Kai Swoboda
The Government has announced that from 1 July 2016 the Military Superannuation Benefits Scheme (MSBS)—the existing superannuation scheme for serving Australian Defence Force (ADF) personnel—will be closed to new members.[1] In its place will be a specific superannuation fund for ADF personnel, to be known as ADF Super.[2] Existing members of the MSBS will have the option of moving to the new scheme but need not do so.
This change will affect how superannuation arrangements for people joining the ADF personnel are funded by government and members. It may also have an impact on final retirement savings and payments in retirement, death and disability benefits, management of superannuation by individuals and ADF recruitment and mobility.
The MSBS, established by the Military Superannuation and Benefits Act 1991, opened to new members in October 1991. As at 30 June 2013, there were around 157,000 members of the MSBS, with around 5700 new and rejoining members in the preceding 12 months.[3] The average pension paid to MSBS pensioners in 2012–13 was $26,582.[4]
Under the MSBS, members of the ADF are required to contribute a minimum of 5 per cent of their salary, with the option to increase this to up to 10 per cent and to make additional pre- and post-tax contributions. These contributions form the member-financed benefit, which is invested by the fund trustee and credited with the appropriate investment earnings.
Upon leaving the ADF, members who exit the scheme are entitled to receive the member-financed benefit regardless of their reason for leaving the ADF. Exiting members are also entitled to an employer-financed benefit, the amount of which varies based on the reason for their scheme exit. The employer-financed benefit is generally preserved until the member reaches their minimum preservation age. A key feature of the employer financed benefit is that benefits are not related to contributions but rather are based on years of service and salary.
This latter feature of the MSBS—characterised as a defined benefit—has been gradually phased out in the private and public sectors in favour of accumulation schemes. Under an accumulation scheme, a member’s benefits are directly related to cumulative contributions plus (or minus) investment earnings on the accumulated balance. The most recent estimate of the notional equivalent employer contribution that would be required to fund benefits paid from the MSBS is 30.4 per cent of superannuation salary.[5]
The defined benefit feature of the MSBS is shared with a number of now closed Commonwealth public sector superannuation schemes and creates a future unfunded liability for the budget. Projections indicate that the unfunded liability from closed schemes declines from around 2030 but that total unfunded liabilities would continue to grow should the MSBS remain in its current form. The closure of the MSBS is expected to reduce unfunded superannuation liabilities by $126 billion by 2050.[6] The switch to an accumulation scheme will however have an impact on the budget as the employer contributions will be paid when the liability is incurred. Including funding for administrative arrangements, the cost over the forward estimates is $242 million.[7]
There have been calls for the closure of the MSBS for a number of years. A 2007 review of military superannuation arrangements commissioned by the Howard Government (the Podger Review), called for a new accumulation scheme to be established, with ‘generous’ employer contributions increasing with length of service (at 16, 23 and 28 per cent of superannuable salary.[8] The Podger Review’s report, despite being received prior to the November 2007 election, was not released until after the election of the Rudd Government, and did not receive a formal government response under the Rudd or Gillard Governments.
More recently, the National Commission of Audit called for the MSBS to be closed to new entrants, with a new scheme established based on an accumulation plan for new ADF members.[9]
While both the Podger Review and Commission of Audit recognised that the unique nature of ADF service warranted a separate superannuation scheme, they provided different rationales for recommending the closure of the MSBS and for its replacement by an accumulation superannuation scheme:
- The Podger Review’s assessment of the MSBS was that it provided very generous benefits to long-serving members with a choice of an indexed pension or lump sum or both, but that for shorter serving members, it was a substantially less generous level of employer benefit than might appear. It also noted that the MSBS was too complex for members to understand and did not allow members to exert any control over their employer-financed benefits. It had not, in practice, contributed much to recruitment or retention because the complexity undermined the potential benefits of the scheme’s structure; but it provided generous death and disability benefits, in line with the unique nature of military service.[10]
- The Commission of Audit considered that the Commonwealth’s unfunded superannuation liabilities represented a significant long-term risk to the Commonwealth’s balance sheet and should be better managed. Closing the MSBS was to be part of a package of measures to address these risks.[11]
Some of the weaknesses of the MSBS highlighted by veterans groups in the past have included the application of a maximum benefit limit, the lack of portability of the employer benefit and indexation of a pension benefit to CPI only.[12]
The final features of the proposed new scheme are not finalised. Details that have been provided by the Government include:
- existing MSBS members who leave and then rejoin the ADF are able to re-enter the MSBS
- employer contributions will be paid at a rate of 15.4 per cent to a member’s chosen superannuation fund, increasing to 18 per cent for any period in which members are serving in war-like operations
- there will be no mandatory employee contribution and
- death and disability benefit arrangements will be consistent with those under the MSBS.
The move from a defined benefit to an accumulation scheme is consistent with changes in superannuation more generally in Australia. The design elements of the new scheme, including conditions attached to any death and disability benefits, the relative generosity of the employer contribution and portability of benefits will be keenly followed by veterans groups. It is difficult to assess at this stage how the new scheme will impact on recruitment and retention in the ADF. Other broader strategies, discussed in a related Defence Personnel, may be more important in this regard.
[7]. Budget measures: budget paper no. 2: 2014–15, op. cit., p. 75.
[9]. National Commission of Audit, op. cit., p. xvii.
[10]. A Podger et al., op. cit., pp. 14–15.
[11]. National Commission of Audit, op. cit., p. 61.
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