Operation of Maximum Benefit Limits
Recognition of interdependent relationships
Indexation of military superannuation pensions
The operation of life expectancy factors
Transition to retirement provisions
Preservation and portability arrangements
The calculation of final salary
Military superannuation scheme complexity
The impact of the Compulsory Retirement Age
The appropriateness of the three-tiered invalidity classification system
Suspension of benefits upon imprisonment
The Terms of Reference (TORs), paragraph 2, require the Review Team to analyse a list of specific issues which have been highlighted by emerging and extant Government policy and member feedback. These issues, which mostly concern technical aspects of current schemes, are considered below together with the additional matter raised by the Minister (concerning pensions for those remanded in custody).
The Maximum Benefit Limited (MBL) is a design feature of the MSBS that has existed since implementation of the scheme. MBLs impose a ceiling on the employer-financed benefit based on a member’s final average salary and the benefit multiple on separation.
As at 30 June 2007, 290 personnel (out of 46,793) active MSBS members had reached the pension MBL and ceased contributing to the scheme. This number has grown steadily since mid-2004, partly because of the maturing of the scheme and partly as a result of the higher MSB Fund investment returns since July 2003. These members represent an increasing proportion of the ADF’s more senior personnel (being MSBS as opposed to DRFDB contributors), though still representing less than 1% of all serving scheme members.
There is increasing concern and dissatisfaction regarding the MSBS MBL provisions and a general perception, especially among more senior, long-serving members, that the value of their total ADF remuneration is significantly undermined when they reach their MBL point. The issue was raised in each of the Service submissions to the Review and the submission from the Head of the Defence Personnel Executive, as well as those from the RSL, the RDFWA and other Ex-Service Organisations. The perception of reduced remuneration is not entirely valid, as annual adjustments to the MBLs and extra years of service do generally add to employer-financed benefits after reaching their MBLs. However, there is a reduction in effective employer contributions, and the perception of total cessation of employer contributions may well affect retention of some critical ADF members.
The MBL provisions are also complex, difficult to administer and confusing to members in their application. They reflect the philosophy of the time, when such limits were also introduced into the Public Sector Superannuation (PSS) scheme, and Reasonable Benefit Limits (RBLs) were imposed on the superannuation system. This philosophy effectively imposed a constraint on the role of superannuation to spread lifetime earnings, by limiting support for those on higher incomes. However this approach has been changed recently with the removal of the RBLs in the tax system from 1 July 2007 and the reform of MBLs in the PSS scheme commencing 1 January 2008.
Under the PSS changes, the MBL multiple (of Final Average Salary (FAS)) for most scheme members will increase from eight to ten (for FASs of $50,000 or more). While the Review Team considered aligning the MSBS MBL to the levels now applying to the PSS, this would be difficult as the PSS MBL applies to a single defined benefit element while the MSBS MBL includes both the member accumulation and (notional) employer benefit components. Moreover, with many more ADF members retiring at age 55, the number exceeding the PSS Scheme’s new MBL of ten times FAS is very small, while retaining such an MBL would require a cumbersome administrative arrangement for no significant financial gain. It would also continue an impediment to retaining a small number of highly valued ADF members. The Review Team therefore favours abolition of MBLs for the MSBS.
The Review Team also considered the option to limit the benefits of abolition to future years of service, which would avoid a one-off cost (and a one-off benefit to those already affected by the MBLs) while addressing the retention concern by ensuring full employer support for future benefits. The Review Team, however, believes this would be unreasonable given that the costs can be met within the current overall cost envelope and it would leave the affected members feeling discriminated against; it also notes that it would require new and complex administrative procedures.
The Review Team therefore recommends that MSBS MBLs be fully abolished for all currently serving MSBS members at the date of that change. Consideration could be given to abolishing the MSBS MBLs before the implementation date for the new military superannuation accumulation scheme.
Recommendation 12 The MSBS Maximum Benefit Limits should be abolished.
From 30 June 2004 the Superannuation Industry (Supervision) Act 1993, the Retirement Savings Account Act 1997 and the Income Tax Assessment Act 1936) were amended to broaden the category of people who can receive tax-free superannuation benefits on the death of a scheme member. The definition of ‘dependant’ in these Acts was expanded to include people in a recognised interdependent relationship, which exists where two persons are in a ‘close personal relationship’, they live together and one or both provides the other with financial/domestic support and personal care. The broader interdependent relationship provisions are intended to cover same-sex partners and dependency arrangements involving siblings, parents or persons with a disability; there is no requirement for these persons to be ‘related by family’.
Initially, there was no consideration given to the impact of the interdependent relationship legislative changes on defined benefit superannuation schemes that provide reversionary pension death benefits and/or whose operation is covered by separate legislation. Reversionary death benefits (usually pensions) provided by defined benefit schemes such as the DFRDB Scheme and the MSBS are not covered by the interdependent relationship legislation, which basically applies to the tax treatment of death benefits paid from lump sum accumulation arrangements. Consequently, only people who meet the existing definition of spouse (i.e. eligible married and defacto couples of opposite sexes) are eligible to receive reversionary death benefits from the military schemes.
The issue of superannuation benefits for interdependants in public sector defined benefit schemes has been under consideration by policy officers from the responsible Government departments (including Defence) for some time. This issue is complex and involves some seven Commonwealth defined benefit schemes with differing designs and membership profiles.
The Review Team believes the new scheme, like the Public Sector Superannuation accumulation plan (PSSap), should reflect contemporary practice and recognise interdependent relationships. It does not consider that the unique nature of military service would justify an exception. This would not substantially affect the cost of the new scheme as it is primarily a defined contribution scheme, though it will marginally affect the cost of the (defined) death benefits, where these are converted into a pension.
In principle, there is a strong case also for recognising interdependent relationships in the existing schemes. The Review Team understands, however, that the costs to all Commonwealth defined benefits schemes would be of the order of $2bn in unfunded liabilities, and suggests that any change to the MSBS and DFRDB be made in conjunction with any such changes to the other Commonwealth defined benefit schemes.
Recommendation 13 The proposed new scheme should recognise interdependent relationships. Recognition of interdependent relationships in the existing military superannuation schemes should be consistent with, and reflect, Government policy for the other Commonwealth defined benefit superannuation schemes.
The Review Team received many submissions (including from the RSL, the RDFWA and most other ex-service organisations, and many retired ADF members) expressing concern that the value of DFRDB/DFRB and MSBS pensions had not kept pace with the ‘costs of living’ despite using the Consumer Price Index (CPI). Many of these submissions called for an indexation method tied to an average earnings-based system, or more closely aligned to that applying to members of the community in receipt of the age pension.7
Indexation based on the CPI does, in fact, adjust pensions for the costs of living. There is no evidence that, over time, the costs of living of pensioners such as DFRDB and MSBS benefit recipients increase faster than those of the broader Australian community around which the CPI index is based. It is true, however, that the CPI does not reflect movements in community living standards which relate more closely to changes in earnings.
It is also true that DFRDB and MSBS pensions generally provide only modest incomes to retired ADF members, as shown in Table 9–1.
Table 9–1: DFRDB and MSBS pension levels
|
|
Proportion of DFRDB/MSBS Pension Recipients |
|
|
DFRDB % |
MSBS % |
|
|
Less than $10,000 pa |
2.2 |
32.0 |
|
$10,000 - $20,000 pa |
53.2 |
20.6 |
|
$20,000 - $20,000 pa |
34.4 |
21.3 |
|
Over $30,000 pa |
10.2 |
26.1 |
In considering the case for varying current indexation arrangements, the Review Team analysed the differing arrangements under the DFRDB and the MSBS.
DFRDB Pensions. The Review Team considers that there is an in-principle case for changing the indexation arrangement of DFRDB pensions:
On the other hand:
Given government policy on preservation arrangements, the Review Team considers there is no case to increase the generosity of benefits payable prior to age 55, but there is a case for older DFRDB pensioners.
In light of the above, the Review Team recommends that, only if the Government is willing to go beyond the envelope of current costs, it should consider indexing DFRDB pensions on a similar basis to that applying to age pensions. Any such improvement should be limited to pensions paid from age 55. An alternative option with a lower cost, which the Government could consider, is to limit this improvement to pensions paid from age 65, in line with age pension arrangements.
Recommendation 14 If the Government is willing to go beyond the envelope of current costs, it should consider indexing DFRDB/DFRB pensions for those over 55 on a similar basis to that applying to age pensions. Because of the costs involved, this option does not warrant the priority attached to the other recommendations. An alternative option the Government could consider is to limit this change to pensions paid from age 65.
MSBS Pensions. The MSBS provides lump sum benefits, with a choice to convert at least 50% of the lump sum employer component into an indexed pension. The conversion factor of 12 at age 55 means that, on reaching the current preservation age, an eligible member who converts their lump sum employer benefit will receive 1/12th of the lump sum as an annual pension. This is a very generous option, especially when compared to the actuarial value of the indexed pension, which would be in the order of 1/20th of the lump sum on a cost-neutral basis. It would be difficult to justify an even higher subsidy for pensions by indexing them on the basis of earnings rather than prices.
The Review Team therefore does not recommend a change in indexation arrangements for MSBS pensions.
Recommendation 15 There should be no change to the MSBS pension indexation arrangements.
New scheme. Under the proposed new scheme, retiring members with 15 or more years of service will have the option to purchase indexed pensions, with the index based on the CPI or some wage index, but on the basis that they pay a fair price determined by a Government-approved actuary from their lump sum benefit. This price would also be reviewed on a regular basis. Disability benefits, not funded from accumulated benefits but paid directly by the employer, will be indexed according to Defence earnings, in line with MRCA arrangements.
On retirement, eligible members of the DFRDB Scheme can commute part of the pension for an immediate lump sum. The maximum amount that can be commuted is currently five times the retirement pay (expressed as an annual amount). On commutation, annual retirement pay is reduced by the lump sum commutation figure divided by the recipient’s life expectancy, which is based on life tables applying in the 1960s. A number of submissions (most particularly from the Returned and Services League of Australia, the Regular Defence Force Welfare Association and the Vietnam Veterans' Federation of Australia) highlighted the increase in life expectancy since then, seeking a lower reduction in the pension for commutation; several also seek restoration of the pension level if and when the member reaches their identified life expectancy (and has purportedly ‘paid back’ the commuted lump sum).
The Review Team acknowledges the significant improvement in life expectancy since the 1960s, but is not persuaded by the claim for a more generous treatment of commutation arrangements. The facts are that the conversion factor based on a 1960s life expectancy is substantially more generous than a cost-neutral conversion factor that takes into account opportunities to earn interest on the commuted lump sum. A conversion factor based solely on current life expectancy figures would be even more excessively generous. Table 9–2 compares a cost-neutral conversion factor at age 45 (the typical age at which a DFRDB member leaves the ADF) with the DFRDB factor and a factor based solely on current life expectancy.
Table 9–2: DFRDB commutation conversion factors*
|
|
Males |
Females |
|
Current factor at age 45 (based on 1960s life expectancy) |
27.4 |
32.4 |
|
Factor at age 45 if current life expectancies are used (as advocated by ex-service organisations) |
35.0 |
39.2 |
|
Factor at age 45 on a fair price (cost neutral) basis |
16.4 |
16.7 |
*The factor is the annual (partially indexed) pension reduction required in exchange for a lump sum at age 45.
As mentioned earlier regarding indexation arrangements, the current MSBS employer benefit pension conversion arrangement is also heavily subsidised (though in the opposite direction) with a lump sum to pension conversion factor of 12 applying at age 55, and a factor of 11 at age 60.
If any change were made to the DFRDB, it should be to require a substantially larger reduction in pension in return for the commuted lump sum, not a smaller reduction. In line with the TORs requirement of no detriment, the Review Team recommends no change to the life expectancy factors currently applying to the DFRDB commutation calculation.
Recommendation 16 There should be no change to the DFRDB scheme life expectancy factors.
In February 2004 the Government announced its Transition to Retirement policy as part of ‘a more flexible and adaptable retirement system’. The Superannuation Industry (Supervision) Regulations 1994 were amended to implement this change and since 1 July 2005 participating schemes have been permitted to release superannuation benefits to members who have reached their preservation age, but not yet retired from the workforce. Transition to retirement benefits must be taken in the form of a non-commutable income stream (i.e. a pension).
The transition to retirement changes are not mandatory for superannuation schemes in order to avoid imposing undue compliance costs associated with amending legislation and/or scheme rules (particularly in the case of defined benefit arrangements). The new PSSap currently makes transition to retirement benefits available to members; however, because of technical complexities and budgetary issues there are no plans to extend the transition to retirement provisions to the closed civilian defined benefit schemes (CSS and PSS).
There are existing arrangements available to military personnel that enable them to either work part-time and continue to draw a retirement pension, or work part-time and accrue full superannuation benefits. Members of the permanent ADF are presently able to work part-time and continue to accrue full military superannuation entitlements for any period of service under the part-time leave-without-pay provisions. Additionally, former permanent ADF members can perform part-time Reserve duty (for tax-free remuneration) whilst in receipt of a retirement pension.
As outlined in Chapter 4, the Review Team considers that the proposed new scheme should allow transition to retirement benefits by allowing recipients of pensions to continue in employment, including in the ADF (see Recommendation 3e.). However, to extend the Government’s transition to retirement provisions to the current defined benefit superannuation schemes would present technical design and funding problems similar to those which have precluded such extensions to the CSS and PSS.
As mentioned in Chapter 2, portability of accrued benefits is one of the desirable characteristics of a contemporary Australian superannuation scheme and the ability to move superannuation balances from one fund to another is particularly important to Generation X and Y individuals.
While the MSBS employer benefits are vested and preserved, they are not readily portable. On resigning from the ADF, the major part of the preserved MSBS employer benefit is maintained as a promise, not as real money in an account, and is indexed annually in line with CPI movements rather than invested with a real rate of return. (The much smaller funded productivity component is also only notionally maintained, but it grows according to the MSB Fund (default strategy) earnings.). This is a major source of complaint from former ADF members who served for shorter periods and wish to consolidate their superannuation balances in a new employer accumulation fund with investment-based earnings growth (as opposed to CPI). The Review Team received submissions on this issue from the Returned and Services League of Australia, Regular Defence Force Welfare Association and other Ex‑Service Organisations, and from many individual preserved MSBS members.
The effect of the current arrangements is very substantial for many members of the ADF. For example, an MSBS employer-financed benefit accrued after seven years service (with enlistment at age 18) would ostensibly equal 1.26 times Final Average Salary (ie seven times 18%) but, as it would remain preserved for at least 30 years and mostly adjusted only with CPI, the final benefit is likely to be much less than an equal amount invested in an accumulation scheme over the same period. Even if the member chooses to take the heavily subsidised pension option at age 55, the employer-financed benefit is equivalent to an employer contribution rate of 15.5% under the new accumulation plan assuming a long-term fund earning rate of a conservative 6% per year, or a contribution rate of only 9.8%, if the fund earning rate was 8.5% per year. These rates are below the apparent 18% under the MSBS arrangements.
In July 2005, Government legislation introduced the requirement for most Australian employers to offer employees fund choice where Superannuation Guarantee contributions, including a default option for employees who did not make an election. There were a number of exemptions to this requirement, including APS employees and the military where members were required to remain in existing defined benefit schemes. However, since 1 July 2006 Australian Government employers have been required to offer of superannuation fund choice to members of the PSSap, and other new civilian employees and statutory office holders covered by SG arrangements.
The Review Team’s proposed new scheme will offer fund choice, member investment choice and full portability of accumulated benefits as set out in Recommendation 3. Allowing current ADF members and MSBS preserved members to receive funded benefits, as set out in recommendations 7 and 8, will extend portability to many current and former ADF members.
Changes to the Family Law Act 1975 in December 2002 means that, in the event of marriage breakdown, superannuation is treated as an asset and split in the same way as other property. Spouses can agree to adjust the division of property to compensate for superannuation imbalances, they can agree on a division of superannuation balances themselves, or they can have the Family Law Court determine the split of superannuation interests.
Apart from the Family Law arrangements, under the Tax
Laws Amendment (Superannuation Contributions Splitting) Act 2005,
superannuation contributions made from 1 January 2006 can be voluntarily split
between spouses, either within the same scheme or to a different complying
scheme, subject to age and workforce participation conditions. This is a
voluntary regime and superannuation funds are not compelled to offer spouse
contribution splitting. Splittable contributions include employer SG amounts,
salary sacrifice contributions and
co-contributions paid by the ATO.
Under current military superannuation arrangements, there are scheme-specific mechanisms for splitting DFRDB and MSBS entitlements for Family Law purposes. The resulting non-member spouse interests are transferred to the MSBS as associate benefits. For both schemes, these provisions are complex and lead to residual benefit calculations that are confusing to members and former spouses, and difficult to administer. For example, one component of the non-member spouse associate benefit is subject to MSB Fund earnings and can be rolled out, while the other (unfunded) portion is subject to scheme preservation rules and is indexed to the long-term Government Bond rate. As the number of associate benefit holders grows (in line with divorces of serving military personnel) ComSuper staff will be presented with an increasing administrative burden which will in turn result in more costs to Defence.
The Review Team notes that the proposed new military superannuation scheme will be subject to the Family Law superannuation benefit splitting provisions. However, unlike the DFRDB and MSBS, there does not appear to be a requirement for scheme-specific valuation and member benefit reduction factors as the new scheme will be a pure accumulation arrangement (other than disability benefits). Accordingly, any non-member spouse benefit will be fully funded and can be rolled out on settlement.
The Review Team considers the facility to split concessional contributions (including employer and salary sacrificed contributions) with a spouse is a desirable feature of the new military superannuation scheme.
The ability for spouses of scheme members to contribute to the scheme (personally or from an external employer) is also proposed at Recommendation 3f.
In the DFRDB Scheme superannuation benefits are calculated using final salary (the salary rate at the highest increment for the substantive/provisional rank held on the last day of ADF service). However, the MSBS FAS is calculated over the last 1095 days (three years) of contributory service. This is similar to the FAS regime used in the civilian PSS (introduced in July 1990) which is based on superannuation salary at the member’s last three birthdays.
The DFRDB and MSBS benchmark salary calculations are presently used to determine resignation, retirement, invalidity and death benefits provided by the respective schemes.
There were two reasons behind the introduction of FAS. Firstly, benefits based on salary received on the final day of service (the DFRDB scheme model) would be unrepresentative of the member’s ADF career. Secondly, the importance of a specific payday on the final benefit resulted in considerable selection effects on separation. For example, in August 2004 the inclusion of Qualification and Skill allowance components in superannuation salary was a factor in some members’ decisions to leave the ADF and access DFRDB entitlements. Actual salary paid has less relevance in the MSBS because pay fluctuations arising from promotion, or an increase/reduction in superannuable allowances, takes three years to fully impact on the FAS calculation.
These two features do not apply in the case of death and disability since the benefit is based on prospective service rather than past, and the member cannot choose the date of death, injury or separation. Furthermore, the use of FAS can have a significant disadvantage on the death benefit provided to eligible dependants where the member has recently received material increases in salary or superannuable allowances. Disability benefits are also designed to compensate a member for loss of potential earnings and it is noteworthy that current MRCA benefits are based on final paid salary.
As detailed in Chapter 4, death and disability entitlements under the proposed new military superannuation accumulation scheme are more aligned towards the MRCA benefit regime and will be based on final salary (not FAS) and prospective service to age 60 as set out in Recommendation 4d.
The Review Team similarly considers a similar approach should be adopted for MSBS death and invalidity benefit calculations. The Team recommends that these benefits under the MSBS be calculated on a member’s final salary, or the highest superannuation salary received during their eligible service. The higher superannuation salary would not include higher duty payments.
Recommendation 17 MSBS death and disability benefits should be calculated on the member’s final salary or highest salary for superannuation purposes rather than the current final average salary.
The Review Team notes DFRDB members already have the option to elect and maintain contributions on their higher superannuation salary in the event of a reduction in pay.
The main concern raised about the complexity of current schemes relates to the three-tiered incapacity classification system under both the MSBS and the DFRDB. This was raised in particular by the Superannuation Complaints Tribunal which identified problems with the inability to obtain a higher classification once a class C invalidity benefit is confirmed, the requirement for determination of an exact disability percentage and the somewhat artificial distinction between the A, B and C classification.
The MSBS Board, the RSL, the RDFWA and a number of individuals also raised concerns about the complexity of assessing disability under the MRCA and the MSBS and DFRDB arrangements.
The Review Team considered marginal changes to existing arrangements, but decided that the most appropriate option was to replace the current three-tiered approach in the proposed new scheme, with disability benefits more closely aligned to MRCA arrangements and with the Department of Veterans' Affairs (DVA) managing both the MRCA and the new scheme’s disability benefits (see Recommendation 4b.). It notes, however, that further work will need to be undertaken to settle the appeal processes under the proposed new arrangements.
The Review Team considered the possibility of varying the disability benefit arrangements for those who remain with the MSBS or DFRDB, but decided it was too difficult to do so while also meeting the requirement in the TORs of no detriment to former and current ADF members. Accordingly, some of the current complexities will remain for some years.
The other concern about complexity relates to the MSBS MBLs, raised by ComSuper. The Review Team’s proposes full removal of the MBLs (see Recommendation 12).
As detailed in the TORs, the unique nature of the military service includes the likelihood that most long-serving members will retire at or before age 55, notwithstanding the new compulsory retirement age of 60. Accordingly, the proposed new scheme offers pensions from age 55 to those with 15 or more years of service. Under the new 2007 tax arrangements, such pensions will be taxed until the member reaches age 60 although the pension rebate would be available from preservation age, where this is under 60. The Review Team sees no particular reason to introduce an additional tax concession for ADF members of the new scheme. Of course pensions after age 60 will be tax free.
Similarly the Review Team believes there is no need to change the MSBS provisions that allow members to take a retirement pension from age 55 and to use the same age in the calculation of prospective service for death and invalidity benefits.
As discussed in Chapter 4 and in this Chapter under the heading ‘Military Superannuation Scheme Complexity’, the Review Team does not support continuation of the three-tiered invalidity classification system under its proposed new scheme, but accepts it is necessary to continue the system for those who choose to stay with the MSBS or DFRDB. This is reflected in Recommendation 4.
The Review Team agrees with the 1990 Cole Report that invalidity should remain linked to superannuation. The reasons for linkage remain valid:
“… the special nature of military service requires that the ADF be able to shed unfit personnel who do not fall within the total and permanent invalidity category….”;
“…retain the right to retire on invalidity grounds those members who would not meet the stringent medical standards of the ADF, even though they might be capable of employment of a similar nature in the civilian workforce…”; and
“…maximum invalidity benefits are payable only to those who are genuinely unable to participate in the workforce…”.
The Review Team considers, however, that a stronger rehabilitation approach should be introduced, for the benefit of members as well as Defence, and that superannuation arrangements should draw on the experience and expertise developed by the Department of Veterans’ Affairs in managing the MRCA.
During the course of the Review, the Minister Assisting the Minister for Defence raised with the Review Team the applicability to military superannuation of provisions for the continuation of pensions for individuals remanded in custody by Federal or State Authorities.
Current arrangements are complex and not particularly coherent. Under DVA benefit suspension provisions affecting recipients who are remanded in custody on Federal, State and Territory offences:
MSBS and DFRB/DFRDB pensions, whether for disability or retirement, are not suspended. The invalidity pensions subsume any entitlement to an employer benefit and are therefore more in the nature of superannuation entitlements. Additionally, if an MSBS Class A or B invalidity pension is ceased before age 55 (for example, on downgrade to class C during a periodic review) then the recipient's full preserved employer benefit is restored.
Under the Crimes (Superannuation Benefits) Act 1989 (the ‘CSB Act’), employer superannuation benefits of ADF members, Commonwealth employees, Judges and Members of Parliament can be forfeited when these individuals are imprisoned for more than 12 months on corruption offences. A corruption offence is defined as a criminal offence that involves abuse of office or an attempt to pervert the course of justice committed when the individual is a Commonwealth employee. Similar provisions exist for AFP members under Part VA of the Australian Federal Police ACT 1979.
Apart from the CSB Act provisions, there are no (civil imprisonment) benefit forfeiture or suspension measures applying to CSS, PSS or Parliamentary Contributory Superannuation Scheme entitlements. The general Australian workforce is not subject to the loss of employer funded superannuation benefits on imprisonment, whether for corruption offences or any other reason.
Apart from the existing provisions for corruption, the Review Team is inclined to an approach along the following lines:
Alternatively, the Government could distinguish between members’ entitlements to their accumulated benefit, and their access to more discretionary defined benefits for disability, along the following lines;
It would be difficult (and unfair), however, to make such a distinction under the current MSBS and DFRDB schemes as invalidity pensions under these arrangements actually substitute for the employer benefit entitlement. Consideration would also need to be given to protect financially dependent family members. Moreover, such an approach would not be the same as applies to civilians in either the public or private sectors. For these reasons the Review Team prefers the first approach.
Recommendation 18 Benefits for members or persons imprisoned because of a criminal offence should not be suspended, other than for those offences specified in the Crimes (Superannuation Benefits) Act 1989. The Review Team notes that State authorities may consider recovering amounts from prisoners’ income to offset accommodation and administrative expenses, and/or to contribute to victim compensation.
Whichever of these approaches is adopted by the Government, the Review Team would not support the recovery of payments made prior to conviction or to recovery of payments made before any legislative change.
From 1 July 2008 the Government is changing the Superannuation Guarantee (SG) requirements. In particular, the Government has determined that ‘protected earnings bases’ for SG compliance calculations will no longer apply. Accordingly, the next DFRDB and MSBS Benefit Certificates (provided by the Australian Government Actuary) will be required to certify that the schemes provide superannuation benefits that are no less than equivalent benefits provided by the SG based on 9% of Ordinary Times Earnings (OTE). The new scheme will also need to comply with the new definition of earnings for SG purposes.
A number of current ADF allowances which are not counted towards military superannuable salary will be included under the broader OTE definition. In a recent response to a query from the Actuary on this matter, the ATO has stated that all ADF base pay and non-reimbursement type allowances (including tax-exempt operational and deployment allowances) will be considered as OTE for future SG compliance calculations.
While it is understandable that the SG provisions need to ensure that employers meet their minimum obligations, salary for superannuation purposes, particularly in more generous schemes, should normally reflect ongoing pay and allowances that determine the living standards which are intended to be maintained in retirement. The Review Team does not propose therefore any change to the current definition of salary for superannuation purposes in military superannuation schemes. The new scheme will meet the revised SG requirements in the vast majority of cases, other than in respect of overseas operational allowances, given its generosity.
The Review Team considers that tax-free overseas operational allowances provided for limited periods of war-like service should not be included in the OTE for SG compliance calculations as overseas deployment/operational allowances are not considered to be part of ‘normal’ ADF salary. There is also a case for treating the ADF as a special case as the concept of OTE (based on ‘ordinary hours of work’) does not apply. ADF members are expected to be available for duty at all times and are not eligible for overtime. The Review Team suggests that a formal ATO ruling on military OTE components be sought by Defence.
7 The indexation method applying the age pension seeks to maintain the value of the age pension at 25 percent of male ordinary time average weekly earnings.