If you are approaching retirement and wish to adopt a phased retirement approach whereby you may change to part-time work, or switch to another role with your current employer at a reduced salary, your DB will most likely be a different amount compared to your projected outcome if you had continued to work at full capacity until you retire.First a short recap on how a DB is calculated…
Your DB is calculated using a formula that has three parts,
(1) your Final Average Salary (FAS),
(2) your Member Benefit Multiple (MBM), and
(3) your Member Reserve (MR) factor as follows:
Defined Benefit = FAS x MBM x MR factor
FAS is the average of your salary advised to the Fund by your employer over either the last one or two years before the calculation date. The averaging period depends on your employer. This takes into account any salary increases you have over that time.
Please note: Some items of your pay may not apply for super purposes – check your Annual Statement for your FAS and ask your employer for what’s included or not included in your salary for super purposes.
If you work part-time - for example, 4 days instead of 5 days per week (or 80% of the full-time equivalent hours), your employer provides the Fund with full-time equivalent salary to calculate your FAS. If your salary for working 4 days per week was $50,000, then your employer will advise the Fund that your full-time equivalent salary is $62,500 (i.e. uses the same hourly rate). This means that regardless of how many days you work we always use the full-time equivalent salary to work out your FAS.
The Fund rules say that if you have a genuine reduction in your salary used to determine your FAS then your actual FAS can’t be less than the FAS that applied immediately before the reduction occurred and this pre-reduction FAS is indexed each year with the change in Average Weekly Ordinary Time Earnings (AWOTE) for Australian workers. This protects your benefit from the effect of a salary reduction.
Please note: Working part-time by itself doesn’t mean a salary reduction occurs, unless your hourly pay rate is also reduced with the part-time work because the Fund always uses a full-time equivalent salary to calculate defined benefits.
Your MBM is a number that reflects how long you have been a contributing member to the Energy Super DB category in the Fund and your work situation over that time.
Your MBM increases by 0.195 for each year of membership over which you worked in full-time employment. The MBM also takes into account any periods that you worked less than your normal full-time hours or took extended leave without pay.
If your DB membership was 20 years made up of 15 years full-time, 4 years of part-time at 4 days per week (80%) and 1 year of leave without pay (LWOP) your MBM would be 3.549, calculated as follows:
Full-time MBM is (15 X 0.195 X 1.0) = 2.925
Part-time MBM is (4 X 0.195 X 0.80) = 0.624
LWOP MBM is (1 X 0.195 X 0.0) = 0.0
Total MBM = 2.925 + 0.624 + 0.0 = 3.549
Your MR factor is a reduction factor that applies to your benefit calculation if you are under age 55 when your defined benefit is calculated. Once you reach age 55 your MR factor will be 1.0 for future calculations. For DB members under age 55, your MR factor is reduced by 0.02 for each year (in years and complete days) that you are under age 55 but won’t be less than 0.70.
If you were to calculate your MR factor on your 50th bithday it would be:
MR factor = 1.0 less (5 x 0.02)
MR factor = 0.90
When calculating your Energy Super DB three tests are applied to ensure that you receive your appropriate benefit amount which is the greater of:
*For most DB members this amount is frozen at age 55 and does not increase thereafter.
The following three examples are provided to show how defined benefits are calculated for different scenarios. The first two scenarios are simple situations where a DB member experiences a reduction in either “hours worked” or “salary”, but not in both. The third scenario is more complicated, being a reduction in both.
Bill, aged 58 years, and has been a member of the Energy Super Defined Benefit for 32 years. He worked full-time (40 hours per week) for 30 years, then reduced his working hours to 32 hours per week (a 4-day week) for 2 more years before retiring. Bill’s hourly pay rate remains unchanged, and his FAS is based on his average salary over one year.
Bill wants to finish work and be fully retired. His salary in his last year of employment was $80,000 (full-time equivalent salary). His actual earnings that year were 80% of his salary ($64,000).
Bill’s defined benefit calculation at retirement uses the following numbers:
Defined benefit = ($80,000 X 6.162 X 1.0)
Bill’s defined benefit at retirement = $492,960*
*Bill’s actual benefit is subject to a minimum of at least the Member Reserve benefit tests described earlier in this fact sheet, which could be more but not less.
Sam, aged 60 years, and has been a member of the Energy Super Defined Benefit for 35 years. He worked full-time (40 hours per week) for 30 years, then changed roles, working for the same employer, for 5 more years on a reduced salary until he retired. Sam’s hourly pay rate at the time of his salary reduction was about 70% of his pre-reduction salary. His FAS is based on his average salary over one year.
If we make the following assumptions we can calculate Sam’s retirement benefit:
We need to calculate Sam’s two FAS amounts using, (a) his pre-reduction FAS increased by AWOTE, and (b) his post-reduction FAS increased by 20% as follows:
(a) is [$90,000 + ($90,000 X 0.15)] = $103,500
(b) is [$60,000 + ($60,000 X 0.20)] = $72,000
The higher FAS (a) is used to calculate Sam’s defined benefit at retirement as follows:
Defined benefit = ($103,500 X 6.825 X 1.0)
Sam’s defined benefit at retirement = $706,387.50*
*Sam’s actual benefit is subject to a minimum of at least the Member Reserve benefit tests described earlier in this fact sheet, which could be more but not less
Kerry, aged 55 years, and has been a member of the Energy Super Defined Benefit for 30 years. Kerry’s employment arrangement specifies a standard 9-day fortnight, but for the last 5 years Kerry had an agreement with his employer to work regular additional hours each fortnight for which he receives a 13% salary loading. Kerry’s salary as advised by his employer is $90,400 per annum, which includes the 13% loading for the extra hours he regularly works Kerry plans to reduce his working hours leading into retirement so, for the next two years, will work half of the standard 9-day fortnight (i.e. 4.5 days each fortnight).
By making the choice to change to a 4.5-day fortnight, Kerry is no longer eligible to receive the 13% loading on his salary.
To summarise the above, we can say:
We will also make the following assumptions:
We need to calculate Kerry’s two FAS amounts using,
(a) his pre-reduction FAS increased by AWOTE, and
(b) his post-reduction FAS increased by $6,400 as follows:
(a) $90,400 + (90,400 X 0.0816) = $97,777
(b) $43,200 X 2 = $86,400
Calculating the benefit:
We also need to calculate Kerry’s MBM in two parts,
(a) during his 30 years of full-time work, and
(b) during his 2 years working half the normal hours (4.5 days each fortnight):
(a) (30 yrs X 0.195) = 5.85
(b) (2 yrs X 0.195 X 0.5) = 0.195
Therefore Kerry’s total MBM = 6.045
We now have all the information to calculate Kerry’s defined benefit at retirement using the following formula:
Defined Benefit = (FAS X MBM X MR factor)
Defined benefit = ($97,777 X 6.045 X 1.0)
Kerry’s defined benefit at retirement = $591,062*
*Kerry’s actual benefit is subject to a minimum of at least the Member Reserve benefit tests described earlier in this fact sheet, which could be more but not less.
For more information about your Energy Super Defined Benefit please check your Annual Statement or read the Energy Super Defined Benefit Guide available online at brightersuper.com.au/pds
LGIAsuper Trustee (ABN 94 085 088 484) (AFSL 230511) (the Trustee) as trustee for LGIAsuper (ABN 23 053 121 564) (RSE R1000160) (the Fund) trading as Brighter Super. Brighter Super products are issued by the Trustee on behalf of the Fund. Brighter Super may refer to the Trustee or LGIAsuper as the context may be.
This info sheet provides general information only and does not take into account your individual objectives, financial situation or needs. As such, you should consider whether it is appropriate in light of your own objectives, financial situation and needs prior to making any decision. You should consult a licensed financial advisor if you require advice which does take into account your personal financial circumstances. You should also obtain and consider the Product Disclosure Statement (PDS) before making any decision to acquire any products. A Target Market Determination (TMD) is a document that outlines the target market a product has been designed for. Find the PDSs and TMDs at brightersuper.com.au/governance.