Chapter 2:                        Desirable characteristics of military superannuation in Australia today

Best practice superannuation

Recruitment and retention

Impact of the unique nature of military service

Best practice superannuation

The fundamental purpose of superannuation is to ensure an adequate income when people finish their working lives by facilitating the spreading of lifetime earnings. The required financial levels are achieved through individual savings and employer superannuation contributions spread over the whole working life, and restricting access to these funds until genuine retirement, with the current preservation age in Australia being age 55 but increasing to age 60.

International superannuation

Overseas best practice superannuation schemes encourage total contributions that are sufficient, with government social security, to maintain an individual’s living standards after retirement, and a standard of living commensurate with that of the rest of the community. While ILO Convention (1952) No 102 sets 40% as a minimum income replacement on retirement, more commonly a net income of around 60% or more of the net pre-retirement income is provided from age 60 to 65. The key risks faced by individuals, viz. inflation, years of life after retirement, and untimely death or disability, are often covered by indexed pensions and insurance benefits in the form of continuing income from these schemes.

The ageing of the population of many countries has triggered widespread reform of retirement incomes policies, particularly in developed countries. There has also been growing interest in ensuring that policies in developing/transition countries are effective and affordable, and support economic development. The OECD and World Bank encourage a ‘three pillars’ (or ‘multi-pillars’) approach involving, first, a publicly managed, tax-financed pension system; second, compulsory privately managed, funded schemes; and thirdly, voluntary (funded) retirement savings. To respond to ageing populations, both organisations support increasing the emphasis on the last two ‘pillars' over the first, which should focus primarily on poverty alleviation. A fourth ‘pillar’ is now sometimes mentioned, being earnings from continued part-time work beyond normal retirement age.

In line with this broad approach, there has been a trend internationally towards funded schemes and away from unfunded social security systems with generous earnings-related benefits. Nonetheless, many overseas superannuation schemes, particularly military schemes, are still based on defined benefits, which commonly have the disadvantages of limited flexibility and increasing unfunded liabilities.

Australian superannuation

Australia is one of the pioneers of the ‘three pillars’ retirement incomes policy, and gives more emphasis than most other OECD countries to funded occupational superannuation and private savings and less emphasis to unfunded social security (by focussing on its ‘safety net’ role). It is frequently placed amongst the leading countries in terms of its preparedness for population ageing. As such, it may be considered to be close to international best practice in terms of the broad policy framework.

Best practice contemporary schemes in Australia provide maximum flexibility to members and recognise that members own their accumulated benefit. These schemes feature a menu of options for contributions (pre or post tax) and for benefits (lump sums and/or various types of retirement income streams). Consequently, members are given considerable choice in respect of their contributions and investments. Members are also kept informed, having disclosure of the current value of their accumulated benefits. The best schemes also provide access to information and calculators on the members’ likely future benefits to enable sensible life choices.

The majority of Australian schemes are also financed in an equitable way across generations, so that each generation effectively meets the costs of its retirement benefits. Increasingly this equity is achieved through fully funded schemes. In delivering these best practice outcomes, however, contemporary Australian schemes leave the individual with some of the risks that might otherwise lie with the scheme’s sponsor or an insurance company.

The most recent tax arrangements also favour taxed schemes, where concessional contributions are taxed and fund earnings are taxed, but benefits taken after age 60 are not assessed as taxable income.

Overall, the Review Team considers that best practice superannuation involves:

Recruitment and retention

The Review Team drew on the evidence of recent Defence and community surveys, its consultations, a commissioned survey of ADF members (conducted by ORIMA Research) and focus group discussions to assess the current and potential impact of superannuation on recruitment and retention. Some more details of this evidence is at Appendix D.

Recruitment

ADF and community surveys indicate that young people have little interest in superannuation. With around 85% of ADF recruits aged 25 or less (93% aged 30 or less), this substantially limits the potential role of superannuation as an attraction measure for the ADF.

The commissioned survey revealed that just over a quarter of ADF members were aware of military superannuation before they enlisted and 11% indicated they were at least partially influenced to join the ADF by the superannuation arrangements (see Figure 2–1 below).

Figure 2–1: Influence of superannuation scheme benefits on job

To what extent did your knowledge of military superannuation and its benefits influence your decision to join the ADF?

 

Focus group discussions suggested this influence may be substantially greater amongst (the increasing number of) mature age recruits and former ADF members considering re-enlistment, and would be greater still if the value of the employer contributions were more clearly understood. Younger recruits are also influenced by parents and other relatives (many of whom are currently serving or have served in the ADF), and their appreciation of the value of military superannuation may indirectly support recruitment.

Retention

The Defence Personnel Environment Scan 2025 summarised from ADF exit surveys the top ten reasons for the exit of service members at four specific career points. Superannuation, and indeed remuneration in general, did not feature in any of the lists. The 2003 ADF Attitude Survey identified the top 15 influences on retention for various age groups; superannuation does not feature for members less than 30 years of age, but does become a factor for older members.

The commissioned ORIMA survey revealed that a significant minority (38%) felt that their superannuation arrangements at least partially influenced their decision to continue in the ADF, despite only a third being confident that they had a good understanding of their superannuation (a third indicated poor knowledge). The proportion of those with over 20 years of service who felt that superannuation had at least partially influenced their decision to stay was around 70%. See Figure 2–2.

Figure 2–2: Influence of superannuation upon members to remain in the ADF.

To what extent does your membership of your military superannuation influence your decision to remain in the ADF?

The limited understanding of the value of military superannuation was confirmed both in the consultations undertaken at the beginning of the Review and in the focus group discussions conducted later. There was almost universal ignorance of the value of the employer contribution and its impact on ADF members’ total remuneration compared to remuneration available outside the ADF. The commissioned survey revealed that nearly 70% had at best a moderate understanding of the benefits of their military superannuation. This was confirmed by the findings that, while a clear majority believe the death and invalidity benefits are higher than under civilian schemes, views of the resignation and even the retirement benefits are much more equivocal, even though the fact is that, for most members, the MSBS is significantly more generous than civilian schemes.

This might help to explain the limited impact of the current schemes on retention. There is no clear correlation between MSBS employer contribution levels and separation rates. While the DFRDB has had a clear impact amongst the long-serving members (with low separation rates from about 15 years of service to 20 years, but a very sharp spike after 20 years when eligibility for pensions is gained), it did not affect the vast majority of ADF members who leave before 15 years of service without any employer benefit (other than special arrangements to meet the Superannuation Guarantee requirements).

Increasing the potential impact

Notwithstanding the evidence about the limited recruitment and retention effects of the current schemes, other evidence suggests there is scope for superannuation to play a more effective role in retention, and in attracting former ADF members to return. Focus group discussions and the earlier consultations demonstrated the critical importance of clarifying the value of employer superannuation contributions to ADF members and to potential recruits. If the value of superannuation for each individual member could be made more transparent and included in the standard remuneration package description, as occurs for jobs on offer from other employers, the competitive advantage of the ADF would be so much clearer and the pressure to increase pay rates might be reduced. This would not only have retention benefits but could be particularly valuable in attracting skilled mature aged workers into the ADF and encouraging the return of former members; it could also influence young people indirectly through the views of their parents.

This is not just a matter of better education and promotion, but concerns the basic design of the schemes: it is difficult to quantify the value of MSBS benefits for individual members even when the member separates from the ADF.

The commissioned survey also revealed that the most important features of the MSBS for members are the generous level of the employer benefit, the absence of administration fees and the insurance cover for death and disability. The two most important features supporting retention are the indexed pension (preferred over a lump sum by two thirds of those surveyed, as shown in Figure 2–3) and choice of investment. Focus group discussions confirmed, in particular:

Most ADF members also favoured flexibility over their own contribution levels but with encouragement to make such contributions.

Figure 2–3: Preferred form of benefit on retirement

From your current viewpoint, which benefit would you prefer at retirement?

More generally, superannuation contributes to the overall level of satisfaction with the ADF conditions of service package, and it is a significant hygiene factor in supporting a positive view of continued military service for longer-serving members. ADF members of all ages also understandably focus strongly on the support for themselves and their dependants in the event of death or injury, particularly in the present climate of high operational tempo and risk.

Balancing these considerations, the Review Team considers that, to support recruitment and retention, military superannuation should:

Impact of the unique nature of military service

There is a requirement for any military superannuation scheme to recognise the unique and special features of military service (detailed in the Terms of Reference). The requirement to accept being placed in life-threatening circumstances not covered by contemporary insurance arrangements, demands that there be superior death and invalidity benefits for members and dependants. The case for such benefits goes beyond service-related death or disability, as military service requires a level of physical and mental fitness that can be undermined by non-service incidents and lead to medical discharge.

Military service is also a special form of endeavour that places considerable stress on members and dependants, and posts them regularly to different locations disrupting family arrangements including spouse careers. There is therefore a justified expectation in the ADF that the employer should be somewhat paternalistic in taking extra care of members and their families so that members can focus their attention on military duties. The consultation process, both with ADF members and with other stakeholders (particularly the Defence Families of Australia), confirmed the importance of supporting family members as well as the ADF members in the superannuation arrangements.

For those who choose a full career in the ADF, notwithstanding compulsory retirement at age 60, the Review Team has been advised that the vast majority will retire by age 55; many of these individuals may then have limited opportunities to embark on a new career. The Review Team examined the practice of some of our allies in this regard, as outlined in Chapter 3. Canada and the US provide some benefits based on years of service (25 and 20 years, respectively) that are payable before normal retirement age, while the UK restricts retirement benefits to age 55. The Review Team is not persuaded of the justification to provide 20 or 25 year pensions, but notes that good international practice does seem to recognise that some form of benefit for the military should be available from a younger age than the community norm. It is a matter for judgement what that age should be. The Review Team considers the MSBS (and UK) age 55 standard is reasonable, particularly with the Australian preservation age increasing to 60.

The unique nature of military service and employment suggests that an appropriate military superannuation scheme would provide:

 

Review Team Guiding Principles

Drawing together the desirable characteristics of military superannuation from best practice contemporary superannuation, the potential impact on recruitment and retention and the unique nature of military service, the Review Team has applied the following Guiding Principles for any new arrangements for military superannuation:

•           Flexibility, to meet individual member preferences regarding both contribution arrangements and the form of benefits and to respond to future changes to the broader superannuation or ADF environments.

•           Simplicity, to enable ADF members to clearly understand and measure the value of their current employer contributions to superannuation and the potential future benefits.

•           Adequacy, for all members of the ADF, both short-term and long-term, with a level of benefit that facilitates the maintenance of living standards, both on and through retirement.

•           Tailored, to address the unique nature of military service by providing generous life-time support for dependants in the event of death or disability and rewarding long and arduous military service.

•           Visibly attractive, forming an integral part of the remuneration package, enhancing the ADF conditions of service package and, in particular, supporting retention at critical points for the ADF and attracting former ADF members to re-enlist.

•           Financially sustainable, with stable employer contributions over time and no increasing unfunded liability.

 

These Guiding Principles, particularly the principle requiring benefits tailored to address the unique nature of military service, confirmed the need for the Australian Defence Force to have its own superannuation scheme.

 

 Recommendation 1 The Australian Defence Force should continue to have its own mandated superannuation scheme with benefits that reflect the unique nature of military service.