This paper seeks to compare the capitalisation rate offered by the Government Superannuation Fund (GSF) to retiring GSF members with the alternatives of borrowing and sale of the pension entitlements.
The paper uses standard discounted cash flow techniques.
The principal conclusions are as follows: first, while up to 50 per cent of a GSF member's pension claims can be effectively sold, the restriction that the buyer must be an individual implies a band of possible sale prices with an upper bound equal to that prevailing if sales were unrestricted (present value). Second, borrowing is increasingly favoured over capitalisation as the retirement age declines, and the critical retirement age below which borrowing dominates capitalisation is 64 for men and 66 for women if the GSF member has a spouse at the retirement date and otherwise about three years less. Third, the present value of the pension benefits is well in excess of both the capitalisation rate offered by the GSF and the capitalisation rate implicit in borrowing, implying sale prices even well below present value that are superior to the better of capitalisation and borrowing.
The analysis treats the retirement age of a GSF member as exogenously determined. However, the analysis also provides insights into the optimal retirement age and this issue is currently the subject of further research.
The paper should provide guidance to GSF members who are contemplating capitalisation of their entitlements.
