Accrued Benefit Multiple (Lump Sums)

Accrued Benefit Multiple (Lump Sums) is the factor accrued to valuation date and is applied to superannuation salary to determine the lump sum value of the superannuation interest. For example, if the scheme provides for 0.21 of salary to accrue each year, then after 10 years, the abm is 2.1. The value of the superannuation interest that has accrued assuming a superannuation salary of $10,000 is $21,000. As this amount would not be available to the member until perhaps the maximum retirement age, it would have to be discounted by present value factors based on the length of time to maximum retirement age.

Accrued Benefit Multiple (Pensions)

Accrued Benefit Multiple (Pensions) is the factor accrued to valuation date and is applied to superannuation salary to determine the yearly pension that would be payable at some future date. It needs to be converted to a lump sum for valuation purposes and that is achieved by dividing by the pension conversion factor where that is defined within the scheme rules.

Accumulated Basic Contributions

Accumulated Basic Contributions is the term used in the Commonwealth Superannuation Scheme (CSS) to describe the mandatory 5% employee contributions and interest. This is the component which is used, inter alia, to determine the preservation value. See also Supplementary contributions and Productivity contributions.

Accumulation Interest

Accumulation Interest is where the wealth in the superannuation fund grows based on the contributions (employer and employee) and the fund earnings. It could be compared to a bank account. However, unlike a bank account, there are restrictions on when the funds invested in a superannuation environment can be accessed. Accumulation interests are the most common type of superannuation interest and are the easiest to value. The mandatory superannuation paid by employers is 9% and is sometimes referred to as the Superannuation Guarantee Charge. Most of this money is paid into accumulation schemes. They are sometimes referred to as defined contribution schemes, particularly in the North American context.

Adjusted Base Amount

An Adjusted Base Amount comes into existence after an agreement or order establishing a non member entitlement by the fund (the base amount) and is adjusted to reflect its increase in value over time. Thus the member can increase his or her superannuation without influencing the non member's entitlement. See also base amount.

Allocated Pension

An Allocated Pension is a pension paid from an identifiable lump sum. The annual pension payments are subject to specified minimum and maximum amounts depending on the amount of the lump sum and the circumstances of the member. The lump sum will earn interest during the period in which the pension is paid. It could be compared to a bank account, earning interest, from which specified minimum and maximum amounts are withdrawn each year until the lump sum is exhausted. If the pensioner dies before the amount is used up, the balance can be paid to a designated beneficiary or is paid into the estate.

Base amount

Capital Guaranteed period of a pension refers to a period of time in which the remaining value of the superannuation benefit is paid to the estate in the event of the death of a pensioner. This addresses the main concern of pensioners where premature death may deprive the estate of the entirety of the value of the superannuation interest. Care needs to be taken to ensure that the guarantee relates to the entirety of the benefit and not just to the employee's contribution. The guarantee period is usually 5 or 10 years and is a variable in the valuation methodology.

Cliff Vesting

Cliff Vesting is an attribute of a superannuation scheme that rewards long service by increasing the value of the superannuation interests after a period of employment. For example, the Defence Force Retirement Death and Disability Scheme has a 20 year vesting period with zero employer benefit until 20 years of service.

Commutation

Commutation is the conversion of a pension stream into a lump sum. For example, some pension schemes allow 5 years of pension to be taken as a lump sum with a consequential reduction in pension. The ability to convert to a lump sum needs to be taken account of in the valuation process.

Deferred Benefit

This usually relates to a defined benefit interest where employment has ceased and the benefit is payable at a future date. Deferred benefits are sometimes referred to as preserved benefits. The deferred benefit usually arises because the scheme is unfunded and the employer does not wish to crystallize a cash benefit that would be required if portability was available.

Defined Benefit Scheme

A Defined Benefit Scheme is one where the amount that is paid at retirement is defined by the member's salary and length of service. These types of funds are most commonly found in government schemes and some corporate schemes. Entry to many of these schemes ceased in the early 1990's, and any new employees will often only have the option of joining an accumulation fund. In a defined benefit scheme, the employer bears the investment risk by averaging over time and between employees.

Growth phase

This is where the superannuation benefit is growing - from contributions by the employee, or the employer or from earnings or a combination. The growth phase contrasts with the payment phase where the superannuation benefit is being paid out.

Indexation of pensions

This is the mechanism for increasing the value of a pension by reference to an index, normally the consumer price index (CPI). The next most common index is AWOTE - average wages overtime excluded. Sometimes, pensions are increased by CPI plus a percentage, normally between 1% and 5%.

Net Present Value

This is an essential element in valuing an income stream such as a pension or a lump sum at a future date. It is based on the concept that a dollar today is valued more highly than a dollar in a year's time and recognizes that interest can be earned in that time period.

Payment phase

Payment phase occurs when the superannuation benefit is being paid or drawn down. It contrasts with the growth phase. Payments are either a lump sum or a pension or a combination of both. Where a pension is paid, the pension can be indexed by various means.

Percentage only superannuation interests

Percentage only superannuation interests are one of seven separate types of superannuation. Each scheme will be prescribed in the Regulations and will generally relate to judges' and parliamentarians' schemes where the vesting scale is short and generous making valuations very difficult.

Preserved benefit

Preserved benefit relates to a benefit that is in the growth phase, has generally been converted to a lump sum, and has its genesis in a period of past employment. Its growth is generally by reference to CPI index or by fund earnings. See also deferred benefits.

Preservation

Preservation is a fundamental concept in the retirement income policy and refers to restrictions on accessing superannuation benefits until retirement.

Productivity Contributions

Productivity Contributions is the term used to describe the 3% Award superannuation granted around 1988.

Reversionary benefit

Reversionary benefit is a benefit payable on the death of the member when the superannuation interest is in the payment phase. The benefit is usually payable to a spouse. For State Government Schemes, a spouse may include a same sex partner. This is not the case for Commonwealth Schemes. The reversionary benefit is normally 67% but can range from 50% to 100%.

Self managed superannuation funds

Self managed superannuation funds are funds that meet a number of conditions including having fewer than five members and each member must be a trustee of the fund. Self managed super funds will most often be established as accumulation funds, but may also be a defined benefit fund. The same concepts of accumulation and defined benefits apply to self managed funds, it is only that the funds are restricted by matters such as the number of members. Self managed funds are administered by the ATO.

Superannuation Guarantee Contributions (SGC)

This is the compulsory employer contributions for superannuation. The rate is now 9% and payment is now required quarterly. Most of the SGC monies goes into industry funds such as REST, HOST Plus and are accumulation schemes.

Splitting order/Splitting agreement

Splitting order/Splitting agreement requires that when a member's superannuation interest becomes payable, the non member spouse is entitled to be paid his or her share and there is a corresponding reduction in the entitlement of the member.

Supplementary Contributions

Supplementary Contributions is the term used in the Commonwealth Superannuation Scheme (CSS) to describe employee contributions in excess of 5%.

Unsplittable/Unflaggable interests

Unsplittable/Unflaggable interests include superannuation interests worth less than $5000 (note that this threshold is not indexed) and payments made to members on compassionate grounds.