Defence Force Retirement and Death Benefits Amendment (Fair Indexation)
Bill 2010 and related matters
On 24 March 2011, the Senate agreed to amendments to the motion that the
Defence Force Retirement and Death Benefits Amendment (Fair Indexation) Bill
2010 (the bill) be read a second time to refer the bill, together with the
amendments circulated by Senator the Hon Michael Ronaldson on sheet 7027, and
proposed mechanisms for funding the bill, to the Finance and Public
Administration Legislation Committee for inquiry and report by 10 May 2011.
Conduct of the inquiry
The committee advertised the inquiry on the Internet and in The Australian
and invited submissions from interested organisations and individuals. The
committee received 16 public submissions. The list of public submissions
received together with other information authorised for publication is at Appendix
1. Submissions can be accessed through the committee's website at: http://www.aph.gov.au/senate/committee/fapa_ctte/index.htm.
The committee agreed not to hold a public hearing for this inquiry.
The committee received a supplementary submission from the Alliance of
Defence Service Organisations (ADSO) which commented on matters in relation to
the Department of Finance and Deregulation (Finance) submission and noted that
it had been provided after the closing date for the receipt of submissions. The
ADSO further stated that 'this late submission from DoFD, intrudes into the
political arena'. The receipt of submissions after the due date is not an uncommon
occurrence and organisations and individuals are often granted extensions of
time to provide submissions. This occurred with the Finance submission. In
addition, the Finance submission was provided in ample time for consideration
by the committee during its deliberations. The committee further considers that
the Finance submission provided information directly relevant to the
THE BILL AND AMENDMENTS CIRCULATED
The bill was introduced in the Senate by Senator Ronaldson on 18
November 2010 to change the indexation methodology applied to the military
superannuation pensions of eligible members of the Defence Force Retirement and
Death Benefits (DFRDB) Scheme. Amendments circulated on sheet 7027 proposed the
same change for eligible members of the Defence Forces Retirement Benefits (DFRB)
Scheme. The change in the indexation methodology is to 'recognise the unique
nature of military service and the need for a fair, equitable and
fiscally-responsible military superannuation system'.
Currently, the twice yearly indexation of pensions paid under the DFRDB
Scheme and the DFRB Scheme is based on the consumer price index (CPI). The bill
proposes that from 1 July 2011, pensions paid to DFRDB and DFRB superannuants,
aged 55 and over, will be indexed in the same way as other Australian
Government income support pensions are indexed. The bill proposes that, in line
with present practice and using the pre-determined 'pension MBR factor',
DFRDB and DFRB pensions will be indexed to the higher of the CPI, Male Total
Average Weekly Earnings (MTAWE) or the Pensioner and Beneficiary Living Cost
Senator Ronaldson commented that:
The measures in this Bill will ensure that over 56,000
retired Australian Defence Force personnel who are members of the now closed
DFRDB and DFRB schemes have their superannuation pensions indexed more fairly
and in a manner which better reflects changes in the costs of living.
The bill and amendments propose that new definitions of LCI and LCI
number be inserted into the DFRDB Act (section 98A) and the DFRB Act (section
83). The LCI means the Pensioner and Beneficiary Living Cost Index. This
measure is produced by the Australian Bureau of Statistics and is an additional
measure for assessing cost of living pressures. The LCI number is defined in
accordance with the quarterly publication of the LCI number by the Australian
The bill and amendments also propose to insert new sections 98AB, 98BB
and 98BC in the DFRDB Act and new sections 84AA, 84AB and 84AC in the DFRB Act.
The effect of these provisions is as follows:
proposed sections 98AB and 84AA apply to a pensioner who is 55
years of age or older and provides for the DFRDB and DFRB pensions to be
indexed at the higher of the CPI, pension MBR method or LCI;
proposed sections 98BB and 84AB provide for the single pension
MBR amount to reflect the changes in MTAWE; and
proposed sections 98BC and 84AC provide for the indexing of DFRDB
and DFRB pensions if the LCI method is found to be the highest of the three
It is stated in the Explanatory Memorandum that the amendments proposed
are estimated to cost $98 million over the forward estimates. It was further
stated that 'ongoing costs associated with the introduction of this bill can be
met through the accrued funds of the Future Fund. This additional commitment is
entirely affordable in the long-term.'
The DFRB Scheme was established in 1948 and closed to new members in
1972. As at 30 June 2010, the DFRB Scheme had no contributing members and 3,978
members receiving pensions. The DFRDB Scheme closed to new members in 1990 and
as at 30 June 2010 had 4,246 contributing members and 53,003 members receiving
pensions. The Military Superannuation and Benefits Scheme (MSBS) is currently
open and 54,525 members contribute to the scheme.
The indexation of the DFRDB and DRFB pensions has been examined a number
of times. In 1972, the Joint Select Committee on Defence Force Retirement
Benefits Legislation (Jess Review) concluded that the most appropriate method
of maintaining the real value of retired pay was to ensure it maintained its
relativity with average weekly earnings.
In 2000, the matter was considered again by the Senate Select Committee on
Superannuation and Financial Services. The Select Committee concluded, in
relation to indexation, that the CPI alone, as a measure of inflation, may not
be the best method to adjust the value of Commonwealth public sector and
defence force benefits, if parity with living standards in the community is to
be maintained. The Select Committee went on to recommend that the Government
examine the feasibility of adopting an indexation method other than the CPI for
Commonwealth public sector and defence force superannuation schemes, to more
adequately reflect the actual increases in the cost of living.
A further review of military superannuation (Podger review) was undertaken
in 2007. The review made two recommendations in relation to indexation of
that, 'if the Government is willing to go beyond the envelope of
current costs', consideration should be given to indexing DFRDB/DFRB pensions
for those over 55 years on a similar basis to that applying to the age pension;
that there be no change to the MSBS pension indexation
The most recent Government initiated review of Australian Government
superannuation pensions was undertaken by Mr Trevor Matthews. The review
recommended that the indexation of military superannuation payments should
continue to be based on the CPI. The Government supported this recommendation.
The then Minister for Finance and Deregulation, the Hon Lindsay Tanner, stated:
...we are satisfied that the CPI is the most suitable index
to protect Australian Government superannuation pensions against inflationary
price increases available at this time.
It is also in line with the indexation of most other similar
pensions in Australia, including all equivalent State Government schemes.
A change to the indexation of these pensions therefore is not
warranted, especially as it would come at a significant cost to the taxpayers.
It would also be inequitable for superannuants who previously chose to take
their superannuation in a lump sum.
Submissions from individuals and non-government organisations supported
the bill's proposal to index military superannuation to the greater of the CPI,
MTAWE or PBCLI. The difference in performance between military superannuation
pensions and other government pensions such as the age, disability and War
Widows pensions was noted. Submissions also argued that there are significant
reasons why military pensions should be indexed in a more favourable way.
Indexation of military superannuation
Submitters argued that as a result of indexation based on the CPI, over
time defence superannuation pensions will be eroded to an amount that will no
longer sustain pensioners.
Mr Bernard Nebenfuhr stated:
If the present form of CPI indexation of pensions were to
continue, I am quite convinced that over time, the pension on which I and many
other loyal and long serving ex‐service
men and women of Australia will rely on almost exclusively during retirement,
will be eroded to an amount that will barely sustain us.
It was also noted that the average military service pension is less than
the age pension but does not include the extra entitlements associated with the
Submitters also commented that the age pension, single parents pension
and other welfare payments are indexed by the CPI or MTAWE whichever is higher.
The Vietnam Veterans Association of Australia (Queensland Branch), concluded:
Defence Force Superannuates, who have made an important
contribution to the quality of life enjoyed by this country, are falling behind
in their retired incomes that are the basis of their standard of living and quality
of life. If average weekly earnings are increasing at a faster rate than the
CPI then those whose income is tied to the CPI will be left behind in the
quality of life they can afford.
The Returned and Services League of Australia (RSL) noted that CPI is a
measure of inflation and is not designed to measure cost of living increases.
The RSL commented that many military superannuants had been forced to seek
welfare assistance and stated:
...indexation of their military superannuation pensions has
been so inadequate for so long that the decline in purchasing power of their
superannuation payments have forced them into applying for funds provided under
the nation's safety net for the needy.
The RSL also pointed to the reviews which had supported a change in the
method of indexation of military superannuation. In relation to the Matthew's
Review, the RSL stated that the review did not separately examine indexation of
military superannuation schemes; accepted the notion of 'productivity' in
relation to the defence force when it has no relevance to the service rendered
by the ADF; there was a less than objective examination of the impact of a more
generous form of indexation on those who elect to take superannuation
entitlements as a lump sum; and rejected the evidence that indexation based on
the CPI is inequitable as it fails to match increases in the cost of living was
In addition, the Alliance of Defence Service Organisations (ADSO) argued
that over the years the CPI has changed: in the 1980s the CPI methodology
changed; and the nexus between movement in the CPI and wage and salary
adjustments no longer exist. The ADSO thus concluded that changes made to the
CPI since the late 1980s have failed to protect and maintain the purchasing
power of retired military pension recipients from erosion over time.
The committee was provided with analysis of the impact of the different
basis of indexation of military pensions. The Vietnam Veterans Association of
Australia (Queensland Branch) stated that a military pension of $20,000 in 1990,
which had been indexed using the greater of cost of living or average wage over
the last 21 years, would be some $11,463 higher now than under the current
Both the Department of Finance and Deregulation (Finance) and Department
of Defence (Defence) commented on the use of the CPI as the basis of indexation
for military superannuation pensions. Finance and Defence noted the
recommendation of the Matthews review that pensions for Australian Government
civilian and military superannuation schemes should continue to be indexed by
the CPI. It was also noted that the Matthews review also considered that the
unique nature of military service would be more appropriately addressed through
specific benefit design features of the military superannuation schemes rather
than through indexation.
Finance also commented that the AGA's advice to Defence indicated that
the bill would provide for better indexation arrangements than currently apply
to the Age and Service Pensions. Finance went on to state that the age pension
and superannuation benefits are not comparable: superannuation is an employment
benefit while the age pension is a safety net benefit to ensure that
Australians receive a minimum level of income in retirement.
Indexation by reference to MTAWE was also not supported as it was noted that
the Matthews review found that the purpose of indexing military superannuation
pensions was to take account of inflationary price increases. Indexation by
MTAWE would provide pensioners with a share of productivity increases.
Reasons for improvement in pension indexation
Submitters pointed to a number of factors which they argued supported a
change in the indexation method of military pensions.
The RSL submitted that the separateness of the Australian Defence Forces
(ADF) has been recognised since Federation through legislation, including
superannuation legislation, and in other areas such as the Australian Honours
system. The RSL argued that 'given these facts it is difficult to understand
why successive Governments have sought to align the indexation of military
superannuation payments with the indexation of superannuation for former
The RSL went on to note that the Parliament had introduced legislation to
provide specifically for the ADF and concluded that:
By these actions the Parliament has made clear that
superannuation for members of the nation's armed forces cannot be provided by
superannuation schemes enacted for Commonwealth public servants, police, fire
fighters or others paid by the Commonwealth Government regardless of whether
some of these civilian occupations entail exposure to danger as part of their
Other submitters also argued that there were specific reasons why DFRB
and DFRDB pensions should be indexed more favourably. The ADSO pointed to the unique
nature of military service and stated that it 'deserves unique solutions and
also places a great burden on the Government as the "employer" to
ensure that ADF members are looked after both during and after Service'.
The Vietnam Veterans' Federation commented that members of the ADF have
suffered conditions of service far less favourable than civilians including:
liability for compulsory high risk combat operations;
a restriction of liberty in a regimented way of life;
compulsory long and irregular working hours;
compulsory statutory retiring ages well below the community
compulsory high standards of physical fitness;
frequent compulsory relocation causing schooling and network
long periods of compulsory separation from family.
Other submitters noted that very few spouses had careers which contributed
to the superannuation benefits of the couple. In some cases, posting cycles
prevented continuation of careers of spouses and thus had affected the spouse's
The Australian Veterans and Defence Services Council also noted its
research indicated that NCOs, many of whom receive less than $25,000 per annum
in superannuation, have difficulty in finding steady employment after discharge
to supplement their military pension.
An additional matter raised by a number of submitters was that defence
salaries have risen significantly over the last two decades and are now more in
line with civilian salaries. However, for those who retired during the 1970s
and 1980s, the pension is based on lower salaries. The lower pension salary,
together with lower rate of indexation, has resulted in many of those on
military pensions have had to rely on Centrelink support payments.
Defence responded to these comments and noted that, in addition to
superannuation, other remuneration and conditions are available to the ADF.
These include service allowance, other salary related and disability related
allowances, overseas and locality allowances, ADF specific leave and housing
and removals that reflect the special nature of military service. In addition,
there are specific health, family support and compensation arrangements for the
Finance also noted that there are a number of mechanisms whereby the unique
nature of military service is reflected in critical differences between military
and civilian superannuation schemes. These include:
higher employer contribution rates and death and disability
provision of a guaranteed lifetime level of income and indexation
to DFRDB pensioners which are not generally available in the wider community.
Additionally, DFRDB pensions are not affected by downturns in the economy, such
as occurred during the global financial crisis; and
after 20 years service (at any age) a member of the DFRDB is
entitled to a guaranteed lifetime indexed pension set at 35 per cent of
superannuation salary. After 30 years service the member is entitled to a
guaranteed lifetime indexed pension of 51.25 per cent of superannuation salary
even if the former member returns to the workforce.
Finance went on to note that the provision of an indexed lifetime
pension as part of any remuneration package is available to only a limited
number of Australian employees, mainly members of Australian Government and
State Government defined benefit superannuation schemes that are now closed.
The Matthews review found that in the few circumstances where employees receive
indexed pensions, these are indexed by CPI increases in nearly all cases. Some,
very few, schemes index pensions to wage increases.
Finance commented that a person's terms and conditions of ADF service result
in a rate of employer superannuation contribution in respect of the DFRDB that
is generous in comparison to the MSBS, the civilian superannuation schemes and
the minimum rate of 9 per cent required under the Superannuation Guarantee
arrangements. The employer contribution rate for the DFRDB is 33.4 per cent of
superannuation salary; this is more that the Commonwealth Superannuation Scheme
(21.4 per cent) and significantly more than the Public Sector Superannuation
Accumulation Plan (15.4 per cent). If the bill is passed, the employer
contribution for the DFRDB would increase to 40.6 per cent of superannuation
Application to pensioners over 55 years of age
The Injured Service Persons Association commented on the application of
the bill to pensioners aged over 55 years. The Association stated that 'those
who are medically discharged onto an invalidity pension should be financially
disadvantaged for the rest of their lives by having their main source of income
only indexed to one standard'. The Association went on to state that:
...to continue with this so called "fair
indexation" amendment bill will be a slap in the face of those who at
young ages are restricted in future earnings with no prospect of building a
large retirement fund...A soldier aged 24 who is unfortunately discharged
invalidity Class A pension in limited for the rest of his financial life whilst
his peers progress through their military careers with the ability to increase
The Association called on any amendments to military superannuation
indexation include DFRDB and MSBS Invalidity Pensions.
The Australian Veterans and Defence Services Council also noted that the
bill only applies to those veterans over 55 years. The Council acknowledged
that the bill was 'a start', however it would not overcome the financial
problems of all veterans.
Finance commented on the restriction of the bill to those over 55 years
of age and stated that it is not clear that there is a superannuation policy
rationale for changing the 'employer and employee relationships' for one group
of Commonwealth scheme members compared with others. In addition, the bulk of
current serving members contribute to the MSBS Scheme and not the DFRDB Scheme.
Cost of the change in indexation
The cost of the proposed change to indexation was canvassed extensively
in submissions. The RSL acknowledged that there would be an increased cost to
the taxpayer should the proposed bill be passed. However, the RSL argued that a
change to indexation may result in fewer military superannuants needing to
access Centrelink payments. The RSL also stated that a less tangible but
prospectively more substantial financial offset is possible by streamlining the
process experienced by some former members of the ADF as they seek settlement
of contested benefits during their transition from the ADF to civilian status.
In addition, the RSL noted that there would be benefits for recruitment as the
ADF has experienced great difficulty in retaining trained and experienced
personnel. One of the disincentives to continued service was a perception
amongst serving members that the military superannuation benefits on offer
after leaving the ADF after a long period of service were less than reasonable.
The ADSO commented on the Government's costing of alternative indexation
arrangements for Commonwealth superannuation pensions and argued that they were
exaggerated in the following areas:
assuming an unfunded liability investment return of 6.0 per cent,
which has no recognition of the existence of the Future Fund and the expected higher
investment returns on the assets held in the Future Fund in support of the
assuming the increased rate of indexation (relative to current
level of indexation) is 1.5 per cent – this rate appears to reflect short term
experience more than expected long term experience in the respective indices,
and yet it is applied for 40 plus years into the future with significant
compounding effects on the cost; and
quoting costs gross of the impacts of clawback, despite
acknowledging a clawback effect in the order of 30 per cent.
The ADSO concluded that by taking all of these matters into account, the
estimated costs of alternative indexation could be reduced by as much as 50 per
cent (20 per cent for investment return and 30 per cent for clawback effect).
As a result, the ADSO submitted that:
Implementation of the community standard of indexation, as
adopted for the Age and Service pensions applied to all components of
DFRB/DFRDB/MSBS military superannuation pensions, including the total
reversionary pension for partners of deceased military superannuation
pensioners and preserved employer benefits, is estimated not to exceed $16M in
FY 2011–2012 and an additional $176M over the forward estimate period before
The ADSO considered that funding of the change to the indexation method
could be provided by the Future Fund.
The submission of Mr Peter Thornton estimated that changing the
indexation of military superannuation from CPI to MTAWE would cost $302 million
over the next 10 years.
However, Mr Thornton's analysis estimated that this cost could be reduced by
$82 million to $220 million, if a one off lump sum appropriation of
$220 million from the Future Fund was made and transferred to ARIA. This
appropriation could be drawn down by Comsuper to pay for the additional pension
increases under new indexation.
Finance and Defence provided the committee with costings of the proposed
bill by the Australian Government Actuary (AGA). The AGA estimated the bill
would have an immediate increase in the Government's unfunded superannuation
liability of $6.2 billion.
This would worsen the Government's balance sheet. The fiscal impact is $1,667
million and the cash impact is $175 million over the forward estimates. These
cash costs would increase significantly in the years beyond the forward
estimates. For example, it increases from $33 million in 2012–13, to $235 million in 2020–21 and to $503 million by
2028–29 in nominal
The AGA's costings complied with Australian actuary standards and were verified
by an independent actuary.
Finance noted the Government's commitment to fiscal responsibility,
including returning the Budget to surplus by 2012–13.
This requires all new proposals to be offset by savings over the forward
estimates. Under the Budget Rules, offsetting savings require a decision to
reduce expenses below what they would otherwise have been. This would not
include second round economic effects, or indirect flow‐on effects, because of the difficulties inherent
in quantifying such effects. Against these policy settings, Finance commented
that a proposal with longer term costs, such as those contained in the bill,
would require structural savings elsewhere in the budget in order to meet the
objective of delivering budget surpluses, on average, over the life of the
In addition, Finance argued that if the bill were passed, pressure would
arise from other groups to be treated in a similar way. This would result in
financial implications for the Commonwealth budget and increasing disparity
between some Commonwealth superannuation beneficiaries and the broader
It is stated in the Explanatory Memorandum that the ongoing costs for
the proposed change can be met through the Future Fund. In response, Finance
stated that the Government established the Future Fund 'to help meet unfunded
superannuation liabilities that will become payable during a period when an
ageing population is likely to place significant pressure on Commonwealth finances'.
Finance added that withdrawals from the Future Fund to pay superannuation
benefits may only occur once the superannuation liability is fully offset or
from 1 July 2020, whichever is earlier. For this purpose a target asset level
is calculated by a Designated Actuary (currently the AGA) and represents the
assets of the Future Fund that would be required to offset the unfunded
superannuation liability at the same point in time. The AGA estimated the
target asset level for the Future Fund at $103.2 billion for 2010‑11. As at 31 December
2010, the Future Fund had assets of approximately $72 billion. Finance
concluded that the impact of the bill would be to exacerbate this gap.
In relation to the Department of Defence budget, it was stated that any
change in indexation arrangements would result in 'an additional pressure on
the Defence budget as no funding is currently provisioned in the budget for
such a change, which will need to be offset from existing program outcomes'.
Defence went on to state that arguments to meet the cost of the change to
indexation through a reduction in the growth of Australian Public Service (APS)
employees in the Department of Defence 'would require further efficiencies to
be found within Defence to enable delivery of ongoing programs'. Instead of the
purported growth of 12.6 per cent in APS employees used during debate on the
Bill, the growth rate will only be 9.4 per cent by the end of 2013–14.
Both the Defence Force Retirement and Death Benefits scheme
and the Military Superannuation and Benefits Scheme already provide benefits
well in excess of the community standard...The Actuary has advised that under
the Bill, Defence's notional employer contributions for the Defence Force
Retirement and Death Benefits scheme would increase to 40.6 per cent,
increasing Defence's contribution by $18.7 million in the first year, but decreasing
over time. This is a further direct cost on the Defence budget. Further offsets
would need to be identified in addition to any found to cover the underlying cash
impacts to government.
The committee does not support the proposed change to the indexation of
military superannuation. The committee considers that the unique nature of
military service is adequately reflected through mechanisms both during and
post service. During their period of service, members of the ADF have access to
service allowances, other salary related and disability allowances, ADF
specific leave, housing, health, family support and compensation arrangements.
The employer superannuation contribution rate during the service period is also
higher than other government employees: for the DFRDB is it 33.4 per cent
compared with the CSS rate of 21.4 per cent. Post service, DFRDB pensions
provide a guaranteed lifetime level of income and indexation which is generally
not available in the wider community. In addition, the index pension is
available, at any age, after 20 years of service.
The impact on both the Government's fiscal position and the Department
of Defence's ability to deliver ongoing programs is significant and cannot be
denied. Calls for the changes proposed by the bill to be funded from the Future
Fund do not recognise that there is a gap between the target level of assets
required in the Future Fund and the assets of the Fund. This gap will be
exacerbated if the bill is passed. The committee therefore considers that the
bill should not be passed.
The committee recommends that the Defence Force Retirement and Death
Benefits Amendment (Fair Indexation) Bill 2010, and the amendments on sheet
7027, not be passed.
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