2.1
This chapter details the provision of information on commutation to DFRDB members, highlighting the information provided by the Commonwealth Superannuation Corporation (CSC) and Defence, as well as the findings of the Commonwealth Ombudsman (Ombudsman) who looked into this issue in detail, including whether there had been financial detriment as a result of the information provided and whether compensation was warranted. It also notes some responses to the Ombudsman's report and the Ombudsman's reply.
2.2
It is worth noting at the start of this chapter information contained in the Ombudsman's report about commutation which summarises the key issue and the options that have been and are available in legislation:
It is important to note that there have only ever been two options available to DFRDB members: namely, to commute, or not to commute. DFRDB members reported being told that commutation was a loan to be repaid over their life expectancy. Such information is incorrect. At law, commutation is not a loan, but a permanent exchange of one type of entitlement for another. The result is a permanent reduction to retirement pay.
Numbers choosing to commute
2.3
Ahead of investigating the information provided to DFRDB members the numbers choosing to commute is helpful to keep in mind. The Ombudsman's report noted that the numbers choosing to commute dropped slightly in recent years but remains high (at or above 85 per cent), even after improved guidance about the effect of commutation started to be published from 2004. A 2001 Administrative Appeals Tribunal (AAT) decision also made it clear that 'retirement pay cannot revert to the pre commutation rates once life expectancy factor age is achieved'.
2.4
The CSC told the committee that:
Anecdotally, we are aware that the commutation option has been highly regarded by members of the Defence Force as it has assisted people to make the transition to civilian life (including allowing them to make choices for their financial future, such as paying off loans and/or purchasing property.
2.5
The Ombudsman reported on interviews held with some DFRDB members, that '[w]ith very few exceptions, we were told they would have still commuted, because at the time they needed access to capital, for example to purchase a home or business'.
2.6
A submitter confirmed that:
I would like to add that due to the many moves required during defence service most retiring DFRDB members relied on the commutation…lump sum to provide a deposit for their own homes as they settled back into civilian life.
2.7
Mr Herb Ellerbock, Secretary, Australian Defence Force Retirees Association, (ADFRA) noted that his circumstances at the time meant that he needed to commute:
I had not been able to establish anything after 20 years in the Army. We moved from pillar to post. I had a young family. Interest rates were very high at the time, something in the order of 17 per cent. It was the only way I was going to be able to buy a house. So, yes, I would have made that decision regardless.
2.8
Mr Kel Ryan, President, Defence Force Welfare Association, noted that commutation 'notwithstanding that its future implications were little understood…was a significant attractive element to the scheme…'
2.9
The DFRDB COMMUTATION CAMPAIGN (the Campaign), however, was of the view that '[h]ad the Superannuants been aware of the Life-Term impost of their Retirement Pay, very few would have accepted the lump sum proffered by the DFRDBA'.
Provision of information
2.10
On the question of who provided incorrect information to them, some submitters pointed to Defence, a smaller number to the Defence Force Retirement and Death Benefits Authority (DFRDBA)/CSC and many were not specific, stating that they attended resettlement seminars and outlining what they were told.
2.11
In summary, the argument to the committee is that some DFRDB members were led to believe that the reduction to their retirement pay as a result of commuting or taking a lump sum was temporary and would cease on reaching their life expectancy factor age. DFRDB members assert that they relied on this information to their financial detriment and/or that this design aspect of the DFRDB scheme is not fair.
2.12
The Campaign which represents over 1,000 veterans registered with the campaign and a further 2,000 with registered interest through social media sites, detailed the understanding that arose from advice provided by Defence:
Superannuants were fully aware that once the Lump Sum was received, their annual Retirement Pay would be reduced by an amount calculated on their length of Service, rank, salary, and the number of years until they reached their Notional Life Expectancy point. At that point, they understood their Retirement Pay reductions would cease. This too, they were falsely assured of by Defence, in Official publications over a 20-year period….
2.13
Mr Ken Stone, Independent Advocate, the Campaign, pointed out to the committee that Defence published 'six editions of an official publication' that advised ADF personnel that retirement pay reductions would stop once they reached their notional retirement age.
2.14
Commander Anthony Parkin (Rtd) was just one of many who recounted their experience:
I attended a Resettlement Seminar early 1989 prior to retiring in July 1989 having served in the Royal Australian Navy for 20 years. I was informed of the opportunity to commute a portion of my DFRDB pension and receive a lump sum payment. I understood that, once the lump sum was received, my annual Retirement Pay would be reduced by an amount calculated on my length Service, rank, salary, and the number of years until I reached my Notional Life Expectancy point, when I understood the reduction would cease. At no time was I advised that this reduction in my Retirement Pay would be for life; I expected my full Retirement Pay to be reinstated once I had paid off the lump sum and reached the Life Expectancy point of around 72 years.
2.15
Similarly another submission stated:
We were advised that in recognition of our service an interest free loan was available to help us integrate back into society, by commuting a portion of our pension. We were told that we would pay it back based upon life expectancy whereupon the pension would revert to the pre-commutation rate. It is inconceivable to think that had we been appropriately educated on DFRDB that we would agree to paying it back on a permanent basis, beyond our life expectancy and to then have the same penalty imposed upon our widows, for the rest of their natural lives.
2.16
Yet another submitter argued:
DFRDB members were not informed that if they took the commutation option that they would keep paying for the commutation lump sum with a reduced pension for the rest of their lives. DFRDB Members who chose not to commute their pensions will still be getting the extra amount (circa $2000 per year) for the rest of their lives.
DFRDBA/CSC
2.17
Other submitters pointed to the DFRDBA (now CSC) as the source of misleading information or saw failings in communication with DFRDB members. For example Mr Rodney Cox told the committee that he considers that 'I have been deceived by the DFRDB AUTHORITY in accepting a Lump Sum benefit known as a COMMUTATION – without the conditions, thereof, being openly made known to me'. Mr Keith McIntosh was also of the view that the CSC failed to disclose the fact that commutation 'was for life in the resettlement seminar I attended and in the correspondence I received'.
2.18
The Campaign also pointed to the DFRDBA. Mr Ken Stone explained:
…the primary DFRDB Authority brochure, that was issued on October 1974 and had DFRDB advice to serving members, was not actually issued to every serving ADF member. No; the authority only issued it to DFRDB Authority resettlement counsellors and Department of Defence resettlement administrators.
2.19
Mr Stone explained further:
That authority [DFRDBA] created and clearly enunciated administrative policy for communication to the Department of Defence—the scheme sponsor—to whom they were responsible. Why not the same statement to superannuants? It was clear, it was concise and it was understandable. Conspicuously, though, that same authority abjectly failed to render the clear and concise interpretation and communication of that policy to their clients, those being DFRDB contributors and veteran superannuants.
The maladministration of client communications by the DFRDB [A]uthority failed to provide accurate policy advice to contributors. In so doing, it failed to identify its prime target audience and failed to deliver [correct] communication policy to them.
2.21
The Campaign alleged that:
[t]he term Commutation, and the policy it represented, in applying a Life-Term impost (at the full reduction-rate applied to total recovery of the pre-payment sum by their National Life Expectancy Point, ongoing) was duplicitously hidden by DFRDBA from contributors. Additionally, also over-written with false information, by their direct employer, Defence. The TRUE policy was never revealed to eligible superannuants – even on revelation by the DFRDBA some 30-years after the scheme was launched, only ADF personnel were then advised – not Veteran Superannuants.
2.22
Further, the Campaign submitted that there was 'a complete failure in client communications and consequently, client understanding of its Schemes'. It added:
Such communications should be on a one-on-one basis not through intermediaries such as Departmental processes. The same conditions should apply to CSC in regards to its clients, as are met by private sector financial industry providers.
2.23
Another submitter argued that 'the DFRDB Authority has failed to divulge to contributors, its intent to sustain reductions in pay indefinitely even after the full amount of commutation has been recovered'.
2.24
Mr Michael Tehan submitted that there was a 'failure by DFRDB[A] to openly identify a crucial condition; that the pension would be permanently reduced even after the advance payment had been fully repaid'.
2.25
The Vietnam Veterans Association of Australia also alleged that 'false advice [was] often given by representatives of the DFRDB[A].' Mr Jim Nicholls pointed to the incorrect information provided by Defence arguing that 'it serves to demonstrate the ineptitude of the DRDFB Authority to communicate its policy condition even to the Defence Department that sponsors the DFRDB Superannuation Scheme, let alone to individual contributors and superannuants'.
2.26
However, Mr Colin Wade, one of three single service officers representing the respective service nominees on the DFRDB Authority Board who had extensive involvement with and experience of the administration of the DFRDB scheme, provided evidence that:
[a]ll DFRDB members who voluntarily elected commutation of part of their retirement pay were provided with the correct advice by the DFRDB Authority. Members who elected to apply for a lump sum commutation and a reduction in retirement pay signed the commutation election form and the DFRDB Authority subsequently confirmed the election to commute and advised members the reduction in retirement was reduced from that date in accordance with the intent of the DFRDB Act 1973.
2.27
Mr Wade added that during ADF Resettlement Seminars 'the DFRDB seminar presentations were conducted by experienced Counselling Officers' and they 'conducted the presentations using a standardized, pre-prepared 'overhead projector' slideshow and later a 'powerpoint' format to ensure consistency of information across all seminars'. He noted that video footage reviewed by the Ombudsman recorded in 1984 and 1989 confirmed that DFRDB members were advised of the correct application of the life expectancy factor 'as described in the original DFRDB Authority circular provided to Defence in 1973'.
Did everyone receive incorrect information?
2.28
While some submitters contended that all DFRDB members received the incorrect advice, this was not the evidence provided to the committee or the Ombudsman. The Ombudsman noted that '[s]ome members [chose to commute] on the basis of the incorrect advice, while others did so based on a correct understanding of the scheme'.
2.29
While noting that many ADF members were misinformed about the operation of commutation, the Defence Force Welfare Association (DFWA) stated that '[i]t is also clear that many ADF members were correctly informed of the effects of commutation and specifically that the reduction to the pension was for life. Whether the ADF Members acted on correct or incorrect advice, most Members elected to commute. A small percentage decided not to commute'.
2.30
The committee received a submission which indicated that the submitter:
elected to commute my DFRDB pension on leaving the services, in the full knowledge that in doing so my pension (payment) would be reduced for my lifetime and in the event of my demise my then surviving wife would receive 5/8 of my pension (calculated on the basis that I had not commuted)'.
2.31
This submitter added that 'I always made a point of advising both senior officers and NCOs who were retiring or about to retire of the conditions of DFRDB including the permanent reduction of pension should they commute and the benefits of a "deferred pension" which was not well known at the time'. While acknowledging the findings of the Ombudsman's inquiry that there are people who were given incorrect information, the submitter added that 'these same persons appear very reluctant to admit or agree that many were properly informed and indeed make false claims to back their assertions that ALL 55,000 DFRDB RECIPIENTS WERE MISLED'.
2.32
The submitter told the committee that they attended a resettlement seminar in late 1984 over 2 days, attended by around 100 personnel where 'quite a discussion ensued regarding the life long pension reduction'.
2.33
This submitter further noted that '[t]here are Facebook sites specifically on the DFRDB commutation dispute which actively discourages, removes and in my case threaten those who claim to have known about the life long reduction in pension because it weakens their claims of rorts, criminal behaviour, false and misleading information they claim was promulgated or published by relevant Government Authorities'.
2.34
This submitter concluded that:
I am totally of the view that those who are seeking compensation, restitution of the payment at the conclusion of their Notional Life Expectancy are opportunists taking advantage of a perceived lack of information at the time of their discharge, be it real or imagined. Would I like my pension restored at reaching my NLE, the answer is YES. But I accepted the conditions prevailing at my time of discharge and I will not lie, claim rorts, misrepresentation or whatever in order to do so.
2.35
Mr Wade also attended presentations by representatives of the DFRDBA to ADF personnel on the DFRDB scheme at ADF resettlement seminars. He told the committee that throughout his career he was not aware that ADF personnel in pay and discharge sections were providing misleading information and had he or the other service representatives been aware then corrective action would have been taken.
2.36
Mr Wade noted the numerous examples of incorrect information disseminated to ADF personnel and agreed that the failure of Defence to ensure only accurate information was provided to DFRDB members constituted defective administration by Defence. He added that:
However, while the misleading information was provided in good faith, no ADF personnel were authorised to interpret documents and advice provided to DFRDB members by the DFRDB Authority on the DFRDB scheme or the commutation provisions within the DFRDB Act 1973.
2.37
Further, '[w]hile amounting to defective administration by Defence, the provision of unauthorized and misleading information, does not affect the legitimacy of the DFRDB legislation'.
2.38
Defence highlighted that the Ombudsman found 'there had been a mixed message over the years' in relation to the provision of information on commutation:
Sometimes the message was correct and clearly identified what commutation meant for members, but, unfortunately, on other occasions, that wasn't the case. A number of publications within the Defence context over the years had put forward some wrong information, and that's what the Ombudsman had identified through the inquiry that they had conducted.
Commonwealth Ombudsman findings
Information provided by DFRDBA/CSC
2.39
The Ombudsman's report contains a detailed description of the DFRDBA/CSC operational guidelines, brochures, forms and letters from 1973.
2.40
In 1973, the DFRDBA issued a circular to all Defence service agencies explaining how the scheme would operate. This circular clearly explained the permanence of the commutation reduction:
Although a life expectancy factor is used, full retirement pay is not restored should the member live beyond normal life expectancy. By the same token, should the member die before attaining the expected age, no attempt is made to recover the amount of the lump sum outstanding form the dependents or the estate.
2.41
The original 1973 form for commutation required members to sign the following acknowledgement:
I realise that under the provisions of Section 24 future retirement pay payments will be reduced as a consequence of this election on and from the date the election is received by the Authority.
2.42
In 1978 the form was accompanied by explanatory notes which stated 'Commutation is a conversion of a portion of future retirement pay payments to a one time lump sum. Once the conversion is made the portion commuted cannot be restored during the member's lifetime'.
2.43
The Ombudsman noted that 'forms were often accompanied by a print out of the commutation calculation and the future rate of retirement pay'.
2.44
The Ombudsman found that [t]he information provided by the DFRDB Authority (now CSC) was at all times correct. However:
while correct, the information was not sufficiently clear to correct the misunderstanding that many members had from their interactions with Defence. With the benefit of hindsight, I can now see how this information could have been clearer, as is the case with CSC’s current documents.
2.45
The Campaign was critical that the Ombudsman Report found no defective administration in relation to the DFRDBA (now CSC). Mr Stone argued that the Ombudsman 'was blind to the DFRDBA administrative failures'.
2.46
The information provided has subsequently been improved on a number of occasions since 2004. The current advice available from the CSC booklet, A summary of the Defence Force Retirement and Death Benefits Scheme, notes: 'Commutation of a benefit results in a permanent reduction in your retirement benefit based on your life expectancy…If you choose to claim a commutation lump sum, this will permanently reduce your pension…'.
2.47
CSC noted that it participated in the Ombudsman's investigation 'to the fullest extent possible…even though CSC did not exist for the vast majority of the period in question'. CSC provided:
'a large quantity of historical documents' dating back some 40 years to the Ombudsman. The Ombudsman found that CSC was 'responsive and co-operative' in providing 'significant amounts of information going back many decades'.
2.48
CSC also noted that 'people could obtain information and confirm their understanding prior to making an election to commute'.
2.49
Ms Alana Scheiffers, General Counsel, CSC, elaborated on the actions taken following the Ombudsman's report:
The recommendations from the inquiry firstly related to updating communications, so those communications have all been reviewed and updated per the recommendation. We have reported back to the Ombudsman and advised the Ombudsman that all of those recommendations have been implemented. There was also a recommendation around communicating with a specific cohort of members. I can't recall exactly off the top of my head but it was a certain time frame prior to retirement. So we have communicated with that cohort of members as required and continue to answer any questions. A part of the recommendations, a minor one, was to make sure that we referred to Defence's apology, which we did on our website.
2.50
In relation to the specific cohort, the Ombudsman recommended that 'commutation election forms and standard letters (sent to members in advance of their retirement and immediately after commutation) should clearly explain commutation will result in a permanent reduction to retirement pay'. In addition the CSC should identify 'whether there are any members who have discharged and have already received the existing standard letter, but who are still in time to either commute, or ask CSC to reverse their commutation election. CSC should write to this cohort to explain that commutation will result in a permanent reduction to retirement pay'.
2.51
On notice, the CSC confirmed that it had communicated with 47 individuals as a result of the Ombudsman's recommendation.
2.52
Responding to questions from the committee, Ms Schieffers outlined the way the CSC communicates with members:
There are two methods of communication we would have with our members. Firstly, for those who are currently contributors, those who are still serving, which is approximately 900 members, they receive annual statements from us each year. With respect to pensioners, we communicate with them on a regular basis to advise them of updates to their pension payments with respect to the CPI increases that happen six-monthly.
2.53
On notice, the CSC confirmed that they have contact details for all members as they 'are all current DFRDB pensioners who receive regular communication from CSC'.
2.54
Given the allegations in relation to the CSC, particularly those of intent to sustain reductions in pension, it is also important to note the role of the CSC:
CSC does not make or change policy in regard to any of the super schemes that we administer, including the DFRDB scheme.
Policy and legislative change is formulated and dictated by the Government of the day. CSC simply puts in place any changes and administers the schemes according to the policies or legislation made by the Government.
Information provided by Defence
2.55
The Ombudsman found 'numerous examples of incorrect written and verbal information being disseminated within Defence from commencement of the scheme in 1973 onwards'. He noted that '[t]his information helped create and reinforce a relatively widespread misunderstanding among DFRDB members that the retirement pay reduction due to commutation would cease on reaching the life expectancy factor age'.
2.56
The Ombudsman's investigation focused on the accuracy of the information provided to DFRDB members and it recognised that:
Many DFRDB members, likely numbering in the thousands, were provided incorrect information by Defence personnel who were responsible for providing advice about the workings of the scheme. Those DFRDB members were led to believe, incorrectly, that their commuted pensions would increase once they reached their life expectancy factor age. The absence of clear guidelines and instructions to staff led to this incorrect information being provided, which resulted in a misunderstanding of the basic design of the scheme.
2.57
The Ombudsman concluded that '[i]n my view, this amounted to defective administration by Defence' and recommended that the Secretary of the Department of Defence and the Chief of the Defence Force apologise for the defective administration that occurred and for the disappointment members have experienced. The apology letter can be found at Appendix D to the Ombudsman's report. It is also available from the Defence website.
2.58
On notice, Defence advised that 'four individuals contacted the Department of Defence via the DFRDB investigation email address to request a posted copy of the apology letter. One individual called requesting a verbal apology, and a response was provided by Defence'. In addition:
Since May 2019 there have been 115 contacts via 1800DEFENCE and the Defence Customer service email inbox regarding DFRDB. This includes both enquiries that were general in nature and enquiries that were requesting specific information to support submissions to the Ombudsman. Of this five enquiries were seeking further information or seeking an appeal in relation to the Ombudsman's review. All queries were responded to by Defence.
2.59
Defence indicated that from the early 2000s onwards it has provided the correct information to DFRDB members.
Claims of financial detriment
2.60
Many DFRDB members who wrote in to the committee believe that based on the information provided to them, their decision to commute has resulted in financial detriment, which they want remedied. For example, the Campaign stated:
The compulsory Retirement Pay reduction continued beyond Superannuant NLE points with Veteran Superannuants being unaware this would continue Life-Term. This was at the financial detriment of the 55,000 Veteran Superannuants that accepted the Commutation, and without superannuants knowing the actual conditions of repayment as automatically applied to their Superannuation by the Commonwealth's DFRDB agent.
Our campaign contends the Commonwealth is depriving DFRDB Superannuants of over $100 MILLION annually from ongoing Retirement Pay reductions – despite Superannuants having fully repaid their Commutation Lump Sum on reaching their Life Expectancy point. This estimate is simply an assumed average reduction, across the cohort, of some $2,000 per person.
2.62
The Campaign summarised their position:
The Veteran Submissions [to the Ombudsman's investigation]…at no stage, claimed financial detriment in comparison to those that did not commute, yet this was the comparison made by the Ombudsman.
The contention by Veteran Superannuants was, ALWAYS: that as individuals they suffered severe financial detriment through the life-term impost of Retirement Pay Reductions, beyond what they would have, had they not commuted.
2.63
Another submitter argued:
Every Member who chose to commute will suffer financial detriment when they reach their perceived Life Expectancy under [t]he scheme. Once this age is reached all money provided to the member as a result of [commutation] would have been paid back to the government in full. The continuation of these payments until the death of the member is to their …financial detriment. There is no reason [ex]cept to be a [source] of financial revenue to the government for these payments to continue past the accepted life expectancy.
Commonwealth Ombudsman investigation
2.64
The Ombudsman considered what should occur to remedy the defective administration.
Engaging actuarial expertise
2.65
The Ombudsman engaged two expert actuaries, the Australian Government Actuary (AGA) and KPMG, to independently model a number of scenarios, ie. the financial results of commuting and not commuting, in order to determine 'whether those who were given misleading information were likely to have suffered overall financial loss as a result of their choice'.
2.66
Some submissions questioned this modelling. For example, Mr Stone, the Campaign, asserted:
The Ombudsman's inquiry accepted just 12 cases of the 55,000 data sets available from CSC. He used this speculatively and inappropriately to create a case whereby spurious financial modelling determined that none of the 55,000 superannuants suffered any financial detriment by accepting a commutation despite they are still paying the same amount as the first year they started reimbursing the Commonwealth. Yet, annually, still their retirement pay suffers reduction at the same rate of benefit as its first year benefit. Would any superannuant knowingly accept an open-ended debt that would grossly outweigh its benefit? I think not.
2.67
The ADFRA also questioned the modelling stating that 'those who responded to the Ombudsman's investigation were not a valid sample of the total DFRDB recipient population'.
2.68
The Ombudsman explained how the modelling was undertaken:
The modelling provided by both AGA and KPMG was factual, based on real-life scenarios with all assumptions chosen by our Office. Although we had regard to the actuaries analysis provided as part of their reports, the Office undertook its own independent analysis of the modelling results.
2.69
The actuaries were asked to assume two investment scenarios for each case. The first scenario was based on the lump sum being invested in the purchase of a home (as based on interview this was likely to have been the most common use of the lump sum). The second scenario was based on the lump sum being placed in a term deposit. The actuaries were asked to use historical home loan and term deposit rates.
2.70
The Ombudsman clarified that their modelling did not compare the hypothetical outcome, ie. if the law had permitted retirement pay to increase on reaching life expectancy factor age:
While DFRDB members would undoubtedly be better off financially under this approach, it is not a suitable point of comparison. This is because, while disappointment and unmet expectations are legitimate causes for concern, particularly where they are the consequence of defective administration, they are unlikely to be financially compensable, in court proceedings, as a person was never entitled to this financial outcome.
2.71
It was further explained:
The modelling we commissioned is, in our view, a more accurate way of determining the likelihood of a person experiencing an actual loss (as opposed to financial disappointment) as the result of deciding to commute when compared to not commuting. It takes into account, using conservative assumptions, the economic benefits of both options.
2.72
At the hearing Mr Manthorpe indicated his confidence 'in both the independence and the professional credibility of the actuaries who worked with us on this issue…'.
2.73
Providing further detail about the approach, Mr Manthorpe stated:
We looked at everybody's stories. As you know, we had thousands of people approach us, and we looked at, and considered, every single submission that was made to us. In terms of their actuarial modelling—and I think that's what you're getting at—we worked with the actuaries to identify 12 cases. I know I did use the word 'samples' a little while ago, but probably a better way to put it is that there were 12 cases that we thought provided a broadly representative and realistic set of circumstances to model whether people were or were not financially disadvantaged by the choice to commute. …[The list] was informed by people leaving the military at different times, leaving the military at different ages, or leaving the military having achieved different levels of rank and, therefore, salary. That then gave us the basis upon which to give the actuaries a set of cases to model to see how that played out over time.
2.74
It was emphasised that they did not study 50,000 cases and '[i]ndeed, no actuary would; they would always choose a sample, or some cases or whatever to do a piece of modelling'.
2.75
Mr Manthorpe further explained the approach taken to the modelling and the findings:
We haven't gone and investigated 50,000 individual cases. We took a sample of cases that informed the actuarial modelling, and that sample was based on trying to get a range of scenarios—different ages, different ranks, different times at which they entered and left the military—to get a broad spectrum of possibilities to test whether the commutation option that they took was better or worse in the long run than not taking commutation. If that modelling had demonstrated that they were better off not taking commutation, if they'd been misled about what commutation meant and that had influenced them to take commutation, then you might have a widespread incidence of a case for compensation or some kind of reparation, but in the end that's not what the modelling demonstrated.
2.76
The approach and results of the AGA and KPMG modelling are available from the Ombudsman's website.
Commonwealth Ombudsman findings
2.77
The Ombudsman found that:
In all of the scenarios we modelled, using conservative assumptions about how retiring members might have used the lump sum, commutation has resulted in a beneficial overall financial outcome for DFRDB members to date. This is particularly true for DFRDB members who retired in the years before 2010. While some of those who discharged in recent years may be able to make the case that at some time in the future they could be financially worse off having commuted, I am satisfied these decisions to commute were made after CSC improved its publications to explicitly advise that the commutation reduction is permanent.
2.78
Defence indicated that the modelling undertaken by the Ombudsman 'demonstrated having early access to capital provided by commutation was generally beneficial to DFRDB members relative to the alternative of not commuting'.
2.79
The Ombudsman concluded:
I am satisfied the decision to commute is not likely to have, of itself, caused financial loss, relative to the only other option that was available at law. I have therefore concluded that it is not appropriate to recommend compensation in a broad sense.
2.80
The Ombudsman pointed out that 'missing out on a benefit to which a person is not actually entitled under the law does not necessarily mean that the person has suffered financial detriment'.
2.81
Summarising the findings, Mr Manthorpe told the committee:
It is undoubtedly the case that the members concerned did not get what they were told they'd get. They got less than what they were told they'd get, but they got what they were entitled to, and what they were entitled to under the commutation option was, based on the modelling, highly likely to be better in the long run than the other option that was available.
Consideration of compensation
2.82
The Ombudsman noted that 'there was abundant evidence of financial disappointment, frustration and unmet expectation' which was based 'on financial disappointment from not receiving the entitlement to which they believe they were entitled'. However, the Ombudsman recognised that '[f]inancial disappointment and unrealised expectations are not compensable'…'This is because the person must suffer financial detriment as a result of a decision they made relying on the incorrect advice. Further, it must have been reasonable to rely on the incorrect advice, and they must have taken reasonable steps to minimise the loss'.
2.83
The Ombudsman considered whether some form of financial reparation or ex gratia payment was necessary but decided not to do so because:
First, on the basis of the modelling, to do so would unreasonably place the cohort who commuted in an even stronger financial position than those who correctly understood the operation of the scheme and decided not to commute, which in the long run appears to have been the less beneficial choice for most people. Similarly, it would provide an unjustified windfall at taxpayers’ expense for those who did understand the scheme and chose to commute.
Second, to do so would presume to contradict the intent of the Parliament that passed the legislation establishing the DFRDB scheme decades ago. It would of course be possible for the current Parliament and the current Government to consider whether the policy issue in question ought be re-opened in light of the analysis in this report.
2.84
At the hearing, Mr Manthorpe summarised why he did not recommend compensation:
…I stopped short of recommending that the government pay compensation or some form of reparation as, in my view, to do so would have: created new inequities between different groups; potentially produced an unjustified windfall for those who properly understood the scheme, at taxpayers' expense; and presumed to set aside what parliament had intended in the first place.
2.85
Mr Manthorpe further stated:
I would reiterate that, on a personal level, I have every sympathy with people who were misled about what they were going to get. Defence shouldn't have done that, and that's why, in my report, I recommended to the department, the CDF and the secretary that, at the very least, they apologise. Then the next question was: is there something else that should be done here? For the reasons I outlined in my report and have touched on already, I couldn't think of an additional remedy that would do anything other than put me in the position of suggesting that the rules of the scheme that were put in legislation 50 years ago needed to, in effect, be rewritten.
CDDA scheme option
2.86
It was however acknowledged that outlying cases of which the Ombudsman was not aware could not be ruled out and therefore the Scheme for Compensation for Detriment caused by Defective Administration (CDDA scheme) was seen as suitable for the consideration of any such cases. A list of considerations which would need to be satisfied as part of any such claim were also developed.
2.87
The CDDA scheme, a policy owned by the Department of Finance, is 'a discretionary mechanism available to non-corporate Commonwealth entities. It allows an entity to pay compensation when a person or organisation has suffered detriment as a result of the entity's defective administration, when there is no legal requirement to make a payment'. '[T]he non-corporate Commonwealth entity which is the subject of a CDDA Scheme claim is the entity responsible for considering and making a decision on that claim'.
2.88
The CDDA scheme is managed by the Directorate of Special Financial Claims within Defence. Defence advised that '[c]urrently no claims have been successful as claimants have been unable to demonstrate they have incurred a financial detriment due to this issue'. Defence provided more detail on the claims to date:
As at 12 May 2021, Defence had received 38 claims under the scheme. Thirty-six of them were assessed and were unsuccessful. Why the difference between the 38 and the 36? Two of the people who had put forward claims then had discussion and correspondence with the department and decided to not go ahead with their claims.
2.89
Defence also reported that there have been 'telephone and email enquiries from a handful of others who did not choose to make a claim'. On notice, Defence indicated that '[n]one of the claimants, to our knowledge, engaged a lawyer or other representative to assist them with their claim'.
2.90
While acknowledging the defective administration in the information supplied to members before 2004, Defence added that:
However, there were cases where it was apparent or acknowledged that the member did know in advance of their election that the pension would not be restored to the pre-commutation amount when they reached the life expectancy factor age.
2.91
Defence reported that:
Generally, the claimants did not dispute they were better off having commuted than had they not commuted. Their complaint about the DFRDB scheme and the Ombudsman's conclusion was that the scheme was not as generous as they were led to believe it would be.
2.92
Defence took the committee through how the CDDA scheme works and how applications are assessed:
The first aspect that we look at is the question of whether there has been defective administration. In this case, Defence accepted the report of the Ombudsman as evidence the defective administration had occurred and that the members who commuted may have been subject to that defective administration. So the first aspect was considered to have been satisfied.
The second aspect is the detriment aspect. The Ombudsman determined that, following the modelling that was completed by the Australian Government Actuary and by KPMG on behalf of the Ombudsman for the purposes of the report, in all of the circumstances that they looked at the members were financially better off having commuted than they would have been had they taken the alternative, which was not to commute and retain the full pension. The Ombudsman offered the opportunity to members who considered that their circumstances differed to come to the CDDA scheme and show how their circumstances were different. Of the 38 claims that Defence looked at, two of the claimants chose to withdraw their claim, acknowledging that their circumstances were not substantially different from those that the modelling was based on. Of the remaining 36, the decision-maker was not satisfied that the claimants' circumstances substantially differed.
2.93
On notice, Defence provided additional detail regarding the criteria used to assess a claim:
The claims were assessed against the criteria under the Compensation for Detriment caused by Defence Administration (CDDA) scheme (Resource Management Guide No. 409, May 2017), which requires that there has been defective administration causing direct financial loss.
2.94
Defence added that '[i]n all cases, Defence accepted there was defective administration in the form of incorrect or ambiguous advice about commutation under the Defence Force Retirement and Death Benefits (DFRDB) scheme'. Further, in relation to why claims were not successful:
The Ombudsman did not find any model cases that showed financial loss resulting from defective administration. Defence invited claimants to explain how their situation differed from those modelled. All claimants asserted their loss was the Commonwealth's failure to restore the DFRDB pension to the pre-commutation amount, fully indexed, when they reached the life expectancy age, because that is what they had understood would happen. None of the claimants were able to establish that they had suffered actual financial loss.
2.95
Defence summarised that for 'compensation to be payable under the CDDA scheme, claimants must be able to show that they have sustained detriment of some kind. The distinction between financial detriment and financial disappointment is addressed in the CDDA guidelines':
…A claimant does not suffer financial detriment merely because they were correctly not granted a benefit after being advised that they would receive that benefit…
2.96
When asked about whether a CDDA decision can be reviewed, Defence reported that there is an internal review option which 'two of the members who made a claim sought to take up'. They provided additional material which was reviewed 'but it did not change the decision-maker's determination that the members' circumstances didn't substantially differ from that which was presented in the modelling'.
2.97
Defence noted that a second review option available is to request that the Commonwealth Ombudsman review the decision made by Defence 'to look at the way that Defence looked at the claims and to make any suggestions, where Defence may have considered matters erroneously.' However Defence reported that '[n]one of the claimants have taken up that second review option to date'.
2.98
The Campaign noted the CDDA option 'where a case of Financial detriment could be sustained' but indicated that '[n]o compensation has been made to any claimant to our knowledge'. It added that they believe it is 'a direct outcome of the inappropriate financial modelling sanctioned by the Ombudsman that is counter to the claims of our case'.
Defence engagement following the ombudsman's report
2.99
When asked how Defence engaged with DFRDB members following the Ombudsman's report, Mr David Nockels, First Assistant Secretary, People, Policy and Culture, Department of Defence, advised the committee that:
One of the recommendations from the review by the Ombudsman was for the department, through the secretary and the Chief of the Defence Force, to issue an apology. That's how we engaged with DFRDB members post the review. That apology was embedded in the Ombudsman's review and findings; it's an annex to that. We also posted that on the Defence website and, within that, also gave options for people to contact Defence, if they so desired, to have a written apology letter go directly to them. That was the way we engaged with members post the review.
2.100
Defence advised that it 'did not contact any veteran groups after the [Ombudsman's] investigation was complete. However, following the release of the Commonwealth Ombudsman's report, the Ombudsman advised Defence that copies of the report were sent out to individuals upon request, including to some ex-service organisations'.
2.101
Mr Nockels told the committee that DFRDB members have continued to write to the department and the minister on these matters and this correspondence is responded to through the regular processes.
Views of the Commonwealth Ombudsman's report
2.102
Mr Wade supported the analysis and findings of the Ombudsman's report stating that it 'provided a comprehensive and accurate analysis of the administration of the scheme in accordance with the DFRDB Act 1973 and the accuracy of information provided to DFRDB members by the DFRDB Authority and compliments the Terms of Reference for the Senate Inquiry'.
The Ombudsman Report clearly demonstrated that there was no evidence of fraud, lies, coercion, deceit, deception, or maladministration by Defence and the DFRDB Authority in the administration of the DFRDB scheme commutation provisions in accordance with the DFRDB Act 1973.
2.104
Mr Wade also appreciated that 'some DFRDB members will never accept the Commonwealth Ombudsman and the AAT determination that: "a member who elects to commute has their retirement pay permanently reduced according to the statutory formula set out in s24(3)(b) of the DFRDB Act"'.
2.105
Most submissions, however, expressed a general dissatisfaction about the process and findings of the investigation undertaken by the Ombudsman. For example, the Australian Army Training Team Vietnam Association (WA Branch) Inc stated that:
In the Commonwealth Ombudsman's Report which was clearly flawed, there were findings that military members were misinformed but the Ombudsman made no recommendations for recompense or reversion to 100% of your military pension once reaching your Notional Retirement Age. Subsequent questions to the Ombudsman for methodology and evidence of his findings were ignored. In other words it was another ploy by the government to deceive military superannuants with no outcome.
2.106
Mr John Snell provided his view:
I have read the Ombudsman's consideration of these facts and note that he has taken a very legalistic view of the matter but has largely ignored the misapprehension that has resulted from the information promulgated by officials at the time. He appears happy for the reduced payment to continue for the remaining years of my life but he does not debate that I (and others like me) have repaid all of the advance through reduced fortnightly payments.
2.107
Mr Peter Larard provided his view of the Ombudsman's report:
I submitted to The Ombudsman some years ago on this matter in which I included critical observation that many of the questions circularised, to which the Ombudsman sought answers, were worded and structured indicating strongly that at least the Ombudsman staff who designed the questions had never intended The Ombudsman to find in favour of there being any problem! My opinion at the time was, and is now, that the designed purpose of The Ombudsman's inquiry was to dismiss the matter!
2.108
Others such as Mr Charles Myhill argued that the Ombudsman 'did not understand the military chain of command, placed undue emphasis on brochures issued by CSC and ignored the misinformation provided by all levels of the military command structure. I was a solder trained to follow orders no matter in what form they were issued, this is discipline in its purest form'.
2.109
The Campaign submitted that the Ombudsman 'failed to recognise' the submissions made to the inquiry by veterans in relation to the advice they received and 'instead accepted DFRDBA-CSC information, this being from the very organisation he was investigating for Mal-Administration'. In addition:
The Ombudsman then went against his own Terms of Reference and accepted the spurious financial modelling, based on data of just 12 cases out of those of the 55,000 veteran superannuants, who ill-advisedly accepted a commutation.
2.110
The Campaign felt that the Ombudsman's report was 'poorly presented and spuriously biased, and failed to factually address the issues'. Specifically that while acknowledging Defence failed in its administration that no reparations were recommended.
2.111
Mr Clive Connor called the Ombudsman's report a 'farce and should be withdrawn by the Minister'.
2.112
The DFWA submitted that the Ombudsman self-generated his own Terms of Reference which:
in the opinion of most veterans were very narrow. Thus viewed by the veterans' community, the outcome was equally narrow. Many thought that yet another opportunity for a wider objective view was lost. And the perfunctory apologies by the Chief of the Defence Force, the Department of Defence Secretary and the Commonwealth Superannuation Corporation (CSC) did nothing to remedy the firm conclusion within the Ombudsman's report that there had been "defective administration" both of the implementation process of the DFRDB Scheme and the way it was subsequently operated.
2.113
The Ombudsman emphasised in his report that he 'cannot be directed to undertaken an investigation, to arrive at a certain conclusion or on the scope of an investigation'.
2.114
The Ombudsman told the committee that following the publication of their report they received correspondence from some members 'criticising the scope of our investigation and expressing dissatisfaction that our report did not recommend that compensation be paid'. In addition '[s]ome members requested a review of our Office's report findings and asked us to reopen the issues considered. We considered whether to review the investigation and the report and decided not to do so'.
2.115
The Ombudsman concluded:
While we acknowledge the frustration and distress conveyed to our Office by many members throughout the investigation, as stated in our report, our assessment was, and still remains that DFRDB members received what they were entitled to, even if it fell short of what they were misinformed they would receive. Further, the actuarial modelling illustrates that members were generally better off choosing the commutation option, compared to the other option that was available at law.
Further response from the Ombudsman
2.116
At the hearing, the Ombudsman responded to four criticisms of his report contained in submissions to the inquiry. First, in relation to allegations that the report was 'biased', Mr Manthorpe stated:
I reject that assertion. I and my office considered the evidence that was put to us, fairly and in good faith, consistent with our legislative remit and our professional integrity. I brought an entirely open mind to the issues and was subject to no improper influence. The conclusions in the report were entirely my own.
2.117
Second, while some submissions alleged the approach to be 'selective', Mr Manthorpe responded:
To the contrary: we engaged comprehensively with the issues that were within our remit and indeed went further by providing an avenue whereby issues outside our remit could be aired.
2.118
Third, in relation to consultations with Defence and CSC, but not with affected members, regarding the scope of the inquiry:
There is nothing unusual about this. Whenever we undertake a major investigation of an issue in an agency we afford them an opportunity to comment on the scope of the investigation to ensure that it is logistically practical, well planned and soundly based. This process had no bearing on the core issues we considered. Moreover, we considered the issues raised in every submission that was put to us by scheme members, and we shaped our investigation and report accordingly.
2.119
Finally, the criticism in some submissions questioning why the actuaries did not model a scenario whereby retirement pay reverted to the non-commutation rate at their life-expectancy-factor age. Mr Manthorpe responded:
To that, I'd say that all investigations of this kind are iterative. They're a journey of discovery. Ultimately, we chose not to model this scenario. We came to the view that there had indeed been defective administration in the form of giving inaccurate information to members. It followed that what we needed to model was whether this defective administration was likely to have caused financial detriment—that is, we needed modelling that showed whether members were likely to have suffered actual financial loss as a result of choosing commutation, on incorrect advice, over the only other option that was available. To model the third option would have been to model what was and still is a legal and policy illusion that has no grounding in the legislation that this parliament passed nearly 50 years ago.
2.120
Mr Manthorpe also addressed the criticism that the inquiry was paid for by Defence:
I think somewhere, in some of the submissions, people assert that the inquiry wasn't properly independent because Defence paid for it. Let me address that point: yes, Defence paid for it, but somebody had to pay for it, and it was always going to be the taxpayers. It was quite a big inquiry, as you can see from the scale of submissions and so on. When we were asked to take it on, I said, 'Well, I'll take it on and look at the matters of administration, but someone's got to foot the bill.' That was a conversation I had with Defence, but I don't think that bears on the independence that I and my colleagues brought to bear. So they provided the funding.
Responding to requests to review the investigation
2.121
Noting that he was asked to reopen the investigation, Mr Manthorpe explained in more detail to the committee why he decided not to do this:
Essentially, it was because, when I looked at the further advice that people gave to me—I understand their disappointment with my report. What can I say? I looked at this issue in good faith and I came to the judgements that I came to. When requests came in to look again, to reopen the investigation and so on, I and my team looked at those requests and, for all of the requesting, I couldn't see—within the scope of the powers I have and the role I have as the Ombudsman, which is to look at matters of administration and make such recommendations as I see fit—a way back into the issues that was going to change the fundamentals of what I had concluded. So, in that context, I declined to do what they requested.