Portable Long Service Leave in the Building & Construction Industry. Shauna Ferris, Louise Thornthwaite, Ray Markey, and Tim Kyng

Transcription

1 Portable Long Service Leave in the Building & Construction Industry Shauna Ferris, Louise Thornthwaite, Ray Markey, and Tim Kyng

2 Thanks to..! Management of Portable LSL schemes! Actuaries Doug Drysdale, Peter May,! David Quinn-Watson! Colleagues in WorkPlace Relations

3 The Traditional View of LSL! NSW Parliamentary Debates, 1951! To reduce labour turnover,! To provide a reward for long and faithful service, and! To enable employees halfway through their working lives to recover their energies and return to work renewed, refreshed, and invigorated.

4 The Push for Portability! Greens Senators in July 2014! That the Senate refer the matter of portable long service leave to the Education and Employment References Committee for inquiry...! The creation of a nationwide portable entitlement scheme for long service leave and any other appropriate entitlements, taking into account The number of Australian workers in insecure work; Increased workplace mobility and increasingly precarious working conditions

5 Actuarial Advice Needed?! Greens Senators in July 2014! Developing recommendations as to how any such scheme could be paid for and implemented, including: The role of existing portable long service leave schemes operating in some sectors; and How the scheme should be co-ordinated and by whom

6 ! Question 1:! Are there good reasons for improved! vesting and portability of LSL benefits?! Isn t LSL supposed to! reward long and faithful service?

7 Vesting & Qualifying Periods (NSW) Eligible for Leave Pro-rata Payment on Termination by Employer/Illness

8 Comparison to Superannuation! 1980s Superannuation A reward for long and faithful service Very poor vesting for short-term employees No preservation requirements Unions pushed for full vesting and portability via Industrial Relations system Supported by Hawke-Keating government in the national interest to improve retirement savings

9 ! Question 2:! Do Australians need more long service leave?! (Uncommon elsewhere)! Would it be better to cash out such benefits?! What is LSL really used for?! [Note: we are now entering a data-free zone]

10 The Need for Leave?! 1. Longer working life (retire at 70?)! 2. Workplace Stress! 3. Family friendly workplaces (parental leave)! 4. Carer responsibilities (flexibility)! 5. Employer perspective: flexible workforce

11 ! Question 3:! Do Australians need a more flexible! compulsory savings system?

12 LSL Payments! Many people never take LS leave, BUT! Do receive LSL cash payments on termination of employment (if vested) Redundancy Pay (low level of savings ME Bank) Death / Disability Benefits Hardship Payment (some states) Early Retirement (more restrictive preservation?) Supplemental Retirement Savings

13 LSL Termination Payments (ATO)

14 ! Question 4:! If we do decide to improve! vesting and portability of LSL benefits,! what is the best way to do so?! (McKell Options Paper)! Should we create more! industry-based portable LSL schemes?

15 Industry-based Portable Schemes! Coal Industry (national)! Building & Construction Industry (all states)! Contract Cleaners (ACT, Queensland, NSW)! Community Services (ACT)! Security Industry (ACT)

16 Building and Construction Schemes! Separate schemes in each State & Territory! Roughly $3 billion in Total Assets! About 1 million Registered Members! Average benefit paid $7,300 in 2013

17 Organisation! Central Register of Employers & Workers! Maintains records of service of registered workers Data provided by employers Lifetime records! Collects levies Most states: Percentage of payroll NSW, Queensland, NT: Percentage of building costs! Pays benefits: Either reimburse employer or directly to employee

18 Benefits (NSW)! Defined benefits = multiple of pay, based on service ( Pay is variously defined)! LSL cash payment at any time after 10 years service! Pro-rata payment on ceasing to work in the industry after 5 years service! Death/Disability/Age Retirement after 55 days service! Deregistration if no service in the industry for 4 years

19 Issues with Benefit Design! Many employees never benefit since they leave the industry before qualifying (cyclical industry) Queensland 2010/ / /2013 Registered Workers at start of year Workers removed from the 267, , ,336 23,351 27,324 31,454 register Percentage under the 4 year rule 8.7% 10.0% 11.2%! Lost members benefits have vested but are never claimed! Four-year break rule causes administrative difficulties

20 ! Question 5! Is an industry-based structure suitable for a nationwide portability scheme?! Historical reasons for industry based schemes? [Incrementalism - just like superannuation]! If national portable LSL is desirable, why should entitlement to portable LSL be dependent on remaining in the same industry for x years?

21 Administration Efficiencies in collection of levies Online submissions National Project for back-office systems Strong efforts to educate / enforce compliance Better than Fair Work Australia? Costs per member comparable to superannuation funds BUT the costs are high relative to the size of the benefits provided Large schemes.. Small Scheme (Tasmania) $1 in costs per $6.50 in benefits paid $1 in costs per $3.70 in benefits paid

22 ! Question 6:! In superannuation, over the years we have seen many small industry funds merge in order to obtain the benefits of economies of scale.! Is it sensible (cost-effective) to set up more! small industry-based portable LSL schemes?

23 Investment Performance! A high proportion of growth assets! Creating volatility in investment returns

24 NSW 30.00% 22.50% 15.00% 7.50% 9% 15% 12% 17% 14% 11% 9% 21% 0.00% -7.50% % -2% -2% -1% -10% -10% Tasmania

25 Surpluses & Deficits! During the 1990s, the funds all accumulated large surpluses! During the GFC, most of the funds developed substantial deficits.! Have largely recovered by now Increased levies Better investment performance

26 Deficit and Recovery Year ending 30/6/2009 Year ending 30/6/2013 ACT 129% 96% Northern Territory 168% 200% New South Wales 80% 99% Queensland 82% 137% South Australia 88% 103% Tasmania 101% 113% Victoria 77% 86% Western Australia 75% 121%

27 Issue #1 : Benefit Improvements In the 1990s, what did the funds do with their surpluses?! Strong pressure to improve benefits! BUT the benefit improvements are continuing long after the surplus has disappeared.! -> higher long terms costs for employer

28 Issue #2: Levy instability! When there was a surplus, levies were reduced! When there was a deficit, levies were increased (sometimes quite sharply)! Employer resistance to levy increases The higher the levy, the greater the incentive to avoid it! Instability in levy rates

29 Victoria

30 Western Australia

31 Australian Capital Territory

32 Tasmania

33 Consequences! Unhappy Employers Tasmanian Parliamentary enquiry 2011 Harder to compete with out-of-state manufacturers! Generational Cross-Subsidies New employers paying off old deficits! Pro-cyclical effects in a downturn Higher payouts as workers leave industry Lower level of building activity (Lower levy base) Higher levies to cover investment losses Deficits arising from valuation assumptions (if using low govt bond rates as valuation rate of interest)

34 ! Question 7:! Is a defined benefit structure suitable for a multi-employer scheme?! Especially where there is often a high turnover of employers?! What (if anything) can/should be done to reduce variability in the levy rates?

35 Letting it Ride?! Theoretically the schemes could hold the levies at a more stable level.! Allowing greater variability in funding ratios! Are deficits acceptable? Question of security of members benefits! Are surpluses politically feasible? Pressures over ownership of surplus

36 Issue #3: Ownership of surplus! During the 1990s, when funds had large surpluses, some of the surplus was diverted to other uses.! NSW government (Bob Carr) removed $180 million from the fund Employers unhappy Especially when levies increased soon afterwards! Queensland s fund paid about $16 million to a training fund.

37 Royal Commissioner Cole (2003)! I consider that long service leave moneys should be used only for the purposes for which they were paid. Transparency is important, particularly in this industry...!..the fact that long service leave funds are siphoned off for other purposes which may be beneficial to the industry is not sufficient justification for that occurring...!..i can see no justification for imposing upon the industry a levy by legislation for long service leave for employees and then using portions of the funds so raised for other purposes.

38 Ownership of Deficit?! When the NSW fund had a surplus, the NSW government took $180 million! In 2012, the same fund had a large deficit.! Current moves to privatise the fund!.presumably means that NSW government will no longer have any liability for deficits

39 Public or Private?! Victoria & Tasmania privatised their portable LSL schemes in the late 1990s. Why?! NSW is considering this.! Which type of administration is preferable?! Cole Royal Commission report:! The critical difference between the two approaches is that, in the latter (privatised) model government no longer has any hands on involvement in the scheme or any financial exposure to it. (emphasis added).

40 Financial Reporting: Valuation Issues! The valuation of LSL liabilities is sensitive to the choice of discount rates, e.g. in NSW Discount 3% 7% Wage Increases 4% 4% Gap -1% +3%! 2012 government bond rate (low due to GFC)! 2013 expected long term return on assets! Difference = reported deficit reduced by $54 million! ($831m-> $777m)

41 ! Question 8:! At present different schemes use different methods for determining the discount rate for valuation of liabilities.! Which method is preferable?! Should the Actuaries Institute! make recommendations to the! Accounting Standards Board?

42 Conclusions Portable LSL schemes in the building and construction industry provide valuable benefits to workers in that industry Few would be eligible for LSL otherwise Schemes have support of stake-holders But the industry-based model does not seem suitable for the extension of portable LSL to the wider community.

43 ! Alternatives?