Defence super revisited July 24, 2000 The following article has been produced by the Directorate of Superannuation in conjunction with Comsuper to retrace the history of the change from the DFRDB scheme to MSBS. I had this article commissioned as it continues to be a source of comment and some dissatisfaction raised with me and the PERSAT during visits to people throughout the Navy. The aim of the article is to close this discussion off for all time. Regardless of personal views, I believe it is time to move on. Those who were in the Navy at the time of change all made their choices based on the best information available at the time, including individual predictions of the impact of the change. For those who joined after the change, no choice was available, as MSBS was the scheme which applied in accordance with Government policy. Changes which have occurred since are also in accord with changes in Government policy and apply to all of Australia. Another misconception which arises is that DFRDB was a great retention tool. In fact less than five per cent of entrants to the Navy ever served 20 years or more to become entitled to DFRDB retirement pay. I commend this article to you and reiterate that Navy has no intention to reopen the DFRDB debate. D.J. Shackleton VADM RAN Chief of Navy DFRDB and MSBS - did I make the right choice? Some members have expressed concern about the decision they made in 1991/92 to transfer to the MSBS - of course those members joining the ADF after October 1991 had no choice, they had to join MSBS. Unfortunately the reasons some members are unhappy about their decision are based on misconceptions. Why was the DFRDB scheme closed? The DFRDB scheme was reviewed in 1989. The review arose for a number of reasons. There had been big changes in the superannuation industry, not the least of which was that the Government had set standards which included minimum requirements for all private and public sector superannuation schemes. The DFRDB scheme did not meet those minimum requirements. In addition the scheme was no longer considered to meet service objectives or provide the right incentives for members. The DFRDB scheme provides a generous benefit to those who serve for at least 20 years but it also has some significant deficiencies. The worst is the fact that at the time of the review 70 per cent of DFRDB members left before reaching the 20-year point. In 1999 this figure was 10 per cent. These members receive no interest on their contributions and no benefit from the employer. The aims of the review were to introduce superannuation arrangements that: were as simple to understand as possible given the complex nature of superannuation; were flexible enough to meet the needs of a wide range of individual members; met the Government standards applying to all superannuation schemes; and cost no more than DFRDB scheme. After extensive investigation the review committee found that it was not possible to amend the DFRDB scheme to accommodate all the aims. Any proposals to amend the scheme to ensure compliance with the Government standards would have involved substantial additional cost, which was contrary to the Terms of Reference. Therefore a totally new scheme, the MSB Scheme, was proposed. However, in announcing the review the Government provided an "ironclad guarantee" that benefits in the existing scheme would remain available to DFRDB contributors. Thus, while all new entrants had to join the new scheme DFRDB contributors had the choice of staying in DFRDB or transferring to MSBS. The "Choice Campaign". Members were given a period of 12 months in which to make their choice. During that period, which ran from October 1 1991 to September 30 1992, members were provided with every possible means to assist them in making the decision. This included a kit comprised of booklets outlining the DFRDB and MSB schemes, as well as another comparing the schemes, and a comprehensive personal information statement providing estimates of benefits payable under different circumstances, for both schemes. In addition information seminars were conducted at every base, a hotline was established, a video was available for viewing and members had access to individual counselling. The then CDF, GEN Gration, advised members that the decision was one of the biggest financial decisions they would make and he urged them to make an informed choice, based on their own personal circumstances, rather than being influenced by what their mates were going to do. When members had made their decision they had to sign an election form acknowledging that the decision could not be reversed and that they had received sufficient knowledge to enable them to make the decision. But things have changed since then! It's been nearly nine years since the MSBS was proposed and yes there have been some changes. Some members made the mistake of basing their decision on one scheme feature only, rather than looking at the schemes as a "package deal". Their personal circumstances have since changed and they are now disillusioned about their choice of scheme. Of course, the superannuation environment has also changed and this has resulted in changes to the MSB scheme. The changes have come about largely because the Australian population is ageing and the Government realises that there will be insufficient funding to support us in our retirement. Consequently changes have been made to all superannuation funds that comply with the Government superannuation standards (these are now enshrined in the Superannuation Industry Supervision Act 1993, otherwise known as SIS) to ensure that we provide for our own retirement. In particular, the age at which we can access our superannuation benefits (known as preservation age) has been increased from 55 to (incrementally) age 60 and we can no longer take our superannuation benefit as a lump sum unless we have reached our preservation age and left the workforce. These new changes affect MSBS members but not DFRDB members because the DFRDB scheme is exempt from the SIS rules. Why is it exempt? Because as stated before, too many amendments were required to make the scheme comply with the Government standards and there was that "ironclad guarantee" that DFRDB benefits would remain available to those wanting to stay with DFRDB. Of course this has made many MSBS members unhappy and some who had a choice, wish they had remained in DFRDB. But really there isn't any need to be unhappy. Sure they won't be able to use their superannuation lump sum to buy that new car or pay off the house if they leave early, but that is not what your superannuation is there for. In reality, the preservation changes are a form of enforced saving and it means that members can be sure that they will have money in their retirement. Some members believe that if they could take their money and invest it elsewhere it would grow at a much better rate than MSBS offers. It is true that although the member's own contributions and part of the employer contributions earn interest through fund investments, the largest portion of an MSBS benefit (that part financed by the employer) only earns interest at the Consumer Price Index (CPI) rate, after you leave the ADF (which is basically linked to inflation). But what many MSBS members don't realise is that it is their employer, the Department of Defence, who funds this portion entirely and it is at a rate far in excess of community standards. Currently all employers must provide their employees with a superannuation amount of at least eight per cent. This compares with 18 per cent for MSBS members in the first seven years of membership, rising to 23 per cent after seven years and a huge 28 per cent after 20 years service! You won't find too many employers who can offer an employer benefit like that. And also you need to keep in mind that when you compare the MSBS (and DFRDB) to other private superannuation funds, that unlike other funds, there are no fees for joining, exiting or administration. Will I get a chance to make another choice about my superannuation scheme? The DFRDB scheme is closed and will never be reopened because it does not comply with the SIS rules. Members were made well aware during the choice campaign that their decision was irrevocable. Many of you may be aware of proposals by the Government to introduce "Choice of Fund". The intention of this initiative is to make superannuation more portable and to make individuals responsible for the decision of which superannuation fund to invest in. The political parties have not reached agreement and the legislation has not been passed by Parliament, despite being introduced nearly three years ago. As it is at the moment, it is not intended that the "Choice of Fund" arrangements will apply to members of the ADF. The reason for this is that the special nature of military service justifies conditions of service, including a superannuation scheme, which differ from those available to the community at large. Unlike other employers, the Department of Defence considers that it has a duty of care to ensure that ADF members are covered by a superannuation scheme that provides appropriate insurance against death and invalidity as well as generous retirement benefits. So did you make the right choice? The DFRDB and MSBS schemes have very different benefit structures that make it difficult to draw meaningful comparisons. Particular features in one may look better or worse than comparable features in the other. Both have excellent insurance cover for your dependants, in the event of your death either as a contributor or a pensioner. But the two schemes can only be assessed by comparing the total benefit package that each offers. Regardless of which scheme you belong to the decision made by those offered the choice in 1991/92 cannot be changed, nor can the DFRDB scheme be reopened for those who are members of MSBS. Both schemes are very generous compared to community standards even though there may be features of some which appear to be more appealing to some people.