BILLS DIGEST NO. 5, 2015–16              10 August 2015

Australian Defence Force Superannuation Bill 2015

Kai Swoboda
Economics Section 

Date introduced: 25 June 2015

House:  House of Representatives

Portfolio: Defence

Commencement:  On Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

The Bills Digest at a glance

Purpose of the Bill

•       The Australian Defence Force Superannuation Bill 2015 is one Bill in a package of three Bills that establish a new superannuation scheme for members of the Australian Defence Force (ADF) who join the ADF after 1 July 2016. The proposed new superannuation scheme—Australian Defence Force Superannuation Scheme (or ADF Super)—will replace the existing Military Superannuation and Benefits Scheme (MSBS).

–      This Bill, and the Defence Legislation Amendment (Superannuation and ADF Cover) Bill 2015, include the necessary provisions in relation to closing the MSBS and establishing ADF Super.

–      As the MSBS scheme also includes incapacity and death cover arrangements, these elements are being separated from the ADF Super scheme by the Australian Defence Force Cover Bill 2015, which is designed to be consistent with the death and disability benefits provided under the MSBS scheme.

Background

•       The MSBS scheme is a defined benefit superannuation scheme that consists of a member funded component (from employee contributions) as well as a defined benefit that in broad terms is based on years of service and final salary. In contrast, private sector employees and more recently engaged public sector employees are generally members of accumulation superannuation schemes—where the final benefit is related to the value of employer and employee contributions as well as associated earnings over time.

•       Some features of the MSBS, which generally provides a greater benefit for longer serving ADF members, may be incompatible with general superannuation arrangements and penalise members who serve for shorter periods.

•       A 2007 review of military superannuation arrangements recommended that the MSBS scheme be closed and replaced by an ADF-specific accumulation superannuation scheme.

Key elements

•       This Bill contains the arrangements for the establishment of the Trust Deed for ADF Super, the administration of the scheme by the Commonwealth Superannuation Corporation, eligibility requirements for the scheme and other provisions relating to the variation of the Trust Deed and legislation relating to ADF Super.

•       Although not a provision of this Bill, the proposed employer contribution rate of 16.4 per cent is an important element in assessing whether a new superannuation scheme is desirable, balanced against the other changes.

Stakeholder concerns

•       While organisations representing current and former ADF personnel support the establishment of a fully funded accumulation scheme for ADF members, they are opposed to some of the specific elements of the proposed scheme, such as the employer contribution rate and the exclusion of part-time reservists.

•       These organisations were generally opposed to the closure of the MSBS scheme in 2008 when the Rudd and Gillard Governments were considering the recommendations of the 2007 review.

Key issues

•       The defined benefit nature of the MSBS leads to the Commonwealth having an unfunded future liability. There has been a move away from defined benefit schemes in recent time to reduce risks to the budget of the unfunded liabilities generated by such arrangements. The avoidance of such risks is an important consideration in the decision to close the MSBS scheme.

•       Another threshold issue is whether the proposed ADF Super scheme, which will apply to ADF personnel who commence from 1 July 2016 and allow some existing personnel to transfer part of their accrued superannuation savings, provides for improved superannuation arrangements as a whole.

Purpose of the Bill

The main purpose of the Bill is to establish arrangements for a new superannuation scheme from 1 July 2016—to be known as the Australian Defence Force Superannuation Scheme (or ADF Super)—for certain members of the Australian Defence Force (ADF). The Bill also provides that the new scheme is to be administered and managed by the Commonwealth Superannuation Corporation (CSC).

The Australian Defence Force Superannuation Bill 2015 is one Bill in a package of three Bills related to the establishment of ADF Super. As the existing superannuation scheme—the Military Superannuation Benefits Scheme (MSBS)—also includes incapacity and death cover arrangements, these elements are being separated from the ADF Super scheme. The key elements of each Bill are shown in Table 1.

Table 1: Key elements of the package of Bills relating to the establishment of the Australian Defence Force Superannuation Scheme

Bill

Key elements

Australian Defence Force Superannuation Bill 2015[1]

·    Outlines eligibility for a new superannuation scheme to be known as the Australian Defence Force Superannuation Scheme (or ADF Super).

·    Provides for ADF Super to be established under a trust deed (a legislative instrument that is not disallowable).

·    Specifies that the Commonwealth Superannuation Corporation will be the trustee for ADF Super.

Defence Legislation Amendment (Superannuation and ADF Cover) Bill 2015[2]

·    Specifies the employer contribution rate of 16.4 per cent for ADF Super as an amendment to the Defence Act 1903.

·    Includes consequential and transitional arrangements involved with establishing ADF Super.

·    Introduces flexible service conditions for permanent members of the ADF.

Australian Defence Force Cover Bill 2015[3]

·    Introduces standalone statutory death and invalidity cover (ADF Cover) for members of ADF Super and those ADF personnel who would have been members of ADF Super but for choosing their own superannuation fund.

Structure of the Bill

The Bill is divided into a number of parts:

•       Part 1 provides that the Act is to commence on the day of Royal Assent, provides a simplified outline of the ADF Super scheme, and includes various definitions

•       Part 2 includes the requirement for the relevant Minister to establish the Trust Deed for the ADF Super scheme, which may include requirements to allow the splitting of superannuation interests for family law purposes

•       Part 3 covers the eligibility requirements for the ADF Super scheme, including how ADF personnel employed as at 30 June 2016 will be eligible to participate in the scheme

•       Part 4 provides for the administration and management of ADF Super by the CSC and

•       Part 5 covers various matters including those who are subject to the Trust Deed, termination and variation of rights by later legislation, and the making of certain rules by the Minister.

Background

Existing superannuation arrangements

Existing members of the ADF are generally members of one of two superannuation schemes:

•       the Defence Force Retirement and Death Benefits Scheme (DFRDB) — established in 1973 and closed to new members from 30 September 2001 or

•       the MSBS (also referred to as ‘Military Super’) — which opened to new members from 1 October 1991.

A key feature of each of these two schemes is that rather than providing a superannuation benefit that is related to the value of employer and employee contributions as well as associated earnings over time, they provide a benefit that consists of a member funded component (from employee contributions) as well as a defined benefit that in broad terms is based on years of service and final salary. These two schemes also include arrangements for superannuation payments to be made in cases of incapacity and death.

The MSBS is established under the Military Superannuation and Benefits Act 1991.[4] As at 30 June 2014, there were around 56,500 contributing members, 96,000 ‘preservers’ (who do not contribute to their scheme because they are no longer ADF members) and 11,000 pensioners in the MSBS.[5]

The key features of the MSBS include:

•       member contributions — the basic contribution rate is five per cent of salary, including higher duties and the qualification and skills element of certain environmental allowances. Members can contribute up to ten per cent of their super salary. Ancillary contributions are also accepted, including both pre- and post-tax contributions such as additional personal, salary sacrifice and spouse contributions. These form the ‘member component’ of the benefits paid from the scheme

•       investment choice — members can make limited choices about the investment strategy for the member component

•       benefits on or after age 55 — a member financed benefit equal to member contributions accumulated with fund earnings plus an employer financed lump sum benefit based on a multiple of final average salary and total service. On age retirement, the employer financed lump sum may be wholly or partially converted to a CPI-indexed pension

•       resignation benefit (before age 55) —on resignation, the member would be entitled to an immediate lump sum of the member component and a preserved employer benefit. The preserved employer benefit is paid at age 55, or earlier in certain circumstances. The unfunded portion of the preserved employer benefit is increased in line with movements in the CPI between the date of exit and the date of payment. When this benefit is paid the member has the same pension option as applies to retirement benefits and

•       invalidity benefit paid depending on the level of assessed incapacity (60 per cent or more, 30 per cent to 59 per cent and less than 30 per cent).[6]

Policy development

2007 review of military superannuation

In February 2007, the then Minister Assisting the Minister for Defence in the Howard Government announced a review of military superannuation arrangements.[7] The broader context to the review included concerns about the tax treatment of military superannuation payments following changes to broader superannuation taxes announced in the 2006 Budget, improving recruitment and retention to the ADF and growing unfunded liabilities associated with the MSBS.[8]

In announcing the review, the Minister noted:

Superannuation benefits are a key component of the total remuneration package for Australian Defence Force members and the overall aim of the independent review is to ensure that the military schemes continue to meet the needs of our people and reflect contemporary superannuation standards in a sustainable manner.

… The last review of military superannuation was undertaken in 1990 and since then, there have been many changes in the wider community superannuation environment and in the demographics and career aspirations of ADF members.[9]

The review team, chaired by Mr Andrew Podger (and therefore sometimes cited as the Podger Review), delivered its report to the Minister on 31 July 2007.[10] The report was released by the newly elected Rudd Government in December 2007.[11]

The Podger Review established its own principles to guide the assessment of the MSBS, which included flexibility to meet individual member preferences and to respond to future changes to the broader superannuation or ADF environments, support retention, adequacy over both short-term and long-term, and financial sustainability for the Government over the long term.[12]

The key findings of the Podger Review were that while the MSBS compared ‘reasonably well’ with most overseas military schemes and with other Australian schemes for uniformed bodies, it ‘falls well short’ of best practice contemporary superannuation and does not contribute significantly towards recruitment and retention.[13] The review recommended that the MSBS be closed and the establishment of a new scheme, which would have the following features:

•       individual accumulation accounts with ‘generous employer contributions’ increasing with length of service at 16 per cent (first six years), 23 per cent (next nine years of completed service) and 28 per cent (after 15 years) of superannuable salary

•       flexibility for members to set their own contribution rate, if any (with a default rate of five per cent from after tax salary), select their investment risk profile and to make contributions following separation from the ADF

•       members to have choice over the superannuation scheme into which their contributions will be invested whilst maintaining membership of the mandated death and disability benefits under the new scheme

•       options for members with 15 years or more service, from age 55, to purchase indexed pensions (with a choice of indexation factors, at an unsubsidised price determined periodically by a Government-approved actuary) and/or an account based pension and

•       a range of options for the way members can access their benefits after preservation age, including through an account-based pension. This would allow members to take advantage of the Government’s transition to retirement provisions.[14]

Following the release of the report and a further period of consultation by the Rudd Government, veterans groups were opposed to the recommendations for a new scheme as proposed by the Podger Review.[15]

2013 National Commission of Audit

On 22 October 2013, the Coalition Government announced the establishment of the National Commission of Audit (NCOA).[16] Included in the terms of reference for the NCOA was a review of ‘the long-term sustainability of the budget position, identifying key policy areas where trends in expenses and revenue pose risks to the structural integrity of the budget’.[17] This was relevant to the MSBS due to its unfunded nature.

In its report released in February 2014, the NCOA noted that the MSBS was now the only major Commonwealth superannuation scheme with unfunded defined benefits that remains open to new members, and was ‘generating uncapped and increasing unfunded liabilities’ to be paid for by future generations.[18] In recommending closure of the MSBS, the NCOA noted:

Steps should be taken now to better manage [liabilities]. Any changes must, however, recognise the obligation Australia has to look after our serving personnel. The Commission recommends that the Military Superannuation and Benefits Scheme be closed to new members and replaced by an accumulation scheme for new Australian Defence Force personnel. The new scheme should be designed in a way that recognises the special contribution these Australians make to the defence of the nation. Any new scheme should continue to provide a defined benefit where a member dies or is medically discharged from the Defence Force. This death and disability element will complement the accumulation component of the scheme.[19]

2014–15 Budget announcement

As part of the 2014–15 Budget, delivered on 13 May 2014, the Government announced that from 1 July 2016, a new accumulation scheme for new members of the ADF would be established and that the MSBS would be closed to new members from this date.[20] The main media release announcing the change related mainly to the impact on ADF members, not mentioning a policy rationale based on reducing future unfunded liabilities. However, in a separate 2014–15 Budget media release relating to the status of the NCOA recommendations, the Minister for Finance and Treasurer noted in relation to the recommendation to close the MSBS and replace it with an accumulation scheme that ‘[s]tructural reforms to manage unfunded superannuation liabilities are in the 2014–15 Budget’.[21]

The Budget Papers noted that the introduction of new fully funded arrangements was estimated to reduce the Government’s unfunded superannuation liability by $126 billion by 2050.[22] Some detailed elements that were included in the budget announcement were:

•       no change to the superannuation arrangements for existing MSBS members, but they may elect to be covered by the new arrangements

•       a 15.4 per cent contribution rate to a member’s chosen fund, with the rate increasing to 18 per cent ‘for any period in which members are serving in war-like operations’ and

•       serving ADF personnel covered by the new arrangements will also be covered by statutory death and disability arrangements consistent with the defined benefit arrangement currently in place under the MSBS.[23]

Committee consideration

At the time of writing, the Bill had not been referred to a committee. Also, no Parliamentary Committees that report on the provisions of Bills, including the Senate Standing Committee for the Scrutiny of Bills or the Parliamentary Joint Committee on Human Rights had reported on the Bill or elements of the Bill.

Policy position of non-government parties/independents

Australian Labor Party

The Australian Labor Party (ALP) has not indicated that it supports the proposed arrangements as a whole. In June 2015, the Shadow Parliamentary Secretary for Defence noted that ‘Labor will now carefully consider the legislation … to ensure it achieves the best possible outcome for all ADF personnel’.[24]

When the ALP released the Podger Review of military superannuation arrangements on 24 December 2007, the then Minister for Defence Science and Personnel noted that it had been a pre-election commitment to publicly release the review report within four weeks of forming government and that this commitment had been met.[25] In releasing the review report, the Minister foreshadowed a period of further consultation that would continue until 31 March 2008.[26]

As noted above, ex-service organisations were opposed to the recommendations of the review for a new accumulation scheme.[27] A further one and a half years after the release of the report by the Rudd Government, the Shadow Minister for Defence Science, Personnel and Assisting Shadow Minister for Defence noted that the Government had yet to release its response to the review.[28] The shadow spokesman noted that:

Since the findings of the review were made public on the 24 December 2007 we haven’t heard anything from the Rudd Labor Government … ADF members, both past and present, deserve to know what the government is going to do with their superannuation.[29]

On 2 June 2010, the Minister for Defence Personnel confirmed in the House of Representatives that the Government would not be implementing the recommendations of the review, noting that:

[T]he overwhelming response through that consultation process was that the military community and the ex-services community did not want Podger because the changes involved were not in line with what they saw as the best way to maintain the uniqueness of military service and a proper beneficial system for military superannuants into the future.

That produced a problem for this government. We had a report from the previous government outlining a set of recommendations which clearly, once we consulted, the community did not want.[30]

Other parties/independents

At the time of writing, the views of independent Members and Senators and other parties on the proposals included in the Bill have not been publicly expressed.

Position of major interest groups

The Defence Force Welfare Association (DFWA) broadly supports the closure of the MSBS and the establishment of an accumulation scheme for ADF members.[31] However, the DFWA has expressed some concerns with aspects of the proposed arrangements including:

•       it does not adequately recognise the unique nature of military service—‘the ADF is not the public service’ and the proposed contribution rate of 15.4 per cent is the same as the public service superannuation scheme and

•       strongly supports superannuation contribution for service in the ADF Reserves, with no offsetting provisions —‘part-time ADF members should not be discriminated against’.[32]

The Alliance of Defence Service Organisations—whose membership includes the DFWA and a number of other organisations—considered at the time of 2014–15 Budget that the proposed employer contribution was ‘inadequate’ and that it would lobby for an increased percentage ‘that recognises the uniqueness of the military profession’.[33]

The Returned & Services League of Australia (RSL) supports the establishment of a separate superannuation scheme for ADF members and for a fully funded scheme that will allow portability of superannuation entitlements when members of the ADF finish their service.[34] Specific issues highlighted by the RSL included not supporting two-tier contribution rates (15.4 per cent for non-warlike service and 18 per cent for periods of war-like service) and a view that governance arrangements should be also separated out from other public sector superannuation schemes.

Just prior to the 2014–15 Budget announcement in response to the NCOA recommendations, the Australian Defence Association warned that the proposed changes ‘could affect the Defence Force’s ability to recruit and retain personnel’.[35] In commenting on the proposal following the 2014–15 Budget, the Association noted:

I think defence welfare groups have every right to feel let down by the inclusion of this in the budget when assurances were given ahead of the budget that it would not be there and groups would be consulted about any changes.[36]

Financial implications

The Explanatory Memorandum for the Bill does not include an estimate for the financial impact of the changed arrangements, noting that ‘the establishment of ADF Super is a 2014/15 Budget Measure’.[37]

The 2014–15 Budget included the following estimates for the changed superannuation arrangements (Figure 1). It should be noted that the change to an accumulation superannuation scheme involves a cost to the budget as it effectively recognises the superannuation liability as an expense as it is incurred rather than as the benefit is paid under the defined benefit scheme arrangements.

Figure 1: 2014–15 Budget impact of establishing new military superannuation accumulation

Figure 1: 2014–15 Budget impact of establishing new military superannuation accumulation.
Source: Australian Government, Budget measures: budget paper no. 2: 2014–15, p. 75, accessed 1 July 2015.

However, these estimates were based on establishing a new scheme with different contribution rates for non-warlike and war-like service. It is unclear how the decision to have a single contribution rate of 16.4 per cent has impacted on the estimated cost of the changed arrangements.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[38]

Key issues and provisions

What are the arguments in favour of establishing a new military superannuation scheme?

Part 2 of the Bill includes the key provisions to establish the Australian Defence Force Superannuation Scheme (also to be known as ‘ADF Super’) by a deed, which will be a non-disallowable legislative instrument (clause 7). The Minister will be empowered to, by writing, amend the trust deed subject to the trustee—specified to be the Commonwealth Superannuation Corporation—consenting to the amendment, or in other certain circumstances (clause 8).

There are a number of arguments used in favour of establishing a new military superannuation scheme. These include a general preference for accumulation superannuation arrangements as well as changed labour market and superannuation arrangements and career patterns for ADF personnel.

Unfunded liabilities of defined benefit schemes

There has been a trend away from defined benefits superannuation schemes for the private and public sector in Australia and also around the world. Contributing to the decline in some other countries were factors such as increased job mobility, more women in the paid workforce (entailing less family attachment to particular employers), fewer workers in unions, lower interest rates (entailing higher defined benefit liabilities, especially for defined benefit plans offering pensions), and increased longevity.[39] In Australia, many of the same factors applied, but changed tax arrangements and strengthened regulatory arrangements were also an important factor.[40]

For Commonwealth public sector employees, the last remaining defined benefit scheme, the Public Sector Superannuation (PSS) scheme, was closed to new members from 30 June 2005.[41] From this time, Commonwealth public servants have been eligible to be members of an accumulation scheme, the Public Sector Superannuation Accumulation Scheme (PSSap) and receive an employer contribution rate of 15.4 per cent.[42]

The underlying rationale for the closure of the PSS and the move to accumulation superannuation arrangements were concerns about the intergenerational equity of making future taxpayers fund the defined benefits of former public servants when they retired. Indeed, the establishment of the PSSap in 2005 occurred at around the time of the establishment of the ‘Future Fund’—a separate fund, to be contributed to by budget surpluses and assets sales, to pay for the unfunded defined benefit superannuation of Commonwealth public servants. Introducing the Bill to establish the Future Fund, the then Treasurer noted that:

When the fund is eventually drawn down to pay superannuation liabilities—some of which are accruing now—taxpayers will face a lighter burden than would have been the case if this fund had not been established. The fund represents a sensible financial policy now for the benefit of future generations. The fund will be needed in the future because we know that future generations will have the costs of the ageing of the population on their hands within 20 years time. The fact that the current generation is funding its liabilities, and also funding liabilities accrued in the past, will give future taxpayers a much better chance to cope with these challenges.[43]

The National Commission of Audit’s recommendation to close the MSBS and establish an accumulation superannuation scheme largely reflected concerns about budget sustainability and intergenerational equity. In making the recommendation, the NCOA noted:

Unfunded superannuation liabilities on the Commonwealth’s balance sheet represent a significant risk to the long-term financial position of the Commonwealth. The unfunded liability for defined benefit schemes is currently estimated at some $150 billion rising to over $350 billion by 2050. These liabilities will have to be paid for by future generations.

Steps should be taken now to better manage them … The Commission recommends that the Military Superannuation and Benefits Scheme be closed to new members and replaced by an accumulation scheme for new Australian Defence Force personnel.[44]

Information presented in the 2014–15 Budget papers showed the reduction in the Commonwealth’s unfunded superannuation liabilities as a result of the decision to close the MSBS from 1 July 2016 (Figure 2). The impact of the decision was to reduce the unfunded superannuation liability by $126 billion by 2049–50.[45]

Figure 2: Change in unfunded Commonwealth Government superannuation liability projections with the closure of the MSBS from 1 July 2016, 2013–14 to 2049–50

Source: Australian Government, Budget strategy and outlook: budget paper no. 1, 2014–15, p. 7–24, accessed 1 July 2015.

Modernising superannuation arrangements

Criticisms of the MSBS itself have also been made on a number of grounds. Many of these criticisms are based on comparisons with features associated with contemporary accumulation superannuation arrangements that apply across the workforce more generally.

The Podger Review noted a number of issues with the MSBS including:

•       ‘very generous benefits’ to long-serving members with a choice of an indexed pension or lump sum or both but ‘a substantially less generous level of employer benefit’ for shorter serving members due to the preservation requirements. For shorter serving members the benefit ‘may be less than necessary to contribute to the full maintenance of living standards in retirement’

•       the scheme is complex for members to understand and does not allow members to exert control over employer-funded benefits, and

•       the scheme ‘has not, in practice, contributed to recruitment or retention because the complexity undermines the potential benefits of the scheme’s structure’.[46]

Some of these issues have also been raised by organisations representing current and former ADF personnel, which have also identified a number of shortcomings of the MSBS—although not all of these issues are addressed by the package of Bills—which in the view of these organisations can disadvantage some MSBS members:

•       there are no portability provisions and members cannot get access to the employer benefit component until they reach preservation age. For shorter term members ‘[if] they were able to roll over the employer benefit to a complying super fund of their choice they would be significantly better off over the long term’

•       the indexation of the MSBS superannuation benefit to the consumer price index results in ‘the purchasing power of the pension [being] continually eroded over time. That is because, as most know, CPI is a measure of inflation not purchasing power’[47] and

•       long-term ADF members contributing to MSBS are subjected to a Maximum Benefit Limit (MBL). The effect of this is to ‘force these most experienced and valuable service personnel to stop contributing to the accumulation component of their fund while at the same time the government ceases contributing as well due to the member’s total payout having peaked’.[48]

Comparison of MSBS with ADF Super

With the Minister noting that ADF Super would represent a ‘modern’ superannuation arrangement, the shift away from a defined benefit to an accumulation scheme addresses a number of criticisms of the MSBS in terms of its flexibility, portability and choice available to ADF members compared to their counterparts in the private sector and more recent public sector employees.

A comparison of the proposed ADF Super arrangements with the MSBS was published by the Department of Defence in June 2015 (Figure 3). On this comparison, key benefits to ADF members compared to the MSBS are in giving choice about where superannuation contributions are made, the removal of the mandatory employee contribution requirement and a benefit that is portable upon leaving the ADF.

Figure 3: Department of Defence comparison between ADF Super and MSBS.
Figure 3: Department of Defence comparison between ADF Super and MSBS

Source: Department of Defence, ‘ADF Super’, Department of Defence website, accessed 3 July 2015.

This comparison does not address the relative value of the employer contribution of rate of 16.4 per cent, when compared to the workforce generally at the superannuation guarantee rate of 9.5 per cent (rising gradually to reach 12 per cent from July 2025) and other selected superannuation schemes. Any comparison on the relative benefits for ADF members will therefore need to consider the benefits associated with flexibility, less complexity and portability traded off against a lower employer contribution rate.

16.4 per cent contribution rate—Too high, too low, or about right?

Item 2 of Schedule 1 to the Defence Legislation Amendment (Superannuation and ADF Cover) Bill 2015 inserts new section 52A into the Defence Act 1903 to specify that the employer superannuation contribution rate for ADF Super members (or those that would be members had they not chosen their own superannuation fund) is 16.4 per cent of ordinary time earnings, to be paid into the fund for each pay period.[49] This is a more regular payment than under the superannuation guarantee, which generally requires payments to be made quarterly.

The proposed 16.4 per cent employer contribution rate is higher than the contribution rate under the superannuation guarantee and for the current Commonwealth public sector scheme (PSSap), but is lower than the notional employer contribution rates under the existing schemes covering ADF members (MSBS and DFRDB), the scheme covering Commonwealth judges, and the scheme that covers federal members of Parliament elected prior to the 2004 election (PCSS) (Table 2).

Table 2: Employer contribution rates, selected Commonwealth public sector superannuation schemes and superannuation arrangements

Scheme

Features

Employer contribution rate (%) (a)

Superannuation guarantee July 2016

Payment to accumulation scheme. Generally applies to all employees.

9.5%

Superannuation guarantee July 2025

Payment to accumulation scheme. Generally applies to all employees.

12%

Public Sector Accumulation Scheme (PSSap)

Generally applies to all Commonwealth public sector employees who commenced after July 2005.

15.4%

Parliamentary superannuation accumulation scheme

Payment to accumulation scheme. Applies to Parliamentarians joining the Parliament who were not sitting Parliamentarians on 31 August 2004.

15.4%

Australian Defence Force Superannuation Scheme (ADF Super)

Payment to accumulation scheme. Proposed to apply to ADF members who join from 1 July 2016.

16.4%

Public Sector Superannuation Scheme (PSS)

Closed defined benefit scheme. Generally covers Commonwealth public sector employees who commenced employment between 1 July 1990 and 30 June 2005.

18.8% (last estimated in 2011)

Commonwealth Superannuation Scheme (CSS)

Closed defined benefit scheme. Generally covers Commonwealth public sector employees who commenced employment between 1 July 1976 and 30 June 1990.

20.3% (last estimated in 2011)

Military Superannuation Benefits Scheme (MSBS)

Defined benefit scheme. Generally covers members of the ADF who commenced service from 1 October 1991. Remains open to new members.

30.4% (last estimated in 2011)

Defence Force Retirement Defined Benefits scheme (DFRDB)

Closed defined benefit scheme. Generally covers members of the ADF who commenced service up to 30 September 1991.

35.5% (recalculated in 2014 to reflect changed indexation arrangements)

Parliamentary Superannuation Scheme (PCSS)

Closed defined benefit scheme. Generally covers Members and Senators elected to the federal parliament. Closed to new members from 9 October 2004.

40% (last estimated in 2011)

Judges Pension Scheme

Defined benefit scheme. Remains open.

68.9% (last estimated in 2011)

Note: (a) The employer contribution rate for defined benefit schemes is calculated by an actuary based on the experience of members under the scheme, assumptions about inflation, wages and member experiences and calculates the estimated contribution rate that would be required to fund the benefits accruing to contributors.

Source: Superannuation Guarantee (Administration) Act 1992, subsection 19(2); Department of Finance and Deregulation, PSS and CSS Long Term Cost Report 2011, Prepared by Mercer Consulting (Australia) Pty Ltd using data as at 30 June 2011, 2012, p. 2; Department of Finance and Deregulation, Parliamentary Contributory Superannuation Scheme — Long Term Cost Report 2011, Prepared by Mercer Consulting (Australia) Pty Ltd using data as at 30 June 2011, 2012, p. 18; Department of Finance and Deregulation, The Judges’ Pension Scheme Long Term Cost Report 2011, Prepared by Mercer Consulting (Australia) Pty Ltd using data as at 30 June 2011, 2012, p. 18; Explanatory Memorandum, Defence Forces Retirement Benefits Legislation Amendment (Fair Indexation) Bill 2014, p. 7; Australian Government Actuary, Military Superannuation and Benefits Scheme Defence Force Retirement and Death Benefits Scheme and Defence Forces Retirement Benefits Scheme: A report on long term costs prepared by the Australian Government Actuary using data to 30 June 2011, 2012, p. 29; Parliamentary Superannuation Act 2004, subsection 8(2), all accessed 30 June 2015.

As originally announced in the 2014–15 Budget, the contribution rate was proposed to be 15.4 per cent with an additional amount of a 2.6 per cent (that is, to a rate of 18 per cent) ‘for any period in which members are serving in war-like operations’.[50]

Defence groups including the Defence Force Welfare Association (DFWA) and the Returned & Services League (RSL) were opposed to a two-tier contribution rate. This opposition was based on a number of arguments including:

•       contribution rate at 15.4 per cent did not differentiate between ADF and civilian superannuation arrangements and ‘fails to match the Government’s stance of treating members of the ADF separately’

•       the higher rate for war-like operations differentiated between ADF members who were part of a ‘team’ and such a distinction weakened this and could be a ‘corrosion of morale’ and

•       ADF members on peacekeeping missions are exposed to danger and yet their service may not be categorised as ‘war-like’.[51]

Both the RSL and DFWA proposed a single rate of at least 18 per cent.[52]

The ALP has welcomed the single rate of 16.4 per cent rather than a two-tiered rate, which ‘would have undermined the team ethos of the ADF, and served as an administrative nightmare’.[53] The ALP also notes that this rate ‘clearly recognises the unique nature of military service’.[54]

In his second reading speech, the Minister noted that the employer contribution rate took account of the nature of military service and was higher than applied generally:

In recognising the unique nature of military service, the government has agreed to a single employer contribution rate of 16.4 per cent, which is a generous rate well above community standards.[55]

Comparisons of this 16.4 per cent rate with other arrangements will need to take into account a range of factors, including the military service, the general standard applying to employees under the superannuation guarantee scheme and the appropriateness of comparisons with members of parliament and the judiciary.

Eligibility for membership of ADF Super

Part 3 of the Bill sets out the eligibility requirements for membership of ADF Super. Broadly, a person is eligible to be a member of ADF Super from 1 July 2016 if:

•       they are a member of the ‘Permanent Forces’ or are a ‘continuous full-time Reservist’[56] or

•       they are a member of the MSBS (whether they are currently contributing or receiving a benefit) or are a former contributing member of the DFRDB scheme (clause 11).

These arrangements effectively exclude only those existing ADF personnel who were engaged prior to October 2001 and are therefore members of the DFRDB scheme from becoming ADF Super members. To become a member of ADF Super, a contributing DFRDB member would have to resign from the ADF and then rejoin the permanent force or serve a period of full-time continuous service as a reservist.[57]

Choice of fund

An eligible person becomes an ADF Super member by making a conscious choice to join the fund or by virtue of not making a choice, with the fund effectively being the sole ‘default’ fund under the Superannuation Guarantee (Administration) Act 1992 (clause 12). It is important to note that eligible ADF Super members can therefore choose any complying superannuation fund (including a self-managed superannuation fund) under these arrangements.[58]

Transfers from MSBS and DFRDB schemes

As noted above, a contributing DFRDB member is not eligible to join the ADF Super scheme. However, contributing MSBS members have a choice to transfer to the ADF Super scheme but this transfer only applies to their member and ancillary benefits and not their employer contribution (which remains preserved in the MSBS). In addition, once an MSBS member makes the choice to move to ADF Super they will not be able to move back to the MSBS scheme (subclause 12(3) of the Bill and proposed subsection 7(3) of the Military Superannuation and Benefits Act 1991, to be inserted by item 58 of Schedule 1 to the Defence Legislation Amendment (Superannuation and ADF Cover) Bill 2015).[59]

Veterans groups have had a longstanding position that the employer component in the MSBS should also be available for transfer to another superannuation fund when a person leaves the ADF rather than remain preserved in the MSBS. In relation to the proposed arrangements, the Defence Force Welfare Association (DFWA) noted that:

MSBS contributors serving when the new ADF Super scheme comes into force may join the new scheme. They will be able to transfer their personal compulsory MSBS contributions (and earnings accrued) to the new scheme if they wish. However they will not be able to access their employer’s contributions to MSBS, either at that time or when they leave the ADF. Instead, their government MSBS contributions will be preserved within MSBS until they retire finally from the workforce, indexed only to the totally inadequate Consumer Price Index (CPI).

The DFWA strongly opposes this arrangement. No other Australian in a modern superannuation scheme is unable to access their employer’s contribution in order to transfer to a scheme of their choice.[60]

In choosing to transfer to the ADF Super scheme from the MSBS, ADF members will need to potentially balance several factors including that they:

•       are no longer required to pay the mandatory five per cent contribution as required under the MSBS and therefore may experience an equivalent increase in take home pay

•       are able to gain more control over their accumulated employer component by potentially choosing their own superannuation fund

•       exclude themselves from the potential benefits provided (which depend on period of service, possible promotions, et cetera) under the defined benefit element of the MSBS.

Treatment of part-time reservists

The Superannuation Guarantee (Administration) Act 1992 includes a specific exclusion regarding superannuation contributions for reservists, with the tax-free pay part-time reservists receive excluded from an employer’s liability to make the minimum mandatory superannuation payments.[61] The rationale for this exclusion, which has been in place since the commencement of the superannuation guarantee scheme in 1992, was that tax-free payments should be excluded from also receiving superannuation contributions.[62]

Reservists who are not considered to be a ‘continuous full-time Reservist’ are also excluded from being a member of ADF Super (clauses 4 and 11).

Veterans groups are opposed to the arrangements that continue to exclude part-time reservists from receiving superannuation contributions for their service. The RSL noted that:

… there is good reason to offer membership of the new ADF superannuation scheme to members of the army, navy and air force reserve forces as a choice for each individual on a once only decision basis. The RSL appreciates that this proposal may entail an administrative cost and that some members of the reserve may decline an offer of membership of the proposed new ADF superannuation scheme for taxation or other reasons. However, because of the ADF total force concept now evolving the RSL contends that each member of the ADF reserve should be given the choice of opting in or out of the new ADF superannuation scheme.[63]

This view is also supported by the Defence Force Welfare Association, who note that:

The government says that ADF Super will not extend to part time members of the ADF Reserves. Given that all major political parties in Australia are committed to compulsory universal superannuation for all work performed, part time or full time, the government’s position is indefensible.

DFWA strongly supports ‘employer’ superannuation for service in the ADF Reserves, with no offsetting provisions. Part-time ADF members should not be discriminated against.[64]

Trustee and administration arrangements

As previously noted, the CSC will become the trustee of ADF Super, with the trust deed to also set out the functions and powers of CSC in relation to ADF Super and to make rules for the administration of ADF Super.

Part 2 and Part 4 of the Bill provide for various arrangements for the administration and functions of the CSC to manage the ADF Super scheme, including that the costs of administration of the Act and trust deed are to be paid by CSC out of the ADF Super Fund in accordance with the trust deed (clause 19). Other matters include the provision of rules for the payment of fees so that these are not considered to be a tax for constitutional purposes (clause 20). Arrangements for the splitting of superannuation in the event of a relationship breakdown are also included (clause 9).

In broad terms, the arrangements relating to the splitting of superannuation, the establishment of a Trust Deed for the scheme, the appointment of CSC as the trustee and the framework for the administration of the scheme by CSC are comparable to those established for the existing public sector scheme, the PSSap, as set out in the Superannuation Act 2005.[65]

The cost of administration arrangements included in clause 19 provide that ADF Super members will pay for the administration of the scheme. This is consistent with the recent changes to the PSSap scheme made by the Governance of Australian Government Superannuation Schemes Legislation Amendment Act 2015 that shifted the cost of administration from the Commonwealth to members of the PSSap scheme.[66]

Other

Part 5 of the Bill includes provisions relating to persons who are subject to the Trust Deed, termination and variation of rights by later legislation and the making of rules.

Clause 28 allows the Minister to make rules that are required or permitted by the Bill, or necessary or convenient for giving effect to the Bill. In most cases, the CSC must consent to proposed rules (subclause 28(2)). Subclause 28(3) sets out limits on the Minister’s rule-making powers, such that the rules cannot, for example, create an offence or civil penalty, or impose a tax.

Subclause 29(1) specifies that the rules may contain provisions that ensure that ADF Super is able to satisfy conditions or requirements imposed under a number of specified Acts (including the Income Tax Assessment Act 1997 and the Superannuation Industry (Supervision) Act 1993). Of note, subclause 29(2) provides that in the event that the rules made for the purposes of subclause 29(1) are inconsistent with a provision in the Bill (when enacted) or the Trust Deed, the rules will prevail. It appears that no other Commonwealth legislation contains a provision of this type. The Explanatory Memorandum to the Bill states:

This provision is necessary because the conditions or requirements of the above laws are usually promulgated by regulations or other instruments made under those laws. Allowing rules to be made under this Bill would allow those conditions or requirements to be met more quickly than if Act amendments were required. It is intended that should it be necessary to make rules under this section, legislation would be introduced as soon as possible to give effect to the relevant provisions.[67]

In commenting on documents that had been made available to the RSL for review (which appear to have similar provisions to those in the Bill), the RSL noted the flexibility that the rules would provide for any Government:

Another matter of concern to the RSL in the draft documentation was that normally any delegated rules or regulations or instruments cannot be inconsistent with the main legislation; whereas our examination suggests this is reversed in this case. Thus we understand that where there is any inconsistency between the draft documentation and the Rules, the Rules prevail.

We advised that this contrasts with what is normal practice and that we do not agree with it. We noted that if this was allowed to stand one of the ways of changing ADF Super would be to use the power to amend the rules. Our concern is that such action could be effected without having to pass amending legislation through Parliament. That would mean no consultation and no debate. The RSL opposed this aspect of the draft documentation and asserted that any Rules must be subservient to legislation.[68]

This issue could be expected to be addressed by the Senate Standing Committee for the Scrutiny of Bills when it presents its examination of the Bill.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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[1].              Parliament of Australia, ‘Australian Defence Force Superannuation Bill 2015 homepage’, Australian Parliament website, accessed 7 August 2015.

[2].              Parliament of Australia, ‘Defence Legislation Amendment (Superannuation and ADF Cover) Bill 2015’, Australian Parliament website, accessed 7 August 2015.

[3].              Parliament of Australia, ‘Australian Defence Force Cover Bill 2015’, Australian Parliament website, accessed 7 August 2015.

[4].              Military Superannuation and Benefits Act 1991, accessed 10 August 2015.

[5].              Commonwealth Superannuation Corporation, Annual report 2013–14, p. 54, accessed 3 July 2015.

[6].              Commonwealth Superannuation Corporation, Militarysuper book: a summary of the Military Superannuation Benefits Scheme, 30 June 2012; Australian Government Actuary, Military Superannuation and Benefits Scheme Defence Force Retirement and Death Benefits Scheme and Defence Forces Retirement Benefits Scheme: A report on long term costs prepared by the Australian Government Actuary using data to 30 June 2011, 2012, both accessed 3 July 2015.

[7].              B Billson (Minister Assisting the Minister for Defence), Review of military superannuation, media release, 27 February 2007, accessed 1 July 2015.

[8].              A Bartlett, Bartlett welcomes Governments [sic] belated examination of defence force superannuation, media release, 27 February 2007; N Sherry and A Griffin, Government not to be trusted on military super review, media release, 27 February 2007; B Toohey, ‘Opinion: Terror doesn’t hang on defence’, West Australian, 28 August 2006, p. 19, all accessed 1 July 2015.

[9].              B Billson (Minister Assisting the Minister for Defence), op. cit.

[10].              A Podger, D Knox and L Roberts, Report of the review into military superannuation arrangements: Military Superannuation Review, Department of Defence, Canberra, 31 July 2007, p. i, accessed 1 July 2015.

[11].              W Snowden (Minister for Defence Science and Personnel) and A Griffin (Minister for Veterans’ Affairs), Review of military superannuation, media release, 24 December 2007, accessed 1 July 2015.

[12].              Podger Review, op. cit., p. 12.

[13].              Ibid., p. ix.

[14].              Ibid., pp. 17–18.

[15].              D McLennan, ‘Defence groups attack super plan’, Canberra Times, 22 March 2008, p. 7, accessed 10 July 2015.

[16].              M Cormann (Minister for Finance) and J Hockey (Treasurer), Coalition commences Commission of Audit, joint media release, 22 October 2013, accessed 1 July 2015.

[17].              Ibid.

[18].              National Commission of Audit, Towards responsible government: the report of the National Commission of Audit, Phase 1, National Commission of Audit, Canberra, February 2014, p. 60, accessed 1 July 2015.

[19].              Ibid.

[20].              M Cormann (Minister for Finance) and D Johnston (Minister for Defence), New military superannuation scheme arrangements, joint media release, 13 May 2014, accessed 1 July 2015.

[21].              M Cormann (Minister for Finance) and J Hockey (Treasurer), Our response to the National Commission of Audit report, joint media release, 13 May 2014, accessed 1 July 2015.

[22].              Australian Government, Budget measures: budget paper no. 2: 2014–15, p. 75, accessed 1 July 2015.

[23].              Ibid.

[24].              G Brodtmann, Labor welcomes Government’s back down on ADF super, media release, 25 June 2015, accessed 10 July 2015.

[25].              W Snowden (Minister for Defence Science and Personnel) and A Griffin (Minister for Veterans’ Affairs), Review of military superannuation, media release, op. cit.

[26].              Ibid.

[27].              D McLennan, op. cit.

[28].              B Baldwin, Still no word on the review into military superannuation, media release, 29 July 2009, accessed 7 August 2015.

[29].              Ibid.

[30].              A Griffin (Minister for Veterans’ Affairs and Minister for Defence Personnel), ‘ Second reading speech: Governance of Australian Government Superannuation Schemes Bill 2010, Comsuper Bill 2010 and the Superannuation Legislation (Consequential Amendments and Transitional Provisions) Bill 2010’, House of Representatives, Debates, 2 June 2010, p. 4948, accessed 10 July 2015.

[31].              Defence Force Welfare Association, ‘The proposed new military superannuation scheme, the DFWA position—February 2015’, DFWA website, accessed 1 July 2015.

[32].              Ibid.

[33].              Alliance of Defence Service Organisations (ADSO), ‘ADSO update 5/2014 – Year 2014 in review – 04 August 2015’, ADSO website, accessed 4 August 2015.

[34].              Returned & Services League of Australia (RSL), National President’s newsletter no 2 of 2015, RSL website, pp. 1–4, accessed 3 July 2015.

[35].              J Strachan, ‘Super in the line of fire’, Sunday Canberra Times, 4 May 2014, p. 1, accessed 5 August 2015.

[36].              J Kerin, ‘Fire returned over military super changes’, Australian Financial Review, 15 May 2014, p. 16, accessed 5 August 2015.

[37].              Explanatory Memorandum, Australian Defence Force Superannuation Bill 2015, p. 3, accessed 7 August 2015.

[38].              The Statement of Compatibility with Human Rights can be found in the Explanatory Memorandum to the Bill.

[39].              H Bateman and G Kingston, ‘Restoring a level playing field for defined benefits superannuation’, paper presented at the Melbourne Money & Finance Conference, 1 and 2 July 2013, p. 4, accessed 1 July 2015.

[40].              Ibid.

[41].              Commonwealth Superannuation Corporation (CSC), ‘PSS: About us’, CSC website, accessed 5 August 2015.

[42].              Commonwealth Superannuation Corporation (CSC), ‘How PSSap works’, CSC website, accessed 5 August 2015.

[43].              P Costello (Treasurer), ‘Second reading speech: Future Fund Bill 2005’, House of Representatives, Debates, 7 December 2005, p. 3, accessed 5 August 2015.

[44].              National Commission of Audit, Towards responsible government: the report of the National Commission of Audit, Phase 1, op. cit., p. xvi.

[45].              Australian Government, Budget strategy and outlook: budget paper no. 1, 2014–15, p. 7–24, accessed 1 July 2015.

[46].              Podger Review, op. cit., pp. 14–15.

[47].              The same issue was relevant to DFRB/DFRDB benefits. However, the Government changed indexation arrangements for the DFRB/DFRDB superannuation benefits for recipients aged 55 and over from 1 July 2014 so they would be indexed according to the greater of the increase in the CPI or the Pensioner and Beneficiary Living Cost Index, subject to meeting the specified floor percentage (27.7 per cent of male total average weekly earnings for the single pension) (Defence Force Retirement Benefits Legislation Amendment (Fair Indexation) Act 2014, Schedule 1, accessed 3 August 2015).

[48].              Defence Force Welfare Association (DFWA), ‘Letter to the Editor Canberra Time [sic] 9 May 2014’, DRWA website, accessed 3 August 2015.

[49].              Parliament of Australia, ‘Defence Legislation Amendment (Superannuation and ADF Cover) Bill 2015’, Australian Parliament website, accessed 7 August 2015.

[50].              Australian Government, Budget measures: budget paper no. 2: 2014–15, p. 75, op. cit.

[51].              Returned & Services League Australia, National President’s newsletter no 2 of 2015, p. 3, op. cit.; Defence Force Welfare Association, ‘The proposed new military superannuation scheme, the DFWA position—February 2015’, op. cit.

[52].              Ibid.

[53].              G Brodtmann, Labor welcomes Government’s back down on ADF Super, op. cit.

[54].              Ibid.

[55].              S Robert (Assistant Minister for Defence), ‘Second reading speech: Australian Defence Force Superannuation Bill 2015’, House of Representatives, Debates, 25 June 2015, p. 7584, accessed 30 June 2015.

[56].              The terms ‘Permanent Forces’ and ‘continuous full-time Reservist’ are defined in clause 4 and cover certain ADF personnel engaged under the Naval Defence Act 1910, the Defence Act 1903 and the Air Force Act 1923.

[57].              Explanatory Memorandum, paragraph 34.

[58].              Ibid., paragraph 54.

[59].              Department of Defence, ‘ADF Super: Frequently asked questions’, Department of Defence website, accessed 9 July 2015.

[60].              Defence Force Welfare Association, op. cit., p. 5.

[61].              Superannuation Guarantee (Administration) Act 1992, section 29, accessed 7 August 2015.

[62].              J Kerin (Treasurer), Superannuation guarantee levy: an information paper, The Treasury, Canberra, December 1991, p. 6, accessed 9 July 2015.

[63].              Returned & Services League of Australia (RSL), op. cit., p. 2.

[64].              Defence Force Welfare Association, op. cit., p. 5.

[65].              The Superannuation Act 2005 (accessed 10 August 2015) has a similar structure and provisions relating to how the CSC will be empowered to administer the fund.

[66].              Governance of Australian Government Superannuation Schemes Legislation Amendment Act 2015, Schedule 3, accessed 9 July 2015.

[67].              Explanatory Memorandum, Australian Defence Force Superannuation Bill 2015, op. cit., paragraph 83.

[68].              Returned & Services League of Australia (RSL), National President’s newsletter no 3 of 2015, RSL website, p. 4, accessed 10 August 2015.