Thursday, August 22, 2013

What the DFRDB Was Meant to Deliver

Mr Ken Marsh

17 June 2012

The Minister for Veterans Affairs
Parliament House,
Canberra, ACT 2600

Dear Minister

The 2008 ‘Review of Pension Indexation Arrangements in Civilian and Military Superannuation Schemes’ authored by Mr Trevor Matthews gives every impression of being a carefully crafted document designed to mislead the reader into supporting a position that cannot be substantiated by an understanding of the historical context in which the indexation method for the Defence Force Retirement and Death Benefits Scheme (DFRDB) was arrived at. In fact, when all the evidence is considered it seems more than likely that an unbiased person would arrive at a conclusion other than that reached by Matthews.

Serving military members, unlike their fellow Australians, cannot take industrial action regarding their conditions of service. More than any other workers they rely on the good will of the Australian Government to maintain those conditions. It is paramount to the relationship between the Government and current serving members that the Government be seen to honour commitments made to former service men and women. Any Government reliance on misleading reports to justify inaction to redress existing wrongs can only undermine the level of trust existing between it and its military servants. It therefore follows that the Government must act quickly to redress wrongs when it becomes aware of these.

Below I outline my reasons for believing that the Matthews document is inaccurate and misleading. In preparing this letter I have accessed the Jess, Pollard and Pollard/Melville reports plus the Hansard and an industrial relations text book.

In chapter 3 of his report Matthews supposedly discusses the purpose of the indexation arrangements of Australian Government civilian and military superannuation schemes. While he mentions the ‘Joint Select Committee on Defence Forces Retirement Benefits Legislation Report of May 1972’ (hereinafter referred to as ‘Jess’ or the ‘Jess Committee’) he draws on the reviews carried out first by Professor Pollard (March 1973) and then  Pollard and Melville (1974). Neither of these reviews considered military superannuation or the recommendations of the Jess Committee. Therefore it cannot be fairly stated that he examined the purpose underlying the indexation of military superannuation arrangements.

Following the release of the Jess report Prime Minister McMahon announced that he had referred the matter of indexation ‘to independent expert investigation’ because military and civilian pensions had historically been adjusted on a similar basis and he wanted DFRB pensions considered within the broader context (Hansard, House of Representatives, 26 Oct 1972). The soon-to-be-elected Prime Minster, Gough Whitlam was critical of this move, accusing the government of shelving ‘once again’ this ‘unanimous report, which has never been criticised in the Parliament’ (Hansard, 26 Oct 1972). In Government he did not carry through with this. I quote Mr Hamer from the Hansard of 30 May 1973: ‘The present Government did not follow through on this matter so that Professor Pollard's report covers only the Commonwealth superannuation scheme.’

It is clear from reading the Pollard report that he did not address the matter of military superannuation. In his opening paragraph he states: ‘Superannuation schemes have been introduced … in part to enable officers of long standing to maintain a reasonable standard of comfort after retirement.’ This is markedly different to the intent of Jess, which recognised the unique nature of military service as being ‘so different’ to that applying to ‘civilian employment’ that superannuation arrangements required a ‘totally different approach’ (Jess, para. 52). In fact, ‘retirement’ within the Jess context meant life after separation from the military. Jess recognised the challenges that those who gave the best years of their life to the military faced, both during their service career and in their transition to civilian life, including the difficulty of finding permanent and suitable employment. It must also be understood that by far the majority of service men and women who reached the age of 55 were mandatorily retired. This meant that if they were unable to find other employment or were faced to take low-paid, casual and unsuitable work they were denied the final ten years of working life available to public servants to plan for retirement. There was a stark contrast between the needs of the two groups.

As for the 1974 Melville/Pollard report, it is clear from the letter to Mr Melville dated 28 March 1974 by the then Treasurer Frank Crean (included as Appendix A in the report) that the scope of his task was limited to the proposed ‘new superannuation scheme for Australian Government employees’. The DFRDB legislation was enacted in 1973.

Matthews makes no mention of the fact that the DFRDB Scheme was enacted for a different purpose to that of the Commonwealth Superannuation Scheme or of the conditions of service that Jess – and the Parliament of the day – sought to address.

Matthews is correct when he says Jess proposed that ‘pensions … should be indexed annually to maintain relativity with average weekly earnings’ to ‘provide increases in line with changing community standards’ and that this proposal was ‘not implemented by the Government of the day’ (3.2). (Jess preferred ‘retired pay’ to ‘pension’ (Jess, 49)). He then discussed the recommendations of first Pollard, and then Melville/Pollard. It is in this commentary that he neglects critical facts and in doing so makes what can only be seen as misleading statements.

His bland statement that the methodology recommended by Pollard (pension increases of 1.4% times CPI increases applied to the Government funded portion of the pension) was adopted for the ‘1922 [Public Service] Scheme and the DFRB from 1 July 1973 and subsequently for DFRDB’ (3.2) is in part contradicted by his next paragraph where he correctly refers to the Pollard/Melville recommendation of increases in line with those of the CPI.

More importantly he ignores the intent of the 1973 DFRB increase. Speaking to this Bill on 25 May 1973 the then Minister for Defence, Mr Barnard explained: ‘As there has not been an adjustment of DFRB pensions since 1 October 1971, the Government has decided that rather than delay the granting of a much needed increase, an early adjustment should be made in the pensions of those who retired under the conditions of the old scheme, that is, before 1 October 1972.’ Explaining the reason for not adopting the indexation methodology proposed by Jess he said:

The main reason for this is that there have been recent developments in pension updating arrangements in other Commonwealth pension schemes and I want these developments investigated and assessed in relation to their implications for the defence forces scheme. The investigation is proceeding but it may be some little time before a method can be found which is suitable for application to persons who retired under the old scheme and for those who retire under the new scheme.

It is clear from this statement that a decision regarding a permanent indexation method had not yet been made. There is no commitment in this statement to adopting the same method as that applied to these other schemes.

Matthews also fails to mention the 1974 increases granted to members of the DFRB and DFRDB schemes. This was ‘related to the 16.2 per cent increase in average weekly earnings during the 12 months ending 31 March 1974’ (Barnard, 13 Nov 74, Hansard). Speaking to this Bill on 28 November, Senator Maunsell said that the opposition supported the Bill. He then said that ‘the Jess Committee, recommended that there be automatic annual adjustments based on average weekly earnings. So far the Government has not been able to bring down legislation to give effect to that recommendation. I can understand that there are problems associated with it.’ He then queried ‘whether the 16.2 per cent increase of these pensions is sufficient to combat the galloping inflation which is taking place in this country at present.’

Maunsell’s comments in this regard are significant given that it was the Fraser Government that finally introduced permanent indexation of the DFRDB scheme in 1977. Speaking to the Bill that introduced automatic indexation Mr Bonnett said that he had ‘waited a long time for this Bill to be introduced and I shall not detain its passage through this House for any longer than is necessary.’ (Hansard, 23 Feb 77). In 1977 Bonnett was a member of House of Representatives but had previously served on the Jess Committee that recommended indexation in line with increases in the average weekly earnings (as had Maunsell quoted above).

Did acceptance of the CPI by Bonnett represent an about turn on his behalf or, for that matter, the Government of the day?

Jess rejected the Consumer Price Index as the basis for indexation because it considered ‘the index does not fairly represent changes in general community standards (para. 124). It was clear to Jess that if ‘retired pay’ did not retain relativity with average weekly earnings its ‘real value’ would be ‘quickly eroded’ (para . 115). Figures available to Jess demonstrated that average weekly earnings had increased at ‘almost double that of the Consumer Price Index’ in the period 1954 to 1970 (Figure X, p. 34, para. 125).

The reason for this disparity between the CPI and wage increases is found in the national wage case of 1953 when the Industrial Relations Court abandoned its long standing practice of granting quarterly wage increases based on increases in the cost of living. By the early 1970s the Industrial Commission had lost its ability to control wages with the rate of increases being of real concern to economists and employers. The Whitlam Government sought to address this and beginning with the first wage case of 1975 the industrial commission reverted to wage indexation based on increases in the CPI. Wage increases for each quarter of 1975 were capped at the increase in the CPI. After this the commission began the practice of partial indexation, which meant that not all workers received the full CPI increase each quarter. This was the practice in place in 1977 when the CPI was adopted as the method for increasing DFRDB and DFRB incomes. (Australian Industrial Relations, 2nd Ed., S. Deery and D. Plowman, 1985, chapter 11)

Relevant to this matter is the Whitlam Government’s policy to first increase and then maintain the maximum rate of aged and like pensions to 25% of average weekly earnings. This proved to be a difficult policy objective, one that was never fully realised.

During the second reading speech of the Social Services Bill on 15th Oct 75, Mr Stewart, the Minister Assisting the Minister for Social Security, reiterated the Government’s intention of raising pensions to 25% of average weekly earnings and increasing them every six months. He went on to say ‘the Budget proposes to increase, as a temporary measure, the standard rate of pension by the percentage increase in the consumer price index between the December quarter in 1974 and the June quarter in 1975 and to base the increase payable in the autumn of 1976 on the increase in the CPI between the June and December quarters of 1975.’

On the 22nd Oct Dr Klugman, ALP stated:

The honourable member for Hotham then turned to the general argument as to moving the relationship of pensions or benefits in general away from average weekly earnings to the consumer price index. I support that move. The last increase in average weekly earnings for the June quarter was 1.1 per cent. The increase in the consumer price index for the same quarter was something of the order of 3.6 per cent. Therefore pensioners and other beneficiaries are better off by having their pensions related to the consumer price index.

Almost 12 months later (14 Oct 76), Mr Hayden, then in opposition said:

Another point that concerns me is the failure of the Government to carry out its election promise to legislate for immediate and automatic increases in pensions and benefits in line with the consumer price index. … I draw the attention of honourable members to a statement made on this topic in December last year at the time of the federal election campaign. The Hon. D. L. Chipp, who was a spokesman for the coalition parties, issued a Press statement on Liberal Party, letterhead dated 8 December 1975. It states:

Both parties have undertaken to increase pensions in line with the Consumer Price Index. We propose to bring in legislation which will allow increases in pensions to be made instantly and automatically -

Those words should be stressed and underlined in Hansard - as soon as the new index is announced. This will eliminate the procedures now necessary of having to debate a Bill in Parliament in order to increase pensions.

The system we had, of course, was one that did take a little time because it was related to average weekly earnings. Historically the benefits related to average weekly earnings would be of a much higher order because with very odd exceptions they always have moved at a faster rate than the consumer price index. Delay arose solely because average weekly earnings statistics are delayed a few months before they come out. Consumer price index statistics have a delay of no more than two or three weeks on average at the completion of a relevant quarter. Under the proposals in this legislation there will certainly be automatic adjustments but the adjustments will take place, for instance, in November and will be in accord with movements in the CPI in the March and June quarters earlier in that year. The next adjustment will take place in May and will be in accord with movements in the CPI in the September and December quarters of the preceding calendar year; that is, in each case there will be a delay of about 5 months before the adjustment takes place in the pension rate.

Note firstly that Hayden’s objection is not to the method of indexation. Rather, he believes the approach taken by the Fraser Government unfairly delays the passing of increases on to pensioners. Secondly, he spoke of the delay the ALP, when in Government, faced in obtaining average weekly earnings statistics. The CPI allowed increases to be more quickly passed on which meant that pensioners would not fall so far behind as they would if waiting for increases based on wages.

Again Matthews appears to misrepresent the facts. At 5.5 he claims that it has been ‘a policy objective of successive governments since the 1970s that Aged Pensions should reach the equivalent of that [25% of MTAWE] benchmark using a similar waged based index’. In fact, Don Chipp shortly before the dismissal of the Whitlam Government stated categorically in the House ‘that pensions should be tied to the consumer price index- is in the Opposition's social security policy. But we have never promised 25 per cent of average weekly earnings’ (22 Oct 75). In Government, Fraser introduced automatic indexation of aged pensions in line with increases in the CPI (see Howard, Hansard, 9 Sep 76). Matthews gives the impression that the aged pension was increased on an ‘ad hoc basis from time to time’ to achieve the 25% objective. Clearly it was believed that when the CPI was adopted it would in fact achieve that objective.

Matthews mentions nothing of the historical context within which the DFRDB legislation was first introduced and the method of indexation finally settled on. The Jess committee, at a time when wage increases were soaring out of control, recommended that the service man or woman who completed 20 or more years’ service should receive ‘retired pay’ indexed annually in line with increases in average weekly earnings. This was in recognition of the unique nature of military service.

The recommendations of first Pollard, and then Pollard and Melville, related solely to Public Service superannuation and they did not consider in any way the uniquely different needs of those in the armed services.

With the introduction of wage indexation in 1975 wage increases were capped at increases in the CPI. It was only after this time that wage increases dropped out of the debate on military superannuation. It is clear that by the time the automatic indexation of military ‘retired pay’ was legislated, both sides of Parliament believed this was a method that would be more beneficial to not only military superannuants, but social welfare recipients as well.

While there were statements from both sides of the Parliament from time to time regarding the desirability of indexing military and public service retirement incomes to a similar formula this was never debated. The significant change in wages policy in 1975 negated the necessity for this. The 1974 debate on DFRDB increases clearly demonstrates that indexation in line with wage increases was still very much in the mind of the Parliament and, given the words of Senator Maunsell on the 28th November any move on behalf of the Fraser Government to align DFRDB ‘retired pay’ to anything less than the better of increases in either the CPI or wages growth would represent a complete turnaround by the Government.

In light of the above I believe it is imperative that the Government move quickly to distance itself from the Matthews report. One final quote from Jess: ‘In our view, confusion can only result and has resulted in the attempt to maintain a link between the D.F.R.B. scheme and the Commonwealth Public Service Superannuation Scheme’ (51).

In the spirit in which the Jess committee completed its work I can only encourage you to consider the needs of military superannuates with a prime focus on the unique nature of their service and that you do this with haste.

Yours Sincerely,

Ken Marsh

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