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Investigation into the administration of the Defence Force Retirement and Death Benefits (DFRDB) scheme

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The primary focus of the investigation is the accuracy of the information provided to DFRDB members. The office also issued several sets of questions and requests for information to the Department of Defense (Defence) and the Commonwealth Superannuation Corporation (CSC) under s 8 of the Ombudsman Act.

Important terms

B ACKGROUND ON THE DFRDB S CHEME

History of the DFRDB

Most of the essential provisions of the DFRDB Act came into force retrospectively on 1 October 1972. The scheme was closed to new members from October 1991 following the Cole Review (1990)8 because it no longer met the needs of the ADF.

Important concepts explained

Members who are not eligible for retirement pay when they are dismissed will have their contributions refunded. 18. A member who chooses to commute has his retirement pay permanently reduced according to the statutory formula set out in s 24(3)(b) of the DFRDB Act.

The legal situation

I SSUES ARISING OUT OF I NVESTIGATION — C OMMUTATION

Commutation data

Lower interest rates, particularly since around the year 2000, may have reduced the attractiveness of receiving a lump sum on withdrawal from ADF compared to the maximum indexed pension. As more members became eligible to access a subsidized home loan under other schemes, there may have been less need for members to access a lump sum for mediation.

What DFRDB scheme members told us

Of the significant submissions, 97 percent of submitters told us they had chosen to commute. 46 percent of submitters could not remember when they received the commuting information.

Detriment84%

However, for some applicants there was a large gap in the period between receiving information about the change of job and the date of retirement of more than 12 months or in some cases, more than 10 years. Based on our conversations with individual submitters, it appears that some who said they received financial advice may have referred to conversations with private sector financial representatives who attended seminars regarding investment strategies for the lump sum.

What agencies told us

What we found

The earliest occurrence of this exact 'permanent reduction' wording appears to be in the 2007 edition of the DFRDB book. At the commencement of the scheme in 1973, the DFRDB Authority issued a circular to all Defense Service Agencies,61 explaining how the scheme would operate. Forms are often accompanied by a printout of the commutation calculation and future rate of retirement payment.

D stated that the use of life expectancy tables meant that he was not concerned about the length of the reduction.

Did this amount to defective or deficient administration?

Appropriate policies and guidelines should have been put in place within Defense to ensure that only the correct information was provided, particularly when the correct information was provided to Defense by the DFRDB Authority at the start of the scheme. In contrast, we did not identify any information provided by the DFRDB Authority that was incorrect, either in its written materials or in its verbal notifications. With the benefit of hindsight, the DFRDB Authority could have used clearer language to explain the long-term impacts of the change in pension pay since the inception of the scheme.

Although it would have been better if the brochures and information provided by the DFRDB had been clearer on this issue, the information provided by it was factually correct.

Did the defective administration result in detriment?

I SSUES A RISING FROM THE I NVESTIGATION – I NDEXATION

Overview

Legislative background

The Superannuation and Other Benefits Legislation Amendment Act 1986 temporarily reduced the annual CPI indexation by 2 per cent from 23 October 1986 to 20 October 1989, after which the published CPI indexation was again used each year.94. In 2014, the Defense Force Retirement Benefits Legislative Amendment (Fair Indexation) Act 2014 added Division 3 of Part XA of the DFRDB Act. Generally, the purpose of this section, which applies to pensioners over 55, is to ensure that the DFRDB indexation schemes for this group work in the same way as indexation.

How indexation works

A non-indexed part of the severance pay is only paid if the person commutes less than four times their annual severance pay entitlement, which we refer to as. Prior to 1983, the maximum amount a retiring member could elect to commute was four times their annual pension entitlement. In fact, a person who has chosen to commute more than four times their annual pensionable salary exchanges part of their indexed pensionable salary, as illustrated in Figure 13.

However, when a person commutes more than four times their annual pensionable pay, they receive less than the full indexed pensionable pay.

What were members told?

To demonstrate, the chart below shows how different factors of change affect the indexed and non-indexed parts of the pension. The brochures and pamphlets do not explicitly state the impact of commuting more than four times the annual dollar amount of retirement pay, and in particular, that the annual increase in members' retirement pay will be less than if they travel four times or less.

Analysis

P OLICY ISSUES RAISED WITH US

In the course of this research, many people have raised issues with us relating to the policy design of the scheme itself. Many members also felt that the surrender divisor and indexation benchmarks used in the DFRDB Act were unfair or inadequate. We also observed confusion among members about the operation of legal provisions relevant to the commutation divisor and indexation.

We have provided further explanation below to help understand these aspects of the schema (noting that indexing is also discussed in Part Four).

Expectation of life factor—the ‘commutation divisor’

In addition to concerns about being cheated, many claimants, including those who now understand that the post-retirement reduction is permanent, have expressed dissatisfaction with the fact that the legislation does not allow for an increase in retirement pay for reaching the age of the longevity factor. The legislation could have provided for the use of a separate external actuarial table updated from time to time. This suggests that the designers of the scheme never envisaged the use of current tables, but instead preferred a static switching factor.

Indexation arrangements

Observations

C ONCLUSION AND RECOMMENDATIONS

While we found no errors from CSC, we identified actions that could further improve communication about the long-term effects of commutation on pension pay.

Defective administration by Defence

Consideration of separate compensation scheme

Outlying cases

We have therefore set out the criteria (Appendix F) that we believe must be met for a CDDA claim to have any chance of success. The principle underlying these criteria is that, in the absence of evidence to the contrary, our report is a finding with respect to two of the core elements of a CDDA claim – that there was deficient administration by Defense and that the inadequate administration does not cause financial damage. These findings can be refuted by the fact that a person, with some evidence, can point to specific financial harm based on their individual circumstances.

This may be to explain why the modeling assumptions do not apply to their personal circumstances, or that there is some other financial harm directly caused by their reliance on misleading information provided by Defence.

Improvements to CSC information

This can help members self-assess before filing a CDDA claim and can help the defense determine whether a claim should be fully assessed. Financial disappointment due to the scheme operating differently from the way people were told and losses due to the person's subsequent investment decisions or life events are unlikely to meet this test. In our view, defense decision makers would be justified in terminating any claim, without further detailed assessment, that does not clearly show why the person's.

CSC should write to this group to explain that the change will result in a permanent reduction in pensionable pay.

A PPENDIX A—M INISTERIAL C ORRESPONDENCE

OMBUDSMAN 0

In consultation with the Ministry of Defense and after considering your request, I have decided, pursuant to section 5(1)(b) of the Ombudsman Act 1976, to open an ex officio inquiry into the accuracy of the information provided by scheme administrators and relevant departments Members of the DFRDB scheme in relation to commutation. Before the investigation begins, my officials will work with the Department of Defense to reach agreement on appropriate funding arrangements for this investigation. We will also consult with the Ministry of Defense and the Commonwealth Super Annuation Corporation (CSC), as trustees of the scheme, about the scope of the investigation.

During the investigation, my office will work closely with your department, DVA and the relevant scheme administrators.

A PPENDIX B—DVA RESPONSE

I welcome the opportunity to provide information about any compensation advice given to DFRDB members by the Department of Veterans Affairs (DVA). However, these delegates do not provide advice to DFRDB members regarding the operation of the shifts. In the 1990s, DVA operated a Veterans Affairs Financial Information Service (VAFIS), which provided a financial counseling service similar to the Department of Human Services' (DHS) Financial Information Service.

However, it is my understanding that, like the DHS Financial Information Service, which our clients are also entitled to use, the service provided information about the consequences of financial decisions, but did not provide tailored financial advice.

A PPENDIX C—D EFENCE RESPONSE

Thank you for your letter dated 25 October 2019 regarding your inquiry into the administration of the Defense Forces Pension and Death Benefit Scheme (DFRDB). It was encouraging to see that the report was unable to identify any instances where a financial loss had occurred as a result of any incorrect information being provided to members of the DFRDB Scheme. However, we recognize that some information provided to members in the past may have caused confusion and concern among members.

A letter to DFRDB members is contained in Appendix 1 for publication in your final report and will also be posted on both the Defense and CSC websites and available to DFRDB members upon request.

A PPENDIX D—D EFENCE A POLOGY TO DFRDB M EMBERS

DFRDB Members

The scope of the investigation was limited to the management of the DFRDB scheme. The Ombudsman found that the information occasionally circulated to some DFRDB members in the 1980s and 1990s about the long-term consequences of surrender was incorrect. On the basis of an actuarial examination by experts, the Ombudsman also found that the incorrect information was unlikely to have caused any financial loss to Members.

Although they would be provided by well-intentioned administrators and managers, the defense had to ensure the accuracy of the information provided.

A PPENDIX E—CSC RESPONSE

Thank you for providing your Office's draft report on the administration of the DFRDB scheme. CSC is committed to continually improving the way we manage the pension funds of which we are trustees, and we are determined to strive for the best possible outcomes for all our valued clients. I thank the CSC staff who have at all times demonstrated their professionalism, expertise and commitment to provide your firm with the requested information.

We appreciate you giving the CSC the opportunity to comment on the draft report and for the professionalism of your staff throughout the investigation process.

A PPENDIX F—CDDA C ONSIDERATIONS Purpose of this Appendix

Considerations for DFRDB members

Considerations for CDDA decision-makers in Defence

A PPENDIX G—G LOSSARY

A scheme to provide retirement benefits, including a defined benefit plan, to certain members of the Australian Defense Force who have met minimum service (usually 20 years). They are subordinate to the legislation and are part of the management of the legislation so that they can be examined by the Ombudsman. Index A cost of living index reflects changes over time in the purchasing power of household income after tax.

On its own initiative The Commonwealth Ombudsman may, in accordance with Section 5(1)(b) of the Ombudsman Act 1976, investigate on its own initiative any action, whether in connection with a matter of administration, by a government department or by any prescribed authority.

A PPENDIX H—C HRONOLOGY

Figure

3.146. Figure 9 below shows the term deposit rate modelling completed by the AGA for the  same set of figures
3.149. Figure 11 shows the results of the AGA modelling of using the commutation lump sum  for the purchase of a house
3.152. Figure 12 shows that a member who discharged between 1990 and 2010 may live to  their ‘break-even’ age, and ultimately be better off having not commuted

References

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