3.1
A number of issues around the design of the DFRDB scheme were raised with the committee, including the views that: it did not live up to the commitment made to ADF personnel; it was not what was recommended by the Jess Committee; the permanently reduced pension as a result of commutation is unfair; the expectation of life factor tables used are seen as out of date; and indexation arrangements have issues, including the link to CPI, historical adjustments and the interaction with commutation. Submitters also questioned the parliamentary scrutiny of the bill setting up the scheme.
3.2
It should be noted that although DFRDB scheme design issues were raised with the Commonwealth Ombudsman, he clarified that 'those matters were outside the scope of my functions'. However, his report included a summary of them 'in recognition of the strength and volume in which those views were expressed'. Mr Manthorpe discussed this aspect with the committee:
…I think that some of the submitters made submissions to me, and are making submissions to you, that go to the policy design of the scheme: the rates of indexation, the age factors and whether the pension should have gone back up to the non-commutation rate when someone reached life expectancy. All those things are, in effect, wired into the legislation and, therefore, the policy that informed the legislation of the scheme. I appreciate that some of the submitters don't believe that those settings are adequate, but those are matters of policy; they're not matters of administration.
Dissatisfaction with the design of the scheme
Promises made
3.3
It was put to the committee that the DFRDB scheme was put forward to the ADF as a beneficial scheme. For example, Mr Clinton McKenzie noted:
The DFRDB scheme was not a 'soft promise' to ADF members and prospective ADF members. The DFRDB was an unequivocal commitment and actively promoted as a concrete benefit of ADF service…
…
Although I cannot remember the precise terms of much of the information provided to me about the DFRDB scheme before I enlisted, I do recall the 'upshot as if it were yesterday: "In return for at least 20 years of ADF service and compulsory deductions from your pay, you will be entitled to comfortable retirement pay which, when you die, will accrue to your surviving spouse or orphans to keep them comfortable".
3.4
Another submitter recalled that as a junior officer he understood that one of the purposes of the DFRDB scheme was 'to retain members in the ADF because of the attractiveness to receive a pension (no matter how small) after 20 years or more service'.
Not the scheme recommended by the Jess Committee
3.5
Some submitters were of the view that the design of the DFRDB scheme is not what the Jess Committee recommended and that the current design of the scheme emerged because of action taken by Commonwealth departments.
3.6
The Australian Defence Force Retirees Association (ADFRA) contended that the Jess Committee recommendations were not correctly translated into legislation; Treasury and Defence reduced the benefits through their representation on the legislation drafting committees; the legislation was not properly scrutinised; and parliament did not understand the outcomes of the legislation which was exploited by Treasury and Defence.
3.7
Mr Herb Ellerbock, Secretary, ADFRA, told the committee:
Most of the Jess committee's recommendations were opposed by Treasury, because the recommended provisions were deemed to be more generous than those provided in the Commonwealth Superannuation Scheme for public servants. Treasury's view was supported by the Department of Defence and upheld by the McMahon government, which effectively shelved the Jess committee report…
As is evident in Hansard, service representation was excluded from the committee which drafted the DFRDB Act, and, in the absence of that representation, the drafting committee was able to incorporate in the DFRDB Act the first of an ongoing series of inconspicuous measures which significantly reduced the defined benefits set down by the Jess committee and adopted by the Whitlam government.
3.8
The Defence Force Welfare Association (DFWA) argued that legislators need to correct the administration defects surrounding commutation as the failure to do so 'seems contrary not only to the spirit and intent of the 1973 Jess Committee Report leading to DFRDB but also to the parliamentary debate that passed the DFRDB Act, and to the information that was subsequently distributed to ADF members'.
3.9
When asked about the Jess Committee report, Mr David Nockels, First Assistant Secretary, People, Policy and Culture, Defence, responded:
I wouldn't comment directly on that, other than to say that I think that the scheme as it is now is what we have and have had. There have obviously been adjustments over time to that scheme, but that is the scheme with which we work. I personally wasn't around at the time of the Jess review, so I can't make comment on what ended up happening with the scheme versus what the Jess review was suggesting and whether there were interpretations or slight changes and nuancing around that. But the scheme is what the scheme is, and that's what we work with. We have done so for many years, including with adjustments to that scheme over the years.
3.10
The Ombudsman also responded to a question on this issue:
I know that some of the submissions we've got and some of the submissions you've got from aggrieved members essentially say that the legislation somehow didn't reflect the intent of a previous committee; there was a committee called the Jess committee way back before the legislation was passed. I understand those concerns. I understand people may feel that. But at the end of the day the legislation was passed by the parliament as it was constituted in the 1970s, and that's where we went…
Drafting and Parliamentary scrutiny
3.11
Some submitters also argued that there was not sufficient parliamentary scrutiny of the legislation and parliament did not understand what it was voting on.
3.12
Submitters, including Commander Darcy stated that the legislation became law with 'only cursory Parliamentary consideration'.
3.13
The ADFRA also stressed that:
Parliament did not adequately scrutinise Defence Force Retirement and Death Benefits Bill 1973, and on a balance of probabilities, did not understand the operation of the Bill or its effect.
3.14
Mr Ellerbock, ADFRA, contended that:
By not properly scrutinising the legislation, which affects many of us for more than 50 years of our lives, past parliaments have allowed bureaucrats to subvert the intent of the Jess committee and reduce the real value of our benefits by as much as 40 per cent. We look to this committee to recommend the restoration of our benefits.
Permanently reduced pension
3.15
The permanent reduction to the pension and the information provided was the subject of Chapter 2. The DFWA was of the view that 'the principle of a reduced DFRDB superannuation pension is an appropriate one following a veteran electing to commute part of it. However, in the opinion of many there is more than a degree of unfairness about a legislated outcome that requires those veterans who live longer to effectively subsidise those who die earlier. The result is that the reduction in pension due to commutation is greater than it would have been if the pension reduction were based on "the member's life expectancy at the date of commutation", as claimed'.
There is little question that, due to the longer period of reduced pensions received by veterans, the Commonwealth 'pockets' far more than the commuted monies that were originally advanced. DFWA does not believe that this could have been the intent of the architects of the DFRDB Act 1973. It belies belief that the Legislators of the time designed a system to deliberately deny veterans a beneficial outcome by seeking to recover more than any amounts commuted. Evidence of this is illustrated by the use of 1960-62 Life Tables and not 1970-72 Life Tables available for the 1973 Act.
3.17
The RSL noted that the '[c]ontinuation of the (reduced) post commutation pension beyond the period when the commutation amount has been repaid' is a source of dissatisfaction for members. The was supported by Mr Clinton McKenzie who stated:
The permanent reduction in the annual rate of commuted retirement pay beyond a member's 'Schedule 3 nominal life expectancy' has – along with matters like indexation – become a legitimate focal point of grievances – and, consequently, a focus of the response of governments and the Ombudsman.
3.18
Mr David Plummer contended that the permanently reduced pension 'is not what the architects of the scheme conceived or what the Parliament intended when the scheme was approved'.
3.19
However, Mr Colin Wade noted that:
There was never any intent in the legislation for retirement pay to be treat[ed] as a loan and the commutation payment reduction restored, should the member live beyond life expectancy and there is no justification for the government to effect change and amend the DFRDB Act 1973.
3.20
Mr Wade confirmed that the intent of the DFRDB Legislation 'was to enable DFRDB members to retire from the ADF at a relatively young age and commute part of their retirement pay entitlements and receive a reduced retirement pay thereafter'. He added that [t]he DFRDB scheme provide[s] very generous, defined benefit superannuation entitlements for members and dependent spouses and families as intended in the legislation'.
3.21
Defence noted that when the DFRDB Act 1973 was legislated, 'the commutation provisions were mirrored off the DFRB scheme'. Defence also advised that:
The permanent lifetime reduction to a DFRDB pension as a result of commutation is consistent with the arrangements in the other civilian and military superannuation schemes. In CSS, the Public Superannuation Scheme (PSS) and MSBS if a member chooses to take part of the benefit as a lump sum, the amount of their lifetime pension is permanently reduced from what it would have been had the member not taken a lump sum. The factors used to convert pensions into lump sums (or vice versa) in the CSS, PSS and MSBS have not been amended or reviewed since the schemes commenced and are considered as permanent design feature of the schemes.
Commonwealth ombudsman investigation findings
3.22
The Ombudsman noted that some submitters to his investigation 'asserted that a permanent reduction is inconsistent with the Jess Report recommendation of a 'proportionate' reduction, and that therefore the Jess Report should take precedence'.
3.23
The Ombudsman noted that '[t]here is nothing in 24(3)(b) which creates a fixed time frame or end date for the reduction. Nor is there any other provision, in the DFRDB Act or any other legislation, which would cease the reduction'.
3.24
The Ombudsman added that 'in our view the legal meaning is plain and not capable of any other interpretations. Placing limits on the benefits to be provided is not inconsistent with the purpose of the DFRDB Act, which must necessarily contain some limits on entitlements. What individual parliamentarians understood is not relevant. The DFRDB Act, as passed by parliament, requires a permanent reduction'.
3.25
The Ombudsman also referred to the view of the Administrative Appeals Tribunal which considered 24(3) and 'found neither ambiguity nor obscurity in the provision'.
3.26
However, a couple of submitters put forward cases attempting to argue there is uncertainty with some interpretations of the legislation.
The use of expectation of life factor tables
3.27
Defence noted that Schedule 3 of the DFRDB Act 1973 provides for the 'Expectation of Life Factor'. This is 'an element of the commutation calculation, which is undertaken to determine a DFRDB member's lump sum and resultant pension benefit'. Defence noted that this is interchangeably known as Life Expectancy Factor or Life Expectancy Tables.
3.28
If a member elects to commute, paragraph 24(3)(b) of the DFRDB Act contains a statutory process of calculating the resulting reduction to retirement pay:
the commutation lump sum is divided by the person's 'expectation of life factor' to produce the annual reduction for commutation. The expectation of life factor is worked out according to their age and gender using a table in Schedule 3.
3.29
Submitters pointed to the life expectancy tables in Schedule 3 of the DFRDB Act arguing they are inappropriate or out of date. For example, one submitter argued '…the latest Australian Bureau of Statistics (ABS) suggest that I could live for a further 7 years beyond the DFRDB life expectancy estimates'. This submitter also argued that '[a] female with the same rank and retiring at the same age has a longer life expectancy. This means that a female has less to pay back each fortnight and the result is a higher fortnightly pension'.
3.30
Mr Steven Kersnovske told the committee that '[c]learly the Life Expectancy Factor Tables were outdated from the start, never giving the opportunity for a true or fair service pension calculation to be achieved'.
3.31
The Campaign referred to 'obsolete Life Expectancy data' alleging they were 'predicated to be in the Commonwealth's favour'.
3.32
The DFWA saw the continued use of the life expectancy tables in the DFRDB Act as the 'root cause to the unfairness'. They stated that '[t]here is a clear 'wrong' in using such out-of-date Life Tables that few can even recall that they exist beyond a reminder from the Commonwealth Superannuation Corporation to those ADF members the subject of the Defence Force Retirement & Death Benefits Act 1973 that year-by-passing year they continue to be silently disadvantage[d] by having their superannuation pension unfairly reduced'.
3.33
The DFWA added that:
The Ombudsman's report glossed over a key concern, namely that life tables more than half a century old continued to be used, even though many veterans and ex-service organisations made submissions on the matter. The 1960s life tables force veterans to accept a lower lifetime military superannuation pension than would "life expectancy on discharge" as it still advertised by the CSC.
3.34
The RSL also pointed to the 'use of dated life expectancy tables which effectively shorten the commutation repayment period and hence reduce the residual pension'.
3.35
Mr Peter Thornton alleged financial detriment as a result of the use of the tables in Schedule 3. Mr Thornton contends that 'the DFRDB Authority did not, ever, advise the Government or the Parliament of the day that the data contained within Schedule 3 was out of date and irrelevant; thereby perpetuating a nonfeasance by failing to exercise its Statutory and Fiduciary responsibilities'. He argued that 'Parliament did not intend that the life expectancy data contained within Schedule 3 would remain as a "fixed" divisor in perpetuity' and submitted:
Had the Parliament intended to have a "fixed" divisor, then surely it would have explicitly stated so in the wording at s24(3).
3.36
In summary, Mr Thornton contended that 'based on the historical record, [he] remains of the firm opinion that the Parliament would have readily changed the life tables had it been properly briefed and advised to do so by the responsible Statutory authority – the DFRDB Authority'. He goes on to assert that the financial detriment comes from defective administration 'but not that of the Department of Defence…but instead that of the DFRDB Authority' who 'failed to properly advise the Government and Parliament of the day that the life expectancy tables became quickly out of date'. Mr Thornton maintains that:
benefit recipients of the DFRDB scheme who separated from the ADF on or after 1975 have all sustained a financial detriment in the rate of the residual Retirement Pay, no matter if a member had commuted or not, because the contract entered into with the Commonwealth to purchase future benefits, as advertised, was breached with respect to the calculations pertaining to Commutation and life expectancy.
3.37
Defence advised that [s]hould a member live for more that the Life Expectancy Factor years used in the calculation of their lump sum, the pension is not adjusted accordingly. No part of the lump sum is recovered from a deceased member's estate, should the recipient die before reaching the Life Expectancy Factor years used'.
3.38
Defence noted that the AGA advised Defence 'that when the DFRDB scheme was introduced, the use of the 1960-1962 Australian Life Tables as a commutation factor was favourable to members relative to the alternative pension'.
3.39
Defence confirmed that the expectation of life factor tables are part of the Act and so to change them would require legislative change and there would be increased costs for the Commonwealth. CSC also noted that '[a]s the DFRDB Scheme operates under legislation, any changes would have to be made by amending legislation passed by Federal Parliament'.
Commonwealth Ombudsman investigation findings
3.40
The Ombudsman noted that the expectation of life factor is better described as a 'commutation divisor' as it is 'the divisor for the purposes of calculating a reduction to a person's retirement pay following commutation. It reported that 'these figures have been the same since the DFRDB Act commenced in 1973' and that members submitted that this is unfair given the increase in life expectancy since 1962.
3.41
The Ombudsman noted that using later life expectancy figures was open to the government and parliament of the day, however:
This was not the path chosen. This suggest that the scheme drafters never envisaged use of current tables, but rather, preferred a static commutation factor. With retrospect, if it had been formally named a 'commutation divisor' rather than a 'life expectancy' factor, it is possible that misunderstanding that ensued could have been avoided.
Definition issues
3.42
The Campaign noted that the term commutation is not defined in the DFRDB Act.
Commonwealth Ombudsman investigation findings
3.43
This issue was also raised with the Ombudsman. However, the Ombudsman did not view the lack of a definition of commutation in the DFRDB Act as a concern because 'not all terms used in legislation need to be specifically defined. Where terms are not defined in an Act, and some ambiguity arises, courts will look to whether there may be a common law definition, or their ordinary meaning is applied'. It was also pointed out that a definition is not required because the Act sets out the steps involved in commutation.
Indexation
Defence
3.44
Defence indicated that since the introduction of the DFRDB scheme there have been a number of reviews to consider the most appropriate method of indexation for DFRDB members. The Defence submission details these reviews finishing with the most recent legislative change in 2014 where DFRDB and DFRB pensions for those over 55 are now indexed in the same way as age and service pensions.
3.45
Many submitters raised dissatisfaction with the indexation arrangements of the DFRDB scheme. These were concerns that: the indexation benchmarks are unfair or inadequate; previous indexation adjustments should be revisited; and about the interaction between commutation and indexation.
Concerns about the formula
3.46
A submitter pointed to the history of indexation starting with the report of the Jess Committee which noted:
The committee has concluded that the adjustment should be related to average weekly earnings and the relativity of retired pay with that index maintained. This will ensure that the man in retirement will be able to maintain his position in relation to rising community standards and that he will obtain those increases when they are needed. To some extent this is a compromise between the proportion of salary method of adjustment…and the proposal that adjustment be related to the Consumer Price Index. The Committee rejects the latter suggestion because it considers that the index does not fairly represent changes in general community standards.
3.47
This submitter noted that'[d]espite the Jess Committee Report, the government of the day enacted the Defence Force (Retirement and Death Benefits Amendments) Act 1977 which related all adjustments to the CPI'.
3.48
Mr Ellerbock, ADFRA, also noted:
Regarding indexation, the Jess committee recommended that retired pay and invalid pay be adjusted annually so that relativity with average weekly earnings is maintained. The committee had rejected the consumer price index because, in its view, that index did not fairly represent changes in general community standards. But, because the method of pension updating in other Commonwealth pension schemes was then being revised, automatic adjustment was not incorporated in the original DFRDB Act…
3.49
Mr Ellerbock added that the 1977 bill incorporated a 'double-edged benefit reduction measure':
Firstly, it linked adjustments directly to the consumer price index, which had already been rejected by the Jess committee in 1972 and was found to be unsuitable by the Pollard review in 1973. Secondly, it excluded from the application of the CPI increases a part of the DFRDB benefits determined by a notional life expectancy factor. Furthermore, on the death of the recipient member that exclusion from indexation flows on to the benefits of the member's spouse and dependent children.
3.50
Mr William Harrison stated that 'I also believed that my Super entitlements would be adjusted by/to the rate of inflation…not the Consumer Price Index…'. Mr Clinton McKenzie noted that '[a]fter discharge from the ADF I watched as the 'buying power' of my DFRDB retirement pay eroded inexorably'…No independent, qualified expert says the CPI is an accurate measure of the real cost of living''.
…the continued use of the CPI for adjustments after the introduction of Monetary Policy generated a predictable reduction of DFRDB Pension value. This was [a] foreseeable outcome and should have been addressed by the DFRDB Authority. A new method of indexation was determined when the CPI adjustments proved inadequate to maintain living standards to adjust Old Age Pensions however DFRDB pensions continue on CPI adjustments and consequently declined in value for many years.
3.52
The RSL noted a 'failure to maintain relativity with the Australian standard of living, through appropriate indexation'. Another submitter argued that:
The current methodology for the indexation rate of the pension only has the effect of making the financial matters worse. Current indexation is not keeping pace with the real cost of living increases we experience today.
3.53
Mr Clive Conner submitted that:
It was well known in 1973 that CPI was not a fair indication of the increases in cost of living, yet the Government persisted with this until 2014 when the Fair Indexation Bill was passed…
3.54
Mr Ellerbock argued that the 2014 amendments 'did nothing to remedy the effects of unfair indexation from 1976 to 2014' and the DFRDB Act 'continues to unfairly index the benefits of recipients aged under 55 and it retains the formula which excludes from indexation a substantial part of our benefits'.
3.55
The DFWA noted that the Defence Force Retirement Benefits Fair Indexation Act of 2014 'recognised at least one significant deficiency in that the pensions of DFRB/DFRDB superannuants over 55 would be indexed in the same way as age and service pensions'. Meaning that:
the pensions would be indexed to the better of the Consumer Price Index (CPI), the Male Total Average Weekly Earnings (MTAWE), and the Pensioner and Beneficiaries Living Cost Index (PBLCI). After all, while the CPI had been once an accepted index to maintain a pension's value relative to national wages, it had lost its relevance in wage fixing. CPI had become an economic tool to measure inflation rather than living costs. It was not an index to ensure the purchasing power of superannuants was maintained, being the intent of the original enabling legislation to the Scheme.
3.56
The DFWA added that:
Until the passing of the Defence Force Retirements Benefits Fair Indexation Act, DFRB/DFRDB pensions stood out as being more harshly treated than almost every other long-term Commonwealth payment subject to regular indexing to maintain its value. Unfortunately, the Act by any fairness measure didn't go far enough. It somehow deliberately excluded the under 55 DFRDB retirees and those in receipt of DFRDB invalidity superannuation pensions.
3.57
Mr Keith McIntosh set out his view in relation to indexation and called to have more choice:
…Having the income stream pegged to the CPI indexation as it has evolved has seen a slow decline in value of this asset. It has gone from 8% in 1990 to 0% 2021. A rough way to compare this is, had I spent my entire working life in the ADF and retired on the rank I was when I actually retired with the seniority, I would be on a higher retirement income that I am now and this is having worked for 27 years in civilian street earning far more and salary sacrificing more to my civilian superannuation, than the same rank with 47 years in the ADF. How does that work. I am eligible to have a Centre link old age pension top up, something is definitely wrong here. I feel the DFRDB was not a good very good investment.
3.58
Another submitter called on the government to ensure relativity is maintained for the retired soldier to the serving soldier.
3.59
Mr Bert Hoebee urged the committee to also look at what he considers to be unfair indexation for MSBS recipients.
3.60
In relation to indexation, Defence advised that:
When automatic indexation was introduced in 1976 it was applied only to the 'notional rate of retirement pay' to reflect the employer funded part of the pension. The non-indexed portion of a pension reflects the employee funded (member contributions) part of the pension. This broadly replicates the indexation arrangements of the CSS and was consistent with the recommendations of the 1973 Pollard Review and the 1974 Melville & Pollard Review.
Concerns about previous indexation adjustments
3.61
Submitters referred to previous legislated changes to indexation. A submitter recommended 'that the benefits deducted over the three years 1986 to 1989 be restored'. In addition this submitter argued that 'it is reasonable to request compensation between CPI and the process for indexation described in the Defence Force Retirement Benefits Legislation Amendment (Fair Indexation) Act 2014 from my date of retirement until 2014'.
3.62
That submitter argued that:
Since 1973 (the Defence Force Retirement and Death Benefits Act) until 2014 (Defence Force Retirement Benefits Legislation Amendment (Fair Indexation)) Act (41 years), the true value of Defence Force Retiree pensions has been going backwards.
3.63
Another wrote that '[t]here is evidence that…DFRDB pensions, were not always CPI adjusted as per the legislation but discounted by 2% when inflation was high'.
The importance of legislation should be to maintain fair and equitable pension indexation to retain pension value. In particular, the arbitrary Government decisions to discount the CPI indexation when inflation was high and the Government introduction of Monetary Policy, (that allowed interest rate[s] to be manipulat[ed] by the Reserve Bank), resulted in DFRDB pensions losing value.
3.65
In looking at the question of the occasions when the full CPI indexation of the DFRDB and DFRB pensions was not paid, the Parliamentary Library noted in 2008:
The Superannuation and Other Benefits Legislation Amendment Act 1986 amended the legislation governing the operation of both the DFRDB and DFRB from the payday of 23 October 1986 to discount the 1986 pension increase by 2 per cent from 9.2 per cent to 7.2 per cent. This policy continued until 20 October 1989 (that is, the full CPI increases were not passed on to DFRDB pensioners). There was no later increase in the DFRDB pension to make up for this period of discounting.
3.66
The Parliamentary Library noted that:
These actions were undertaken as a budget measure in response to the unusually high rates of inflation of the period combined with a shortfall in government revenue. The rates of increase in CSS pensions were also discounted in the same way during this period.
Interaction of indexation with commutation
3.67
Defence explained the interaction of indexation with commutation:
If a member does not elect to commute or commutes less than four times the pension then indexation is only applied to the 'notional rate of retirement pay'. The 'notional rate of retirement pay' is the rate of pension that would be payable if the member had commuted four times the pension (which was the maximum amount that could be commuted at the time indexation arrangements were introduced).
If a member does not elect to commute or commutes less than four times the pension there will be a non-indexed portion of the pension. If a member commutes four times or greater (maximum five times) the residual pension is fully indexed.
3.68
Submitters raised the interaction of commutation and indexation. The Campaign submitted that there is inequitable indexation of commuted and uncommuted retirement pay:
In respect to Commutation, the provisions of the DFRDB Authority were: that under INDEXATION policy, the quantum to be indexed annually would only apply to the Retired Pay after Commutation, irrespective of whether the Superannuant had Commuted or had Not Commuted.
However, those that commuted are believed to be receiving disproportionate indexation, as would have applied, had they not commuted, consequently, superannuants that commuted are suffering further substantial financial detriment, to Retirement Pay.
The Exclusive Detailing of Commutation Policy from Veteran Superannuants by the DFRDBA, and the FALSE INFORMATION, as propagated officially by Defence, inter alia, countless (55,000) Veteran Superannuants were misled into accepting a Commutation. We therefore contend that all DFRDB Superannuants, so duped and recognised as having received a Commutation, that, as at the time of reaching their Notional Life Expectancy point, be regarded as not having received a Commutation.
3.70
The Campaign put the view that 'regardless of whether a Veteran Superannuant Commutes, or does not Commute, their Retirement Pay should be exactly the same in both cases'.
3.71
Mr Peter Larard stated:
There is wide belief now that, for those who commuted, only a portion of the reduced pension is actually used for annual CPI (or other) pension indexation. Indeed! If so, how can there be any justification for basing indexation upon only a percentage of a reduced pension! There was certainly no knowledge advised or known of this matter, or any effect upon widows' Reversionary Pensions in 1974 or 1981.
3.72
Mr Rodney Cox also submitted that 'Retirement Pay indexation, as applied to Commuted and Uncommuted Retirement Pay, places significant detriment on Retirement pay where I commuted, as opposed to, NOT commuting'.
Commonwealth Ombudsman findings
3.73
The Ombudsman's report details the interaction between indexation and commutation. It was noted that '[i]n effect, the DFRDB Act operates to divide a person's annual retirement pay into two portions – one which is indexed and one which is not. The amount of these portions are connected to the amount the person can commute'. It was also noted that 'the indexed portion of retirement pay has remained at the amount of retirement pay which would be payable annually if a person had decided to commute four times the annual retirement pay entitlement, even though since 1983 a person can commute more than four times'. The Ombudsman summarised that:
In effect, a person who elected to commute more than four times their annual retirement pay is exchanging a portion of their indexed retirement pay....This means that a person who commuted more than four times their annual retirement pay would be left with an annual pension less than the maximum available indexed retirement pay.'
3.74
Therefore in relation to indexation:
For people who did not commute, or who commuted an amount less than or equal to four times their annual retirement pay, they are receiving the full indexed retirement pay…However, where a person commutes more than four times their annual retirement pay, they are receiving less than the full indexed retirement pay. In this case, indexation is only applied to the actual pension paid. Therefore the indexation factor is applied to that lower amount.'
3.75
It was further explained that:
For people who commute up to four times the amount of their retirement pay, the difference between what they receive and what they would have received if they had not commuted (the ‘commutation reduction amount’) is fixed—it remains the same dollar amount from year to year throughout their life, unaffected by indexation.
However, a person who commutes more than four times the amount of their retirement pay has a smaller amount of indexable retirement pay (as a result of the initial reduction). This means the difference between their retirement pay and the retirement pay they would have received if they had not commuted will grow over time in accordance with the indexation factor.
3.76
The Ombudsman noted that the modelling undertaken by the AGA and KPMG took into account the indexation described in the DFRDB Act.
3.77
While noting the complexity of indexation in the DFRDB Act, the Ombudsman was satisfied that indexation was properly applied to DFRDB pensions by the administrators. However, it noted that the information provided by CSC:
did not advise the longer term consequences of electing to commute more than four times a person's retirement pay. In particular, this information could have made clearer that doing so has the effect of commuting a portion of a member's indexed retirement pay, which would in turn lower the amount by which their remaining annual retirement pay would grow through indexation.
3.78
Further, in relation to the information provided by CSC:
The provisions for indexation in the DFRDB Act are extremely complex which is not uncommon across Commonwealth law. This is why it is good administrative practice for agencies administering those complex laws to explain them in a way lay people can understand.
While we acknowledge that the impact of indexation is unlikely to be the primary motivator to the decision to commute or not, it is still important that people have all relevant information in front of them when making a decision. The more complex a legislative scheme, the more critical it is that administrators of the scheme provide plain language explanations of how it operates.
3.80
In relation to the views expressed that indexation arrangements should be changed, the Ombudsman noted that:
Indexation arrangements more generally have been the subject of numerous government reviews and inquiries. There is no reason to believe that each of these issues are not the intended policy outcome following deliberate and considered government policy decisions.
3.81
When asked about the scheme and indexation, Defence and CSC emphasised that it is their role to administer the scheme in accordance with the legislation and that the legislation itself is a matter for government.
Other issues
Administration
3.82
Mr Brian Dirou expressed the view that the 'creation of an omnibus authority to manage multiple differing pension schemes has generated administrative shortcomings re the DFRDB pension scheme'. He outlined a number of these and suggested a 'dedicated website for DFRDB members could be created embracing a Summary of the Defence Force Retirement and Death Benefits Scheme and access to itemised detail of member DFRDB account history, to minimise need to navigate bureaucracy'.