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Superannuation Legislation Amendment (Family Law and Other Matters) Bill 2004

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2002 - 2003 - 2004

 

 

the parliament of the commonwealth of australia

 

 

SENATE

 

 

superannuation legislation amendment (Family Law) bill 2002

 

 

SUPPLEMENTARY explanatory memorandum

 

Amendments to be moved on behalf of the Government

 

 (Circulated by the authority of the Minister for Finance and Administration, Senator the Hon Nick Minchin)

 



AMENDMENTS to the Superannuation legislation amendment (family Law) bill 2002

outline of amendments

Current provisions in the Bill

The Superannuation Legislation Amendment (Family Law) Bill 2002 (the Bill) includes amendments to seven Acts that provide the rules for the superannuation schemes for members of the Defence Force and for civilian employees of the Australian Government.

The Acts are being amended as a consequence of the changes made to the Family Law Act 1975 (the FLA Act) by the Family Law Legislation Amendment (Superannuation) Act 2001 and consequential changes to the regulations under that Act (the new Family Law regime). 

The new Family Law regime

The changes to the Family Law regime ensure that superannuation interests can be treated as the property of married couples for the purposes of a property settlement and provide for those interests to be split between the parties where there is a settlement.  The new regime provides a method for the valuation of an accrued superannuation interest in a defined benefit scheme at the time of marital breakdown.  That value can then be taken into account for the purposes of a property settlement and can be split between the parties.  Parties may agree, or the Family Court may order, that the trustees of a superannuation scheme must allocate a base amount, or the amount calculated by applying a percentage to the valuation, to the ex-spouse of a scheme member, described in the Family Law regime as a non-member spouse.  The new regime then provides, as a default option, for the indexation of that amount (if the benefit is not immediately payable) and for the amount or the indexed amount to be deducted from the benefit that is or becomes payable to the member and paid to the non-member.

The default option applies generally to all defined benefit superannuation schemes and the new regime recognises that it may not be the best approach on an individual scheme basis.  As an alternative, the new regime allows superannuation scheme rules to be amended to provide for the creation of a separate interest for the non-member and the subsequent reduction of the benefit becoming payable to the member.  The amount allocated to the non-member may be retained in the scheme, indexed in a manner consistent with the valuation of the interest and become payable to the non-member in such form and in such circumstances as the scheme rules permit.  The separate interest may also be transferred to another scheme if permitted by the scheme rules.

Proposed amendments to the Parliamentary Contributory Superannuation Act 1948 (the PCS Act)

The proposed amendments insert in the Bill amendments to the PCS Act to apply the alternative separate interest approach to the scheme provided for under the PCS Act.  The separate interest approach ensures a clean break of superannuation entitlements between the parties at the time of marriage breakdown and also provides both parties with control over their respective individual benefits.

The new Family Law regime and the proposed amendments will not mean that the Australian Government or the scheme trustees or administrators will be determining property settlements.  The separating parties or the Family Court will determine whether a member's superannuation benefit is to be split.  If the parties or the Court wish to split superannuation then they will decide on the split between the parties.

Some of the detail of the proposed approach will be included in delegated legislation provided for under the PCS Act under new provisions to be inserted by the proposed amendments.

Creation of separate interest

Under this approach, when scheme administrators are served with an agreement by the separating parties or a Court Order, a separate interest will be created for the non-member and an amount of at least the value of the base amount or the percentage of the valuation specified in the agreement or Order will be transferred to the new interest.  The amount transferred to the non-member’s interest is known as the transfer amount.

Restrictions on separate interest creation

It is proposed that the separate interest approach will not be applied in all cases.  Where the member's interest in the scheme consists solely of a benefit that would not be a splittable benefit under the new Family Law regime, for example, an orphan's pension, a separate interest will not be created.  In addition, the separate interest can only be established if both the member and the non-member are alive at the time.  That is, it will not be created if either party should die after an agreement or Order has been made and before the operative time of the agreement or Order.  Under the PCS Act the new interest will be created within the scheme rules.

Finally, a separate interest cannot be created if the base amount is more than the value of the interest as calculated under the new Family Law regime at the time.  This last restriction is necessary because separating parties may arrive at their own valuation without any reference to information provided by the scheme administrators to assist the process.  Where a separate interest is not created because the base amount is more than the Family Law value, the default arrangements under the Family Law regime will still provide for the splitting of the interest when it becomes payable to the member. 

Indexation of the separate interest

When the member benefit is in the growth phase, that is, the benefit has not become payable at the time that the separate interest is created, the non-member's transfer amount will be indexed until it becomes payable at a rate to be determined by Order of the Minister. 

Payment rules for the separate interest

Where the separate interest is created during the growth phase of the member's benefit, the benefit to the non-member will become payable in one of a number of circumstances.  It may become payable:

·         from age 55 on request (subject to the general preservation rules);

·         if and when the trustee decides that the non-member is permanently incapacitated;

·         to a legal personal representative on death; or

·         at age 65.

Where the separate interest is created when the member is in receipt of a pension benefit, the non-member benefit can become payable immediately.  The transfer amount will be converted into a pension using a methodology provided for under Ministerial Orders and that pension will be immediately payable to the non-member.

The primary form of benefit paid to the non-member will be a pension.

Consequential reduction of the member benefit

The amendments will provide that the member benefit will be reduced to reflect the amount transferred to the non-member.  Because the level of benefit payable to the member under the scheme rules is not determined until cessation of membership, the reduction cannot occur until that time.  However, the member will be aware of the impact of the reduction in the various circumstances that lead to cessation of membership through the annual and ad hoc member statements provided.

Where the member is in receipt of a pension benefit when the separate interest is created the reduction of the member benefit will be immediate and reflect the transfer amount.

Financial Implications

The proposed amendments to the PCS Act are assumed to result in a minor bring forward of benefit payments in the scheme.  The estimated impact on the underlying cash balance is -$0.01m in 2003/04, -$0.02m in 2004/05, -$0.03m in 2005/06 and       -$0.04m in 2006/07. 

 

 

Other proposed amendments

The proposed amendments also:

·         provide for twice yearly CPI indexation of pensions payable under the Defence Forces Retirement Benefits Act 1948 ; and

·         insert minor technical changes to the amendments to the Defence Force Retirement and Death Benefits Act 1973 contained in the Bill.



terms used in explanatory notes

"1948 Act" means the Defence Forces Retirement Benefits Act 1948;

"1973 Act" means the Defence Force Retirement and Death Benefits Act 1973 ;

"1976 Act" means the Superannuation Act 1976;

"1990 Act" means the Superannuation Act 1990;

"1991 Act" means the Military Superannuation and Benefits Act 1991 ;

"Bill" means the Superannuation Legislation Amendment (Family Law) Bill 2002;

"Department" means the Department of Finance and Administration;

"DFRB Scheme" means the superannuation scheme under the 1948 Act;

"DFRDB Authority" means the Defence Force Retirement and Death Benefits Authority;

"DFRDB Scheme" means the superannuation scheme under the 1973 Act;

"FLA" means the Family Law Act 1975 and regulations under that Act;

"FLA member" means a member spouse under the FLA;

"FLA non-member" means a non-member spouse under the FLA;

"MSB Scheme" means the superannuation scheme under the 1991 Act;

"PCS Act" means the Parliamentary Contributory Superannuation Act 1948;

"PCSS" means the Parliamentary Contributory Superannuation Scheme;

"SG" means the Superannuation Guarantee (Administration) Act 1992 and the regulations under that Act;

"SIS" means the Superannuation Industry (Supervision) Act 1993 including the regulations under that Act.

"Trust" means the Parliamentary Retiring Allowances Trust;



notes on AMENDMENTS to the Superannuation legislation amendment (family Law) bill 2002

Inclusion of Proposed Amendments in Main Clauses of the Bill

Amendments 1 to 5 are consequential on the amendments to the 1948 Act.

2.       Amendment 1 adds in Clause 1 (Short Title), page 1 (line 6) the words “and Other Matters” to the short title of the Bill to reflect that matters not related to the main purpose of the Bill are being introduced by certain proposed amendments inserted in the Bill.

3.       Amendments 2 and 3 amend Clause 2 (Commencement), page 2 to omit and substitute “4” with “5” to reflect the commencement of the new clause 5 added to the Bill (table item 1, column 1) and to add a third item (at the end of the table) which provides that new Schedule 2 commences on Royal Assent.

4.       Amendment 4 omits from Clause 4 (Heading), page 2 (line 12) the word “amendments” and substitutes “family law interest splitting amendments” to reflect that Clause 4 only applies to the family law interest splitting provisions in Schedule 1.

5.       Amendment 5 (Application of indexation amendments) inserts in page 2 (after line 23) a new Clause 5 which provides that the amendments made to the 1948 Act by Schedule 2 apply for the purposes of working out an increase in the rate of a pension benefit for the half-year beginning on 1 January 2004 and subsequent half-years and other related purposes.

Inclusion of Proposed Amendments in Schedule 1

6.       Amendment 6 omits from Schedule 1 (Heading), page 3 (line 2) the word “Amendments” and substitutes “Family law superannuation interest splitting and other matters” to clarify what Schedule 1 covers with the insertion of Schedule 2.

7.       Amendments 7 and 8 insert in Schedule 1 minor technical drafting changes to the amendments to the Defence Force Retirement and Death Benefits Act 1973.   Further details are provided at paragraphs 21 to 24 below.

8.       Amendment 9 inserts amendments to the PCS Act in Schedule 1 (page 14, after line 26) , which will provide for the creation of separate interests in the PCSS as a result of a splitting agreement by separating parties or a splitting order from the Family Court.  Those agreements or Court Orders will have an operative time as provided for by the FLA.  In accordance with clause 4 of the Bill amendments included in Schedule 1 (other than items 24 and 34 which allow regulations to be made in the future to ensure the 1976 and 1990 Acts can continue to comply with future changes to the family law regime) will apply to agreements or Court Orders with an operative time that is after the commencement of the Act.  The clause also provides that the amendments will apply to agreements or Court Orders with an operative time prior to that commencement if no benefits have become payable in respect of an FLA member under the particular scheme rules at the commencement. 

9.       Separating parties and the Court have been able to arrive at agreements or orders since 28 December 2002.  Because the amendments to be included in the Bill will allow for a clean break between parties, it is appropriate to cover all agreements or Court Orders where possible.  However, it is not possible to cover agreements or Court Orders where benefits have been paid, or commenced to be paid, before the commencement of the Bill because it would not be appropriate to retrospectively reduce benefits.  Further details of these amendments are provided at paragraphs 25 to 71 below.

10.     Amendment 10 adds to Schedule 1, item 27, page 31 (line 5) the words “and Other Matters” to the reflect the change to the short title of the Bill.

Inclusion of Schedule 2

11.     Amendment 11 inserts a new Schedule 2 to the Bill at page 33 (after line 9) which provides for twice yearly indexation of pensions paid under the 1948 Act.  Further details of these amendments are provided at paragraphs 72 to 98 below.



Commonly defined terms used in schedule 1 to the bill

12.     The amendments to a number of Acts included in Schedule 1, including the proposed amendments to the PCS Act to be included in Schedule 1, define a number of terms in a common fashion.

13.     The terms member spouse , non-member spouse , payment split , splitting order and superannuation interest are all defined with reference to the definitions in the FLA.

14.     Base amount is defined to include a base amount specified in or calculated under a splitting agreement made between the parties as well as an amount allocated by a splitting order from the Family Court.

15.     Family law value (FLA value) is the amount that would be the value of a superannuation interest under the relevant Act as determined under the FLA at the operative time (see definition below).

16.     Operative time is defined in terms of the FLA in relation to a splitting agreement or Court order.  For a splitting agreement this is the beginning of the fourth business day after the agreement and other documentation is served on the trustee or, in the case of the PCSS, the scheme administrators.  For a splitting order the operative time is specified in the order.

17.     Scheme value is an amount to be determined under Ministerial Orders under the relevant Act (including the PCS Act) to assist in the calculation of the transfer amount (see definition below) under scheme rules.  This value will be arrived at by using scheme specific methodology and factors that may arrive at a higher valuation of the superannuation interest than the family law value.  It is intended that the valuation to be used to arrive at the transfer amount in each case will be the greater of the family law value and the scheme value.

18.     Splitting agreement is defined to mean either a splitting agreement or a flag lifting agreement under the FLA.

19.     Splitting percentage is defined to mean the percentage specified in a splitting agreement or splitting order under the FLA.

20.     Transfer amount is an amount of at least the value of the base amount or the percentage of the family law value specified in the splitting agreement or splitting order which will form the basis of a separate interest for the FLA non-member.  A more detailed explanation of this term is at paragraphs 26 and 27 below.



amendments to the Defence Force retirement and death benefits act 1973

21.     The 1973 Act provides a superannuation scheme that applied to Defence Force members from October 1972 to September 1991.  From 1 October 1991, existing DFRDB Scheme members had the option of remaining with DFRDB, or transferring to the new MSB Scheme.  The DFRDB Scheme membership comprises contributors, a very small number of preserved benefit members and pensioners.  Under section 8 of the 1973 Act, the DFRDB Authority has responsibility for the general administration of the scheme.

22.     The Bill will provide for the separate interest approach to be applied when the Chairman of the DFRDB Authority receives a splitting agreement or order in relation to a person who is a DFRDB contributor, preserved benefits member, retirement or invalidity pay recipient, or spouse pension recipient.  With respect to contributors and preserved benefit members, the separate interest for a non-member spouse will be transferred to the MSB Scheme and managed according to MSB Scheme Rules.  With respect to retirement pay, invalidity pay and spouse pension recipients, the non-member spouse separate interest benefit will be an indexed pension for life without a reversionary component.  The method of reduction of the member retirement pay, accrued benefit or preserved benefit will be determined under Ministerial Orders.

Amendment 7 - Benefits for non-member spouse

23.     Schedule 1, item 3, page 6 (line 6) provides for the substitution of “Authority” for “Board” to show that a splitting agreement or splitting order will be received by the Chairman of the DFRDB Authority.

Amendment 8 - Reduction of benefits for member spouse

24.     Schedule 1, item 3, page 7 (lines 2 to 22) substitutes section 49D and inserts a provision to reduce lump sum amounts that become payable to a DFRDB member, whose benefits are in the growth phase at the operative time, and to whom a later standard pension is not payable

amendments to the parliamentary contributory Superannuation Act 1948 (Amendment 9)

25.     The PCS Act provides a contributory superannuation scheme for Senators and Members of the House of Representatives, known as the PCSS.  These contributory members of the PCSS are described in the PCS Act as “members”.  There are also persons in receipt of a pension under the Act, including retired Senators and Members and eligible spouses of deceased members and retired Senators and Members.  Since the November 2001 general election new Senators and Members who qualify for a pension on leaving Parliament before age 55 generally will have payment of that pension deferred until age 55.  All of these persons are considered under the FLA to have superannuation interests in the PCSS.  In addition, after the commencement of the amendments to the PCS Act, an FLA non-member will be considered to have a superannuation interest under the Act.

26.     The Department administers the PCSS on behalf of the Minister for Finance and Administration.  The proposed amendments to the PCS Act to be included in Schedule 1 will provide for the separate interest approach to be applied when the Secretary to the Department receives an agreement or Court order in relation to an FLA member who has a superannuation interest in the PCSS.

27.     Where the relevant superannuation interest is in the growth phase, that is, the FLA member is a contributory member or a person to whom deferred pension benefits may become payable in the future, the separate interest will give rise to associate deferred benefits for the FLA non-member based on the transfer amount.  Those benefits will be indexed in the scheme and become payable as a pension (without reversionary component) to the FLA non-member in one of a number of circumstances.  The FLA non-member deferred benefits will be known as “associate deferred annuities”.  The FLA member’s benefits will be reduced to reflect the transfer amount.

28.     Where the relevant superannuation interest is in the payment phase (that is, the FLA member is in receipt of a pension under the PCS Act), the separate interest will be payable in the form of an immediately payable indexed pension without a reversionary component.  The pensions payable to FLA non-members in these circumstances will be known as “associate immediate annuities”.  The method of reduction of the FLA member pension and the rate of pension payable to the FLA non-member will be determined under Ministerial Orders. 

Item 11A - Definition of annuity

29.     Item 11A includes an associate annuity payable under the PCS Act to an FLA non-member in the definition of “annuity” for the purposes of the PCS Act.

Item 11B - Surcharge deduction amount

30.     Section 4E of the PCS Act provides for the Trust to determine a surcharge deduction amount.  This amount is used to reduce benefits payable under the Act when a person whose surcharge debt account is in debit ceases to be a contributory member of the PCSS.  Subsection 4E(3) ensures that the surcharge deduction amount cannot be more than 15% (reducing to 12.5% by 1 July 2005) of the employer-financed component of that part of the benefits accrued after 20 August 1996.  Item 11B amends section 4E to ensure that, where the employer-financed component of a benefit has been reduced as a result of a splitting agreement or order, that reduction is not taken into account for the purposes of determining the employer-financed component of a benefit accrued after 20 August 1996.

Item 11C, 11D and 11E - Calculation of surcharge reduction to pension

31.     Subsections 18(8A) and (8AC) and 18B(15) of the PCS Act apply the concept of a “basic rate” of pension before reduction for the surcharge as part of the formula used to reduce the pension to take account of the surcharge where appropriate.  To ensure that the formula is applied correctly after an FLA member’s pension is reduced because of a separate interest for the FLA non-member, this reduction is disregarded for the purposes of the basic rate of pension in the formula used to reduce a pension because of the surcharge.

Item 11F - Insertion of new Part

32.     Item 11F inserts a new Part VAA into the PCS Act to provide for splitting of a superannuation interest under the Act when the Secretary to the Department receives a splitting agreement or splitting order in respect of a superannuation interest in the PCSS.

Division 1 - Preliminary

Definitions

33.     New section 22CA provides a number of definitions including the commonly defined terms described at the beginning of the notes on amendments to the Bill.

34.     The definition of transfer amount is pivotal to these new arrangements and varies according to certain conditions.  The transfer amount forms the basis of an associate deferred annuity or associate immediate annuity which represents the separate interest created for the FLA non-member.  The splitting agreement or splitting order will specify a base amount to be transferred to the FLA non-member or a splitting percentage that will be used to calculate a base amount. 

35.     Where a base amount is specified, the FLA value and the scheme value of the superannuation interest will be calculated.  If the FLA value is equal to or more than the scheme value then the base amount will be the transfer amount.  Where the scheme value is higher than the FLA value then the transfer amount will be calculated by applying the proportion that the base amount is to the FLA value to the scheme value.  This method of calculating the transfer amount ensures that the FLA non-member receives the benefit of the higher of the two methods of valuation.  This is necessary because the scheme value is a more reliable indicator of the FLA member benefit that will become payable in the future.

36.     Further definitions include:

·         additional service factor at the operative time and additional service factor at the payment time are defined by reference to new section 22CC;

·         affected benefit is defined by reference to new section 22CH;

·         applicable additional percentage represents the percentage that is applied to Ministerial or office-holder salary in order to calculate the rate of additional pension for a retired contributory member of the PCSS or reversionary annuity payable to an eligible spouse of such a member;

·         applicable basic percentage represents the percentage that is applied to basic salary in order to calculate the rate of basic pension for a retired contributory member of the PCSS or reversionary annuity payable to an eligible spouse of such a member;

Note : A pension payable to a retired contributory member of the PCSS comprises a basic pension based on service as a Senator or Member and an additional pension in respect of any Ministerial or other office-holder service in the Parliament.  A reversionary annuity represents five-sixths of a deceased contributory member’s total pension.

·         associate annuity is defined by reference to new section 22CD or 22CE;

·         associate deferred annuity is defined by reference to new section 22CE;

·         associate immediate annuity is defined by reference to new section 22CD;

·         basic service factor at the operative time and basic service factor at the payment time are defined by reference to new section 22CB;

·         non-standard annuity is defined to mean an annuity under the PCS Act that is not a standard allowance or annuity (see definition below) .   A non-standard annuity is, generally, a pension that would not be a splittable pension under the FLA such as a pension payable to a child or an orphan;

·         Orders is defined by reference to new section 22CK;

·         original interest is defined by reference to new section 22CD;

·         payment time is the time when a benefit becomes payable under the PCS Act;

·         section 16A amount represents the SG amount required to be contributed by employers;

·         section 22Q amount represents the employer component of a transfer value paid to the PCSS from another superannuation scheme;

·         standard allowance or annuity is defined to be any pension or annuity payable under the PCS Act, including an associate annuity.  However, an annuity that would not be a splittable pension under the FLA such as a pension payable to a child or an orphan is not included and is therefore a non-standard annuity (see definition above);

·         transfer factor is arrived at by dividing the transfer amount by the scheme value.

Basic service factor

2.       New section 22CB provides a method of calculating the basic service factor at the time of payment of a retired contributory member’s pension and at the operative time for the purpose of reducing a pension payable to the FLA member under new section 22CH, where the operative time was in the growth phase. 

3.       The basic service factor represents the rate of basic pension accrued by reference to the FLA member’s period of service in the Parliament.  Basic pension generally accrues at the rate of 6.25% of basic salary for each year of the first 8 years of parliamentary service and at the rate of 2.5% of basic salary for each year in the next 10 years of service, subject to a maximum of 75% of basic salary for 18 or more years of service.  On qualifying for a pension, other than on invalidity retirement, the minimum basic pension is 50% of basic salary, based on 8 years service.  A basic pension accrues on a daily basis up to the maximum of 75% of basic salary.

Period of service at least 8 years

4.       Where the FLA member’s period of service is at least 8 years, the basic service factor in respect of both the time of payment and the operative time is 0.5 for the first 8 years plus 0.025 per year for each full year within the next 10 years and 0.025/365 for each day in a part year.  However, where the period of the FLA member’s service up to the operative time is less than 8 years, the basic service factor at the operative time is 0.0625 for each full year plus 0.0625/365 for each day of a part year.

Period of service less than 8 years other than in the case of invalidity pension

5.       Where the FLA member’s period of service is less than 8 years and the FLA member is entitled to a pension, other than an invalidity pension, the basic service factor at the time of payment of the pension is 0.5.  The basic service factor at the operative time is calculated by applying the proportion that the period of service before the operative time is to the total period of service to 0.5.

Period of service less than 8 years in the case of certain pensions including invalidity

6.       Where the FLA member’s period of service is less than 8 years and the FLA member is entitled to an invalidity pension after completing three parliamentary terms or the FLA member is classified as a class 1 invalid, or a spouse’s reversionary annuity becomes payable on the death of the FLA member while a member of Parliament, the basic service factor at the time of payment of the pension is 0.5.  The basic service factor at the operative time is 0.0625 for each full year plus 0.0625/365 for each day of a part year of service up to the operative time.

Period of service less than 8 years in the case of class 2 invalidity pensions

7.       Where the FLA member’s period of service is less than 8 years and the FLA member is entitled to a class 2 invalidity pension, the basic service factor at the time of payment of the pension is 0.3.  The basic service factor at the operative time is 0.0375 for each full year plus 0.0375/365 for each day of a part year of service up to the operative time.

Additional service factor

8.       New section 22CC provides a method of calculating the additional service factor at the time of payment of the FLA member’s pension and at the operative time for the purpose of reducing that pension under new section 22CH, where the operative time was in the growth phase. 

9.       The additional service factor represents the rate of additional pension accrued by reference to the FLA member’s period or periods of service as a Minister or office-holder in the Parliament.  Additional pension accrues at the rate of 6.25% of the additional salary for each year the office is held, up to a maximum of 75% of the salary for the highest paying office held.  The additional pension payable to a member who qualifies for a pension accrues on a daily basis up to the maximum.

Where maximum additional pension entitlement not achieved

10.     In respect of each Ministerial or other office held, the additional service factor in respect of both the time of payment and the operative time is 0.0625 for each full year of service in that office plus 0.0625/365 for each day of a part year of service.

Where maximum additional pension entitlement achieved with only one office

11.     Where only one Ministerial or other office is held in the Parliament and the FLA member is entitled to the maximum additional pension of 75% of the salary payable for that office from time to time, the additional service factor at the time of payment is 0.75.  The additional service factor at the operative time is 0.75 if the period of service in that office at that time is at least 12 years or, if the period is less than 12 years at that time, the factor is 0.0625 for each full year plus 0.0625/365 for each day of a part year of service in that office.

Where maximum additional pension entitlement achieved with more than one office

12.     Where an FLA member has held more that one Ministerial or other office in the Parliament, the additional pension entitlement for each office is aggregated until it reaches the maximum of 75% of the salary for the highest paying office held.  The additional service factor at the time of payment is therefore 0.75.  The additional service factor at the operative time for the highest paid office is also 0.75 if the operative time occurs after retirement but before the pension becomes payable (for example, where the pension is deferred to age 55).  In any other case, the additional service factor at the operative time for the highest paid office is worked out by calculating a factor in respect of each office held before the operative time in accordance with paragraph 45, weighting each factor in accordance with the proportion that the salary for each relevant office bears to the salary for the highest paid office and adding the weighted factors together.  The sum of the weighted factors must not exceed 0.75.

Division 2 - Benefits for non-member spouse

Associate annuity for non-member spouse

13.     When the Secretary to the Department receives a splitting agreement or splitting order in relation to an FLA member who has a superannuation interest under the PCS Act, new section 22CD provides, subject to certain conditions, for the FLA non-member to be entitled to an associate immediate annuity from the operative time or an associate deferred annuity.  The conditions are that:

·         the FLA member's interest is not an orphan's annuity;

·         both the FLA member and the FLA non-member are alive at the time; and

·         the base amount must not be more that the family law value or scheme value of the interest. 

14.     If, at the operative time, the FLA member is in receipt of a pension then the FLA non-member is to be entitled to an associate immediate annuity.  The rate of the associate immediate annuity is to be calculated under Ministerial Orders by reference to the transfer amount. 

15.     If, at the operative time the FLA member is in the growth phase, that is, no pension is payable, the FLA non-member is entitled to an associate deferred annuity under new section 22CE.

Associate deferred annuity

16.     New section 22CE provides for the calculation of, and payment rules for, an associate deferred annuity.

17.     Ministerial Orders will provide for indexation of the transfer amount until it becomes payable in the form of an annuity.  Those Orders will then provide for the calculation of the annual rate of the annuity.

18.     The new section provides that the annuity will become payable either:

·         at the operative time (if later than the earliest of the following);

·         on request after age 55 (subject to SIS allowing the payment of a pension to the person at that time);

·         at a time when the Trust is satisfied that the FLA non-member has become permanently incapacitated within the meaning of SIS;

·         at age 65.

19.     The FLA non-member must request that the benefits be paid and provide any necessary information to determine whether the benefit is payable.  For example, an application for payment on the ground of incapacity must be accompanied by medical certificates.

20.     If the FLA non-member dies before the annuity has become payable, a lump sum benefit will become payable to the legal personal representative or, if none can be found, such other person as determined by the Trust.  The Ministerial Orders will provide a method of calculating the lump sum.

Commutation of small associate pension

21.     New section 22CF provides for the FLA non-member to be able to elect to commute an associate annuity to a lump sum where the annual rate of that annuity is below a level to be determined under the Ministerial Orders.  Commutation is available when either the total rate of an associate immediate annuity or the rate of an associate deferred annuity, whichever is relevant, is below that level.

Division 3 - Reduction of benefits for member spouse

22.     New Division 3 provides for the reduction of the benefit payable to the FLA member in relation to the different nature of his or her interest.  At the operative time for the creation of the separate interest, the FLA member can be in the growth phase or the payment phase.  In the payment phase he or she may be receiving a retirement pension or invalidity pension or a spouse’s reversionary annuity may be payable arising from the death of a contributory member or a pensioner.  The FLA member may also be entitled to an associate deferred annuity or be in receipt of an associate immediate annuity arising from a previous marital breakdown.

23.     It is intended that that part of the benefit that becomes payable to, or in respect of, the FLA member that had accrued up to the operative time should be reduced to take account of the transfer amount.

Operative time during growth phase - reduction of lump sum

24.     Under the PCS Act a superannuation interest may be in the form of a lump sum or pension, including a spouse’s reversionary annuity.  New section 22CG provides a method of reduction for an interest in the growth phase that becomes payable as a lump sum only benefit to the FLA member.  It provides for the reduction of all the possible components of that interest.  The section does not apply where the FLA member is in the payment phase, that is, in receipt of a pension or annuity.

25.     A PCSS lump sum benefit entitlement is calculated under the PCS Act by reference to a member’s contributions and, where relevant, the Superannuation Guarantee (SG) amount and the employer component of a transfer value paid to the PCSS from another superannuation scheme.  Where a separate interest has been created in respect of an FLA non-member during the period of the PCSS membership, it is necessary to provide that the final calculation of the FLA member’s lump sum benefit is reduced to reflect the amount transferred to the FLA non-member at the operative time.

26.     The new section ensures that the various components of the FLA member's lump sum benefit, including member contributions, the SG amount and any employer component of a transfer value, are reduced, at the operative time, by the amounts calculated by multiplying the relevant amount of each component by the transfer factor.

Operative time during growth phase - reduction of pension

27.     New section 22CH provides for the reduction of the FLA member’s pension (including a deferred pension) where the operative time is during the growth phase and the FLA member who was a contributory member later becomes entitled to receive a pension.  The reduced pension may be payable on voluntary or involuntary retirement, or on invalidity retirement, or may form the basis of a reversionary annuity for an eligible spouse which is five-sixths of the FLA member’s pension where the FLA member dies before becoming entitled to that pension.  In some cases the FLA member’s pension may include additional pension for Ministerial or office-holder service.  The reduced pension will also flow through to calculate any spouse’s reversionary annuity on the death of a retired FLA member through the existing provisions of the PCS Act.

Reduction of basic percentage

28.     New subsection 22CH(2) provides the formula for the reduction of the applicable basic percentage which is used to calculate the basic pension.  The formula relies on the basic service factors calculated under new section 22CB.  The reduced basic percentage is calculated by taking away from the basic service factor at the time of payment of the pension the basic service factor at the operative time multiplied by the transfer factor.  The reduced basic service factor is then converted to the new percentage to calculate the basic pension.

Reduction of additional percentage

29.     New subsection 22CH(3) provides the formula for the reduction of each applicable additional percentage which is used to calculate the additional pension.  The formula relies on the additional service factors calculated under new section 22CC.  Each reduced additional percentage is calculated in the same manner as the reduced percentage for calculating the basic pension in paragraph 63.  However, any additional percentage applicable to an office where service in that office began after the operative time is ignored, unless the person has achieved their maximum additional pension entitlement.

Multiple interest splits for same original interest

30.     It is possible under the FLA that, after a separate interest has been created in relation to an FLA member who was a contributory member, the Secretary of the Department may receive an agreement or Court order in relation to a property settlement arising from a later marriage breakdown.

31.     New subsections 22CH(5), (6) and (7) vary the formulas under subsections 22CH(2) and (3) to allow them to apply where more than one agreement or Court order has been received while the FLA member is still in the growth phase.

32.     The subsections allow the formulas used in subsections 22CH(2) and (3) to be used on more than one occasion by replacing the reduction factor with an interim factor or a series of interim factors which represent the reductions applied in relation to reductions before the most recent marriage breakdown.

Reduction not to affect later non-standard annuity

33.     New subsection 22CH(8) provides that a reduction of the FLA member’s pension should be disregarded for the purposes of calculating any non-standard annuity that may become payable at a later date.  This is necessary to ensure that, if the FLA member dies and an orphan’s annuity becomes payable, the rate of that annuity will be calculated as if no reduction of the FLA member’s pension had occurred.

Operative time during the growth phase - reduction where original interest is entitlement to associate deferred annuity

34.     New section 22CI provides that, where the interest of the FLA member is only to an associate deferred annuity then the deferred annuity, when it becomes payable, will be reduced in accordance with Ministerial Orders.  Although an associate immediate annuity becomes payable at the operative time, an associate deferred annuity will often not become payable until some time after the operative time.

Operative time during payment phase - reduction of standard allowance or annuity

35.     New section 22CJ provides for the reduction of the annual rate of pension or annuity payable to the FLA member at the operative time to be calculated under the Orders.  This reduction is to be disregarded for the purposes of calculating any non-standard annuity that may become payable at a later date.  This is necessary to ensure that, if the FLA member dies and an orphan’s annuity becomes payable, the rate of that annuity will be calculated as if no reduction of the FLA member pension or reversionary annuity had occurred.

Division 4 - Miscellaneous

Ministerial Orders

36.     New section 22CK provides that the Minister may make Orders for the purposes of Part VAA of the PCS Act and that those Orders will be disallowable instruments and statutory rules.



Schedule 2 - Indexation under the Defence Forces Retirement Benefits Act 1948 (Amendment 11)

37.     The 1948 Act provides for a superannuation scheme that applied to Defence Force members from July 1948 to September 1972.  From 1 October 1972, all DFRB contributors were compulsorily transferred to the DFRDB Scheme.  Accordingly, all current DFRB Scheme benefit recipients are pensioners.  The DFRDB Authority has responsibility for the general administration of the DFRB Scheme.

38.     The amendments will provide for twice yearly CPI indexation of pensions paid pursuant to the 1948 Act from January 2004.  Currently the 1948 Act provides for annual indexation of pensions.”

39.     Item 1 inserts into subsection 83(1) of the DFRB Act a definition of “first quarter”.  In relation to a half-year beginning on 1 January in a year, it is defined to mean the March quarter of the year and in respect of a half-year beginning 1 July in a year, it is the September quarter of the year.

40.     Item 2 inserts a definition of “half-year” in subsection 83(1) to mean a period of 6 months beginning on 1 January or 1 July in any year.

41.     Item 3 inserts a definition of “prescribed half-year” in subsection 83(1) to mean the half-year commencing on 1 January 2002 or a subsequent half-year.  Commencement from 1 January 2002 has the effect of producing the correct base for commencement of twice yearly indexation commensurate with similar provisions in the 1973 Act.

[Note:  It is proposed to waive any overpayments that may have been made through the application of twice-annual indexation to DFRB pensions between 1 January 2002 and 1 January 2004.]

42.     Item 4 repeals the existing definition of ‘prescribed year” contained in subsection 83(1).

43.     Item 5 amends subsection 83(2) by omitting “March quarter” wherever appearing and substituting “first quarter”.

44.     Item 6 amends subsection 84(1) by omitting and substituting “March quarter” with “first quarter” wherever this term appears in the subsection.

45.     Item 7 amends subsection 84(1) by omitting the word “year” wherever appearing and substituting “half-year”.

46.     Item 8 amends subsection 84(2) by omitting the word “year” wherever appearing and substituting “half-year”.

47.     Item 9 amends subsection 84(3) by omitting the word “year” wherever appearing and substituting “half-year”.

48.     Item 10 amends subsection 84(3) by omitting “March quarter” wherever appearing and substituting “first quarter”.

49.     Item 11 amends subsection 84(4) by omitting the word “year” wherever appearing and substituting “half-year”.

50.     Item 12 amends subsection 84(4) by replacing the reference to “30 June” wherever appearing and substituting “30 June or 31 December (as the case requires)” to ensure that a pension increase is paid in accordance with the new indexation regime.

51.     Item 13 amends section 84A by omitting the word “year” wherever appearing and substituting “half-year”.

52.     Item 14 amends subsection 84B(1) by omitting the word “year” wherever appearing and substituting “half-year”.

53.     Items 15 and 16 amends subsections 84B(2) and (3) by omitting and substituting the reference to “16 June in the preceding year” with “16 June or 16 December (as the case requires) in the preceding half-year”.  Item 17 further amends subsection 84B(3) by omitting the reference to “30 June in the preceding year bears to 12” and substituting “30 June or 31 December (as the case requires) in the preceding half-year bears to 6’.  Section 84B relates to the adjustment of an increase of certain pension benefits.  Amended subsection (3) ensures that the calculation of an adjustment of an increase is in accordance with the new indexation regime.

54.     Item 18 amends subsection 84C(2) by omitting “March quarter” wherever appearing and substituting “first quarter”.

55.     Item 19 amends subsection 84C(2) by omitting the word “year” wherever appearing and substituting “half-year”.

56.     Item 20 repeals the existing paragraph 84C(3)(a) and replaces it with a new paragraph which ensures that the calculation of an adjustment of an increase is in accordance with the new indexation.

57.     Item 21 amends subsection 84C(3)(b) by omitting the word “year” and substituting “half-year”.

58.     Item 22 amends section 84D by omitting the reference to “30 June in a year” and substituting “30 June or 31 December (as the case requires) in a half-year” to ensure that a pension increase is paid in accordance with the new indexation regime.

59.     Item 23 amends subsection 84E(1) by omitting the word “year” wherever appearing and substituting “half-year”.  The note to this item specifies that the heading to section 84E is also amended accordingly.

60.     Item 24 repeals subsection 84E(2).

61.     Item 25 amends subsection 84E(3) by omitting the word “year” and substituting “half-year”.

62.     Item 26 amends subsection 84F(2) by omitting the word “year” wherever appearing and substituting “half-year”.  The note to this item specifies that the heading to section 84F is also amended accordingly.

63.     Items 27 and 28 consequentially repeal subsections 84F(3) and sections 84G and 84GA respectively.