Part 3: Loyalty Rewards Arising from the Expenditure Of Public Money

Parliamentary salaries, allowances and other entitlements.

12: Why We Looked At Loyalty Rewards

On 27 March 2001 the Co-Leader of the Green Party, Mr Rod Donald MP, wrote to us seeking our views on whether:

  • the PSC's policy on Air Points was clearly articulated; and
  • the rules in place are sufficiently explicit and accountability mechanisms sufficiently stringent to ensure that the policy goals are achieved.

Mr Donald's concerns arose from a March 2001 decision by the Speaker (on the recommendation of the PSC) to remove the necessity for MPs leaving Parliament to give up any Air Points they may have accumulated as a result of public expenditure for them to conduct parliamentary business.

Mr Donald also sought our view on whether it was desirable for the policy and rules that apply to MPs to be consistent with the rules that are applied to public servants.

The use of loyalty rewards fell outside the terms of reference for our review of MP salaries, allowances and other entitlements. Further, the Speaker subsequently reversed his March 2001 decision.

Nevertheless, we considered that the use of loyalty rewards by MPs was sufficiently relevant to the issue of their remuneration to include it in our considerations.

13: What Are Loyalty Rewards?

Loyalty rewards recognise a customer's faithfulness to a particular service, organisation, or company. Generally, they involve a benefit of some kind, which the customer receives for not changing between service providers.

Examples of loyalty reward schemes include those for customers of an air travel service (such as Air Points), or users of the services of a particular credit card issuer.

Some general observations we make of loyalty reward schemes are:

  • the rewards in question tend to be in the name of the individual who is accessing the service, regardless of who has actually paid for the service (private individual or employer);
  • an individual generally cannot transfer or assign their rewards to someone else or their employer; and
  • in a simple transaction, multiple rewards may be accrued.

As an example of multiple rewards, if an employee uses a particular airline for air travel for official business, they may earn Air Points. If that travel is paid for using the employee's personal credit card (for which the employee is reimbursed), the employee may receive further rewards. However, both sets of rewards would have resulted from the expenditure of the employer's funds in the first place.

Public employees can earn loyalty rewards as a result of travel or other expenditure in the course of carrying out official business. However, the fact that the travel is paid for out of public money gives rise to some specific problems with the use of the rewards.

14: Previous Consideration of the Subject

The question of how loyalty rewards should be managed by public sector agencies has been considered previously.

In 1994, a former Auditor-General – Mr Brian Tyler – undertook a review of chief executive credit card expenditure. He noted that air bonus points earned in the course of official travel:

  • represent a discount on official costs;
  • accrue to the department; and
  • are to be used by the department to its best advantage.27

The Institute of Internal Auditors (IIA) reiterated this position in 1996.28The IIA commented that, in order to reduce the risk of individuals benefiting at the expense of their organisations and the taxpayer, the individuals should formally agree to the organisation they work for having access to information held by airlines on their Air Points. The IIA also considered that the principle espoused by Mr Tyler was equally applicable to credit card rewards.

More recently, in 1998 the State Services Commission (SSC) reaffirmed Mr Tyler's view in a circular to Chief Executives.29The SSC went further, however, to note that any employee purchasing official air travel and accommodation should be obtaining the best deal for the department, and should not be influenced by any personal considerations.

The SSC's statement recognised that, where an employee is able personally to accrue Air Points, an incentive could arise whereby air travel could be purchased so as to increase personal benefits through accumulated Air Points.

We consider that the fundamental premise of Mr Tyler's approach has not changed in the intervening years. The principle that we reiterate, therefore, is:

Loyalty rewards arising through the expenditure of public funds on official business represent a discount on official costs. Where they accrue to a private individual through public expenditure, they should be –

  • considered the property of the funding entity; and
  • applied as far as practicable, and in such ways, as to realise the advantage they represent for the funding entity.

However, the practical application of such a principle could be difficult. For example:

  • In the case of Air Points, a public employee may not be able to differentiate easily between points obtained as a result of travel on official business and points obtained as a result of their own private expenditure. Hence, policing such rewards can be complex.
  • When an employee who holds loyalty rewards leaves their job, they cannot assign their rewards to their employer. Practically, this means that they can take rewards with them, unless contractually bound by a policy that prevents it.
  • Some rewards may not always be able to be conveniently applied to official business. For instance, Air Points might only be able to be used to gain a discount on a flight that may not be at a time that is useful for conducting official business.

In the light of these possible difficulties, in our view a public entity should:

  • adopt a clearly articulated policy as to how the principle in paragraph 1406 would practically apply to their staff, consistent with the nature of the entity's business;
  • consider the public perceptions about the access to and use of loyalty rewards; and
  • weigh up the savings that could accrue to the entity against the compliance costs and practicalities of utilising the loyalty rewards.

15: The PSC's Air Points Policy

The PSC's current policy is encapsulated in the following statement:

The Parliamentary Service Commission may authorise use of [travel industry] promotions, from time to time, to save money from the Vote. One such promotion is Air New Zealand's Air Points scheme30

Any MP and their spouse (or nominee/dependent child) is entitled to air travel on scheduled air services throughout New Zealand and internationally (see paragraph 313) – the cost of which is met fully from Vote Parliamentary Service. (In addition, former MPs can access a rebate on domestic and international air travel.)

MPs and their spouses/nominees are automatically members of the Air New Zealand Air Points Reward Programme as a benefit of the Koru Club membership provided to each MP and their spouse. Membership of the programme can be declined by specific request of the MP.31

Until the Speaker's March 2001 decision (see paragraph 1202), the key features of the Air Points policy applying to MPs were that:

  • the policy recognised that utilising Air Points should result in savings to Vote Parliamentary Service;
  • MPs could use Air Points arising from their own, their spouses' or their dependants' air travel to obtain domestic air benefits (international air benefits could not be obtained);
  • when an MP ceased to be an MP, they had to disclose the amount of unused Air Points derived from domestic air travel to the Speaker, and agree to their cancellation;
  • in order that the Parliamentary Service could monitor whether savings were being made to Vote Parliamentary Service through utilisation of Air Points, MPs had to state on their monthly claim form whether Air Points had been used; and
  • where MPs had accumulated Air Points to a level that enabled them to "gift" rewards under the terms and conditions of the Air New Zealand Air Points programme, such gifting could only be to the spouse or nominee of the MP or their dependent children.

On 16 May 2001 the Speaker announced that the PSC had revisited its March 2001 recommendation. Subsequently, the PSC released an updated policy on Air Points.

The salient points of the revised (current) PSC Air Points policy are that:

  • MPs and their spouses are strongly encouraged to utilise any Air Points earned from Vote-funded activities to offset travel costs that would otherwise be a charge to Vote Parliamentary Service; and
  • a condition of use of Air Points by MPs and their spouses is that, when an MP leaves Parliament, he or she (and their spouse or nominee) must –
    • agree to surrender unused Air Points derived from vote expenditure;
    • facilitate the surrender by authorising the Parliamentary Service to arrange with the airline for the cancellation of the Air Points; or
    • otherwise satisfy the Speaker that all such Air Points either have been surrendered by the MP, or will be used to offset travel costs that would otherwise be a charge to the Vote.

Consistency Between the PSC Policy and Our Loyalty Rewards Principle

In attempting to assess consistency between the PSC Air Points policy and our principle for management of loyalty rewards (see paragraph 1406), the following factors become clear:

  • an objective of the PSC policy is to achieve savings for Vote Parliamentary Service;
  • allowing MPs to use their Air Points while they are MPs, and even on their leaving Parliament, may actually achieve some savings to Vote Parliamentary Service (given that former MPs can utilise discounted domestic air travel); and
  • it would be difficult to ascertain whether an MP was always using the Air Points in a manner consistent with the policy on their leaving Parliament.

16: Conclusions

The management of loyalty rewards has some inherent difficulty, particularly where the rewards arise through public expenditure. In the case of Air Points, there are no standard "best practice" approaches that are readily applicable to MPs.

In our view, the new PSC Air Points policy is an improvement upon the previous approaches to the subject. We encourage the PSC to closely monitor the implementation of this latest policy, in order that its success in achieving savings to Vote Parliamentary Service through use of the Air Points can be assessed.

27: Review of Chief Executive Credit Card Expenditure, B H C Tyler, December 1994.

28: A Management Guide to Discretionary Expenditure, Institute of Internal Auditors, 1996.

29: SSC circular to all Chief Executives; CE 1998/004 of 17 March 1998.

30: Members' Handbook of Services, paragraph 2.5; Parliamentary Service, 2001.

31: ibid., paragraph 2.5.1(b).

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