COMMONWEALTH OF AUSTRALIA
SPEECH BY
The Rt Hon. W. McMAHON, M. P.
Prime Minister
ON
Defence Forces Retirement Benefits
Ministerial Statement
[ From the ' Parliamentary Debates', 26 October 1972]
Mr McMAHON ( Lowe-Prime Minister)
-by leave-I am now able to inform the
House of the outcome of the Government's
consideration of the report of the Joint
Select Committee on Defence Forces Retirement
Benefits legislation tabled in the House
on 18th May 1972 by the Chairman of the
Committee, the honourable member for La
Trobe ( Mr Jess). Honourable members will
recall that the Committee was formed in
September 1970. It quickly embarked on
a wide-ranging inquiry in the course of
which it recieved 459 written submissiois
from individuals, departments and organisations
and heard evidence from 65 witnesses,
in Victoria, New South Wales,
Queensland and the Australian Capital
Territory. The main recommendation of
the Committee was the introduction of a
completely new scheme to replace the
existing pre-1959 and post-1959 DFRB
schemes. The DFRB scheme has now been
in existence for 24 years. It commenced
in 1948 after an inquiry by an interdepartmental
committee under the chairmanship
of the Honourable J. J. Dedman, then
Minister for Defence.
The original scheme, which had much in
common with the Commonwealth superannuation
scheme, proved to be very inflexible
in operation and in 1957 a committee
chaired by Sir John Allison was
appointed to renew it. The result was the
establishment in 1959 of a new and quite different type of scheme to apply to future
members. This is the new scheme now
known as the post-1959 scheme. Existing
members were not transferred on to the
new basis. Instead special arrangements were
made that preserved for them their accrued
rights and established a basis for them to
contribute for additional benefits as -they
arose. These arrangements, which were
significantly modified in 1965 to permic
members to limit their contributions, are
now known as the pre-1959 scheme. T'ne
pre-1959 scheme is most complex and has
attracted a great deal of criticism.
About 12,000 of the present DFRB
membership of around 80,000 still contribute
on this basis and the present majority
of present pensioners were pre-1959
members, The pre-1959 element of the
DFRB Fund is, however, in a most houyant
position. The report of the Commonwealth
Actuary on his fourth quinquennial investigation,
which the Treasurer ( Mr Snedden)
received from the DFRB Board earlier this
week discloses that on the basis of the DFRB
scheme continuing in its present form, and
I emphasise that proviso, there was an
available surplus of $ 14.9m as at 30th June
1969 in respect of around 19,000 pre-1959
contributors and pensioners. The post-1959
element of the fund, on the other hand,
was approximately in balance, there being
a small deficiency of little importance in
actuarial terms. The treasurer will table
the reports of the Actuary and the DFRB
Board on the fourth quinquennial investigation
later today.
The post-1959 scheme is simpler than the
very complex pre-1959 scheme, but the
Jess Committee concluded that it is still unnecessarily
complex. It has two distict
parts, one covering other rank members,
the other officer members. Each contributor
pays throughout his service a fixed percentage
rate of contribution which varies
with his age and rank at entry. The percentage
rates range from 4.75 per cent for entry
at 15 or less to a maximum of 6 per cent for
other rank members entering at age 30 or
more. Only service from age 20 onwards
counts for pension purposes but both officer
and other rank members who enter before
that age pay lower rates of contribution. The
difference between the maximum contribution
rates for other ranks and officers reflects
the different basis on which other rank
and officer pensions are assessed. The other
rank pension is determined by length of
service while the officer pension is determined
by age at retirement, the maximum
in both instances being a pension approximately
70 per cent of final pay, although
the maximum tapers down -to around 60 per
cent for the most senior officers as in the
superannuation scheme.
Both the pre-1959 and post-1959 schemes
are actuarially based and members' contributions
are retained in an invested fund.
The earning rate of this fund has increased
rapidly in recent years. The estimated
earning rate for the year ended 30th June
1972 is 6.58 per cent, which would be an
increase of 0.24 per cent over the rate for
1970-71. The Jess Committee recommended
that the present fund be transferred to the
Commonwealth, that members' contributions
in future be paid to consolidated revenue
and that the Commonwealth guarantee the
benefits provided and meet all costs not
covered by members' contributions. In the
new scheme recommended by the Committee,
the contribution rate would be a
flat 5.5 per cent of pay for all members
and the level of pensions would be determined
for both officers and other ranks by
length of service.
All service, including service before age
would count for pension purposes and pensions would range from 35 per cent of
final pay after 20 years' service to 76.5 per
cent of pay after 40 years. Officers, like
other rank members, would be entitled to
a pension on completion of 20 years' service,
but a pension reduction penalty of 5 per cent
would apply for each uncompleted year of
service if an officer were retired at his own
request before he reached his retiring age
for rank or an other rank member before
the end of his engagement. The Committee
also recommended that, after retirement, the
whole of a member's pension be adjusted
annually to maintain relativity with average
weekly earnings. The Committee said that
a possible method of achieving this would
be to maintain the relativity of benefits to
current pay for the rank held on retirement.
Other recommendations include desirable
extensions and improvements to provisions
that exist in the present scheme.
The Jess Committee was rightly concerned
to seek to avoid complexions in the
future operations of the DFRB scheme. Far
this reason the Committee concluded that
all present contributors should be compulsorily
transferred to the new scheme and
that they should not be offered a choice of
remaining in their present scheme. The
Government is attracted to the concept of
a simple, comprehensible scheme as outlined
by the Jess Committee, but, in a letter to
the Minister for Defence ( Mr Fairbamn),
the Committee expressed the strong opinion
that if any of the Committee's recommendations
were detrimental to any section of
existing contributors, special short term
arrangements should be made to ensure
that no detriment occurred. The Government
accepted this view and on 20th September
last the Minister for Defence
announced that no-one would be disadvantaged
by participating in the new scheme,
that everybody would have a right by
election to ensure that by participating he
would not be disadvantaged. This inevitably
raised the question whether it would be
possible to make this assurance effective
without introducing a -third DFRB scheme
to supplement the pre-1959 and post-1959
scheme. The Government has no desire to
do so.
There have been strong representations on
-behalf of post-1959 late entrant officers.
There have also been representations on
behalf of those pre-1959 contributors who
have taken the opportunity available to them
of limiting their contributions and receiving,
without increasing the level of their contributions
further, the Commonwealth element
of future accruing pension entitlements. The
crucial point, therefore, is whether it is
practicable to transfer in an equitable way
the pre-1959 and post-1959 contributors to
such a new scheme, without detriment to
any one of them. We shall have an independent
expert examination of this problem.
One supplementary suggestion from the
Jess Committee related to late entry
officers. The number involved are
significant. At 30th June 1972 there were
3,516 officer members who entered at age
23 or later; 773 officers entered at age 33
or later. Because of the change in the basis
for officers' pension to length of service in
the Jess Committee scheme, many of these
late entrant officers would have a lower
pension entitlement. The Jess Committee in
a letter to the Minister for Defence recommended
that these officers, in addition to
receiving the surplus of their contributions
above 51 per cent of salary, should be
allowed to purchase back notional service
to bring the pension they would be contributing
for under the less scheme up to
the level for which they were contributing
under the post-1959 scheme. This proposal
is being actively investigated now.
The Government, like the Jess Committee,
is attracted to the concept of a simple,
comprehensible scheme provided it is possible
to transfer the existing pre-1959 and
post 1959 contributors to the new scheme
without detriment. This is strongly favoured
by the Services. -But if the Government's
assurance of transfer without detriment
should prove to be impracticable, the Government
has decided that it would instead
incorporate many of the recommendations
of the Jess Committee in an improved version
of the post-1959 scheme to which pre-
1959 contributors would be given the
opportunity of transfer on an equitable
basis. In any event, the following 7 specific
recommendations of the Committee have
been accepted by the Government:
Marriages of pensioners before age 60
will be recognised for widows' pension
purposes; A dependent spouse of a female member
or pensioner will be entitled to pension
on her death;
Subject to conditions yet to be determined,
de facto spouses and illegitimate
children will be recognised for
pension purposes;
Children's benefits payable to students
will be continued until age
There will be payable to the estate of a
contributor or pensioner, who dies
without leaving dependants entitled to
pension, an amount equal to one and
one half times his contributions less,
in the case of a pensioner, any pension
or other benefits received;
The tapering of the entitlements of more
senior officers will be eliminated;
A retiring member will not be penalised
by reason of his refusing to sign on to
a reserve force.
The Government has also adopted in a
modified form 6 other recommendations of
the less Committee:
An officer will be able to retire on pension
before reaching his designated
retiring age on completion of 20 years
service for DFR. B purposes;
The present category structure will be
eliminated. Contribution rates will be
expressed as a percentage of pay for
DFRB purposes and pensions as a
percentage of final pay;
For members who enter at age
retirement pensions will range from
35 per cent of final page at age 40 to
70 per cent at age 57 or later;
A retired member will have an unfettered
right within a specified period of
retirement, say, 12 months, to commute
up to the existing one-third of
his pension, other than an invalidity
pension. The amount of the
commuted sum will be determined on
an appropriate annuity basis;
Appropriate provision will be made for
the purchase of past non-contributory
service by present serving members
including those members who in 1948
elected to remain on deferred pay
rather than enter the DFRB scheme;
The concept of an appeals tribunal has
been accepted.
As I have earlier explained, the Jess Committee
recommended that DFRB pensions
be adjusted annually after retirement to
maintain relativity with average weekly
earnings and mentioned a possible method
of doing this. We have concluded that the
issue of post-retirement pension adjustments
cannot be dealt with in the DFRB
context alone. In the past DFRB pensions
have been adjusted at the same time and
on the same basis as Commonwealth
superannuation pensions and similar
adjustment principles have been applied to
other Commonwealth superannuation-type
pensions. The House will recall that last
year the Treasurer in his Budget Speech
announced that the Government was investigating
alternative methods of adjusting
DFRB and superannuation pensions.
We have now decided to refer this
important issue to independent expert
investigation. This investigation will be
called upon to report on various methods
of adjusting pensions for which the Commonwealth
is responsible and the interrelationships
of the various schemes and how
they might be affected by the various
adjustment methods. Additionally, the
investigation will report on the economic
and financial effects of the various methods
considered. The personnel members of the
Navy, Army and Air boards have all
agreed that it is premature at this stage to
press for an annual updating of DFRP pensions
in the light of the other schemes
needing similar consideration. Children's
and orphans' pensions in both the DFRB
and superannuation schemes are expressed
as fixed amounts, although there is an
alternative basis for assessing orphans' pensions.
The manner of determining children's
and orphans' pensions in the DFRB
and superannuation schemes is at present
under consideration and any decisions
taken will be incorporated in whatever
scheme emerges,
We have also given careful consideration
to the Committee's recommendation that
the DFRB scheme be administered by the
Department of Defence and that the
Minister for Defence should be the responsible
Minister. The Government is satisfied
that the present arrangement of the one
organisation-the office of the superannuation
and DFRB boards-servicing both the
DFRB and superannuation schemes, is effective and results in significant economies
through the common use of highly
specialised staff and facilities. There is also
a clear need for co-ordination of policy in
relation to the main Commonwealth contributory
superannuation schemes, namely,
the DFRB scheme, the superannuation
scheme, the schemes of the Commonwealth
Banking Corporation and the
Reserve Bank and the parliamentary and
ministerial retiring allowances schemes. In
the Government's view, this is at present
facilitated by one Minister, the Treasurer,
having responsibilities in relation to all 6
schemes. Another important recommendation of
the Jess Committee was that the present
invested fund of members' contributions,
which stood at $ 154m at 30th June 1972,
be transferred to the Commonwealth and
contributions of members in future be paid
to Consolidated Revenue. I referred earlier
to the improvement in the earning rate of
the DFRB Fund. An invested fund is
likely in the long term to return earnings
at a level that enables members' contributions
to provide greater support for
benefits than would otherwise be the case.
Accordingly, the DFRB Fund will be
retained. The Government has, however,
decided that the investment powers relating
to this fund and the superannuation fund
should be widened so that up to 25 per
cent of each fund can be invested in
shares, debentures, real property, and in
loans to building societies. The Government
proposes also to establish an investment
trust to handle the investment of the
2 funds. The Government is working
towards the necessary amending legislation
being ready for introduction in the
Autumn sitting next year. As already
announced, the legislation will operate
from 1st October 1972. We believe that
the improvements that will be effected by
the legislation will simplify the present
arrangements and result in a very much
better DFRB scheme.
Before I commend this paper to the
House, may I refer in particular to the
dedicated and excellent work that has been
done by the honourable member for La
Trobe ({ Mr Jess), the ' honourable member
for Isaacs (-Mr Hamer), and the honourable
member for Herbert ( Mr ' Bonnett). . I
have read the Committee's report and I
have listened to the arguments that those
honourable member's put to me. I have had
to accept that there is no monopoly of wisdom
in any official group or-perhaps I
could put it this way-in any Ministerial
group. These honourable members have
made a notable contribution. They have
persuaded me that some of the amendments
' which they have suggested are worth
while and in the interests of the active and the retired servicemen. I believe they make
a notable contribution to the DFRB
scheme. I congratulate those honourable
members ; because I think they have done
an immensely important job on , behalf of
the servicemen of this country. I now commend
this paper to the House. I present
the following paper:
Defence Forces , Retirement , Benefits-Ministerial
statement, 26th October 1972.
21401/ 72F. D. ATKINSON, Government Printer, Canberra