Bills Digest no. 5 2015–16
PDF version [766KB]
WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Kai Swoboda
Economics Section
10 August 2015
Contents
The Bills
Digest at a glance
Purpose of
the Bill
Structure of
the Bill
Background
Committee
consideration
Policy
position of non-government parties/independents
Position of
major interest groups
Financial
implications
Statement of
Compatibility with Human Rights
Key issues
and provisions
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.
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.
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.
|
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.
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]
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.
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.
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]
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
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.
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]
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
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.
[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.
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