Address to Government Superannuitant's Council Meeting

Annual Conference
Airport Hotel, Kilbirnie

Thank you for inviting me here today.

I have no doubt that you would have preferred to hear from the Minister responsible for the Government Superannuation Fund, the Associate Finance Minister, Dr Hon Lockwood Smith, but his APEC duties have made it impossible for him to be here today.

However, as you are all ex-government servants who have an interest in maintaining a close connection with the Government of the day, I thought I could spend some time giving you my thoughts as State Services Minister about the future of the public service.

But first, you have asked a number of specific questions about the Government Superannuation Fund, which I'll endeavour to answer.

A number of questions relate to the position of surviving spouses.

Would you support the provision for a surviving spouse to receive payment of superannuation for a period of 28 days after the date of death of the superannuitant?

The surviving spouse receives the spouse allowance from the date of death of the retiree, and there are no plans to change that. However, I should note that section 89(1) of the GSF Act specifies that the instalments are paid in advance and that no portion of it is recoverable on the death of the retiree. In these cases a surviving spouse can receive up to 28 days full retiree benefit following the death of the superannuitant.

To pay a further instalment after death could result in up to 8 weeks of payment which would be a significant cost to the taxpayer.

Would you support the restoration to the equitable level of the allowances for dependent children cared for by surviving spouses noting that children who were dependent prior to 1985 receive an allowance of $78 per year while those who became dependent after 1985 receive a CPI indexed allowance over $2000?

The indexation of the child allowance after 1985 was a feature of the new scheme introduced from that time, which contained a number of improvements in exchange for a slightly higher contribution rate. There does not seem to be a strong case for applying this benefit of the new scheme to persons receiving benefits based on the old scheme.

The same answer applies to the next question:

Would you support the treating of surviving spouses of superannuitants who retired prior to 1985, who then remarry, being treated the same as the spouses of all post 1985 retirees and continue to receive their share of the superannuation payment?

The old scheme which had lower contribution rates, and contributors (as opposed to those who had already retired) had the opportunity to join the new schemes when they were introduced in 1985. The change you suggest would have significant cost to the taxpayer (over $0.5 million a year)

Would you support equal pension rights for surviving spouses of pre 1 April 1990 retirees?

This is an issue, which has been the subject of extensive submissions from your national association, and is the subject of a parliamentary petition. The Government has considered the petition but is yet to make a decision on it. However, I think the Government is unlikely to support it, as it is unlikely to want to revisit the decisions of the previous Labour Government which were reflected in legislation at that time.

My understanding is that the commitment at that time related to the tax-free level of the annuities being received by GSF members who were receiving an annuity as at 31 March 1990 (extended to 30 September 1990). The argument was extended to potential spouses' benefits, and as a compromise, surviving spouses received this favourable treatment in terms of the tax-free benefit for a period of six years. The cost of extending this treatment indefinitely has been calculated as having a present value of $25 million.

Would you support the lifting of the allowance for surviving spouses from 50% to 60% of the retiree's allowance?

I do not think the Government would support such a move. The Government Superannuation Fund scheme benefits are the result of past commitments to Government employees, many of which were the product of intensive negotiations. It would be most reluctant to revisit these commitments which represent a balance between the Government's responsibilities to its employees, and the interests of taxpayers. I do not accept the parallel with New Zealand Superannuation, which is a base retirement entitlement to which all Government Superannuitants are (or will become) entitled to in addition to their GSF annuities.

Moving beyond the topic of spouses, you've asked:

Would you support the reinstatement of second $500 payment approved by the 1990 Order in Council to compensate for 'pause period' and subsequently revoked?

This issue has been the subject of submissions to the responsible Minister by your national association. The second $500, which you characterise as a 'payment', was in fact a proposed increase in the limit of $500 to the cost of living adjustment permitted by the 1988 amendment. As you point out, for financial management reasons, the Government in 1990 canceled this increase in the limit to the cost-of-living adjustment. I understand the Government has not recently reconsidered this issue, but like most of these, it is a matter of balancing the interests of Government superannuitants against those of taxpayers.

Would you support the options of capitalisation and grossing up of tax reduced pensions for all superannuitants who move to an overseas country to live?

The tax-free arrangements put in place in 1990 were made by the Labour Government of that time. The arrangements were reflected in the GSF legislation, and allowed a six month opportunity for pre 1 April 1990 retirees to retain a pre tax equivalent annuity if they moved overseas during that period. New Zealand did attempt to negotiate recognition of GSF annuities as not being subject to taxation in Australia during double tax negotiations in 1994, but was not successful.

Would you support the raising of the indexation for all those receiving currently less that 100% indexation?

I understand that the Government has no intention of improving the level of indexation of annuities received by those who were members of the old scheme. The full indexation provided for the new scheme in 1985 was part of a package, which included higher contribution rates. Although inflation is now at a low level, the extension of indexation in the way suggested would still impose a significant cost on taxpayers.

Would you support a percentage adjustment on Government Superannuation payments so that tax reductions made for the rest of the New Zealand taxpayers are passed on to Government Superannuation?

I can't see that any increases in the GSF payments are likely to compensate for the recent cuts to personal tax rates. In 1990 the Government of the day passed tax reform legislation which applied to all superannuation schemes. These tax reforms meant that investment earnings of the GSF are now taxed. Employer contributions are also now taxed and pension benefits which were previously taxable are payable tax-free.

The policy introduced was designed to ensure that existing pensioners would not be disadvantaged and were not worse off under the new regime than they were under the old (it had been assumed that taxes were more likely to go up than down).

The free-of-tax deduction rate is fixed for life of the pension regardless of the fact that cost of living adjustments would have most pensioners into higher tax brackets over time.

The formula used for calculating GSF pensions do not take into account personal tax rates. As with all defined superannuation schemes, the benefits are calculated actuarially in accordance with the requirements of the Government Superannuation Fund Act, and taking into account among other things, the contribution and subsidy rates of employees and employers. While the use of the word 'tax' may introduce an element of confusion, it is a tax-free allowance and the 'free-of-tax' reduction factor is not to be read as personal income tax.

Let me move on the current public service issues, which, I trust, will be of interest to you. Last week I announced a major change of direction for the State Services Commission. The announcement was the key element of a major re-assessment of monitoring within the core public sector that has already seen new arrangements put in place for monitoring Crown Entities.

The new focus will see the Commission charged with becoming a principal adviser to Ministers on the health and capability of core government departments.

The new mandate for the Commission will redress an imbalance that had been diagnosed since the radical reforms of the public sector began 15 years ago.

The severe fiscal crisis of the late 1980s properly focussed the attention of ministers on gaining control of public expenditure - the so-called purchase side of the equation. As a result, New Zealand politicians probably know more than any other country about what they get for the money they spend and how trade-offs between priorities are made. It has provided us with an indispensable and formidable control over public expenditure.

But Ministers have been much less well informed about the health of the ministries they deal with. There will always be a role for "core government" that incorporates generally accepted functions of a nation state. While we could debate the composition and boundaries of the core state ad nauseam, I don't think this is necessary to understand the fiscal reality that is facing core government in the future. These fiscal pressures on the horizon are combined with dangerous assumptions about the existence of core government capability, and the potential for continuing to extract across the board productivity gains.

But in the absence of any knowledge about what core government capability really means, and without an understanding of what realistic productivity expectations are, we risk continuing to squeeze core government expenditure to meet the increasing demands of social spending. Resorting to ad hoc across the board cuts in core government is not a lasting solution. Neither is continuing to assume public service capability. Given the looming fiscal pressures on the horizon the question before us is one of sustainability.

While Ministers labour over purchase agreements, knowledge about the ability of departments to deliver is left almost entirely in the hands of Chief Executives.

It is time that Ministers were put in a position to seek these assurances.

Since becoming State Services Minister I have been increasingly concerned by the focus of the monitoring undertaken by the SSC. It has tended to provide a rear vision mirror view of departmental performance rather than what the future might hold.

What Parliament and the public needs is an assurance that government departments will be able to deliver in the future and that proper attention is being paid to non-financial matters such as skills, information technology management and ethics.

Moving to a forward looking monitoring regime will require a radical shift in the commission's focus. It will also require the Commission to upgrade significantly its ability to provide forward-looking, pro-active advice on the ability of government departments to deliver.

They are designed to arm Ministers with the information they need to hold Chief Executives to account for their stewardship of taxpayers' resources. In turn, Ministers will have to devote more attention to the 'ownership' side of their portfolios.

I must stress, however, that the new direction for the Commission does not mean a return to the old days when the SSC was a controlling central agency that meddled in day to day management decisions.

Chief Executives have to be left to manage and any suggestion that the Commission should be trying to second guess them would lead to muddle and confused accountabilities. What we are seeking to do is ensure that Ministers, on behalf of the 'owners' (the people of New Zealand), can ask the sort of questions any concerned owner would want to ask. Ministers can't do that if they don't have high quality advice. The Commission has to provide it.

It is surely strange that, currently, there are much more formal arrangements for monitoring the Government's ownership interest in State Owned Enterprises (SOEs) than we do for government departments. Boards are appointed explicitly to monitor the Crown's ownership interest in these companies. Recent announcements have extended this approach to the governance of Crown Entities. Government departments are every bit as important as Crown Entities and SOEs. Ensuring that they can deliver requires a fresh focus from the SSC and from Ministers.

I've been working with the SSC on the changes over the last 18 months. These changes will not occur over night but will be achieved over a 3 year period as the skills were assembled.

It is up to the Commission to prove that it can develop a dynamic, up-to-date approach to monitoring the quality of public sector management. Ministers are ready and willing to play their part.

Finally, it is very appropriate that I should be talking to you so soon after this SSC announcement. Last week's changes were all about viewing the public sector over the medium and long term, not simply through the prism of the yearly budget cycle. It's people that are government's greatest asset. All of you have devoted time and energy to the public service over many years. You have not been forgotten. A bond still exists between you and the Government of the day.

It has been a pleasure talking to you.