4.1
This chapter summarises the suggestions made to the committee to address the design of the scheme including the issues focused around commutation and indexation as well as the potential costs.
What do submitters want to happen?
4.2
While there were differing views on exactly what should occur, overall, submitters called for the legislation to be changed to revise various aspects of the scheme arguing that:
it was drafted contrary to the recommendations of the Jess Report;
it was too complex and parliamentarians did not understand what they were voting on;
the commutation arrangements are unfair and should be changed along with some form of compensation and backpay; and/or
other design aspects of the scheme should be changed, eg. expectation of life factor tables should be updated and indexation adjusted.
4.3
The key suggestions are outlined below. Many of these suggestions were also put to the Ombudsman who noted 'it is clear from the submissions we received, that there is a high level of confusion and dissatisfaction with current policy settings as expressed through the statutory arrangements and many members are hoping for legislative reform'.
Change the legislation to reflect the scheme outlined to them with reimbursement
4.4
A key wish of submitters is for the legislation to be amended to reflect what some were told about how commutation would work by Defence because they believe the current design of the scheme is unfair. They argue that the legislation should be changed to reflect that they accepted a lower pension rate to pay back the lump sum until a nominated life expectancy age and when the lump sum debt is cleared the pension should revert to the pre-commutation rate.
4.5
Some argued this should involve reparations at least in part with most arguing that all monies in excess of reaching the expectation of life factor should be repaid.
4.6
The DFRDB COMMUTATION CAMPAIGN (the Campaign) said that 'retrospective action in respect to the failure of both the DFRDBA and DEFENCE, through Mal-Administration, needs to be taken with appropriate reparations being made'. It added:
We believe that all of those that accepted a Commutation did so under the false and inaccurate policy advice, as passed to them. Furthermore, very few would have accepted the Lump Sum benefit (provided under original Parliamentary guidance as a transition benefit post-Military Service) had they been aware of the Commutation policy of the DFRDBA.
4.7
Mr Stone, Independent Advocate, the Campaign, emphasised that 'it's a matter of getting their own funds back that they were deceived into taking in the first place'.
4.8
Accordingly, the Campaign argued that:
…all those Veteran Superannuants induced to accept a Commutation, without the knowledge of the full financial impost commutation carried, under DFRDBA policy, should be unfettered from that policy, forthwith. Furthermore, that just-reparations should be paid to all affected Veteran Superannuants with a full return of all monies paid to the Commonwealth, in excess of the quantum received as a Lump Sum benefit, in opting for a Commutation.
4.9
In summary the Campaign suggested that those who chose to commute 'be held to what their understanding of the matter was – that reductions in Retirement Pay would cease once they passed their National Life Expectancy Point…'.
4.10
Mr Peter Larard also recommended reinstating retirement pay to the full amount, including backpay from the life expectancy date or at least 'some appropriately major recompense'. Mr Charles Myhill indicated that he should be 'compensated for the overpayments I have made'. Mr Paul McGregor also considered that there should be 'reimbursement of money paid since exceeding the notional life expectancy'. Another submitter recommended 'that the Government acknowledge that the commutation arrangements are unfair and amend policy and legislation arrangements which would entitle me to my pre-commutation pension (appropriately indexed) upon reaching my life expectancy'.
4.11
Another submitter recommended that the committee consider 'restoring full pension payments to those service personnel who as DFRDB members commuted a portion of their pension and reach or have reached the age at which they effectively 'repaid' their commutation amount'.
4.12
The Australian Defence Force Retirees Association (ADFRA) is also seeking:
legislative amendment to cease retirement pay and invalidity pay reduction after Notional Life Expectancy is reached';
reimbursement of all retired pay and invalidity pay reductions after members reached their National Life Expectancy and
restoration of the rate of all DFRDB Defined Benefits to a fair current value.
4.13
However, the ADFRA stressed that they are 'not seeking the retrospective recovery of vast benefits already lost due to unfair indexation from the date of retirement to the present day'.
4.14
Mr Michael Tehan suggested that '[a]ssuming the Committee agrees with the assertion that continuing payment of the pension at the reduced rate is unconscionable,…the rate of retirement pay is to be adjusted to the correct rate immediately; and, [m]embers are to be reimbursed a reasonable portion of the amount they have lost since the [c]ommutation value has been repaid'.
4.15
The position was supported by others including Commander Graham J Darcy RAN (Rtd) who also recommended that the DFRDB Act be amended to 'remove the insidious wording which diminishes the benefits and restore those benefits to the levels which were set down by the Jess Committee and accepted by both Coalition and Labor Governments'.
4.16
Mr David Plummer argued that '[a]s I believe that I have fully repaid my commuted amount, I should now be entitled to a total refund of the excessive payments deducted and my pension restored to my full pension entitlement, with restitution of full overpayment'. He added that the legislation should be amended to 'terminate retirement pay reduction, resulting from commutation, on the date on which the total retirement pay equates to the amount commuted, and restore pensions to full entitlement'.
4.17
Another submitter argued that '[t]he Act requires amendment to ensure the full amount of retirement pay is restored once the contributor attains Life Expectancy – and the commutation amount has been repaid to the Commonwealth'.
4.18
A further submitter argued that [t]he only remedial action that will reverse this absolutely inequitable situation is to remove that part of the legislation that stipulates that a reduction in pensions continues past the NLE age used to calculate the commutation in the first instance'.
4.19
Mr Clive Connor also suggested repaying 'all recipients the amount of overpayment they have made with special taxation considerations and adjust their entitlement to full pre-commutation levels'.
4.20
Noting the difficulties with 'so-called backpay', 'particularly as many DFRDB recipients are deceased', Mr Richard Usher suggested that 'from a given date – such as 1 July 2022 – DFRDB retirement pay, for those who have reached their life expectancy, and had 're-paid' the Commonwealth the full amount of their commutation, should increase to the correct value'.
Potential costs
4.21
Looking at the cost of the remedies suggested by the Campaign, they responded:
How the Commonwealth should meet this cost is essentially for it to determine, however, we believe that the Commonwealth Superannuation Future's Fund has well sufficient resources, and these being specifically for superannuation purposes. Alternatively we suggest that as those Retirement Pay deductions have been credited to Consolidated Revenue, ongoing, and in some cases for decades, perhaps the Commonwealth could consider this is an appropriate source for their rightful payment.
4.22
The Campaign further suggested that 'if the funds previously outlaid by the Commonwealth, were now regarded as Military Transition Grants, that this would be consistent with general grant processes managed by the Commonwealth for a plethora of causes. Furthermore, that this could bec[o]me a positive feature of future Military Transition arrangements'.
4.23
Mr Ellerbock, ADFRA, when asked about costs noted that 'every request for the appropriate information to allow me to do a fully detailed analysis of what you are just asking for now has been denied by the Commonwealth Superannuation Corporation—even to the point of quoting fine print in the Freedom of Information Act to prevent me from getting that information'. However, he indicated that he did have the personal details of some 650 members who commuted and on the basis of that information:
Basically what I put in my submission is that the overpayment of DFRDB payments after life expectancy will run into hundreds of millions of dollars if it's allowed to go on. By the end of the 2020-21 financial year, some $40.7 million will have been overpaid in commutation. If it's allowed to run for the remainder of the period of this scheme, which will probably go out to 2060, that amount will be something in the order of $1.6 billion. That's an estimate based on the 650 members that I've got. That's the commutation estimate…
4.24
ADFRA added that 'a small part of the annual earnings of the Future Fund, the primary purpose of which is to underwrite unfunded Commonwealth Defined Benefit schemes (of which DFRDB is one), would cover the cost of the outcomes we are seeking'.
4.25
Mr Steven Kersnovske submitted that when the benefit of commutation has been repaid the benefit should revert to the full entitlement before the commutation was removed. He argued that [t]he small amount that each DFRDB recipient that decided to commute funds, stands to gain is insignificant and would have been no different to the amount they would receive should they not have commuted funds'.
4.26
Mr Michael Tehan suggested that the cost to government of implementing the scheme described to them [where the rate of retirement pay is adjusted to the did not commute rate along with reimbursement since commutation repaid] 'will be offset by reduction in part pensions that many members draw from DVA or Centrelink when Income/Asset tests are applied to these adjustments and reimbursements'.
Redesign the scheme
4.27
Several other design aspects were raised with the committee focussed on expectation of life factor tables and indexation.
Update expectation of life factor tables
4.28
The DFWA is seeking legislative change to address the life expectancy tables in the DFRDB Act:
For almost six decades the Life Expectancy Tables in the 1973 DFRDB Act have unfairly remained the sole basis of calculating DFRDB pension outcomes to veterans of today'.
4.29
The DFWA recommended that '[r]emedial action should reflect the understood intention that any pension reduction should be based on "the members life expectancy at the date of commutation"'.
4.30
Mr Kel Ryan, President DFWA explained the proposal to the committee:
Firstly, amend the DFRDB Act 1973 so that the applicable life expectancy is the one applying to a retiring DFRDB member on the date he or she elects to commute. The extant 1960-62 tables at schedule 3 are to be deleted. Secondly, create a simple program, or amend an existing program, in order to establish the correct DFRDB pension reduction for each existing and future DFRDB pensioner who commutes. All data elements—age, length of service and date of separation—already exist and are now used to calculate reductions. The only change would be to use the individual's correct life expectancy instead of the act's outdated 1960-62 life expectancy. Thirdly, adjust the DFRDB pensions, including reversionary pensions, of all living DFRDB pensioners in light of step 2….
4.31
However, this suggestion by the DFWA was not supported by the Australian Defence Force Retirees Association arguing that the proposal would 'provide the least benefit for the majority who have retired the longest, and the greatest benefit, albeit still only small, for the 900 odd members who have not yet retired and the relative few most recently retired'.
4.32
Mr Thornton also argued for a change to the tables in the DFRDB Act on the basis that the DFRDBA should have advised the government and Parliament that the data in schedule 3 was out of date and as a result financial detriment has been sustained by DFRDB members.
4.33
It was also suggested to rename the tables to be a commutation divisor as noted by the Ombudsman.
Potential costs
4.34
The DFWA noted that the costs of their proposal [to update the life expectancy tables] requires actuarial study but that an effort was made in the DFWA paper 'Defence Force Retirement and Death Benefits Scheme – Commutation – A simple Solution' which estimates that the average annual increase in DFRDB pensions would be approximately 1.3 per cent. At the hearing Mr Ryan further explained:
Subject to actuarial confirmation, DFWA estimates that DFRDB pensions would rise by 1.3 per cent or, on average, about $400 per annum. The gross cost to the budget is estimated to be in the order of $20 million.
4.35
Mr Ryan, DFWA, added:
Even though the Commonwealth has profited greatly from living and deceased veterans because of the life expectancy issue, DFWA does not call for a lump sum back payment for any DFRDB pensioner. That would be fair to veterans without disadvantaging the taxpayer, but DFWA recognises the parlous state of Commonwealth finances due to the COVID-19 virus and is prepared, albeit reluctantly, to concede this issue. In this case, we recognise that pursuing lump sum repayments, however fair, would impose further bureaucratic and political delays on achieving an outcome for a veteran cohort that is dying off.
Other suggestions
4.36
Mr Brian Dirou provided another suggestion in relation to lump sums:
Considering commuted pensions have been calculated on nominal life expectancies that are being well exceeded in many cases, it would be reasonable to allow conversion to a lump sum after nominal life expectancy to enable pensioners funding availability to ensure adequate financial security for spouses/dependants. The Federal Government is allowing premature use of superannuation investment for other purposes, so why not DFRDB pensioners?
Indexation
4.37
The Campaign called for equality of treatment and argued:
Where indexation is found not to have been consistent with the legislation, that equitable reparations should be made to each Veteran Superannuant, so affected, to fully restore their Retirement Pay reduction to an amount equivalent to that, that they should have received, had they not commuted. Also, that all losses from past reductions of Retirement Pay be paid in full and not taxed in a single year drawdown.
4.38
Mr Herb Ellerbock, DFWA, told the committee:
…the indexation issue remains a fraught one. The changes to indexation brought about in 2014 were very welcome, but they only applied to those aged 55 or greater as far as DFRDB pensioners were concerned. That indexation that applies to them is fair, and the government and, indeed, the parliament recognised that the former method of indexation, CPI alone, was unfair by definition, and that's why fair indexation was brought in. However, it was only brought in for those aged 55 or greater. Those aged under 55 still suffer from unfair indexation. And, similarly, for service people who are members of the following scheme, the Military Superannuation and Benefits Scheme, the employer portion of their scheme is only indexed to CPI, and the cost of that over the period of their time in service before they can receive a pension is very, very significant. It can be in the hundreds of thousands of dollars because of wrong indexation.
On a related issue, the people who, in our opinion, suffer most with wrong indexation are those on invalidity benefits. There are many thousands of DFRDB pensioners and others who are on invalidity benefits of one form or another. Their indexation is CPI at best, and they're the ones who suffer the most. It's difficult for us, as one of the speakers mentioned earlier, to extrapolate from that and say: 'Does this have mental health considerations—a propensity to suicide?' and these sorts of issues. But being treated as second-class citizens when you're already on an invalidity benefit, in our view, is something that the government should remedy and remedy very quickly.
4.40
In summary Mr Ellberbock outlined the position of the DFWA in relation to indexation:
We would like to see a recalculation of the base rates of entitlements, of benefits, based on fair indexation from the date of retirement to the present day, or certainly until 2014, when fair indexation was introduced. That is costly…
4.41
The DFWA also submitted the 'inappropriateness of the CPI as the indexation measure for DFRDB pension adjustment has been recognised by the passing of the Defence Force Retirement Benefits Legislation Amendment (Fair Indexation) Act 2014'. It argued:
Given the indexation was considered inappropriate for those over 55 years, DFWA considers that the time to redress the indexation wrong for the small and decreasing number of DFRDB recipients who are under 55 years of age is long overdue. Action should be initiated forthwith.
4.42
Specifically the DFWA recommended:
…the earliest possible amendment to the Fair Indexation Act so that all DFRDB pension recipients under 55 years and who were compulsorily discharged from the ADF on medical grounds could benefit from their pensions being indexed to the better movements in either the Consumer Price Index, the Male Total Average Weekly Earnings, and the Pensioner and Beneficiaries Living Cost Index.
4.43
The RSL also noted that '[p]ensions indexed solely to CPI have lost value relative to present wage rates and living standards. Male Total Average Weekly Earnings (MTAWE) is seen as a more appropriate indexation basis'.
4.44
Mr Kersnovske recommended that the partial indexation provisions be repealed. Also that the rates of all DFRDB Defined Benefits are restored to a Fair Current Value. That is, the rates those benefits would be now if;
they had been adjusted per the 'fair' indexation method incorporated into the DFRDB Act; and
the reduction of Retirement /Invalidity Benefits after commutation, had ceased on the date NLE is reached.
4.45
Mr Paul McGregor called for a fair indexation method to be incorporated into the DFRDB Act. Mr Clive Connor suggested that there is a need 'to recalculate for each recipient member the amount they had lost through unfair indexation and establish a new individual base line from the date the Legislation was passed'. Mr Charles Myhill also suggested the Fair Indexation Bill 'should have resulted in a new individual base line that included the previous losses due to CPI'. He added that '[s]ince 2014 the Indexation arrangements are fair.
4.46
Another submitter recommended '[r]edress, repay and backdate the Pension Adjustment approved in the Budget as part of the 2014 Fair Indexation Bill'.
4.47
Mr David Plummer recommended to '[a]pply all indexation increases to the full retirement pension pay that would be payable had the member not commuted'.
4.48
Another submitter suggested that '[t]he remedial action required is to recalculate DFRDB Pensions had the 2% discounting not occurred and implement an appropriate indexation system back dated to when Monetary Policy was introduced'.
Potential costs
4.49
Regarding indexation Mr Herb Ellerbock, DFRA, told the committee, '[t]he indexation estimate, if it's allowed to go on until every member of this scheme is dead, will be somewhere between $11 billion and $12 billion'. He added that he has not costed the amount already lost to this point 'but I estimate that, on average, every member in the scheme now has lost in the order of 20 per cent of their defined benefits at this point in time'.
4.50
Regarding the DFWA suggestion, in relation to cost, they submitted:
As to cost, without any insight into the number of members involved in the under 55 cohort, a cost estimate could not be more than a subjective one. Intuitively, given the low numbers, the cost can only be a minimal one against a benefit that must be sizable.
4.51
A submitter who wanted the legislation changed to reflect the incorrect information provided by Defence as well as implementation of a different indexing system, including the two per cent not passed on, submitted that '[t]he cost compared to recent Government initiatives like "Job Keeper" and "Job Seeker" would be miniscule'.
Issues with these suggestions
4.52
The DFWA recognised that legislative action to retrospectively try to turn the scheme into what some DFRDB members understood as a result of the incorrect information provided by Defence would mean:
The small number who did not commute would then have a valid argument that they should now be entitled to commute because the original conditions under which they made their decision had changed. They could claim financial detriment compared to others who did commute and are now to have their pensions increased.
There would be a valid argument that the estates of ADF members who commuted, but died before reaching average life expectancy age, should pay off the outstanding amount. This would not be acceptable under any circumstances. Many of these estates would be held by ADF Members' widows/widowers who are now in receipt of [DFRDB] reversionary pensions based on 5/8 of what the members uncommuted pension would have been. This would not be accepted under any circumstances.
4.53
The DFWA noted that there would be 4 classes of retirement pensioners:
Those who commuted based on incorrect advice;
Those who commuted based on correct advice;
Those who did not commute based on correct advice; and
Those who did not commute based on incorrect advice.
4.54
The Ombudsman looked at these issues and pointed out in relation to reparations that this was not recommended because:
…on the basis of the modelling, to do so would unreasonably place the cohort who commuted in an even stronger financial position than those who correctly understood the operation of the scheme and decided not to commute, which in the long run appears to have been the less beneficial choice for most people. Similarly, it would provide an unjustified windfall at taxpayers' expense for those who did not understand the scheme and chose to commute.
Second, to do so would presume to contradict the intent of the Parliament that passed the legislation establishing the DFRDB scheme decades ago. It would of course be possible for the current Parliament and the current Government to consider whether the policy issues in question ought to be re-opened in light of the analysis in this report.
4.55
In speaking about the potential for perverse outcomes to the committee Mr Manthorpe further explained:
One is that there were people who understood how the scheme was intended to work. There was certainly a group of people, probably in their thousands, as my report says, who were misinformed. But there were other people who understood how it worked, so I found it difficult to make a recommendation that said the taxpayer should now go and give those people, who knew exactly what they'd signed up for, a further payment for something that happened decades ago. That's one issue that would have to be contemplated if there another scheme was put in place. I also thought about the group who understood how the scheme worked and chose the other option—that is to say, they chose the higher pension but not taking the lump sum up-front. They would, I think, be rightly aggrieved if the other group got a further payout, but they didn't get anything even though they understood the scheme properly and they've ended up, if the actuarial modelling is reliable, in a position that is genuinely worse off than the group that commuted.
When I turned my mind to all of those factors I thought perhaps there's some sort of reparation payment you could made. I make recommendations to Defence all the time about reparation payments for people who've suffered abuse in the Defence Force. That's a well structured arrangement scheme. But in this case, again I was struggling to ascertain who would be in and who would be out. How would you determine that? What would be a reasonable payment? In the end, I concluded that these are all policy questions and, if the aggrieved people want to continue to campaign for what they care about, that is fine; it is entirely their right. But they're in the end policy questions that go to the design of the legislation, which was created decades ago.
4.56
Defence noted that in relation to the issues being raised and the DFRDB legislation 'there have been a range of changes over the many years, a lot of it around indexation and in response to a variety of inquiries or reviews commissioned by government, most recently…in 2014'.
4.57
Defence reported that in 2019 the Australian Government Actuary provided advice to Defence that:
any changes to the scheme itself, including life expectancy factors, indexation, or commutation arrangements would have significant immediate costs for Government, both prospective and retrospective. The Actuary also cautioned against making changes to the legislation in isolation without considering the scheme in its entirety due to the potential for unintended consequences.
4.58
Following on from this statement, at the hearing, Defence was asked whether any costings had been carried out. After confirming that no costings had been undertaken, Defence was asked to do so and on notice advised:
Without formal tasking outlining specific policy changes to the Defence Force Retirement and Death Benefits (DFRDB) scheme, Defence is unable to request formal costings from the Australian Government Actuary (AGA).
In Defence's submission to the Senate Inquiry, Defence stated that any change made to DFRDB would likely be at significant cost to the Commonwealth. This statement was informed by the costs involved in the last legislative change to the DFRDB scheme; that being the 2014 change in indexation methodology for pension recipients over the age of 55. As outlined in the Explanatory Memorandum to the Defence Force Retirement Benefits Legislation Amendment (Fair Indexation) Act 2014, the impact on the underlying cash costs for the period 2014-15 to 2017-18 was budgeted to be $162.2m and the unfunded liability at 1 July 2014 was estimated to increase by $5.1b.
Other design issues
4.60
A smaller number of other design issues were raised including: effects on spouse and dependant benefits; taxation; notional retirement age penalty; officer penalties; and interaction with Centrelink benefits.
Other suggestions
More assistance with CDDA scheme
4.61
The DFWA pointed to the CCDA scheme for those cases where financial detriment can be shown, adding that '[s]upport could be provided to affected DFRDB pensioners to both prepare a claim and to appeal any adverse decisions'. It recommended the following options be considered where a member pursues compensation through the CDDA scheme and wished to appeal the decision:
Compensation should include any professional costs expended in preparation of the claim.
Compensation should include legal and other professional costs if a claimant successfully appeals an adverse finding.
Where the claimant's appeal is unsuccessful, the Commonwealth should not apply for costs to be awarded against the veteran.
Improving understanding
4.62
Mr Les Bunn noted the complexity of the DFRDB scheme and suggested that this complexity 'makes it practically impossible for a typical member such as myself to seek and understand aspects of the scheme which are of importance personally'. He added that through his recent attempts to gain information, he was provided with a table of data 'which gave me zero help'. Noting this outcome he went on to say that such outcomes make suggestions on how to improve communication between DFRDB members and the CSC 'very difficult if not impossible to formulate'. Mr Bunn concluded by saying that 'in my case the solution is relatively simple – continue corresponding and questioning until satisfied'.
Website deficiencies
4.63
Mr Brian Dirou also suggested a 'dedicated website for DFRDB members could be created embracing a Summary of the Defence Force Retirement and Death Benefits Scheme and access to itemised detail of member DFRDB account history, to minimize need to navigate bureaucracy'. Specifically Mr Dirou reported that data to calculate the residual pension payable to a spouse and member contributions history are not available.
Education
4.64
A submitter suggested that:
[a] formal information/education program should be provided to all inductees to the Australian Defence Force to describe, outline and detail the features and benefits of the current Defence Superannuation Scheme/s be it DFRDB, MSBS or Military Superannuation. The programs should be included as part of the normal induction process for both recruits and officer cadets. In addition there should be an ongoing program of updates for all Service Personnel, and not merely confine such information to Resettlement seminars prior to separation/discharge.