New super arrangements for defence personnel
Eleven years after the decision to close off entry to the public service PSS defined benefit pension fund, the government has stopped entry to the MSBS pension fund. From July 1, new personnel are offered membership of a new ADF Super Fund or can have the employer contribute to a fund of their choice. A reader has asked how the new scheme compares with the MSBS.
Compared with compulsory employer contributions of 9.5 per cent of salary to private sector funds, the new defence employer contribution is 16.4 per cent of salary, 1 per cent higher than the 15.4 per cent contribution to the PSS replacement PSSAP and significantly higher than the compulsory super payment requirement.
While the difference in benefits will vary from individual to individual, the major motive for closing down the MSBS to new entry was to save money. The Shepherd Committee, which recommended this course of action, estimated that it would reduce the unfunded superannuation liability by $150 billion in 2050.
Particularly for long serving employees, membership of the federal government's defined benefit pension funds has become like winning Tattslotto. Gradually, exiting employees have recognised this by shunning the alternative lump sum benefit options and choosing the indexed lifetime pensions offered at approximately half commercial rates.
There are drawbacks during working life from being a member of defined benefit funds in that a personal contribution out of after-tax money of between 5 and 10 per cent is required to obtain the best employer benefits. Indeed, the biggest advantage of the new ADF and PSSAP funds and there is no requirement for an employee contribution. This increases the ability of members to pay off their mortgages and achieve home ownership more quickly but removes the forced saving for retirement built into the defined benefit funds.
This isn't to suggest that all features of the MSBS and PSS which replaced the DFRDB and CSS funds are attractive. In particular, the employer component (other than the small productivity component) of all preserved benefits is indexed for inflation only until the benefit is taken. Fortunately, the impact of this low super fund earning rate is compensated for by the increased value of the indexed pension final benefit.
The attraction of accumulation funds, such as the new ADF and PSSAP funds, is the higher fund earnings rates. Even at the relatively high 16.4 per cent employer contribution, future defence employees will be struggling unless super fund returns are high to match the pension benefits available from the MSBS.
This is the key issue that serving MSBS members need to consider if, as is possible, they're tempted to switch from the MSBS to avoid making the minimum employee contribution of 5 per cent of salary.