MILITARY SUPERANNUATION BENEFITS SCHEME (MSBS)
The main focus of ADSOS Fair Go Campaign is the restoration of the promised indexation of all Military Superannuation (DFRB, DFRDB and MSBS) Retirement Payments (Pensions) that maintains its purchasing power to keep pace with the costs of living. It hasnt since 1997.
ADSO wants the Federal Government to adopt the same percentage increase and the same frequency as used for Age and Service pensions for all components of Military retirement pensions (DFRB/DFRDB/MSBS): from the present CPI only to the higher of CPI, Pensioner and Beneficiary Cost Index (PBLCI) with reference to 27.7% of the Male take home Average Weekly earnings (MTAWE).
Both the ALP and Coalition have released their 2013 Election policy that in Government they will change the current indexation arrangements for DFRB/DFRDB depending on age but both have excluded MSBS. This exclusion is unacceptable. ADSO will continue to fight for the inclusion of MSBS in the ALP and Coalitions policies.
The Defence Force Welfare Association (DFWA) has written to the Commonwealth Superannuation Corporation to address the following inequities in MSBS. (copy of the letter here)
1. Indexation of the MSBS Pension
Currently the MSBS pension is indexed to CPI in order that it maintain its purchasing power. Numerous reviews have recommended that the Military Superannuation Pensions be indexed to the same way as the age pension that is the higher of CPI, PBLCI, or 27.7% of MTAWE. While the intent of indexation has been always to maintain purchasing power of the pension, and CPI was an appropriate measure, changes to the CPI have in fact seen the purchasing power of MSBS pensions drop. This is particularly galling as the MilSuper Book (now withdrawn) actually says that:
Pensions are subject to full CPI updating every six months (ensuring that $1 in 2011 will be equivalent to $1 in 2028).
Which is, at best, misleading as the current method of indexation does not maintain purchasing power.
2. Indexation of the Preserved Benefit.
When you leave the ADF the employer benefit must be preserved within the MSBS. That preserved benefit is indexed to CPI (unless it is an Associate B benefit). Over a longer period Australian Superannuation has returned on average twice the CPI. The effect on the purchasing power of the preserved benefit over a long period is significant. The preserved benefit should be indexed the same way as the age pension (bearing in mind this is notional indexation and no funds are attached to it until a person reaches the age of 55)
3. Indexation of Associate Benefits
In the case of a marriage break down the growth of Associate B benefit is indexed at the long term bond rate yet the preserved benefit for the MSBS member is indexed at CPI. The long term bond rate is considerably more than the CPI and over a long period the spouse will get considerably more money when they become entitled to access to the preserved benefit. It is incomprehensible why the benefit is indexed at one way for a spouse and another for a member.
4. Inability to access the preserved benefit on discharge from the ADF.
Under the MSBS rules the employer benefit must remain preserved in Military Super until at least age 55. It is important to note that this preserved benefit is nominal and funds are only allocated when a person becomes entitled to them which generally will be at the age of 55, or over.
The preserved benefit will be indexed at CPI and the impact on members is significant, especially those who left the ADF at a young age. Currently there are approximately 87000 personnel with a preserved benefit.
Australian Superannuation returns over the long term are almost double inflation. The difference over a longer period can be hundreds of thousands of dollars.
The Review in to Military Superannuation Arrangements (RMSA) Link here at Recommendation 8 stated; Preserved members of the MSBS should be given the option, for a limited period, to have the current face value of their benefit funded and then taxed on transfer to the new scheme, or to a scheme of their choice.
Here is a case study of the impact of indexing the preserved benefit to only CPI
- A person joins the ADF at 17
- Served for 10 years and discharges
- Employer benefit of $115k (as per MSBS calculator)
- At 65 this is $293k (indexed to CPI as per MSBS Calculator)
Funds invested in super could expect $635k (ASIC Jun 30 2010 estimate of 10 yr av returns by Australian super funds).
The magnitude of the losses which are borne by defence members under the current arrangement can be illustrated by the following example.
• An individual who joins the Royal Australian Navy at 17 and served for 10 years being promoted to Leading Seaman at around the 6 year mark would expect to have a defined benefit of around $115,000(MSBS Calculator)
• Upon discharge at 27. Assuming that this individual retires at 65 he would have 38 years remaining in his working life. This amount will nominally increase to around $293,000(MSBS Calculator) by being indexed to CPI by the time the member retires.
• However If this amount was to be invested in a normal superannuation fund under the growth investment option the member could expect to end up with around $635,187.37 at retirement (Australian Securities and Investments Commission June 30 2010 estimate of 10 year average annual returns by Australian superannuation funds).
• This means that the member in this example would be disadvantaged by $342,187 under the current arrangement.
5. Superannuation for Reservists
Currently reservists cannot contribute to any Military Superannuation Scheme unless they are on Full Time Service (FTS) when they can then contribute to an extant scheme.
Reservists on FTS should continue to be included in normal Defence superannuation arrangements however they are severely disadvantaged if their employer benefit is a preserved benefit as that benefit is only indexed to CPI. A reservist by definition is a part time person therefore they should be given the opportunity to roll over the employer benefit to a complying scheme of their choice when they complete the full time service.
Reservists not on full-time service whose pay is tax-exempt should have the opportunity to contribute to a Military Superannuation scheme and have some employer contribution. This group of people may be one of the few employee groups that have no right to contribute to and the employer does not contribute to their superannuation.
6. MBL Limits
The Maximum Benefit Limit is a limit after which neither the employee nor employer pay into MSBS. This effectively means a 28% decrease in the members employment package (the notional employer benefit) as it only applies to long serving members of MSBS. Recommendation 12 of the RMSA is that the MSBS Maximum Benefit Limits should be abolished.
A letter was published in Army News on MBL Copy here. The response from the Directorate of Military Remuneration was less than adequate. DFWA responded, a copy of the letter is here
Review into Military Superannuation Arrangements.
This report was submitted to Government in 2007 and the DFWA has been in contact with Minister Snowdon multiple times to see when it was going to be released and what government action was going to be taken, especially in relation to the MBL. Numerous times Minister Snowdon has said that he was unwilling to penny packet the report and due to its complexity it would be considered in its totality. It now appears that the government does not intend to take any action on this report. A word of warning though we need to be careful what we wish for. The main thrust of the RMSA was to develop a new Defined Contribution pension scheme. This would be attractive to government as it would be cheaper as it would also transfer the risk to the individual and the scheme would be subject to the fluctuations in the market.
DFWA will be watching closely to ensure that it recognises the unique nature of military service and that the death and disability provisions are not normalised to civilian standards.