Fair go for our veterans

Brief history of military superannuation schemes in contemporary Australia

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The Defence Forces Retirement Benefits scheme (DFRB) arose out of a 1948 review by the government. The DFRB scheme did not provide for automatic indexation of pensions and pensions were increased only when budgetary priorities allowed.

In 1970, Federal Parliament established a Joint Select Committee on the Defence Forces Retirement Benefits Legislation, chaired by Mr JD Jess, CBE, MP. The Committee recommended that the DFRB scheme be replaced by a new scheme with the following key features:

• Members should contribute 5.5% of their pay to the new fund.
• Pensions from the new scheme should be indexed annually to maintain relativity with average weekly earnings. This was to provide increases in line with changing community standards.
• The qualifying period for a pension would be 20 years.
• The pension would be a fixed percentage of the termination salary of the member, with the percentage being determined by completed years of service.

This new fund, the Defence Force Retirement and Death Benefits scheme (DFRDB), started on 1 October 1972 and members of the previous DFRB scheme who were still serving were compulsorily transferred to the new scheme.

The Committee's proposed arrangements for indexation were not implemented by the Government of the day nor any government since then. Instead, the government eventually enshrined in legislation that pensions would be automatically indexed in accordance with movements of the Consumer Price Index (CPI).

The DFRDB scheme closed to new members on 30 September 1991, with the introduction of the Military Superannuation Benefits Scheme (MSBS).

MSBS dates from a major review in 1991-1992 and remains the current scheme for most serving ADF members and all new ADF members since its introduction in 1992.

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Brief History of Indexation of Military Pensions in Australia

Until the early 1970s, military pensions were adjusted either by increasing the value of units held by pensioners or by increasing the number of units held at retirement. Adjustments were made on an ad hoc basis, when budgetary priorities allowed. During the 1970s these ad hoc increases, which occurred very irregularly, were recognised as inadequate to maintain pensions during a period of high inflation.

The DFRDB pension (introduced 1972) was designed to be indexed annually to maintain relativity with average weekly earnings. This was to provide increases in line with changing community standards. The recommended method for indexation was never implemented.

The government subsequently asked actuary Professor AH Pollard to conduct an independent review of pension indexation of civilian and other pensions. In his report (1973) he recommended automatic annual indexation of the government funded portion of the pension by 1.4 times the increase in the CPI between the two preceding March quarters, capped at the growth in Average Weekly Earnings (AWE) over the same period. This effectively updated the total value of the pension. Whilst the methodology recommended by Professor Pollard was adopted for the DFRB from 1 July 1973 and subsequently for the DFRDB, adjustments were not made automatic and pensions were indexed (in line with the methodology) on an ad hoc basis.

In 1974 Professor Pollard and another actuary (Mr GL Melville) were asked to conduct another review of indexation in view of a proposal to introduce a new civilian superannuation scheme that provided a compulsory government financed pension and a lump sum equal to the member's contributions and interest. The review noted that the lump sum (convertible to a pension) would be available to be invested in any way that the employee thinks fit or thinks will best protect him or her against inflation. The reviewers recommended that the government financed pension of the new scheme should be updated annually by the percentage increase in the CPI. It was also recommended that the AWE ceiling be abandoned so that the purchasing power of pensions could be maintained in times of high inflation. This recommended indexation methodology was adopted for the new civilian scheme (CSS) when it commenced in 1976.

Similar changes were applied to the DFRDB scheme without questioning the validity of such changes. Annual indexation by the CPI was also imposed for the successor scheme (MSBS) pensions when that scheme was introduced in 1991.

Biannual adjustment to military superannuation pensions was introduced in 2002.

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A Comparison of Indexation Methods

Three approaches are taken by the Australian Government to index pensions for which it is solely responsible:

• Pensions for parliamentarians who were serving before the 2004 federal election have their pensions indexed according to percentage movements in the salaries of backbench members. Since, 31 December 1989, the cumulative increase in parliamentary pensions for this group is 138.3%.
• Age Pensions are indexed on the basis of whichever is the greater of consumer price index (CPI), the pensioner & beneficiary living costs index (PBLCI) or male total average weekly earnings (MTAWE). Since 31 December 1989, the cumulative increase in the Age pension is 130.5%.
• Military superannuation pensions are indexed solely on movements in the consumer price index (CPI). Since 31 December 1989, the cumulative increase in military superannuation pensions has been 70.0%.

Below: Graphical representation of the effect of the different methods used to index different government pensions over the past 20 years. Fairgo4veterans gratefully acknowledges SCOA & DFWA for the use of this graph

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