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Military Superannuation and Benefits Bill 1991



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House: House of Representatives

Portfolio: Defence Science and Personnel

Purpose

To introduce a new superannuation scheme and retention benefits for members of the Australian Defence Forces to replace the Defence Force Retirement and Death Benefits Scheme (DFRBD). The new scheme will comply with the Occupational Superannuation Standards.

Background

The first retirement benefits scheme specifically designed for members of the Defence Forces was introduced in 1948 and ran until September 1972. From that time entitlements were calculated

under the DFRDB scheme. Since the introduction of that scheme there have been substantial changes in the laws and rules governing superannuation, most importantly the introduction of occupational superannuation standards (OSS) and the National Wage Case decision to require employers to contribute 3% of salary to superannuation. The OSS must be complied with for a superannuation fund to receive concessional tax treatment. The DFRDB scheme is unfunded, so that members contributions are paid into the Consolidated Revenue Fund and entitlements are met from the same source as they become due. There is no investment fund to invest the members contributions as in other Commonwealth superannuation schemes.

The DFRBD scheme was briefly reviewed by the Joint Committee on Foreign Affairs, Defence and Trade in its 1988 report Personnel Wastage in the Australian Defence Force - Report and Recommendations. The report found that while benefits were greater than the community norm in some areas, it was also noted that in some cases, particularly for people retiring before 20 years service, where only a refund of contributions is made, it was behind the community norm. It also noted that the current scheme does not encourage people to serve past their initial engagement term, and called for a review of the scheme. 1 In the response to the report on 11 May 1989, the Minister announced that a review of the DFRDB scheme would be conducted. The terms of reference for the review included to examine the suitability of the DFRDB scheme, any possible changes to that scheme, or the creation of a new scheme for members of the defence forces.

The review team delivered its report, titled Report of the Defence Force Retirement and Death Benefit Scheme Review Committee, in June 1990 and recommended the establishment of a new scheme rather than amendments to the DFRDB scheme. Reasons for this included that: it would be very difficult to adapt the current scheme to conform to the OSS; there would be substantial cost increases; and that the current scheme drives, rather than assists, defence force personnel policy. It was recommended that the DFRDB scheme remain for current members and that new members join, and those currently members of the DFRDB have the option of joining, the new scheme which will be known as the Military Superannuation and Benefits Scheme (MSBS). The features of the MSBS are outlined in the report and the differences between the schemes in respect of retirement, invalidity and death benefits will be examined below. In many aspects, MSBS is similar to the new Public Sector Superannuation scheme for other Commonwealth employees. Amongst the similarities is the treatment of the 3% award superannuation, which is included in the calculation under MSBS but forms a separate component in the DFRDB scheme. There were approximately 70 600 members of DFRDB in 1988-89. Another feature of MSBS is the introduction of a retention allowance, which will be examined below. The benefits available under the schemes will be subject to the reasonable benefits limits, which are part of the OSS. MSBS will be a partially funded scheme, with members contributions being invested by an investment fund and the employer benefit being funded from the Consolidated Revenue Fund.

Comparison of retirement/resignation, invalidity and death benefits under DFRDB scheme and MSBS

Retirement/Resignation

DFRDB scheme

A characteristic of the scheme is that members who resign before completing 20 years service do not receive any employer contributions, receiving only a refund of their contributions. There is one exception to this rule, with members who reach the statutory retirement age for their rank being eligible for benefits if they have completed 15 years service. As eligibility for benefits is based on 20 years service, members are eligible to receive payments many years before normal retirement age (the earliest being at 36). There is an early retirement penalty for officers, with the benefit being reduced by 3% for each year the person retires below the notional retirement age, which is generally five years before the statutory retirement age. This only applies where the reason for leaving the service was within the persons control. Another effect of the 20 year rule is the large increase in separation rates once 20 years service is reached. Benefits are calculated as a percentage of pay on retirement, ranging from 30% after 15 years service, 35% after 20 years service to a maximum of 76.5% after 40 years. Pensions are adjusted twice yearly for movements in the CPI. Members also have the option to commute part of their pension entitlements to a lump sum and this generally occurs due to the favourable commutation rate.

MSBS

Benefits under this scheme will be calculated in terms of a lump sum with the option to convert part of the lump sum to an indexed pension and there will be incentives to take part as a pension. There will be different treatment of the employer and employee components. The employers contribution will be based on the final annual salary of the member averaged over the previous three years and this will be multiplied by a factor for each year of service, with the factor depending on the length of service. For 1 to 7 years this will be 18%; 8 to 20 years - 23%; and 28% for longer service. It should be noted that these are not cumulative, so no matter what the length of service the first 7 years will have a factor of 18% for each year of service during this period. The employer contribution will not fully vest with the members until after seven years service and prior to that time will vest at the rate of 10% per year for the first five years and 25% for the next two years. Part or all of the lump sum may be commuted into a pension at rates more favourable than commercial rates. The rate of pension will be determined by dividing the lump sum by a conversion factor based on the persons age at retirement, and ranging from 12 at age 55 to 10 at age 65. Where the person retires before the age of 55, the conversion factor will range from 12.2 at age 54 to 14 at age 45, increasing at the rate of 0.2 for each year below 55. The pension will be payable even though the person is below normal retirement age (55) if they are retrenched, redundant or have reached the statutory retirement age for their rank (many military positions have a retirement age below 55). Generally, the employers contribution must be preserved (i.e. it will not be payable until age 55) if the member elects to take a lump sum. It will only be able to be paid before this date if the Board is satisfied that the person is sufficiently incapacitated not to be able to work again; if the person leaves Australia permanently; or is approved by the Superannuation Commissioner. Preservation is part of the OSS. Pensions and preserved employer benefits will be indexed annually for movements in the CPI.

The employees contributions, plus earnings from the proposed investment trust, will be available on resignation. The amount may be taken either as a lump sum or preserved in the trust. If the latter course is taken, the contributions will continue to earn interest at the rate earned by the trust.

Invalidity

DFRDB scheme

For invalidity benefits, there is a tiered scale of benefits depending on the percentage of incapacity. Where the person is 60 -100% incapacitated (class A), they receive 76.5% of their pay as a pension; if 30% to 59% incapacitated (class B): 38.25%; and if less than 30% incapacitated (class C): a lump sum equal to 1.5 times their contributions. Incapacity is determined in relation to the ability to undertake appropriate civil employment. Invalidity benefits are not payable in three cases - where the incapacity is due to wilful action to obtain an invalidity benefit; where incapacity occurs within one year of entering the service and the incapacity was due to a pre-existing condition that has not been aggravated; and where the incapacity was due to an event that occurred when the person was absent without leave for a period exceeding 60 days.

MSBS

The proposed scheme will retain the three categories of invalidity currently operating in the DFRDB scheme. There will again be separate treatment of members and employers benefits, with the members contributions being treated in the same way as for retirement/resignation. Regarding employer benefits, those payable to a class A invalid will be based on actual and prospective service, so that if the members joins later in life their benefit will be lower than under the DFRDB scheme where the rate of pension is based on the person serving 40 years (i.e. 76.5% of salary). The period of prospective service will be based on the person serving until the greater of their statutory retiring age and the age of 55. Although benefits are only payable as a pension (this is part of the OSS) they are calculated by reference to a lump sum. The calculation is similar to that for retirement and resignation (i.e. the 18%, 23% and 28% factors are used). The period of actual and prospective service are multiplied by the relevant factors to determine the multiple of the average salary over the past three years. This amount is then divided by 12, the factor used to calculate a retirement or resignation pension where the person retires at age 55. Benefits for class B invalids will be the greater of 50% of the class A rate and the pension the person would have received if they had retired or resigned on grounds other than invalidity and commuted the lump sum to a pension. A class C invalid will not be eligible for a pension and will receive the same benefits as if they retired or resigned at the age of invalidity. Generally, invalidity benefits payable under this scheme will be less for class A and B invalids than under the DFRDB scheme, due to the calculation being based on actual and perspective service rather than 40 years, while it will be greater for class C invalids, due to the employer contribution being greater than the current 3% productivity contribution and the earning of interest on their contributions. Pensions and preserved employer benefits will be indexed annually, while any preserved member contributions will earn the rate of interest earned by the trust.

Death benefits

DFRDB scheme

The rate of benefit will depend on whether the member has dependents and whether they die while a member of the defence forces. If the member has no dependents and dies before retirement, a lump sum equal to 1.5 times their contributions will be payable to their estate. (If they die after retirement they will have received a retirement benefit.) Where the person has a spouse and dies in service, the spouse will receive a pension equal to five-eights of the pension the member would have received if they had retired as a class A invalid. If the member dies after leaving the service, the spouse will receive a benefit equal to five eights of the amount that the member was entitled to at the time of leaving the service. Children and orphans will be entitled to a flat rate per year plus a percentage of the spouses entitlement. For each child, this will be $312 per year and one-sixth of the spouses entitlement. For each orphan the rate is $5000 per year plus one-eighth of the spouses entitlement. The maximum that is payable to all orphans will be equal to the spouses entitlement had the member been a class A invalid.

MSBS

As with other aspects of this scheme, the employer and members benefits are treated separately. The members benefit, their contributions plus earnings, will be payable to the persons spouse; or if there is no spouse - to the persons children; if there are no children - to the people for whom the member provides for in their will so long as the Board is notified; or, in other cases, to their estate. The treatment of the employer benefit depends on whether there are any dependents. If the person is survived by their spouse, the spouse may elect to take the employer benefit due to the member as a lump sum. The employer benefit will be calculated as if the member retired as a class A invalid at the time of death and could take a lump sum rather than a pension. The lump sum may be commuted in full or part into a pension, which will be equal to 67% of the pension that the member would have been entitled to if they commuted the lump sum to a pension. At least half of the lump sum must be commuted with a factor of 12 being used (i.e. the same as retirement at age 55). Where the member has surviving children as well as a spouse, the rate of pension will increase by 11% of the pension that would have been payable to the member until 100% is reached with three children. Where the person is survived by orphans, only a pension will be payable, calculated at the rate of 45% of the pension the member would have been entitled to for one orphan, 80% for two, 90% for three and 100% for four or more. Where the member dies after retirement and is survived by dependents, a pension calculated at the above percentages will be payable but the pension will be a percentage of the pension the member was receiving prior to death. Where the deceased member has retired and has no dependents, was being paid an invalid pension and dies within 10 years of the pension becoming payable, there is payable to the persons estate the lesser of the amount by which their employer benefit exceeds the pension already paid to the member, and the amount of pension that would have been paid to the member for 10 years less any amounts actually paid. For other pensioners without dependents, the estate will receive he difference, if any, between the employers benefit and any pension actually paid.

Retention benefit

A unique aspect of the MSBS is the introduction of a retention benefit, which is designed to encourage people who have 15 years service to remain in the defence forces until 20 years service or retirement age is reached. The benefit will apply to eligible members, i.e. officers, soldiers and sailors above a certain rank who are members of the MSBS scheme, and will be payable after 15 years of continuous service. Where the member has prospective service (i.e. the period until 20 years service is reached or retirement age) of five years or more, the benefit will be equal to the members annual salary at the time they became eligible for the benefit. Where prospective service is less than five years, there will be a pro-rata benefit. There is also provision for recovery of part of the benefit where the member does not serve until the end of the five year period or until retirement.

Miscellaneous

Contributions

Under the DFRDB scheme members generally contribute 5.5% of their salary to the scheme. Under the MSBS members will have the option of contributing at between 5 and 10%.

Membership

The main difference in membership is that the MSBS will be open to reservists who are serving three months or more continuous service (under the DFRDB scheme there must be 12 months continuous service and then contributions are compulsory). While such members are excluded from the DFRDB scheme, they will have the option of joining the new scheme. Neither scheme is open to part-time employees, but this is currently irrelevant as there are no part-time employees in the defence forces.

Investment Fund

Part of the proposal to establish the MSBS is the establishment of an investment fund for members contributions and the 3% employer productivity contribution. While it is envisaged that the scheme will have its own fund and not form part of the Superannuation Fund Investment Trust, which invests funds from the Commonwealth Superannuation Scheme and the Public Sector Superannuation scheme, it is proposed that SFIT will be the interim manager of the fund. After this initial period, the Trustees will have the option of using other managers.

Cost

It is envisaged that there will be long term savings to the Commonwealth in the new scheme. However, there will be increased costs in the short term as the Commonwealth will not have members contributions available as these will be invested in the investment fund. It is expected that there will be net Budgetary costs for approximately 40 years and that in the long term savings will be approximately 2.8% of salary costs for new entrants to the MSBS scheme. 2

Transition

Current members of the DFRDB scheme will have the option of transferring to the MSBS for 12 months after commencement of the new scheme. On transfer to the MSBS, members will be credited with their contributions and notional interest on those contributions as if they had been earning interest in the DFRDB scheme. This is to place transferring members in the same position as new members who will be earning interest on their contributions from the start. However, there will be phasing in provisions to discourage members of the DFRDB scheme from transferring to the MSBS and resigning within two years of the transfer. Otherwise, the member would be able to transfer to the MSBS, resign and be able to take the notional interest on their contributions, which would provide an incentive to resign.

References

1. Joint Committee on Foreign Affairs, Defence and Trade, Personnel Wastage in the Australian Defence Force, p. 347.

2. Report of the Defence Force Retirement and Death Benefit Scheme Review Committee, p. 114.

Bills Digest Service 3 April 1991

Parliamentary Research Service

For further information, if required, contact the Defence Group on 06 2772450.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1991

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1991.