Government Statements on Fair Indexation

28 Mar 2013

Rebuttal of Government Statements re Fair Indexation

Below is the latest version of the “standard response” provided by Government members to requests for fair indexation for military superannuation pensions, and the rebuttal of each point.
The governments original grammar and spelling are retained. Names are redacted.
This rebuttal was prepared by the Defence Force Welfare Association (DFWA) for the Alliance of Defence Service Organisations (ADSO) in March 2013. A brief glossary is on the last page.


Thank you, for writing to XXXX concerning DFRB/DFRDB Pensions. XXXX is fully aware of your concerns and XXXX has read all of the documents. XXXX has asked me to respond on XXXX behalf. The issue of concern revolves around the fact that recipients of military retirement benefits claim they are being discriminated against….

It is more a matter of the servicepersons employer not doing what the employer said it would, i.e. preserving the value (“purchasing power”) of the military super pension.

…because of the manner in which their superannuation pensions are indexed ie in line with CPI on 1 January and 1 July. They would like the same methodology as the Age Pension ie the highest of CPI or the Pensioner Beneficiary Living Cost Index (PBLCI) and the level of Male Total Average Weekly Earnings (MTAWE and also want it to apply from aged 55.

Not quite correct. We want military superannuation pensions to rise by the same percentage and frequency as the age pension and for exactly the same reason – to maintain purchasing power. Its that simple.

I will provide to you an outline of the issue as I see it.
There are three military superannuation schemes:
• Defence Forces Retirement Benefits (DFRB) – closed Sep 1972.
• Defence Force Retirement and Death Benefits (DFRDB) – closed Sep 1991.
• Military Superannuation and Benefits (MSB).
Features of this scheme[which one? We must assume the writer means all military schemes]are:
• The current scheme is more generous than the Commonwealth civilian schemes.

No they are not, apart from some provisions relating to early separation from the ADF. Early separation for most ADF members is in the national interest (we dont want platoons of 64 year old infantrymen in Afghanistan) and it is sensible for military super to recognise this. And theres a cost attached to early separation.
But MSBS actively discriminates against those departing “early” because they are not permitted to roll over their accumulated employer contributions (which are merely notional because the Commonwealth pays nothing up front) to another super fund. MSBS departees are stuck with CPI as an investment return until age 55 or older. They are significantly worse off than PSSap members (public servants) in this regard, let alone members of the various MP and judicial schemes which are, by definition, “Commonwealth civilian schemes”.
And if a DFRDB member “retires” with less than 20 years ADF service then s/he only gets his/her compulsory contributions back, with no interest, plus a small productivity benefit for some (and even that was in lieu of a 1988 pay rise!).
The ADF receives the lowest mean & median super pension of any Commonwealth superannuation scheme grouping (public service, parliamentary, judicial).
The writer needs to define what s/he means by “generous”.

• Commonwealth superannuation pensions provide a guaranteed source of income that are not subject to market fluctuations.

And do not benefit from the markets significantly higher medium & long term returns vis-à-vis CPI. The 20 year real return above CPI inflation averaged 4.7% per annum for 1992-2012 (“The Australian” 22 January 2013) which includes the GFC.

• A military superannuants current pension is not necessarily a measure of their financial situation. Many retired while still of working age. Those on lower incomes may have access to other financial assistance (the majority under the DFRB and DFRDB schemes would fall into this category).

This is possibly the most irritating argument put forward by opponents of fair indexation.
First, an individuals financial situation has nothing to do with the fairness or otherwise of military super pension indexation.
Second, of course “many” (most, actually) ADF men and women retire while still of working age. So they should, because thats in the national interest. But they retire (“separate” is a better word) from the ADF, not from the workforce or from life unless disabled by their ADF service. Also see above re elderly platoons in Afghanistan.
Third, military super is not welfare. Nor is any other form of superannuation. Welfare pensions are available to all Australians regardless of the adequacy or otherwise of their super. It is iniquitous to link the purpose of military super pensions to the purpose of welfare pensions in the writers dog-whistle fashion. The writer is confusing the purpose of superannuation with the reason for indexation. The only reason to index any taxpayer funded pension, welfare or super, is to preserve its purchasing power, which todays CPI indexation does not do.
Fourth, the writer admits that the majority of DFR(D)B recipients fall into the lower income category. Many (most?) also receive a full or part welfare pension. Thats because their DFR(D)B payments are so low. How is that “generous”?

• Military superannuation systems are tailored to meet the special needs of military service eg they are DFRDB pensioners made financial decisions on commutation (99.5%) in exchange for a reduced pension.

The writer must be unaware of the fact that, if a DFRDB member chooses not to commute, the portion of the retirees military super pension that could have been commuted – but wasnt – is not indexed at all, not even to todays unfair CPI.
A DFRDB member would be financially nuts not to commute. And commutation is clearly what successive governments want him/her to do. If that was not the case then all of an uncommuted pension would be indexed.
In any case, commutation provisions have nothing to do with indexation.

• Superannuation, in terms of indexation, is not the same as the age or service pension.
• There is no rational basis for changing indexation for those aged 55. People should be encouraged to work and save for their retirement.

Eh? The writer again confuses the purpose of a taxpayer-funded pension with the reason for indexation. The only reason to index any taxpayer-funded pension, whether it is a welfare payment or a defined benefits superannuation payment, is to preserve the purchasing power of the payment.

Neither a welfare pension recipient nor defined benefit super pension recipient should see his/her standard of living rise or fall if the pension payment is indexed fairly. This is an important principle, and is why welfare (age etc.) pensions are indexed fairly. But military super pensions are not. Our case is that simple.

DFWArealises that this principle has implications for pre-2004 MPs who are PCSS members as well as for judicial super scheme members, all of whom enjoy extraordinarily generous (in the true meaning of the word!) indexation. MP and judicial taxpayer-funded pensions are indexed to todays salaries and not to CPI. By way of example, PCSS MP pensions rose 3.0% in July last year while military super pensions rose by 0.1%. Thats a 30x difference, which again gives the lie to any notion of generosity re military super pensions.

DFWA also realises that the huge PCSS/judicial/military indexation disparity can make it difficult for our parliamentary friends on both sides to convince their colleagues to support our case for fear that their own super scheme(s) will enter a media spotlight. DFWA has no answer to that except to say that the Australian public (read “taxpayer”) has a track record of supporting honesty in politics. This governments position on indexation, as further evidenced by its letter, is not, in our opinion, honest.

For those of lower incomes the new tax cuts introduced on 1 July 2012 are likely to provide more financial assistance for those under $80,000 than proposed changes to indexation.
Example of a person receiving $25,000 pa superannuation pension
• The 1 July 2012 increase of 0.1% means an increase of $25 to $25,025.
• A single person on $25,025, who is eligible for the age/service pension, subject to means testing, would receive up to an additional $9,100 age/service pension.
• A couple with superannuation income of $25,025, subject to means testing, would be eligible for up to an additional $20,533 age/service pension.
• In comparison, if the age pension methodology was applied based on the increase to age pension in March 2012 of 0.9%, this would result in an increase of $225 to $25,225.
• A single person $25,225, who is eligible for the age/service pension, subject to means testing, would receive up to an additional of $9,006 age/service pension or some $4 p/f extra.
• A couple with superannuation income of $25,225, subject to means testing, would be eligible for up to an additional $20,433 age/service pension or some $4 p/f extra in total (combining the superannuation income and the age/service pension).
• From 1 July 2012, the new tax current will mean a reduction of $503 pa or $19 p/f extra.
• The greatest benefit to most pensioners is as a result of the tax changes. Changing indexation will only have minimal impact for those on lower incomes and particularly those eligible for the age or service pension.
The only ones to significantly benefit from changes to indexation are those on higher pensions or with other income and significant assets. It is impossible to apply this to do some military and not others (which the Opposition is doing). Cannot do it only military and not for civilians.

None of the above has any relevance to the case for or against fair indexation. The writer (again!) accidentally or deliberately aims to confuse the purpose of the various taxpayer-funded pensions with the reason for their indexation. Super is not welfare.

Military superannuation schemes have benefits not generally received in other employment sectors:
• a higher employer contribution rates (up to 30% compared with the nationally legislated rate of 9% increasing to 12%);

This is plain dishonesty. The writer is spinning NECR (Notional Employer Contribution Rates), a favourite ploy of this government. Without repeating all of the last five years worth of comments on NECR:
First, NECR are just that, notional. The government does not pay a cent up front into DFRDB. DFRDB has no fund for the government to pay into.
Second, the writer conveniently overlooks the fact that the NECR for the pre-2004 MP scheme (PCSS) is 47.9% (30 June 2008 –Mercer) compared with 24.7% (MSBS) and 33.5% (DFRDB) in 2005, figures used by Mr Matthews for his 2008 report. By way of further contemporary comparison, CSS NECR was 28.2% and PSS 15.6% in 2005. (CSS & PSS are older public service super schemes, superseded by PSSap in 2005.)
Third, comparing the notional ECR for the old defined benefits schemes with the real ECR for modern accumulation schemes is as false as comparing the old CPI with todays CPI and then saying they are the same thing.
Fourth, NECR are calculated for contributing members, not for retired members. NECR for closed schemes like DFRDB should increase with time until all DFRDB members leave the ADF. Thats partly because the people who are still in the ADF and are still DFRDB members (only 3,243 as at 30 June 2012) are more likely to be WO1s or admirals or colonels than their now-retired predecessors because they must have been in the ADF for at least 21½ years . And allDFRDB members who are now in the ADF will receive a DFRDB pension in due course, unlike the majority of their DFRDB predecessors who received nothing from their employer because they served for less than 20 years.
Fifth, the writer also conveniently ignores the fact that todays public servants and post-2004 MPs enjoy a real – not notional – ECR of 15.4%, not “9% increasing to 12%”. Why does the writer not reveal this? Is s/he afraid the Australian public will find out? And why not also admit that some (how many?) get even more than 15.4%?

• an annual payment not subject to market risks;

This is covered above. The writer clearly does not understand the long term nature of modern (accumulation) superannuation vis-à-vis old defined benefits schemes, let alone the mutant MSBS scheme which is a hybrid accumulation/DB scheme.
MSBS members get all the disadvantages of a non-market based scheme without the investment advantages except for their own compulsory 5.0% pre-tax contribution. And even thats doubtful. Their money, not their employers, is invested on their behalf by an investment manager (CSC) with which they are compelled to invest even if better results may be available elsewhere. And CSC recently (Feb 2013) lowered its investment return objectives by some 10% while raising its investment horizons.

• commutation of the annual retirement payment (under DFRDB) between four to five times in exchange for a reduced annual payment (or pension) – an option exercised by over 99 per cent or retirees; and access immediately upon service retirement, in the case of DFRB and DFRDB, after 20 years service as opposed to preservation age for the rest of the community (at least 55 years of age).

Repeated from earlier:
The writer must be unaware of the fact that, if a DFRDB member chooses not to commute, the portion of the retirees military super pension that could have been commuted – but wasnt – is not indexed at all, not even to todays unfair CPI.
A DFRDB member would be financially nuts not to commute. And commutation is clearly what successive governments want him/her to do. If that was not the case then all of an uncommuted pension would be indexed.
In any case, commutation provisions have nothing to do with indexation.
In addition, the writer chooses not to admit that the rest of the community mayconditionally access 100% of their accumulation superannuation from age 55. DFR(D)B members cannot. There is no pool of funds. It is disingenuous at best for the writer to link DFR(D)B with modern accumulation funds in this manner.

Changing indexation methodology would be inappropriate, inequitable with other Commonwealth super arrangements…

Inappropriate? Why? Who says so? What is their reasoning? How is preserving purchasing power “inappropriate” when thats exactly what all governments subscribed to in principle from the time of DFRBs establishment in 1948?
Inequitable with other Commonwealth super arrangements? They already are inequitable! MP and judicial super schemesare extraordinarily inequitable. Even public servants since 2008 areno longer compelled to contribute to their CSS/PSS/PSSap schemes while all servicemen & women are still compelled to contribute to either DFRDB or MSBS. Wheres the equity in that?
And retired ex-service men & women receive a significantly lower average (mean and median) super pension payment than any other Commonwealth superannuation grouping –public service, parliamentarian or judicial. How much lower must military super pensions be before people like the writer stop spouting the outrageous “inequitable” line?
Or is the writer really trying to say that all taxpayer funded pensions, super or welfare,should be indexed only to CPI? If so, would parliamentarians and judges and age pensioners agree?

…and costly.

Cost is at the heart of this governments concern, as it was with the previous Coalition government. Neither government ever admitted that fairness and, more importantly, employer obligations, are factors. Thats why obfuscation, spin, hypocrisy and downright lies have been and still are the order of the day, as evidenced by this letter.
Mr Trevor Matthews 2008 report, released duplicitously by Finance Minister Tanner in 2009, was the first and only one of seven reports/inquiries since 1972 that said to retain CPI. But, even then, only until a better indexation method came along. A better method (PBLCI) did come along two working days after the government released Matthews report but PBLCI did not extend to the military. And, worse, this government has made no attempt to develop an alternative “military” index despite Matthews Recommendation #4 and despite having had four years to do so.
Mr Matthews was an actuary. His report was written by a team consisting overwhelmingly of Department of Finance people. Neither Defence nor DFAT were represented on the writing team so it is unsurprising that cost, as opposed to good governance and the best interests of the nation, drove its findings. For example, Matthews devotes just 11 lines in his 68 page report to the unique nature of military service, despite his terms of reference requiring him to have regard to the “occupational nature of those schemes”.
DFWAs lengthy written response dated 30 Sep 2009 to the Matthews report was sent to Mr Tanner. The paper is still available from DFWA. Tellingly, despite face to face meetings and correspondence, the response has never been answered or even formally acknowledged by former Finance Minister Tanner or by any member of the Rudd or Gillard governments. It is difficult not to conclude that the only reason the Rudd government commissioned Mr Matthews was to kill fair indexation solely on cost grounds while maintaining a façade of independence and objectivity.

Finance and the Government Actuary have costed the Oppositions policy (Defence Force Retirement and Death Benefits Amendment (Fair Indexation) Bill 2010) at $175m cash cost and $1.7b fiscal cost over the forward estimates. The Bill did not include current and former ADF members under the MSB scheme (around 160,000) or any civilian Commonwealth schemes.

More indefensible spin.Why not admit that the first year net cost is no more than $20m and could be half that (see below)? Why not say up front that the forward estimates are a four year – not one year – projection, which many (most?) Australians would not know? Why not say what “fiscal cost” means, and how it is derived?
The cash cost sum is not rocket science although it is affected by assumptions. Matthews (i.e. Dept. of Finance) said that fair indexation would add 1.5% to current military super pensions. Thats arguably high but is an adequate basis to start with.

Using the latest available figures (CSC Annual Report to Parliament 2011-12):

Total Military Super Pensions Paid 2011-12 = $1,597m

X 1.5% = $23.95m (first year extra gross
cash cost before “clawback”)
Call it $24m gross (rounded up)

Matthews chose not to say what “clawback ” should be but he quotes Finance as claiming 15%. Other credible sources in Matthews (e.g. NATSEM) claim 37 to 58% “clawback”. Post-Matthews conservative estimates including by Finance say 30%, which seems reasonable. If so, “clawback” in the first year is:

$24m X 30% = $7.2m
Call it $7m (rounded down)
Using Finances original much lower estimate of 15% “clawback” (Matthews):

$24m X 15% = $3.6m
Call it $3.5m (rounded down)

So, using conservative assumptions & conservative rounding, the first year net cash cost of fair indexation is $17m (i.e. $24m – $7m)

Even using Finances original 15% “clawback” estimate, which common sense says would be far lower than anyone elses, the first year net cash cost is $20.5m.

Lets call the first year net cash cost $20m and not $17m, even though $20m is likely to be way higher than reality. Remember that that is for all military super schemes.

The first year extra cost compounds with time. So does “clawback”. The forward estimates are a projection over four years.

So, the four year extra forward estimates cost will be (very simplistically):
Year 1 – $20m
Year 2 – $20m plus $20m (and a bit)
Year 3 – $20m + $20m & a bit + $20m & a bit
Year 4 – $20m + $20m & a bit + $20m & a bit + $20m & a bit

That adds up to $200m plus a bit. Lets call the four year grand total $205m (in order to satisfy nit-pickers) for all military super pensioners of all ages and from all funds.
Other factors must be taken into account, including the falling numbers of DFRB and DFRDB pensioners (who are dying off) and rising numbers of MSBS pensioners as well as life expectancy and other changes over longer periods.

About 15% of todays military super pensioners are MSBS members. MSBS is not yet included in the Coalitions fair indexation policy, so lets take it out. 15% of $205m is $30.75m so concluding that ~$175m for all DFR(D)B pensioners – less when beneficiaries aged under 55 are excluded – over the four year forward estimates is acceptable, albeitexaggerated.

(A conservative 30% “clawback” results in an extra four year cost of just~$145m for allDFR(D)B pensioners while the higher NATSEM “clawback” percentage in Matthews results in just ~$85m for four years.DFWA can accept $175m for allDFR(D)B super pensioners over the forward estimates despite it being at the highest end of the cost spectrum. The real cost may be half that. )

The much-touted “fiscal cost” of $1.7b over the forward estimates is appalling spin. It is pleasing to note that ministers such as Treasurer Swan and Minister Bradbury have now stopped making this outrageous claim when discussing fair indexation.

When talking cost, this government and its predecessors do not present these facts:
• Military super over the long term is declining significantly as a percentage of GDP. See Matthews.
• Compulsory pre-tax contributions made by DFR(D)B & MSBS members are not acknowledgedbythe government as offsetting super pension payments. Nor is the significant $100m+ (1970s dollars) transferred from DFRB to consolidated revenue when DFRDB was introduced. Military super payments by the taxpayer are offset by these contributions but governments never admit it, so an uninformed taxpayer would believe that 100% of military super benefits are taxpayer-funded, which is demonstrably untrue. (Serving DFRDB members compulsorily contributed 5.5% of pre-tax pay; MSBS members 5.0 %.)
• Similarly, the interest-free loan that DFRDB contributors with less than 20 years service made to their employer is never acknowledged.

Additionally, the Rudd/Gillard governments have not, to DFWAs knowledge, paid one cent into the Future Fund since 2007.

Mr Abbott and other Coalition members have said they would index DFRB and DFRDB superannuation payments the same as age and service pensions but from age 55.
• The age pension is available at age 65 and the service pensions at age 60.
• Those who have disabilities as a result of their defence service can seek compensation through the Department of Veterans Affairs (DVA) – DVA disability pensions are not means tested or taxed.
This is just another unfunded promise from the Opposition Leader presiding over a $70 billion budget black hole. I understand this is an emotive issue, and caring for our retired military members is a priority for the Government. Strengthening governance arrangements and consolidation of funds management aimed at providing better investment opportunities – something the Opposition wouldnt support. To change the way super is indexed cannot be justified. The Opposition know it and thats why they didnt do it during their 11 years in government.

Oh for Petes sake. Again, superannuation is not welfare. The only linkage with welfare pensions is that all taxpayer-funded pension payments (military super or welfare or MP super for that matter) should be indexed to protect the payments purchasing power.
It is irrational to say that CPI indexation will protect the purchasing power of military super payments while simultaneously saying that the better of PBLCI & CPI (with reference to MTAWE) is necessary in order to protect the age pension.

As former Finance Minister Nick Minchin said recently:
This claim (to change indexation) was properly rejected by the Howard Government, of which I was a member.
There is no inherent logic to the proposition that a public sector employment employment-related superannuation payment should be indexed in exactly the same fashion as a means-tested welfare benefit, in this case the age pension.

Ex-Senator Minchins hypocrisy was and is breathtaking. So is his ignorance of the reason for indexing taxpayer-funded pensions of any sort. His ignorance of the changes made over 20 years ago to CPIs methodology is either wilful for a former Finance Minister or disdainfulofAustralias servicemen and women. How Mr Minchin can say what he says while personally enjoying a taxpayer-funded super pension that is indexed to todays parliamentary salaries is beyond comprehension.

The Oppositions position is purely for political purposes – if they were genuine about military superannuation they would include all schemes. The policy as put forward by the Shadow Veterans Affairs Minister in 2010 would not apply to anyone that joined the services after 1991 (that is, part of the MSB Scheme). This rules out most that have served their country in East Timor, Iraq and Afghanistan and ignores the vast majority of current serving ADF members. The Australian Government is committed to providing an equitable and fiscally responsible competitive remuneration package for all current and retired members of the ADF that reflects the unique nature of military service.

So the writer wants us to believe that doing nothing for anybody is better than doing something for somebody.

DFWA seeks fair indexation for all military super pensioners and will continue to advocate for that outcome. Meanwhile, the Coalitions policy is streets in front of the government do-nothing position.

There is no evidence that the writers last sentence above (The Australian Government is committed to providing an equitable and fiscally responsible competitive remuneration package for all current and retired [DFWA emphasis] members of the ADF that reflects the unique nature of military service) is being planned, let alone implemented. In the absence of evidence to the contrary, one must conclude that the statement is untrue.

I would ask you to consider the following questions.
o Why doesnt the Opposition commit to indexation changes to the current scheme (MSB) in the same way?

Perhaps for the same reason the government wont? The writer should tell us…

o Why should military super be indexed at a higher rate when their standard employer contribution is two or three times (up to 30%) than the average workers (9%)? They are getting more upfront, why should the indexation be higher?

Yet another false linkage by a desperate writer. Fair indexation has nothing to do with NECR. If it did, the writers “logic” would result in all pre-2004 PCSS (MP) benefits not being indexed at all because the MP NECR is 47.9%! And to say “They are getting more upfront…” is a despicable lie that is unworthy of any government.

o Will other public service superannuation schemes be also indexed in the same way?

Will judicial and MP pensions also be indexed in the same way? Remember, service in the ADF is unique. It demands unique solutions including a Dept. of Veterans Affairs, a unique legal system, and unique conditions of service. There need be no implications for other super schemes because there is no “employment” linkage. Any decision on other schemes is entirely separate.

o DFRDB is an unfunded scheme – how are you going to pay for it? What government services are going to be cut? The Finance figures said cash $175m and a fiscal cost of $1.7b over the forward estimates.

See earlier comments. Additionally, it was the Commonwealths decision as employer not to fund DFRDB so why should ADF members now have to wear the adverse consequences of the governments politicaldecision not to properly meet its obligations like every other employer? All this government wants to do is to pass the financial buck onto future generations of taxpayers. At least its predecessorestablished the Future Fund for this purpose.
And, importantly, DFWA does not want a new benefit. All we want is restoration of a condition of service that successive governments allowed to be taken away.

• Why did Nick Minchin come out against this in the press? (There is no inherent logic to the proposition that a public sector employment employment-related superannuation payments should be indexed in exactly the same fashion as a means-tested welfare benefit in this case, the age pension). The Australian, 12 May 2012.

See above comments. The writers repetition is tedious, although it is interesting that s/he is happy to so often defer to a noted political opponent.

o Why didnt the Coalition do this during their 11 years in government?

Thats a question for the Coalition. Anyway, is the writer trying to say that a political party cannot change its mind? If thats the case then can we expect this government to nationalise the banks, which was ALP policy in the 1940s? (Come to think of it…)

Australias retirement income system, applying equally to both military personnel and its civilian employees, is based on the three pillars system:
• compulsory savings for all employees under the superannuation guarantee regime;
• voluntary superannuation contributions and other private savings; and
• publicly funded, means tested, age pension and associated social security benefits.
Superannuation benefits are not the same as the age pension. Superannuation payments are an employment-based benefit. The age pension is a means tested income support payment as part of our welfare system. It is not relevant to compare indexation of the age pension and superannuation payments. For many people, the age pension is their principal or only source of income. Commonwealth superannuation payments provide a guaranteed level of income and indexation regardless of a persons other income or assets, and are not affected by investment returns. These types of payments are not generally available to the rest of the community. In addition, and depending on a persons income and/or assets, superannuants can also receive additional financial assistance through the age (at 65) or service (at 60) pension. The current cut-off point for access to an age/service pension for a couple is income of $66,196 and/or assets of $1,032,500 for a homeowner.

Repeat of earlier spin & misstatements by the writer. None are relevant to the indexation issue.

The DFRDB scheme has a number of key features and these include:
• the payment of benefits on retirement after 20 years service;
• the ability to commute between four and five times the annual pension rate in exchange for a reduction in pension. This option was exercised by over 99 per cent of members;
• a higher employer contribution than other schemes (around 30 per cent compared to the current community standard of nine per cent); and
• a higher percentage of final salary as a superannuation pension compared to other Commonwealth schemes. These are:
– after 20 years service, a pension equal to 35% of salary at the highest increment for rank held at the time of retirement
– after 30 years service, a pension equal to 51.25% of final salary at the highest increment for rank held at the time of retirement
– after 35 years service, a pension equal to 62.75% of final salary at the highest increment for rank held at the time of retirement
– after 40 years of service, a pension equal to 76.5 % of final salary at the highest increment for rank held at the time of retirement (civilian employee around 50%)

More repetitive rehash of commutation & NECR. Again, the writer does not reveal that DFRDB members with less than 20 years service receive SFA from their employer even after giving their employer an interest-free loan for their period of service.
And is the writer saying that the DFRDB percentages are bad? If so, which is what s/he is implying, what should the percentages be? A retiring PCSS parliamentarian is entitled toa thumping 50% of backbench salary (more for ministers) after a minimum ofjust eight (8) years service in most circumstances,and 75% of salary after a mere 18 years. A departing DFRDB member with 18 years service only gets his/her compulsory contributions back – with no interest!

Since 1988, DFRDB members are also entitled to a separate three per cent productivity benefit that is paid as a lump sum (the productivity benefit is 9% for those who have not served for 20 years). Under the current MSB scheme, a three per cent productivity benefit is paid each fortnight by Defence and forms part of the MSB employer benefit.

The small 1988 productivity benefit was in lieu of a pay rise at the time. Why does the writer not say so? Anyway, the productivity benefit has nothing to do with indexation. Raising it and all the other non-indexation matters shows how desperate the writer is.

In his 2008 Review of Pension Indexation Arrangements in the Australian Government Civilian and Military Superannuation Schemes, Mr Matthews did not find any conclusive evidence that the CPI understates inflation as it affects Australian Households in general.

As the ABS said over a decade ago, CPI is indeed a measure of inflation but not of cost of living, which is a different thing. Mr Matthews apparently did not realise this.

More damningly, Prof Mark Wooden (University of Melbourne) in an ABC interview on 17 October 2011 said: “Cost of living is rising much faster than the CPI so that means anybody whose incomes (sic) are tied to CPI is going to be struggling and increasingly so.”

This finding was supported by the views expressed in a paper prepared for the Review by the Australian Bureau of Statistics.

If the writer is talking about the ABS paper DFWA thinks s/he is talking about then it was produced after the Review and not for it. In any event, it is not relevant to the issue between CPI as an inflation measure as opposed to a cost of living measure, which todays CPI is not.

CPI did measure cost of living when it was the basis for the Accord in the 80s. But CPI was constructed differently from the late 80s onwards, and has not measured cost of living for well over 20 years. This issue is at the heart of DFWAs case.

Mr Matthews also said that to support a change to the existing superannuation pension indexation methodology… …it would need to be generally accepted that an employer retains a responsibility to compensate former employees for improvements in productivity, as reflected in salary rises, which occur after an employee leaves them. This is not a generally accepted responsibility in Australia.

This is a smokescreen with an element of truth behind it. It avoids the fact that todays CPI does not measure cost of living. Additionally, if Mr Matthews casehere is true then MP and judicial super pensions can only be indexed to CPI and not to “salary rises”, as both are. And the Government did accept Matthews, so why has it taken no action on MP & judicial super pension indexation?

There is a misunderstanding about the change to the indexation method of the age pension in 1997. It has been suggested that is was about maintaining the purchasing power of the age pension. This is incorrect. The 1997 change, which ensured the maximum basic rate of the single adult age pension, after indexation, did not fall below a rate equal to 25 per cent of the male total average weekly earnings (MTAWE), was made to honour an election commitment that pensioners would share in increase in community living standards. This was a policy object of successive Governments since the early 1970s.
At the time of making the change, the then Government said:
Pensions (that is the single adult age pensions) are indexed twice a year – March and September – according to movements in the CPI, ensuring that the real purchasing power of the pension is maintained. However, CPI indexation, by itself, may not enable pensions to keep pace with changes in the living standards of the rest of the community. By legislating to maintain the single rate pension at 25 per cent of male total average earnings, the government is demonstrating its commitment to ensure that pensioners share in the increases in community living standards.

The Howard election commitment came about because welfare pensioners were starting to realise that the then “new” CPI did not keep up with the cost of living. DFWA recalls that the Coalition, in opposition until the 1996 election, picked up on pensioner disquiet and did something about it for their electoral benefit (not unlike todays situation – or the Labor situation before the 2007 election – re fair indexation for military super pensioners). Pensionerpurchasing powerhad fallen back; linking welfare pensions to MTAWE in 1997 was a simple and convenient way of overcoming the problem posed by the changed CPI, and established an important principle.

The Rudd government refined the welfare indexation method in 2009 by developing PBLCI at a cost of some $18m. DFWA applauds the Rudd reforms to welfare pension indexation, particularly because the majority of military super pensioners receive so little from DFRDB etc. that they mayneed to rely on welfare payments in their retirement.

This change to the age pension is not relevant to superannuation payments and yet they are being used to justify changes to superannuation indexation. The DFRB and DFRDB pension were not intended to be the sole lifelong income source for those who were still of working age when they ceased service, either through choice or due to rank retirement age – the general trend has been some 75 per cent of DFRDB members were under 45 years of age when they ceased service, and 40 per cent of those were between 35 and 40 years of age.

More irrelevant spin. Of course DFR(D)B is not intended to be a sole income source for working age people leaving the ADF. It never has been. Additionally, it is unfortunate that the writer has no understanding of why Australia needs a young ADF and why there is a cost attached to that.

Criticism of the DFRDB scheme is not justified. It is a more generous scheme than most other Commonwealth superannuation schemes.

No its not (again). The word “generous” is overworked, irrelevant to indexation, and plain wrong if an objective observer looks at who gets what from the various Commonwealth super schemes.
Nobody paid more to get less than did/do military super members. The only ones who compulsorily paid more (11.5%) are pre-2004 PCSS MPs but they only do so for 18 years, after which they pay just 5.75% for benefits that would make Kerry Packer blush. Judges pay nothing.
And public servants have a security of tenure that ADF members do not (and should not). ADF members with few exceptions were compelled to retire by age 47 until recently. The vast majority of todays DFRDB super pensioners left the ADF under these compulsory early retirement provisions.
Additionally, public servants used to pay (compulsorily) a lower percentage of their pay into PSS/CSS than did DFRDB members. Even better, CSS/PSS contributors these days may contribute to their super but are no longer compelled to do so, unlike MSBS/DFRDB contributors.
And ADF members are not public servants. They are not even employees. Military service is unique, in the correct sense of the word.

While the following are current examples, they do demonstrate that the scheme provides significant benefits:
• A Warrant Officer who retired at the beginning of 2012 after 30 years service is estimated to receive a payment without commutation of approximately $47,000 per year. If he or she decided to commute five times the annual payment, then the lump sum would be around $240,000 in exchange for a reduced annual payment of some $38,000 per year.
• A Major equivalent who retired at the beginning of 2012 after 25 years service is estimated to receive a payment without commutation of approximately $40,000 per year. If he or she decided to commute five times the annual payment, then the lump sum would be around $200,000 in exchange of a reduced annual payment of some $33,000 per year.
• A Colonel equivalent who retired at the beginning in 2012 after 30 years service is estimated to receive a payment without commutation of approximately $68,000 per year. If he or she decided to commute five times the annual payment, then the lump sum would be around $340,000 in exchange of a reduced annual payment of some $55,000 per year.
• A Major General equivalent who retired at the beginning of 2012 after 35 years service is estimated to receive a payment without commutation of approximately $120,000 per year. If he or she decided to commute five times the annual payment, then the lump sum would be around $600,000 in exchange of a reduced annual payment of some $90,000 per year.

Here we go again. The writers use of selective statistics is infuriating. S/he should be ashamed of him/herself.
Most ADF retirees are not and never have been former major-generals or colonels or top warrant officers. And even 25 year majors are far from representative of todays DFRD(D)B retirees.
The writer must not know that todays ADF has only 3,243 DFRDB contributors (2012) as opposed to 56,892 MSBS contributors (2011), which means that the DFRDB figures s/he quotes above apply to very few people in a rapidly shrinking cohort.
S/he is also unaware of the restructure of salary for superannuation purposes that took place circa 2005, plus subsequent pay rises made to retain ADF people, which together mean that the remaining DFRDB contributors would receive a significantly greater payout on separation from the ADF than did their predecessors. There is no jealousy here, merely a statement of fact that illustrates the inapplicability of the writers payout figures to the vast majority of ADF retirees. It is further evidence of spin at its best.

Fact: the average (mean) MSBS super pension is $24,734 (2012).
Fact: the average (mean) DFRDB super pension is $24,603 (2012).
Fact: the average (mean) DFRB super pension is $16,817 (2012).
Median military super pensions are significantly lower than the mean, a fact conveniently ignored by Mr Matthews, by subsequent government apologists and by others who follow the government line in preference to doing their own research.

The proposition being put forward is that these people, and those in previous years who received relatively comparable payments based on salary at the highest increment for rank held at retirement, should have their annual military superannuation payments indexed in the same way as the age pension from 55 years of age and older. That is, a military superannuant who is retired and aged 55, having received a lump sum payment of $200,000, $300,000, $400,000 or higher and an annual non-means tested superannuation payment of $40,000, $50,000, $60,000, should have that annual superannuation payment indexed in the same way as the aged pensioner.

A military superannuant should have his/her military super pension indexed so its purchasing power is maintained in retirement, no more and no less. And superannuation is not welfare. What part of this is so hard to understand?
Or does this “tall poppy” paragraph imply that the government wants to means test military super? If military super is means tested then the principle of means testing any super is established. It is then a smaller step to means test the super of all Australians because a precedent exists. Is this the governments true objective?

A single aged pensioner (on full rate) receives $19,600 per annum. A pensioner couple receives $29,600 per annum. And the pensioner must wait until age 65 (or 60 for the service pension). This is not fair or equitable and it would be financially irresponsible for a Government to implement such a change. As the former Minister for Finance, Nick Minchin, wrote on 2 May 2012:
“However, all claims made upon the public purse, even those by retired Defence personnel, should be considered rigorously and on their merits. This particular claim was properly rejected by the Howard Government, of which I was a member, as well as by the Labor Government.
The payments are maintained in real terms, which is what they signed up for.

ADF people certainly signed up for that but the payments are certainly not maintained in real terms as Mr Minchin asserts. He does not understand the difference between inflation (as measured by todays CPI) and cost of living. And he chooses to forget the Senate Select Committees of April 2001 & December 2002. Both recommended fair indexation for that reason when Mr Minchin was Mr Howards Minister for Finance.

Changing the indexation for defence personnel would create immediate demands for the same change to be made for all other commonwealth employees, at a potentially enormous cost to taxpayers”.

…which reinforces the fact that the only driver of opposition to fair indexation is cost. The Commonwealths legal (and moral) obligations as employer are overridden by cost considerations alone. So much for Finance Minister Wongs claim that “We (Labor) dont leave people behind.” (ABCTV “7.30” 11 March 2013). And see earlier comments on the unique nature of military service; flow-ons are not automatic.

The cost of changing the indexation of superannuation payments for those aged 55 and over (in line with the Coalitions policy – Fair Indexation Bill 2010) is significant. Aligning DFRB and DFRDB payments in line with the Bill would have a cash cost of $175m over the FE, a fiscal impact of $1.7b and an estimated increase in unfunded superannuation liabilities of $6.2b. Aligning all Commonwealth military and civilian superannuation payments would have a cash cost of $322m OVER THE Forward Estimates with an estimated increase in unfunded superannuation liabilities of $33b.
There is no intention to deny former servicemen and women there rightful benefits. In the main, ADF personnel receive the additional benefits during their military service in recognition of the unique nature of this service. These include:
o Competitive superannuation schemes, access to service allowances, other salary related and disability allowances, ADF specific leave, housing, health, family support and comprehensive compensation arrangements. There are special features of the individual schemes (eg access to benefits early, higher percentage of employer contribution).

As you can see this is a very complex issue…

No its not. Its simple. Military superannuation pensions need to rise by the same percentage and frequency as the age pension and for exactly the same reason – to maintain pension purchasing power.
Super and welfare are two different things with two different purposes but the reason to index one is the same as for the other – simply to maintain its purchasing power.

…and requires a considered response which I believe that Government has provided in this case.At all times however he Government is reviewing all benefits and entitlement for all persons in receipt of funds and XXXX is fully aware of concerns being raised at this time.
Thank you very much for raising this issue with XXXX.
Yours faithfully,

Whoever wrote this government letter should be ashamed of him/herself.

Defence Force Welfare Association – March 2013

ADF – Australian Defence Force
DFRB – Defence Force Retirement Benefits Scheme (1948-1972)
DFRDB – Defence Force Retirement & Death Benefits Scheme (1972-1991)
MSBS – Military Superannuation & Benefit Scheme (1991- )

CSS – Commonwealth Superannuation Scheme (1976-1990)
PSS – Public Sector Superannuation Scheme (1990-2005)
PSSap – Public Sector Superannuation accumulation plan (2005- )

PCSS – Parliamentary Contributory Superannuation Scheme (1948-2004)

CPI – Consumer Price Index
PBLCI – Pensioner & Beneficiary Living Cost Index
MTAWE – Male Total Average Weekly Earnings
NECR – Notional Employer Contribution Rate
CSC – Commonwealth Superannuation Corporation
ABS – Australian Bureau of Statistics