SUMMARY OF RAAFA/REOA SUBMISSIONS

RAAFA National, RAAFA [Vic Div] and REOA have made submissions to the Military Review Team as follows:

A SUMMARY OF RAAFA/REOA SUBMISSIONS:

Changes which should be made to the DFRDB Act are as follows:

1. DFRDB pensions should be indexed to the greater of a wage related index (such as Male Total Average Weekly Earnings [MTAWE]) and CPI so that DFRDB pensioners share in productivity gains enjoyed by other Australians;

2. Contemporary actuarial life expectancy tables should be used [i.e. same as used in the Income Tax Act]

3. Pension payments should revert to their initial value, but indexed from the period in which they started to the current period, once the commuted portion has been ‘repaid’.

Change the Income Tax Act so that:

A superannuation pension paid from an untaxed source is paid as special income so that it is not added to non-superannuation income to determine the marginal tax rate to be applied to that non-superannuation income.

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AUSTRALIAN VETERANS AND DEFENCE
SERVICES COUNCIL INCORPORATED
“ AVADSC”

Patron: His Excellency Major General Michael Jeffery AC CVO MC (Retd)
Governor-General of the Commonwealth of Australia

President: PO Box Q314
Rear Admiral Ian McL Crawford QVB Post Office
AO AM (Mil) RAN (Retd) SYDNEY NSW 1230

Secretary: Major Colin Doust JP (Ret’d) Tel:(02) 9377 2320
Fax: (02) 9267 9837
ABN: 55 565 676 688 avadsc@bigpond.com
23 March 2007

The Military Superannuation Review
1 Thynne Street
BRUCE ACT 2617

Email: militarysuper.review@defence.gov.au




REVIEW OF MILITARY SUPERANNUATION ARRANGEMENTS SUBMISSION BY THE AUSTRALIAN VETERANS AND DEFENCE SERVICES COUNCIL

Introduction

The Australian Veterans and Defence Services Council (AVADSC) welcomes this review and applauds the comprehensive Terms of Reference. In particular it is glad to note the emphasis given to the unique nature of military service and will draw on this issue to support its positions. Also AVADSC welcomes the inclusion of Terms of Reference that will require the Review Team to present information concerning the current and future costs of providing military superannuation since the differences between government and the ESO community in calculations of this important financial information has been a source of discontent amongst member associations of AVADSC.

In this submission AVADSC focuses on aspects of the administration of the Defence Force Retirement and Death Benefits Act (DFRDB) 1973, since the departures from the perceptions and recommendations of the Jess Review of 1972, which led to the DFRDB ACT of 1973 have been the main cause of dissatisfaction not only amongst DFRDB superannuants but also, insofar as the principles argued in the Jess Review are relevant to all military superannuation, amongst MSBS superannuants. It goes without saying that the Defence Force was generally satisfied with the content and principles that led to the recommendations of the Jess Review of 1972.

This submission will also discuss the way that dissatisfaction with military superannuation is a factor in the difficulties that the Government faces in attracting and retaining the men and women needed for the current and planned manning levels for the Defence Force.

The causes for dissatisfaction are complex. It will be argued that there has been a knock-on from dissatisfaction with the departure from the Jess recommendations that have contributed to dissatisfaction with other arrangements, which, if it were not for the departure from Jess, may otherwise have been acceptable. In superannuation as with other defence force and veteran entitlements, where reasonable expectations of quality of life have been frustrated other perceptions and emotions are brought into play.

Important causes for unrest in the military superannuation community are, however, the rejection by government and government agencies of requests to provide information, and when the responses to the expressions of dissatisfaction with retirement benefit arrangements are received they are, in many, cases supported by financial statements, which are perceived to be incorrect. Such situations do not give confidence to the advocating ESOs that the government or its agencies have a genuine interest in addressing the issues. These delinquencies will be highlighted in the course of this submission. They lead to doubts whether the concerns of the defence force retirees are being addressed objectively and add to the confusion in the minds of defence force retirees of what was intended, how the defence force retirees are treated in comparison with others in government employment and whether the unique circumstances of the defence force are considered. These were all matters identified and reviewed in the Jess Review of 1972, which led to the DFRDB ACT of 1973.

Only government can determine the principles that should be translated to the detail of the administration of superannuation schemes but the Review Team can lead government to the appropriate perceptions. This submission, therefore, will address matters of principle rather than become involved in details of the calculation of retired pay and pensions and makes the observation that if the principles are followed the resultant rates of retired pay and pensions should meet standards of what is appropriate for the unique circumstances of a defence force.

Whether the present day effects of the changes could have been appreciated at the time they were made is now not clear. Nevertheless it is important to appreciate that the way the principles were changed has resulted in rates of retired pay and pensions that depart from what was envisaged in the deliberations and recommendations of the Jess Review of 1972. This was in respect of how retired pay and pensions would be indexed. The outcome has been detrimental to DFRDB retirees in a way that would have been unacceptable to the principles that guided the Jess Review. It is for the now appointed Review Team to determine whether the later recommendation of indexation to and accepted by the Whitlam Labor Government could be sustained in the light of its detrimental effect on the quality of life of Defence Force retirees in the economic and wage conditions of present day Australia.

There has been considerable discussion in recent months over the taxation treatment of superannuation and uncertainty about how the changes will apply to the several military superannuation schemes. The view has been expressed in some areas that the way that Defence Force superannuants will benefit from these changes compensates for the detrimental effects of the administration of military superannuation schemes. Noting that the taxation treatment of superannuation is an across the board change to all superannuation in Australia the AVADSC position is that a superannuation scheme should not rely on taxation concessions for its adequacy and that the scheme should be adequate on its own merits.

This submission will address:

• What were the principles that influenced the Jess Review recommendations that were accepted by Liberal-Country Parties Government of 1972 and how departures from these recommendations by the Labor Party Government of 1973 have become the main source of dissatisfaction with the principles guiding the DFRDB and the MSBS military superannuation schemes;

• The unique role of the defence force and the complex contribution of optimising defence force factors in achieving national strategic objectives;

• Restoration of retired pay to the pre-commutation level;

• The quality of government responses that have led to loss of confidence in government both as an employer and as a governing authority responsible for the defence function;

• The way that military superannuation is seen by Defence Force men and woman as it impacts on their financial security and on the evident dissatisfaction amongst defence force superannuants are factors threatening the Government’s and Defence leadership’s aspirations to achieve present and future manpower resource objectives.

The Jess Review of 1972

Recommendation 6 of the Jess Review of 1972 was “That retired pay and invalid pay be expressed as a percentage of final pay and be adjusted annually so that relativity with average weekly earnings is maintained. A possible method of achieving this would be to maintain the relativity of benefits to current pay for the rank held on retirement.”

The argument supporting this recommendation took account of retirement from the Defence Force “at much earlier ages than is customary elsewhere in the community”. It also addressed the chances of obtaining employment on retirement. Some retirees may succeed in obtaining well paid employment on retirement whilst others may either be forced into low paid, unattractive work, or may not be able to find employment at all. Much will depend on the general economic climate at the time the man retires. As retirement age is compulsory the man can have little control in choosing an opportune time to retire.”

Recommendation 6 of the Jess Review of 1972 that “final pay be adjusted annually so that relativity with average weekly earnings is maintained” was amended to annual CPI increases following the report of Professor Pollard to the new Whitlam Labor Government in 1973. Regardless of the arguments used by and accepted by the Whitlam Government it goes without saying that if average weekly earnings are increasing at a faster rate than CPI then those whose incomes are tied to CPI will be left behind in the quality of life they can afford. This is exacerbated the further the wage on retirement is from later pay reviews, which have aligned serving members of the Defence Force with general community remuneration standards, including the recent provision for some allowances to be part of the ‘superannuable’ package.

Also while the rate of retired pay at the time of separation appeared adequate because of its relativity to current pay scales even after commutation, over time the adequacy of retired pay has been steadily eroded. Figures produced by the Regular Defence Force Welfare Association show that since December 1989 to December 2006 the cumulative percentage increase in CPI, which is the basis for military superannuation increase, has been 57.00%. Over the same period the cumulative percentage increase in Male Total Average Weekly Earnings (MTAWE) has been 85.7%. It is not surprising that the military superannuant is falling behind the rest of the community in the quality of life that he or she can afford.

Information has been sought about the features of a representative range of superannuation schemes for those in Commonwealth Government employment. It is understood that some schemes ensure that superannuants’ entitlements maintain relativity as retirees to the entitlements of the present day work force. Noting the observation in Recommendation 6 of the Jess Review that a ‘possible method of achieving this (maintaining relativity with average weekly earnings) would be to maintain the relativity of benefits to current pay for the rank held on retirement.” a comparative table of retired pay and contemporary service pay over time for a range of ranks with similar periods of service in order, would demonstrate the erosion of the relativity of retired pay when this principle was discarded. The impact of this erosion of retired pay as a contribution to maintaining standards of living and quality of life will be evident. The Review Team can make recommendations that will restore retired pay so that military superannuants can recover and maintain a standard of living that was envisaged by the Jess review.

The unique role of the defence force and the complex contribution of optimising defence force factors in achieving national strategic objectives

There is recognition elsewhere in the world of the conviction, often articulated in this country by those who support the axioms of the profession of arms, that those who are prepared to pay the supreme sacrifice are entitled to values which differ from those of the mainstream of society. These values project to a military ethos, which if sensibly nurtured and managed to standards acceptable to the community, attracts people to military service and retains them, with all the factors of the economics of the cost of training and the retention of a hierarchy of experienced service men and women associated with length of service. These values and what they represent in terms of the commitment of members of the armed forces set the employment in the Defence Force apart from any other employment.

A matter that is sometimes overlooked is the contribution that the Australian Defence Force has made in the past, continues to make today and certainly will make in the future to the economic, strategic and diplomatic opportunities that accrue to this country through the commitment of the Defence Force to a range of strategic, peacekeeping, law and order and humanitarian situations. The leadership, combat skills and resilience of the Australian Defence Force give confidence to government to commit Australia’s armed forces in pursuit of its international goals. This readiness to commit Australia’s armed forces to common strategic perceptions have been important contributions to the way we are perceived by others.

Industry and commerce because of their evident impact on the economy and associated quality of life are recognised for their contribution to Australia’s success and standing in the world. But the readiness of the Defence Force is and always has been, a critical factor that allows this country to grow its international role with all the economic, political and social benefits that go with it. The regular Defence Force is the force at immediate readiness to meet government commitments and is custodian of the integrity and quality of the capabilities and values that have made it possible for governments to commit the Defence Force in ways that have advanced Australia’s strategic objectives. This contribution to an Australian lifestyle enjoyed by the general community also sets the Defence Force apart from all others in the community.

The Prime Minister’s statement to Australian soldiers in Afghanistan in March 2007; “You have done great honour to our country, won the hearts and minds of the people and won the respect of our allies” shows that this factor, which continues to influence our international relations, confirms the recognition of the unique role of the Defence Force.

For other reasons Jess recognised the differences between a government’s responsibility for retirement benefits for a defence force and the provision for similar kinds of benefits in civilian schemes whether they be retirement benefit schemes adopted by private employers or by the Commonwealth for its public servant employees. Factors were the shorter careers that the Defence Force can offer, the fact that “many servicemen do not have the chance to establish a permanent home, retirement can occur at ages when family responsibilities are high with children at school and university and a man retired from the Defence Force may have to seek further occupational training in order to qualify himself for civilian employment which may mean a relatively long period when he is not able to earn.”

Jess also recognised the special hazards “attributable to active service” for which cover was provided by Repatriation legislation. While Repatriation legislation provided for those with qualifying service the circumstances of employment in the Defence force are distinct from other employment by the fact that once they have joined the Defence Force servicemen and women have committed themselves to the factors identified in the Terms of Reference:

• liability for combat operations;
• a military discipline code;
• a regimented way of life;
• long an irregular working hours;
• statutory retiring ages well below the community norms;
• high standards of physical fitness;
• frequent relocation; and
• separation from family.

An extension of these factors would include the way that the high standards of physical fitness can prevent advancement or could lead to early separation from the Defence Force with the financial penalties that these would entail. Also military skills are not generally relevant to general civilian workforce employment. This becomes even more accentuated the longer people remain in the Defence Force so that defence Force retirees are disadvantaged in gaining access to remuneration in keeping with levels of the general workforce the longer they remain in the Defence Force. This will be further developed in considering factors threatening the Government’s and Defence leadership’s aspirations to achieve present and future manpower resource objectives.

The Defence Force has over time sought to ameliorate the impact of some of the features of the unique role of a defence force through conditions of service. Regardless of conditions of service the distinguishing feature that sets military service apart from all other employment is that those who commit themselves in this way have accepted that they are prepared to pay the supreme sacrifice. Realistically there can be no adequate compensation for this and this feature alone provides argument for segregating arrangements for those who serve in the military forces from all other employment.

For the reasons mentioned above and recognised by Jess in structuring a scheme for defence force retirement benefits, the needs of the present day Defence Force people on retirement and military superannuants should be distinguished from factors influencing decisions on civilian, including Commonwealth Public Service schemes. In providing for military superannuants the Review Team should not be deterred from recommending arrangements, which recognise the unique features and the unique role of the defence force. By distinguishing the defence force from civilian, including Commonwealth Public Service employment and retirement benefit schemes the Review Team can recommend to government appropriate arrangements and avoid the argument that adjustment to military superannuation schemes would lead to a flow-on case for the Commonwealth Public Service. There are many feature of military service, which segregate the military service and its appropriate superannuation provisions from those of the Public Service. The Review Team is in a position to highlight these differences.

Restoration of Retired Pay to the Pre-commutation Level

This is an issue, which has become an increasing cause for discontent the longer a military superannuant experiences the erosion of his or her retired pay through the way Consumer Price indexation reduces the ability to maintain a standard of living in retirement. The dissatisfaction is inflamed by the way that the DFRDB Authority seeks to describe what is sought in restoration of retired pay to the pre-commutation level as an additional benefit because there is no provision in the DFRDB legislation for restoration to the pre-commutation level.

This line used by government agencies that there is no provision in legislation for restoration can equally be used to argue that there is no provision in legislation to prevent the restoration when, by the payment of a reduced pension the amount of commutation has been repaid. The question of restoration then turns on issues of justice, equity and morality of the government in not restoring a superannuation benefit to its full value once the outstanding amount of commutation has been repaid. There is the additional factor that retirees were aware that the amount by which their retired pay was reduced on commutation would not be indexed and the lack of adjustment of this amount to economic conditions was a persuasion to commute for a lump sum. Access to a lump sum has been achieved in other systems by repayment of contributions without affecting the level of retired pay.

The differences between the after commutation retired pay of male and female recipients is another factor that highlights the arguments of justice, equity and morality. The differences have come about because of the differences in life expectancy between males and females and therefore the extended period in which females have to repay the commuted lump sum. Yet in conditions of service before retirement the service of males and females is held to be equal. That the service of females should attract a higher level of retired pay for a longer period (if we are to believe the life expectancy tables) is inequitable and places in question the government argument that retired pay cannot be restored to pre-commutation levels.

It is for the Review Team to examine the justice, equity and morality of the government not restoring a superannuation benefit to its full value once the outstanding amount of commutation has been repaid.

Other Issues

A cause for dissatisfaction associated with the way the after commutation retired pay was calculated is that the Life Factor table which forms part of the DFRDB Act is in fact the 1962 Life Expectancy Table and thus it was already 10 years out-of-date when the scheme was introduced in 1973 and has become progressively more out-of-date ever since. The Life Factors used to calculate the reduced pension after commutation are now 45 years old and of course bear little resemblance to the life expectancy in contemporary Australia.

AVADSC has seen submissions and working papers from and has worked with the Regular Defence Force Welfare Association and the Vietnam Logistical Support Veterans’ Association on superannuation matters over some years. Both associations are members of AVADSC.

AVADSC supports the arguments and the recommendations put forward by these two associations. In particular AVADSC gives strong support to the line taken by the RDFWA and supported by the RSL concerning the detriment to military personnel under the Simplified Superannuation legislation whereby those who have been compulsorily retired with a Category A Invalidity Pension, often at a young age, do not have access to the 10% tax offset until they reach the age of 60 years. If not corrected in the light of the evidence given by the RDFWA at the Senate Economics Committee hearing into the proposed Simplified Superannuation legislation it is recommended that the Review Team argue to correct this detriment.

The quality of government responses that have led to loss of confidence in government both as an employer and as a governing authority responsible for the defence function

Dissatisfaction and impatience have been caused by the rejection by government and government agencies of requests to provide information. Also when the responses to the expressions of dissatisfaction with retirement benefit arrangements are received they are, in many, cases supported by financial statements, which are perceived to be incorrect.

AVADSC has sought the opportunity to be informed on the following matters:
• the budget impact of indexing pensions to the cost of living rather than to the standard of living represented by MTAWE indexation;
• a comparison of the reversionary benefits for a surviving spouse amongst Commonwealth schemes, noting the reversionary benefit of a surviving spouse of a parliamentarian (83%) and of a military superannuant (62.5%);

• a table of the features of a representative range of superannuation schemes for those in Commonwealth Government employment, noting that in some schemes superannuants maintain relativity as retirees to the present day work force;

• a comparative table of retired pay and contemporary service pay over time for a range of ranks with similar periods of service in order to demonstrate the erosion of the relativity of retired pay to current Defence Force incomes as a contribution to maintaining standards of living and quality of life.

The true apple of discord is over the budget impact of indexing pensions to the cost of living rather than to the standard of living represented by the greater of CPI and MTAWE indexation. (as used for the age and service pensions) The response was that if the method of indexing military superannuation pensions was changed from CPI to the greater of CPI and MTAWE the Budget fiscal balance would worsen by about $500 million per annum. ESO calculations based on the total sum of military superannuation paid under the DFRDB and MSBS schemes in year to 30 June 2006 of $1,224 million and an analysis of CPI and MTAWE statistics since 1989, show that the % increase in the greater of CPI/MTAWE exceeds the % increase in CPI by an average of 1.57% per annum. On this basis the cost to budget per annum would be in the order of $19.2 million in the first year. In response to other requests for information the response has been that resources would not be committed to these tasks; reasons were given but this did not satisfy the ESO’s wish to have information.

On one occasion a department officer stated that if the provision for superannuants were reconsidered for adjustment of indexation the Departments of Treasury and Finance and Administration would insist on trade-offs that would eliminate some existing benefits. There was no suggestion of what benefits would be considered to be at risk as trade-offs and one wonders whether ESO advocates were being intimidated. It is also understood that the Government is concerned not to be seen to be ‘looking after’ the Public Service and the Defence Force, which can be presented by the media as already well provided for. This of course ignores the disadvantage of those who retired under conditions of service that fall well short of what is in force today and fails to recognise that parliamentarians and perhaps others in retirement have their retired pay aligned to current entitlements. In any case the majority of DFRDB superannuants in their retired pay are well below what could be considered to be well provided for. As a final comment and for the reasons mentioned under the heading of the unique role of the defence force those who attach importance to the interests of the Defence force and Defence Force retirees can distinguish the military superannuation scheme from other schemes.

Military superannuation as a factor recruiting and retention

Discussions within the ex-Service community of Defence Force manning objectives, current strengths, which are below objectives, future strength objectives and the competition for employment from the needs of the civilian workforce have included the factor of the attraction of superannuation. This issue has also been discussed with people involved in civilian workforce recruiting, where superannuation is an important factor.

Retention was always seen as a factor to ensure a hierarchy of officers and senior non-commissioned officers with experience and levels of leadership skills needed to lead and nurture the Defence Force. Current trends threaten the availability of what has been described in the navy as “the greatest single factor”, the experienced leader.

In October 2006 the strength of the ADF was 51,300; this was below the planning objective. Taking account the order of battle increase recently announced the planning objective is to achieve 57,000 by 2015. The average length of service is 9.2 years and the aim is to achieve in excess of 11 years. The separation rate is 11% and the aim is to reduce this below 10%. The Defence Strategic Workforce Plan 2007-2017 priorities in meeting key workforce risks were:

• Australian Defence Force retention;
• Enlistment;
• Recovering critical ADF and Australian Public Service categories; and
• Conserving the existing work force.

In Australia’s expanding economy there are already strains because of civilian workforce shortages. The demands of the civilian workforce and the attraction of civilian workforce employment pose a threat to Defence Force recruiting and retention objectives.

Some decades ago and this would include the time of the first flush of satisfaction with what the outcome of the Jess Review was seen to offer superannuation was the great attraction to retention. The goal was to achieve 20 years for pension and there were cases where people who had left the services short of their 20 years for pension after experience in the workplace re-enlisted to complete time for pension.

Today retirement pay linked to CPI has been seen over time to erode the capacity of defence force retirees to enjoy reasonable expectations of quality of life. A military superannuation is not seen as an attraction to complete time for pension and it is better to gain access to the civilian workforce to start an investment in remuneration and superannuation schemes, which are linked to the civilian workforces’ levels of remuneration represented by the index of Male Total Average Weekly Earnings (MTAWE). The discontent of defence force retirees is widespread and is known to those contemplating military service, especially those who might have been attracted to the Defence Force through a family tradition of service in the armed forces, a valued source of recruitment.

If retention and what it means in terms of a return on the investment in training and having available an experienced hierarchy are important, then the administration of the current superannuation schemes no longer offer the lure of pensionable service as an attraction when compared with other sources of income. It is not surprising that people wish to make a career change when young. An ex-Service community satisfied with the way it has been and continues to be treated must be seen as an important factor.

For those who advocate the application of market economy factors to the defence of this country the rules of supply and demand are in play.

Conclusion

There is much at stake in this review. The issues have implications for the restoration of confidence in the administration of the military superannuation schemes and to eliminate what is perceived as the inequitable treatment of the defence force retiree community. The factor of recognition of the unique role of the Defence Force can and should be extended to the opportunity that these unique features offer to segregate military superannuation arrangements from civilian including Commonwealth Public Service superannuation schemes.

While AVADSC is representing the interests of its membership in their desire for a fair superannuation scheme, peak ex-service organisations such as AVADSC with a strategic interest in resourcing the defence capability, draw to your attention the manning level implications of dissatisfaction with the current arrangements.


Yours sincerely




IAN McL CRAWFORD
Rear Admiral RAN (Ret’d)
National President




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