Table 3–1 summarises the Review Team’s assessment of the DFRDB and the MSBS against the Guiding Principles outlined in the last chapter.
Table 3–1: Assessment of current schemes against Guiding Principles
|
Guiding Principle |
DFRDB |
MSBS |
|
Flexibility
|
No In small part |
In small part Yes |
|
Simplicity |
No |
No |
|
Adequacy
|
No Yes |
In part Yes |
|
Tailored
|
Yes Yes |
Yes Yes |
|
Visibly attractive
|
Unlikely Limited Limited |
Limited Limited In part |
|
Financially sustainable |
No |
No |
The DFRDB was implemented on 1 October 1972 following the Joint Select Committee Review of Defence Forces Retirement Benefits Legislation, chaired by Mr J D Jess MP. This Committee was established in view of dissatisfaction with the provisions of the former Defence Forces Retirement Benefits (DFRB) Scheme (introduced on 1 July 1948).
Subsequently, a review of the DFRDB was undertaken by a small team led by Sir William Cole and the report of 25 June 1990 (which became known as the Cole Report) concluded that the DFRDB was no longer appropriate for the majority of ADF members, particularly younger personnel, and did not adequately meet the ADF’s personnel management objectives. The Cole Report noted that the DFRDB was designed in a superannuation environment markedly different from that existing in 1990 with increased coverage through the inclusion of superannuation in industrial awards and through the vesting and preservation of employer–financed benefits. A history and description of the DFRDB are contained in Appendix E.
The consultation seminars and focus groups conducted by the Review Team indicated that there was a widespread view across the ADF that the DFRDB was a superior superannuation scheme to contemporary schemes, and to the MSBS, both for individuals and for ADF retention. There was little evidence to support this contention and few members were aware of the majority of the scheme design features or of the analysis of the scheme in the Cole Report. For instance, when the DFRDB closed in 1991, less than 5% of Navy personnel were qualifying for any employer benefit. While recognising that the DFRDB was a closed scheme, the Review Team assessed the DFRDB against the Guiding Principles to test whether the fondness for the DFRDB was warranted.
The Review Team re-affirmed the view of the Cole Report and concludes that:
The Review Team believes it is important that the ADF leadership support better education and awareness of superannuation amongst ADF members and, inter alia, disavows the current widespread but ill-informed view of the DFRDB which has undermined appreciation of the MSBS and the Cole Report, and could undermine this Review Team’s recommendations.
The Cole Report noted that the DFRDB arrangements failed to meet the requirements of the extant Occupational Superannuation Standards Act 1987 in several key areas such as investment earnings on member contributions, the payment of retirement pensions before age 55 and the structure of the DFRDB Authority. Cole argued for a totally new ADF superannuation and benefits scheme to overcome these deficiencies against a background of the Government seeking to make superannuation more readily available and ensuring that the prime purpose of superannuation is the provision of genuine retirement income. The new MSBS structure and the associated Retention Benefit[3] were designed (in part) to smooth out exit rate spikes experienced under DFRDB and to encourage service beyond 20 years.
At the introduction of the scheme, the MSBS met these goals and complied with broader government guidelines on superannuation while retaining the generous death and disability benefits of the DFRDB based on prospective service. Nevertheless, while all members of the ADF now receive an employer benefit, regardless of length of service, the unfunded defined benefit nature of the employer benefit has prevented the MSBS from adapting to the contemporary expectations of ADF members, and in some cases, to changing legislation. A history and description of the MSBS are contained in Appendix E.
In assessing the scheme against the Guiding Principles, the Review Team found that the MSBS:
· provides very generous benefits to long-serving members with a choice of an indexed pension or lump sum, or both;
· for shorter serving members, provides a substantially less generous level of employer benefit than might appear from the benefit structure due to the preservation requirements; this may be less than necessary to contribute to full maintenance of living standards in retirement;
· is too complex for members to understand and does not allow members to exert any control over their employer-financed benefits;
· has not, in practice, contributed much to recruitment or retention because the complexity undermines the potential benefits of the scheme’s structure;
· provides generous death and disability benefits, in line with the unique nature of military service.
The Review Team assessed the military superannuation arrangements of the US, UK, Canada and New Zealand against the Guiding Principles and to seek features that might be adopted as best practice. In each case, of course, the schemes were designed within the context of the different national approaches to the nature of military service, community superannuation and social security arrangements, and societal expectations.
The Review Team noted that:
While the Canadian scheme, in particular, appears to be more generous than the MSBS in respect of retirement pensions, none of the schemes would rank well against all the Guiding Principles. Particular features of certain schemes are, nonetheless, attractive such as the availability of indexed pensions in most schemes and the flexibility of the NZ scheme. A summary of the features of each of the foreign military schemes examined is provided in Appendix F.
The Review Team assessed a number of superannuation schemes sponsored by the Federal and State Governments with emphasis on those that provided benefits to ‘uniformed bodies’ such as police, fire and ambulance workers. The differing work requirements and remuneration arrangements make comparisons with ADF conditions difficult despite the fact that, like the MSBS, these schemes operate in the same regulatory, social security and tax environments.
Overall, the level of benefits varies widely across the government sector although the MSBS is at least competitive for retirement benefits and generally superior for death and disability benefits. In many other schemes these benefits no longer include reversionary benefits or benefits related to prospective years of service, as members are given the option to purchase additional insurance themselves for death and permanent disability. A summary of some relevant superannuation arrangements is provided in Appendix G.
The Review Team determined that, while the MSBS compares reasonably well with most overseas military schemes and with other Australian schemes for ‘uniformed bodies’, it still falls well short of best practice contemporary superannuation and does not contribute significantly towards recruitment and retention. The DFRDB is rated well below the MSBS. While both are tailored to the unique nature of military service there is, even here, room for improvement (particularly to take advantage of the MRCA and its rehabilitation focus as mentioned in Chapter 1). Incremental changes to the MSBS might alleviate some of the weaknesses, but could not satisfy all of the Guiding Principles the Review Team believes should be followed.
In conclusion, the Review Team believes that a new scheme should be introduced that fully satisfies the Guiding Principles.
The Review Team does not consider any overseas scheme, or other Australian schemes, offer complete models that should be followed by the ADF. There may be some particular features, however, that should be taken up.
In recommending a new scheme, the Review Team also:
[2] It is noted that such a scheme design would no longer be acceptable under the Superannuation Guarantee legislation. For this reason special arrangements have had to be introduced.
[3] The MSBS Retention Benefit, whilst not formally associated with superannuation, provided a benefit of one year of salary after 15 years of service for a commitment to serve for a further five years. The benefit was discontinued in October 2005 with grandfathering arrangements which will see declining numbers of personnel becoming eligible each year.