Implementation of the retirement accumulation plan
Implementation of the proposed death and disability arrangements
Possible early implementation of some recommendations
Each of the two elements of the proposed new scheme, the retirement accumulation plan and defined benefit death and disability arrangements, will require more detailed development than set out in this report and the establishment of appropriate administrative arrangements. Considerable cooperation across agencies will be required, together with further consultation with stakeholders, in addition to the normal process of ministerial and Cabinet decision-making and the passing of legislation.
Given the lead times that will be necessary, the Review Team believes the proposed scheme should commence in the first half of calendar year 2009, allowing the initial budgeting impact to be spread over two financial years (2008-09 and 2009-10). This timing assumes Government agreement to the major recommendations soon after the Review Team reports at the end of July 2007.
On commencement of operation of the proposed superannuation scheme, and closure of the MSBS, all new members of the ADF will be required to join the new scheme. The Review Team has recommended members be provided with fund choice for the accumulation of the employer contributions, but that all members must remain in the scheme for the defined benefit death and disability arrangements. At the commencement of the new scheme the Review Team has recommended current members of the ADF, and MSBS preserved benefit members, be provided a once only, year long opportunity to transfer to the proposed scheme. This choice would be facilitated by an education and awareness campaign, and subsidised individual financial advice, as detailed in Chapter 8.
While further work will need to be undertaken on implementation and transitional arrangements, the following describes the overall approach recommended by the Review Team.
A detailed implementation plan will need to be developed once the Government’s responses to the Review Team’s recommendations are known. Some matters will need to be addressed in sequence, while some will be able to be achieved in parallel.
The following issues will need to be addressed in the implementation plan for the retirement accumulation plan.
The introduction of the proposed defined death and disability arrangements will require substantial and additional effort to that identified above. It will involve the establishment of an entirely different, rehabilitation-focused arrangement administered by the Department of Veterans' Affairs (DVA) and not ComSuper.
The following will need to be developed and finalised:
Additionally, agreement will need to be reached on what is to remain the responsibility of ComSuper in administering death and invalidity arrangements for the extant DFRDB and MSBS schemes.
The Review Team has suggested the Government could agree to the early implementation of some recommendations. These relate to changes to the MSBS Maximum Benefits Limits and final salary for death and invalidity purposes (see Chapter 9), and the appointment of the Chair of the DFRDB Authority. If it is agreed to implement these changes in advance of other recommendations, priority would need to be given to appropriate legislative change, member communications, regulatory and compliance issues, systems changes, and the identification and appointment of an independent chair of the DFRDB Authority.
Ongoing administration should be easier overall, both for the retirement accumulation plan and the defined death and disability arrangements. The retirement plan will involve real money in individual accounts not requiring formulae to be checked against Defence records to monitor entitlements. Into the future, there will be a much smaller number of indexed pensioners and a smaller number of preserved members as some will choose to switch their accumulated benefits into different funds. In addition, the disability payments for both superannuation and compensation will draw directly from a single administrative framework.
On the other hand, there will be more family members with accounts whose administrative costs will be covered by Defence. There will also be the need for the fund to offer new products including account-based pensions and pensions with different indexes. Most importantly, the scheme will need to adapt to the requirements of its members for information and support to ensure they can and do make informed choices in managing various flexibilities allowed and the risks involved. This information and support is also essential for Defence to maximise the potential benefits in terms of recruitment and retention, by ensuring ADF members fully appreciate the value of the new arrangements as part of their total remuneration package.
The Review Team is supportive of the view that the board should be responsible for scheme administration and financially accountable for the costs of that administration. Accordingly, the board should negotiate fees and services directly with the relevant service providers (whether that be ComSuper, DVA or others) and negotiate funding for those fees directly. In addition the Board would determine appropriate fees and services. For example, ADF members who have separated and who keep their accumulation plan account active via external employer contributions, would pay fees.
As mentioned in Chapter 4, in conjunction with closing the MSBS to new members, a one-off opportunity should be offered to current ADF members and MSBS preserved members to transfer to the proposed scheme. The opportunity should occur within a window of 12 months from the commencement of the proposed scheme. Elections to transfer will be binding and unable to be revoked. Members not completing a valid election to transfer at the expiry of the window will remain in their existing scheme.
The methodology for the calculation of the transfer values will differ from scheme to scheme.
Transfer of the member contributions made by DFRDB members would be on a basis consistent with that undertaken for the DFRDB transferees to MSBS in 1991. That is, the long-term bond rate would be applied to contributions actually made by the DFRDB members to establish the transfer amount for the member contribution. In respect of the employer contribution, the factor will be based on their actual years of service in DFRDB but utilising the MSBS accumulation factors (18% for seven years, 23% for the next 13 years and 28% for any additional years of service) multiplied by the average salary over the last three years of service. The total amount would then be funded and taxed where relevant, and placed in the proposed new scheme. Subsequently the member may choose to transfer the funds to another scheme.
Current contributors. The member contributions for MSBS members are already funded (apart from the DFRDB component of those that transferred in 1991) and can be transferred directly into a different accumulation scheme if the member wishes. The total employer contributions for MSBS contributors can be derived from the total employer benefit accrued at the time of transfer (that is, accrued multiple times Final Average Salary). The total employer component has two elements, a funded productivity component and the remainder an unfunded component. To effect a transfer to the proposed scheme the productivity component can be transferred directly into an accumulation scheme (along the same lines as the member benefit). The remainder will have to be funded prior to transfer. The total amount would therefore be funded, taxed where relevant, and placed in the proposed new scheme.
Those who are still entitled to the retention benefit that was associated with the MSBS (but not formally part of that Scheme) should keep that entitlement if they choose to transfer to the new scheme.
Preserved members. An MSBS preserved member’s benefit will already have been allocated a value at the time of separation from the ADF. The member-financed benefit is fully funded and may already have been withdrawn or rolled out. The employer benefit comprises two parts; a funded productivity element (which grows with the fund’s investment earnings) and an unfunded element which grows at the Consumer Price Index (CPI). All three amounts can be crystallised at the point of transfer, with that total amount becoming the transfer value. Funding will be required for the previously unfunded amount, taxed where relevant, and placed in the proposed new scheme.
While the main recommendation is that all current ADF members and MSBS preserved members should have a year long opportunity to transfer to the new scheme, careful consideration will also need to be given to members discharged on medical grounds to ensure they are treated fairly.
These members have not chosen to leave the ADF but have separated due to their medical situation. The level of incapacity is subject to review by the MSBS Board or the DFRDB Authority.
MSBS members. In summary, MSBS members receive the following benefits:
Whilst a member remains a Class A or Class B benefit recipient they should be treated like any other MSBS pensioner and no opportunity to transfer should be provided. Given an Invalidity Class C determination effectively provides the same benefits as a member who resigns (i.e. all benefits are preserved), a member who has received a Class C benefit will be provided with the opportunity to transfer to the proposed scheme by the end of the transfer period. The Review Team believes that those classified as Class C during that year should have up to a further six months to decide whether to transfer.
Further, because being reclassified from a Class A or Class B to a Class C effectively makes the person a preserved MSBS member, there is a strong case to give such people the choice to transfer to the new scheme at the time this occurs, even if this is after the normal 12 month window open to others. The opportunity should be a once-only offer within a six month window from being reclassified. This opportunity should be only offered to members less than 55 years of age.
DFRDB members. In summary, DFRDB members receive the following benefits:
Under the Review Team’s recommendations only current serving members of the DFRDB will be provided an opportunity to transfer to the proposed scheme. A DFRDB member who is, or becomes, Invalidity Class A, B, or C after the expiry of the year long election period will not be provided a choice to transfer to the proposed scheme, with the one following exception.
It is possible that an ADF member, who chose in 1991 to stay in the DFRDB because they intended to remain in the ADF for at least 20 years, may be medically discharged before reaching the 20 years service, and be eligible only for the Class C benefit and lose any entitlement to a DFRDB pension. Had they known this unlikely event would happen, they would have transferred to the proposed new scheme during the year-long window of opportunity recommended by the Review Team. Accordingly, the Review Team believes it would be fair to make an exception to the standard arrangement for a DFRDB member (who is a serving ADF member at the end of the election period) who is determined Invalidity Class C before 1 October 2011 (20 years of operation of the DFRDB Scheme). This (at most) small number of members will be provided a six month opportunity to transfer to the proposed scheme. DFRDB members with broken service, that is, who would not have 20 years service at 1 October 2011, will need to have made their election during the election period and base their decision on their personal circumstances and the offer of subsidised financial advice.
MSBS and DFRDB invalidity members who are provided an opportunity to transfer to the new scheme will be offered the subsidised financial advice recommended by the Review Team in Chapter 8. The choice will be a once only opportunity on the first occasion the member becomes eligible for the choice.
Currently DFRDB members who re-enlist may elect to rejoin the DFRDB or join the MSBS. Where a member does not make an election prior to rejoining, they are placed in the MSBS by default. The MSBS Board submission recommended that the default option be changed to DFRDB as this is the most popular choice. Since the DFRDB scheme is closed and is not a complying scheme, the Review Team considers that the default option should remain the MSBS. Once the MSBS is closed, the new scheme should become the default option while members retain the right to elect the DFRDB.
MSBS preservers who re-enlist during the transition period will have the option of transferring to the new scheme or continuing as contributing members of the MSBS. After the transition period, MSBS preservers who re-enlist would continue as contributing members of the MSBS. All other re-enlistees, including ex-MSBS members who chose to transfer to the new scheme, will be members of the new scheme.