Portable Long Service Leave in the Building & Construction

Industry

Shauna Ferris, Louise Thornthwaite, Ray Markey, and Tim Kyng

! Management of Portable LSL schemes

! Actuaries Doug Drysdale, Peter May, ! David Quinn-Watson

! Colleagues in WorkPlace Relations

Thanks to..

! 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.

The Traditional View of LSL

! 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”

The Push for Portability

! 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…

Actuarial Advice Needed?

! Question 1:

! Are there good reasons for improved

! vesting and portability of LSL benefits?

! Isn’t LSL supposed to

! “reward long and faithful service”?

1951

1963

1985

0 5 10 15 20

5

5

10

10

15

20

Eligible for LeavePro-rata Payment on Termination by Employer/Illness/Necessity

Vesting & Qualifying Periods (NSW)

! 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

Comparison to Superannuation

! 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]

! 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

The Need for Leave?

! Question 3:

! Do Australians need a more flexible ! compulsory savings system?

! 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

LSL Payments

LSL Termination Payments (ATO)

! 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?

! Coal Industry (national)

! Building & Construction Industry (all states)

! Contract Cleaners (ACT, Queensland, NSW)

! Community Services (ACT)

! Security Industry (ACT)

Industry-based Portable 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

Building and Construction Schemes

! 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

Organisation

! 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

Benefits (NSW)

! Many employees never benefit since they leave the industry before qualifying (cyclical industry)

! “Lost members” – benefits have vested but are never claimed

! Four-year break rule causes administrative difficulties

Issues with Benefit Design

Queensland 2010/2011 2011/2012 2012/2013

Registered Workers at start of

year

267,768 274,162 280,336

Workers removed from the

register under the 4 year rule

23,351 27,324 31,454

Percentage 8.7% 10.0% 11.2%

! 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?

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 ………….. $1 in costs per $6.50 in benefits paid

Small Scheme (Tasmania) $1 in costs per $3.70 in benefits paid

Administration

! 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?

! A high proportion of growth assets

! Creating volatility in investment returns

Investment Performance

NSW

Tasmania

-15.00%

-7.50%

0.00%

7.50%

15.00%

22.50%

30.00%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

21%

-1%

9%11%

-10%-10%

14%17%

12%15%

-2%-2%

9%

! 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

Surpluses & Deficits

  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%

Deficit and Recovery

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

Issue #1 : Benefit Improvements

! 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

Issue #2: Levy instability

Victoria

Western Australia

Australian Capital Territory

Tasmania

! 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)

Consequences

! 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?

! 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

Letting it Ride?

! 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”.

Issue #3: Ownership of surplus

! 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.”

Royal Commissioner Cole (2003)

! 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

Ownership of Deficit?

! 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).

Public or Private?

! The valuation of LSL liabilities is sensitive to the choice of discount rates,

e.g. in NSW

! 2012 – government bond rate (low due to GFC)

! 2013 – expected long term return on assets

! Difference = reported deficit reduced by $54 million ! ($831m->

$777m)

Financial Reporting: Valuation Issues

2012 2013Discount 3% 7%Wage Increases 4% 4%Gap -1% +3%

! 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?

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.

Conclusions

! Alternatives?