NSW to take superannuation contribution holiday for 2 years

The NSW Government has announced that it will take a 2-year superannuation contribution holiday.

As part of the NSW Budget 2020-21, the State’s defined benefit superannuation liabilities are projected to decrease $17.6 billion from June 2020 to June 2024, primarily driven by rising long-term bond rates. At the same time, this decrease will be partially offset by increased defined contribution superannuation expenses, including the scheduled increase of the Super Guarantee rate from 9.5% to 10% from 1 July 2021.

The NSW Government said it is proposing a revised superannuation contribution plan that will allow it to fully fund the unfunded component of the State’s superannuation liabilities.

The revised contribution plan includes a 2-year contribution holiday, after which the contributions resume and increase by 5% per annum. The Government said it will also “re-anchor” its superannuation target to 2040 to spread contributions over a longer period of time. This initiative will require an amendment to the Fiscal Responsibility Act 2012.

The Budget Papers note that AASB 119 requires the reported superannuation liability to be calculated using the 10-year Commonwealth bond rate as the discount rate to determine the present value of future payments. This approach can result in large fluctuations in the reported value of the liability,  eg a 1% decrease in the 10-year bond rate would increase the liability by $14.1bn.

For funding purposes, AASB 1056 allows the expected long-term return on the fund’s assets to be used as the discount rate. On this basis, the unfunded liability was estimated to be $14.7bn at June 2020 and is projected to increase to $16.0bn by June 2024. The target of fully funding the State’s superannuation liabilities by 2040 is determined using the AASB 1056 basis.

Source: NSW Budget Statement 2020-21, Budget Paper No 1 [p 6-10]

This article was first published in Thomson Reuters’ Weekly Tax Bulletin.

Stuart Jones is a Senior Tax Writer with Thomson Reuters and a respected commentator on all matters superannuation. Stuart is the author of the Australian Superannuation Handbook and contributes extensively to other Thomson Reuters’ services, including the Australian Tax Handbook.

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