 decided that these issues should be the subject of discussion between the unions, the LGSA and the Board. That meeting eventually took place on 4 March 2005 and this is a report on that meeting.

It was attended by the following:

LGSS Peter Lambert, John Livanas
LGSA David Gibson, Lillian Tiddy
USU Barry Mason, Maria Wilson
LGEA Martin O'Connell
Depa Ian Robertson

What's so important about Superable Salary?

This is the salary figure declared by councils for members. It is more critical in the Defined Benefits scheme (Division B) because final retirement payout figures are based on the member's final average salary - ie, by averaging the member's superable salary at the date of exit and at 31 December over the preceding two years.

In addition to determining retirement income for those in Division B, it is important because it defines levels of contribution in Pool A and therefore, again, retirement income.

Issue 1 - Allowances

There are a variety of allowances paid under industrial instruments to employees. It has been a bit of a running sore whether they are or are not accepted as salary for superannuation purposes.

At the meeting on 4 March, Peter Lambert tabled a list of allowances from the Australian Tax Office allowable for the purposes of the superannuation guarantee charge and a State Government circular for First State Super on allowances regarded as acceptable for superable salary.

While there was a discussion at the meeting about what constituted work related or reimbursement allowances, and there was confusion about which was which, this is generally very clear.

It was agreed that Peter Lambert would draft a synthesis of the ATO and State Government lists to be submitted for endorsement at the next meeting of the same parties to the meeting on 4 March. They would then be placed on the LGSS website and in an LGSA general circular.

Issue 2 - What to do about cars?

This has been an issue worrying Barry Mason. There are a wide range of practical difficulties which prevent establishing a proper formula on the "value" of a car for private purposes. Some cars provided by councils do little private kilometres while many do predominately private kilometres - depending on the type of employee the car is allocated to. For example, one of my members in a large country council will do up to 90% business kilometres while an accountant in a small metropolitan council may do bugger all.

This is not an avenue to redress to individual industrial issues at specific councils and it was generally agreed that if the LGSS were to make any recommendation at all, it should focus on the declared FBT value of the vehicle - which is already calculated by councils and incorporated on the employee's group certificate. It was considered by most at the meeting that this was the only practical option.

Issue 3 - Superable Salary for "packaged employees"

This is not a difficult concept to understand. The most critical concept to understand is that the resolution of the problem lies in the hands of the LGSS - the Trust Deed requires the Board to resolve the "assessed cost" of superannuation contributions.

The issue arises only for packaged employees (whether they are senior staff, other employees on term contracts or are packaged in some other exchange of letters or contractual arrangement) only in the circumstances of the employer contribution holiday in Division B.

Ordinarily, superable salary is the total package minus the cost to the employer of superannuation. If there is no actual cost incurred by the council, because the employer contribution to superannuation is being paid from the surplus, then the Board needs to determine what the "actual" cost is. When the contribution holiday started, it began with a reduced contribution by employers until the total contribution holiday was introduced in (insert year here).

Although figures are difficult to squeeze from the LGSS, my guess is that council contributions to superannuation have been paid from the surplus to a total amount of somewhere between $700 million to $800 million. The Board's decision to wind back the contribution holiday to half the normal multiplier etc from 1 July 2005 and remove it entirely from 1 July 2006 means that we are dealing with a specific and finite period of time.

The first contribution holiday began from 1 July 1998 when the Board resolved to introduce a reduced contribution. It will terminate finally on 1 July 2006 - this makes the period in question 1 July 1998 to 30 June 2006.

Here is an example of what this discussion is all about:

In the table that follows, Normal Life is when there is no holiday, Holiday 1 is the effect of the resolution taken in Martin's and my absence at the December 2004 meeting and Holiday 2 is the affect of the recommendation made in this report.

If the employee is on a total package of $100 k, that would normally mean superable salary of $90 k and actual cost of superannuation of $10 k.

During the contribution holiday that money was not paid out and the employee continued to be paid the TRP figure of $100 k - this meant that for industrial and common law purposes, the employee received $100 k in cash benefits and, in addition to that, $10 k in superannuation benefits but not from the employer, from the surplus.

The Board's resolution in December (based on internal advice and a flimsy opinion from Peter Charteris) was that even though the employee was receiving $100 k in cash, the employee's superable salary was actually $90 k.

This is ludicrous. It is inconsistent with the agreement reached between the unions and the LGSA about how the superannuation figure should be dealt with for TRP employees during the contribution holiday and makes no real sense.

It is unfair to suggest that an employee receiving a TRP as cash should have any lesser figure declared as superable salary.

There is an argument, that the "effective" TRP for such an employee would be the TRP in their employment arrangement with the council plus the "notional" remuneration benefit available from the surplus. There is a rumour that Pittwater Council has a legal opinion supporting this view but, having discussed this with the General Manager, the opinion is more about his employment entitlements at Pittwater. The opinion does agree with the $100k figure using the example above.

Industrially, the LGSA and the unions agree that the salary of $100 k must be paid by the council. This is consistent with the subsequent decision of the Bongiorno J in re East Gippsland Shire Council v Strong VSC 448. All that needs to be done now is to have that reflected in a decision by the Board on the concept of "assessed costs" of superannuation.

What is the actual cost and why doesn't Peter Charteris get it?

At the last meeting an opinion from Phillips Fox' Peter Charteris dated 16 February 2005 argued that the Board should not accept that the "assessed annual cost" of superannuation for these employees during the contribution holiday was the actual cost.

Peter argued that:

" 'assessed annual cost' is not defined. The phrase is in terms of cost rather than the actual contribution by the employer and accordingly it is no the actual contributions to the scheme by the employer. Its meanings to be determined from the context it is used.

If assessed annual cost was to equate to actual employer contributions, then the "salary" for superannuation purposes would vary as between employers, where there were different employer contribution rates and between years where the contribution rate changes. This would mean the benefits payable would vary each year depending on the actual employer contribution rate for the year.

Such an interpretation would produce an arbitrary outcome and accordingly is not a, in my opinion, the correct interpretation. Rather an interpretation that produces a salary for superannuation purposes that does not vary in an arbitrary manner in required.

Therefore the assessed annual cost is a long term employer cost, rather than the actual yearly contribution by the employer."

The following points need to be made about this "opinion":

1. There is no precedent cited for this interpretation.

2. Charteris has never expressed a legal opinion about anything to do with the surplus which would provide a benefit to employees. Directors might recall that even without being invited he provided an opinion to the Board that we should not contest the Treasurer's opinion in the Supreme Court.

3. The salary for superannuation purposes already varies between employers and different years because of Award increases and other adjustments. There would be no one in the industry whose salary does not vary on an annual basis.

4. The concept that a decision (like the one I am about to recommend) would produce "an arbitrary outcome and accordingly is not, in my opinion the correct interpretation" is not sufficiently compelling nor forceful to warrant the LGS Board departing from the principle on salary entitlement agreed between the LGSA and the unions during this period - and endorsed when the principle was considered by the Victorian Supreme Court - as noted earlier.

5. "Therefore the assessed annual cost etc" is far from " therefore".

Recommendation:

That the Board:

1. note it is the Board's responsibility to determine the "assessed cost" of superannuation and, having considered the matter,
2. resolve that the "assessed cost" of superannuation for employees during the specific period of the partial or complete contribution holiday from 1 July 1998 to 30 June 2006, is the cost actually incurred by the council each year during that period - ie, none when there is a total holiday and similarly the principle be applied to those periods of time during the contribution holiday when the holiday provided a differing amount, and
3. that Futureplus immediately carry out the administrative adjustments for the small number of members affected.

Finally…

The Board's/Futureplus' attitude to this question has created some disarray in the industry. There are not many General Managers or Directors who have remained in Division B - most taking (in my opinion the wrong advice) from SSC/FuturePlus that they should withdraw from the Defined Benefits Scheme and move into Division E.

Having said that, those employees who remained have issues now about retirement income. I have a member at Wagga Wagga Council who, because of this interpretation issue, believes he will have to work for an additional year for the retirement income that would have been provided with the more equitable recommendation made above.

A sting in the tail?

The only potential sting in the tail is that if the Board resolves, in these circumstances, that the actual cost is the cost actually incurred by the council that financial year, then there may be a principle established for those occasions when the employer may need to contribute more than the normal 1.9 multiplier. This may occur on times for investment return etc.

I regard this as being of such low likelihood, that we should dismiss it or, in any event, deal with that matter when it arises.

There are no costings available for the impact of the proposed definition on the surplus. Suffice to say, compared with the $700 to $800 million gone in employer benefits, this benefit to employees would be infinitesimal.

Ian Robertson
Director