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Update to Cash investment option - answers to frequently asked questions

For information about the CSS Cash Option for contributing members you can have a look at Your guide to the CSS Cash Option or read on for background information and answers to frequently-asked questions. Key terms are underlined and linked to an explanation of that term.

The CSS Board has made a change to the way earnings are allocated to facilitate the introduction of a cash investment option for CSS members in December 2004, and provide a foundation for a fuller range of investment choices in the future.

A cash investment option will provide CSS members the opportunity to choose more surety of earnings (via a Cash Option) in exchange for the likely higher but more volatile earnings delivered by a balanced fund (the current CSS default Fund ).

This is the first step in a transition phase to introducing a fuller range of member investment choices proposed by the Board to meet growing demand for investment options that suit different risk-tolerances, and to ensure the CSS is in line with industry standards.

Change to allocations of earnings

In order to deliver these options to members, now and in the future, the Board has changed the way it allocates earnings by amending the CSS Exit Rate and Crediting Rate policies, with effect from 13 August 2004. The key changes are set out below:

From December 2004, CSS members can choose a Cash Option

From December 2004, CSS members will be able to choose a Cash Option. This is the first step to creating a fuller range of member investment choices in the future.

A document giving details of the Cash Option will be sent to CSS members in October 2004.

Each member choosing this option will be able to transfer (subject to terms and conditions) their funded accumulation components into the Cash Option as if they were exiting the CSS default Fund. From that transfer date onwards, the transferred amount will earn the cash rate and will grow as long as it remains in the Cash Option.

Members will be allowed (subject to terms and conditions) to transfer from the Cash Option back in to the CSS default Fund. From that transfer date onwards, any interest earned from 1 July 2003 (whether from the Cash Option or the default Fund) will again be subject to risk. However, members' balances will never go below the balance as at 30 June 2003 plus any contributions since then.

Some Questions and Answers about the Cash Option

What about those members not transferring?

Under the new policies, if you choose to remain in the existing CSS default Fund, you will still receive your fair share of net earnings from 1 July 2003 to the date you exit. You will simply receive it through the Exit Rate when you leave. In other words, it is only a change to WHEN you receive your allocation of net earnings. Irrespective of investment performance, your balance will never go below the balance as at 30 June 2003 plus any contributions since then.

Why not introduce full member investment choice now?

The CSS Board wants to introduce investment choices for members with funded accumulation components which are affected by investment earnings.

A fuller range of member investment choices can only be introduced in the CSS after legislative change. There are many issues which need to be worked through before legislation can be changed.

In the short term, the Board has decided it can take a transitional step towards member investment choice by amending the CSS Exit and Crediting Rate policies and introducing the Cash Option in December 2004.

Why make these changes now?

Now is a suitable time to make these changes because the CSS default Fund's negative reserve , which precluded introduction of investment choices, has been eliminated.

Why not simply credit everything now and introduce a cash option straight away?

If we were to credit all net earnings now, the CSS default Fund may well slip back into a negative reserve position which would preclude the introduction of the Cash Option.

In addition, the Board must give adequate notice to members, and make the necessary administrative arrangements, before the Cash Option can be introduced.

Please note: The Board retains the right to change the timing of the exit rate determinations and/or the methodology used to calculate the rate as appropriate to the circumstances of the CSS Fund at any particular time.

With these changes, are members exiting now, getting any more than their fair share of earnings?

If you exit now, you are getting no more and no less than your fair share of net earnings from 1 July 2003- you will simply receive it through the Exit Rate WHEN YOU LEAVE.

With these changes, are members continuing in the CSS default Fund going to get less than their fair share of earnings?

If you are continuing in the CSS default Fund, you will receive no less and no more than your fair share of net earnings from 1 July 2003 - you will simply receive it through the Exit Rate WHEN YOU LEAVE.

I don't want member investment choice, why can't I have my crediting rate instead?

ABOUT INVESTMENT CHOICE

We understand there may be some members who do not want member investment choice, although we recommend you seek advice from a licensed financial planner before making any decisions about your super.

However, the Board wants to introduce member investment choice to allow members the opportunity to select investment options that suit different risk-tolerances, and to ensure the CSS is in line with industry standards.

ABOUT THE CREDITING RATE:

By no longer determining Crediting Rates, net earnings from 1 July 2003 will now be allocated through the Exit Rate, at the time you leave.

In other words, this is simply a change to WHEN you will receive your allocation of net earnings. You will still receive your fair share of net earnings from 1 July 2003 through the Exit Rate WHEN YOU LEAVE.

Why hasn't this change been made sooner?

Negative reserves precluded these changes being made any earlier. The complexity of the CSS means that any change cannot be undertaken quickly.

Is there any event that could stop the Cash Option from being introduced?

Yes. The Board has to meet the requirement that members never exit the Fund with less than what they have contributed (given effect by a 'no negative' rate policy). Therefore, if the CSS Fund does go into a 'negative reserve' position, the right to transfer to the Cash Option will be suspended until the negative reserve is eliminated again.

The chance of this happening has been minimised by the Board's amendment to the Exit and Crediting Rate policies.

Do these changes affect existing CSS retirement options for members?

No

What are funded accumulation components which can be transferred to the Cash Option?

Your CSS account is made up of three components:

1. Member Component - this is your fortnightly contributions plus interest. Your contributions comprise your basic compulsory contributions of 5% and any supplementary contributions which you may have paid over 5%.

We call these two components 'funded accumulation components' because they are paid directly into the CSS to be invested and therefore accumulate interest.

2. Productivity Component (if applicable) - this is your employer's fortnightly contributions plus interest.

3. Employer-financed component - This is an amount financed by your employer and calculated only when you leave. This component is generally paid as a pension.

We call this an 'unfunded component' because it is only paid when your retirement benefit is payable, usually when you retire - ie. it is not given to the CSS to invest on your behalf and therefore cannot be transferred to the Cash Option.

When is my member statement coming?

These changes require some administrative upgrades which must take place before member statements can be issued. It is anticipated that Annual Member Statement Packs will be issued in October 2004.

If you are exiting now, simply call an Information Officer on 1300 000 277 for a benefit estimate, as you would have had to do anyway.

How do I keep track of my benefit?

Once you receive your annual member statement, planned to be issued in October 2004, you can use the i-Estimator to estimate your total final benefit. In the meantime, if you are planning to retire shortly, please call an Information Officer on 1300 000 277 and ask for a benefit estimate.

Can I ever be worse off under the new policy?

The only time you would have been better off under the old policy (ie, worse off under the new policy) is at another member's expense. That is, if 2003-2004 earnings were credited to your balance and the Fund's subsequent earnings were negative then a negative reserve would be created. Members who claim their benefit when there is a negative reserve are leaving other members to make up that reserve from future earnings. So leaving members gain, continuing members lose. THIS IS NOT FAIR.

Has the change in policy increased the risk to my BALANCE in the Fund?

This is another way of asking could I be worse off. See the answer above.

Isn't the change really removing the Government guarantee of no negative?

There is no Government guarantee of no negative. The Government or any external party does not make up negative earnings. The no negative is a "guarantee" that continuing members pay for by foregoing future earnings to eliminate a negative reserve if one is created. The new policy minimises the chance of this happening.

Why are my earnings AFTER 1 July 2003 no longer "guaranteed"

They were never guaranteed. See the answer above.

Why is the PSS exit rate higher than the CSS exit rate?

The PSS and CSS have slightly different investment strategies due to the PSS being an open, growing Fund and the CSS being a closed fund with benefit payments exceeding contributions. This means that investment performance will differ by small amounts.

The main reason why there is the difference between the PSS and CSS exit rates is due to the old crediting rate policy. When a negative reserve existed due to poor investment markets, CSS members who claimed their benefit were leaving remaining members to make up the negative reserve from future earnings. The more CSS members who left the more the remaining members had to make up. Since the PSS is growing and the CSS is shrinking, the PSS Fund eliminated the negative reserve much quicker and so the exit rate, which reflects net earnings, is higher.

Is it fair?

Yes, as long as the Fund does not go into a negative reserve. Members will get what their contributions earn. No more no less.

How does my interest compound?

The Board's Chief investment Officer has prepared an illustration of how interest compounds in the Fund, regardless of when it is allocated to member balances.

Let's assume the Fund had $100 in assets on June 30 2003 and that there were 10 members with a member balance of $10 each. For the sake of simplifying this illustration we'll assume members do not continue to make new contributions to the Fund and that all the earnings would have been credited to members under the old arrangements and none to reserves.

Now assume that Fund investments earn a 10% return over the next year so that assets at the end of June 2004 are now $110. Under the old crediting rate policy this $10 is allocated as a crediting rate and each member's balance, as shown on Information Statements, would go from $10 to $11. Under the new policy it remains unallocated so that member account balances remain at $10.

Whether it is allocated as a crediting rate or not, the Fund now has $110 to invest. Now let's ssume earnings are 10% again in the next year. Fund assets will now be $121 (being $110 plus 10%). Again under the previous policy members would be credited with a 10% increase and member balances would be shown as increasing to $12.10.

Now assume a member leaves the Fund. Under the previous policy he or she would leave with $12.10; 21% more than they had two years earlier. In other words, the two 10% crediting rates have compounded up to a 21% total increase.   Under the new policy, the exit rate will be the net Fund earnings since the end of June 2003 expressed as a percentage of fund balances on that date. These earnings are $21 and the fund balance as at June 30 2003 was $100, so that the exit rate is 21%. The member would get their account balance, $10 plus the exit rate of 21% $2,10, giving a total of $12.10.

The result is the same. Investment returns compound whether they are allocated or unallocated.

But the CSS has always declared an annual crediting rate

The CSS operates under the provisions of the Superannuation Act 1976 (the Act), the Superannuation Industry (Supervision) (SIS) Act and other relevant Federal legislation. The Act provides that the CSS Board (the Board) should determine a rate of interest, if any, for Scheme members. This responsibility is given effect by the determination of an exit rate, reviewed at least weekly, and applied to members' accumulated contributions and interest in the Fund at the time of their exit from the Fund. The impact of this practice in times of negative returns, and the desire to have a cash option, are the reasons for the change.

Why the need for change?

The CSS was designed in 1976 and replaced a Scheme that commenced in 1929. Since that time both the superannuation environment and the expectations of Fund members have changed dramatically. Particularly during the periods of high volatility in investment markets in recent years, many CSS members have called for the introduction of investment choices not provided for by the Act. This change in the timing of crediting net Fund earnings to members is necessary to enable the Board to introduce a cash investment option.

How can I calculate my benefit?

Your Annual Member Statement will be issued in October along with offer documents so you can consider whether you wish to transfer your funded component to the cash investment option. That statement will show your benefit accrual in the Fund as at 30 June 2003 and the amount that would have applied had you exited the Fund on 30 June 2004 (ie, by applying the exit rate as at 30 June 2004 to the funded component of your benefit at that date.)

Why weren't members consulted?

The CSS Board has legislated responsibilities that include the distribution of Fund earnings to members of the CSS. Decisions in relation to interest rate policy are the Board's responsibility. The Board consulted with the Government and the unions about the changes.

3 September 2004

Updated 22 September 2004

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