EXPLANATORY STATEMENT
SOCIAL SECURITY (PENSION VALUATION FACTOR) DETERMINATION 1998
Issued by the authority of the Minister for Social Security
Summary
This Determination is made under subsection 1120(3) of the Social Security Act 1991 (the Social Security Act), which was inserted by Schedule 3 to the Social Security (Budget and Other Measures) Act 1998.
The purpose of this Determination is to set out the pension valuation factor that applies to a person for a relevant year for the purposes of section 1120 of the Social Security Act. The pension valuation factor is required in order to determine the value of asset-tested income streams that are defined benefit income streams, under section 1120 of the Social Security Act.
Background
A defined benefit income stream, which is defined by subsection 9(1E) of the Social Security Act, may be subject to the assets test. Subsection 1120(1) of the Social Security Act specifies that section 1120 applies to assets tested income streams that are defined benefit income streams. When the defined benefit income stream is subject to the asset-test, its value as an asset must be determined. Subsection 1120(3) of the Social Security Act states that the value of the defined benefit income stream that is subject to the asset-test, is to be determined by multiplying the annual payments that are payable to the person by the relevant pension valuation factor. The relevant pension valuation factor is the pension valuation factor that applies to the person in accordance with the determination made by the Minister. Subsection 1120(4) of the Social Security Act states that the Minister’s determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.
The pension valuation factors are to be incorporated into a disallowable instrument rather than legislation because they may require revision to take account of changes in the interest rate and inflation environments, and changes in longevity (life expectation factors).
Explanation of the provisions
Part 1 – Introductory
Section 1 cites the name of the Determination and section 2 states that the Determination commences on 20 September 1998.
Section 3 of the Determination defines various terms, including “relevant year”, that are referred to in the Determination.
Section 4 states the purpose of the Determination. The purpose of the Determination is to set out the pension valuation factor that applies to a person for a relevant year under section 1120 of the Social Security Act. The Determination provides guidelines on how the pension valuation factor is to be determined in each case.
Part 2 – Pension valuation factor and index factor
Section 5 of the Determination states that in cases where a defined benefit income stream is indexed at a rate of not more than 8%, then the pension valuation factor that applies to these income streams, is the pension valuation factor that is mentioned in the Schedule to the Determination. In each case, the relevant pension valuation factor listed in the Schedule is that factor that corresponds to the age of the person and the indexation factor for the person’s income stream. The age of the person is taken to be the age of the person on the person’s next birthday following the beginning of the relevant year. The rate of the indexation factor is to be worked out in accordance with sections 6 and 7 of the Determination.
Section 6 of the Determination describes how the indexation factor for a defined benefit income stream is to be worked out in cases where the indexation of the income stream is non-discretionary.
Subsection 6(1) states that in cases where the indexation of defined income streams is non-discretionary, then the indexation factor for the income stream is to be worked out in accordance with section 6.
Subsection 6(2) states that if the defined benefit income stream is indexed by reference to movements in salary, the indexation factor is taken to be a rate of at least 7% but less than 8%. The term “movements in salary” can refer to salary indices that are published by the Australian Statistician, and the movements in these indices.
Subsection 6(3) states that if the defined benefit income stream is indexed by reference to movements in a price index published by the Australian Statistician, the indexation factor is taken to be a rate of at least 6% but less than 7%.
Subsection 6(4) states that if the income stream is indexed in accordance with a rate set by the governing rules of the income stream, then the indexation factor is taken to be the range of rates set out in the schedule that includes that rate.
Subsection 6(5) states that a defined benefit income stream will be taken to be indexed in a non-discretionary way if subsection 7(1) of the Determination does not apply to the income stream.
Section 7 of the Determination describes how the indexation factor for a defined benefit income stream is to be worked out, in cases where the indexation of the income stream is discretionary.
Subsection 7(1) states that in cases where a defined benefit income stream is indexed at the discretion of the trustees for the fund that provides the income stream, then the indexation factor for the income stream is to be worked out in accordance with section 7 of the Determination.
Subsection 7(2) states that, if subsection 7(1) applies to the defined benefit income stream, then the indexation factor is taken to be the average of the indexation factors determined for the 5 years immediately preceding the relevant year. Subsection 7(3) states that the average of the indexation factors is the sum of the indexation factors determined for the person’s income stream, or for a class of income streams that includes the person’s income stream, for the 5 year period referred to in subsection 7(2), divided by 5. Subsection 7(4) states that the indexation factor for the income stream is the range of rates in the Schedule that includes the average indexation factor.
Subsection 7(5) states that if the fund that provides the defined benefit income stream has been in existence, or making income stream payments to the person, for less than 5 years, then the indexation factor is taken to be a rate of at least 6% but less than 7%.
Section 8 of the Determination provides for cases where the indexation factor for a defined benefit income stream is greater than 8%. Subsection 8(1) states that if a person’s defined benefit income stream, as worked out under section 6 or 7, is more than 8%, then the pension valuation factor for that income stream is to be determined in accordance with section 8 of the Determination.
Subsection 8(2) states that the Minister must seek advice from the Australian Government Actuary of the appropriate pension valuation factor for the person. Subsection 8(3) states that the Minister must determine the appropriate pension valuation factor for the person, while having regard to the advice given by the Australian Government Actuary. Subsection 8(4) states that the Minister’s determination under subsection 8(3) is subject to review by the Administrative Appeal Tribunal.