Pension Indexation Review Hearings - Session 1, Thursday 24 July 2008

Trevor Matthews: Well, Ladies and Gentlemen. Can I call this meeting to order? First of all I would like to welcome you today and thank you very much for coming and giving us the opportunity to hear more about your submissions.

It might be useful if I gave you a bit of my background. I am an Australian even though I am not living here at the moment. I lived in Australia for most of my life and have been out of the country for 10 years. I am an actuary by training. I was President of the Institute of Actuaries of Australia in 1997. I have worked in the life insurance area mostly. General insurance as well. I used to run Legal & General, a life insurance company that used to operate here. Then I went to Canada for three years with a company called Manulife. I went to Japan for three and a half years with the same company and then to Scotland for three and a half years and I am now in the process of moving to London, where I am due to take up the position of Chief Executive Officer of Friends Provident, which is another life and pensions company. It used to operate in Australia but does not anymore.

So, I have good experience in life insurance and superannuation from this country and also an international perspective. I was very happy to accept the invitation when approached by the Senator to carry out this enquiry. So, I do thank you very much for your submissions and I am looking forward to an interesting discussion this afternoon. I want to hear from you first, if that is alright, and then we can have some questions after that.

Can I introduce the other members of the team here? David Harris, on my left, on your right, is the Managing Director of TOR Financial Consulting. He is assisting me with the review from the UK end and he is another Aussie. He has a lot of history here in Australia which perhaps he can tell you about in a few minutes. But he is now a consultant in the UK and he has some very wide ranging international experience. Perhaps David, you can tell us about that.

David Harris: So, my background, Ladies and Gentlemen, is that I used to work in banking but also with the Insurance and Superannuation Commission and when Australia moved to compulsion in the mid ’90s and as a public servant. So, I am a member of a scheme - in the PSS, I think it is. And, more importantly I think, all countries internationally are dealing with similar issues around the world and I spent three years in the United States looking at this issue equally through the United States Congress and working with Congressional Advisors and today I am based, like Trevor, in the UK, as we put up with all the cricketing references as we suffer the Ashes potentially next year. So, I equally, like Trevor, look forward to this enquiry and the seriousness and more importantly the conclusions that can draw going forward.

Trevor Matthews: Then we have the Department of Finance and Deregulation team who are helping us at this end. Sandra Wilson here, some of you may know. Devi Kemp and Nhat Nguyen. Is that right?

Nhat Nguyen: That’s right.

Trevor Matthews: So, that is the team that is helping me with the enquiry. We don’t expect the meeting today should be overly formal but for practical reasons we do need to record the hearings, so I will ask you to assist me by mentioning your name each time you speak as it is hard to keep track otherwise. We are planning to put a transcript of the

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hearings up onto the web-site after a couple of weeks. So, I think that is basically where we start and I would like to hand over to you now to hear more about your submissions. Who is going to talk first?

Tom Hayes: My name is Tom Hayes and I am the acting National President of ACPSRO and I am leading off because it’s the umbrella peak organisation for the superannuation organisations that are interested in this issue.

I would like to introduce our team. It consists of SCOA representatives on my right; Dr Annette Barbetti, President of SCOA, and John Coleman, Indexation Manager for SCOA. On the far left is Colonel David Jamison, President of the Defence Force Welfare Association and next to me is Group Captain Phil Morrall, Vice President of DFWA.

I want to make a very short statement. I know some of the others will want to expand on it. There has been very little publicity given to this review and the timescale allowed for submissions has been very tight. The review should not gauge the level of interest in its work by the number of submissions that is received. If that is an issue, we can easily rustle up at least 10,000 more submissions in the next two weeks.

Trevor Matthews: We have had a large number of submissions.

Tom Hayes: The terms of reference, I have to say, have disappointed us. We weren’t consulted. The emphasis seems to be on computation but we see the central issue as being one of equity and fairness. And we have proceeded on the basis that Mr Matthews, you do have a remit, although it is not explicit, to have regard for the issue of equity and fairness. It will be very interesting hearing from you later that that is in fact the case.

We are also disappointed that the terms of reference do not include an item on taxation of payments from so called untaxed funds and my colleagues will be expanding on that issue.

I want to explain very briefly why we believe the Commonwealth, my employer for 29 years, has broken the contract it had with me and many thousands of my colleagues. Over the last 15 years it has allowed very special circumstances to depress in a most questionable way the estimation of the CPI. It allowed this to happen without a word of warning or advice to its loyal employees.

When I joined the Commonwealth Public Service in 1963, we were all repeatedly told and reminded that only the Commonwealth’s Superannuation Scheme, would provide us security that would protect our families from the ravages of inflation because it was indexed to CPI. There was not a scrap of evidence, in those days, that there was any difference between keeping up with inflation and maintaining a particular standard of living.

After 29 years of serving the Commonwealth, I retired in 1992. So did thousands of others. For all of those 29 years there was not a hint in what was to come.

Today, 16 years later, our pensions and our standard of living have sunk in relation to community standards, to the extent that only the very fortunate are not dependent in large measure on supplementation from the aged pension system. I, and many thousands of my colleagues, regard that as a breach of contract.

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How has this happened? Over the last 15 years, this country has been awash with products from Asia, motor cars, televisions, white goods, computers, cameras, telephones, mobile phones etc etc. For these products, in the most part, there has been a gradual decline in sticker price. Also, existing models have been routinely taken off the market and replaced by a new model and the manufacturer invariably claims dramatic quality improvements for the new model. Any decline in the sticker price results in a downward adjustment to the CPI and we do not object to that.

But we most certainly do object to the downward adjustment of the CPI because of the associated claims for improved quality.

Most of these claimed quality improvements are completely illusory and they should never have been allowed to distort the CPI. But unhappily they have and to a large extent. Part of the reason is the international rat race to have good figures for growth in real GDP.

Quality corrections, no matter how questionable, will depress the CPI, result in a lower reported rate of inflation, higher reported growth in productivity and a higher reported growth in real GDP.

And the leader in that rat race would appear to be the USA.

As an example, it uses a price index for personal computers which is beyond silliness. That would not be a problem if it was confined to the USA but many countries follow it, including Australia, which started using it in 1988. I suppose the authorities here said to themselves “if the USA insists on being that silly we have no option but to follow”.

In December 2000 the US Bureau of Economic Analysis used that price index to make some estimates of how much the price reduction of personal computers was due to a reduction in sticker price and how much was due to improving quality. It estimated that between 1994 and 1998 the USA index for personal computers fell by thirty three and a third percent per annum of which 7.7% per annum was due to a fall in sticker price and an unbelievable 25.6% per annum was due to improving quality.

If we assign a shelf price of $2,000 to a personal computer in 1994 these figures mean that in 1998 the sticker price had fallen to $1,452 and the quality corrected price had fallen to $396. How utterly silly. How valuable is an increase in CPU speed from 800 MHz to some kind of gigahertz? Has anyone thought about the bloat to cost of the software that is necessary to make the wretched things work?

The real injustice, as far as I’m concerned, is that if I wanted to buy a personal computer in 1998 I would have to fork out at least $1,452 not including the cost for software while my pension had shrunk to a level commensurate with paying only $396.

And while this emasculation of the CPI was in progress, what did the Commonwealth’s loyal servants hear from their employer? Nothing. Absolutely nothing.

It wasn’t as if the Commonwealth did not understand what was afoot. In January 1993 the then Government decided that CPI indexation of the Age Pension, a method of indexation which had prevailed for many years for the Age Pension, had become inadequate. The increases in CPI no longer resulted in sufficient increases to allow aged pensioners to live respectably. And the Government of the day set a floor level for the age pension of not less than 25% of Male Total Average Weekly Earnings.

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You will hear people say of us “They want it because the Age Pension got it”. That is not the argument at all. The argument is the way the CPI, because of the special circumstances, caused a major change in what was our basic system of indexation up until the late ’80s and the Government decided for the age pensioners it had to do something. We say not that we want it because the aged pensioners got it, we want it because the CPI was pulled apart in the way it was.

To add insult to injury, in 2002, and they waited quite a few years to make it a little bit more respectable, the Reserve Bank reviewed the method of indexing the pensions for its staff. And as a result, the RBA changed from an annual indexation linked to the CPI to half yearly indexation based on change in MTAWE.

Neither of those changes would have been made if the CPI had remained a reasonable reflection of changes in the positive contemporary standards of living. The changes were made because people with access to privileged information knew that the CPI had become an inadequate reflection of the real costs of living.

As far as we are concerned, the Commonwealth has behaved in a grubby and disgraceful way to its past employees. It has not honoured its contract, or even had the decency to tell us that what it had effectively promised to us was at risk.

A completely equitable approach to making good what has happened since 1993 would require the Commonwealth to make good the losses that retirees have suffered since 1993. It would require them to reset present pension levels to corrected level and it would require them to apply proper indexation from now on. However, in an effort to find a way forward and in the spirit of genuine compromise we and our organisations have limited our claim to the future application of a system of indexation for Commonwealth pensions that matches the percentage changes in the age pension. That will do nothing, unhappily, to make good the huge erosion of our pensions in the last 15 years. Thank you. I would like now to hand over to Annette Barbetti, President of SCOA. Thanks Annette.

Annette Barbetti: I am Annette Barbetti, the President of SCOA. I have worked in the public service for over 31 years and during that time I was a Survey Statistician. After being a computer programmer for a little while I was doing survey type things and then I went into economic accounts and was working on the national input output tables for many years. And, therefore, I offered my services to SCOA when I retired in 2004 because I had for some time been aware of this indexation issue. People had been telling me how their pensions had been eroded.

In 2006 I conducted a survey of our members and I found out some very interesting things. Mainly our members were very concerned at the level of the indexation of their pensions and we asked them to give us their views on various issues that we were pursuing. And, almost without exception, they said that indexation was the thing they worried about most. And another sad thing was the way they replied to the survey. Quite a number of members of the association were so poor they had to send their survey forms back in recycled envelopes that their electricity bills and things like that had come in and the stamps on them were Christmas stamps left over from periods of greater prosperity.

We asked the question in this survey “are you in receipt of a part-age pension?” and 39% of them reported that they were. We also asked them about their total household income and we asked them questions about their assets and they told us that most of them were very

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light on in the assets area. The majority of them had assets of less than $100,000 with which to generate any income in addition to their pension and a large proportion, I can’t remember at this moment, how many, said that they found it necessary to dip into their savings to supplement their income.

Another surprising thing was that based on the information that we gleaned from the survey there were quite a few of them who were not yet receiving an age pension who should have been and I think that one of the reasons for this was that they had been told when they first joined the public service that they would be looked after, that they would never have to go on the age pension. They thought that if they had reached the level of Director, or something like that, that they would never ever, ever have to apply for an age pension and they hadn’t realised, as time went on, that they had now become eligible to apply for one because there was no mechanism for informing these people other than what they might read in the paper.

The other thing is that a lot of the information that such people could use to find out their eligibility is available on the computer. And although Centrelink claims that 30% of its customers have access to computers, the proportion of our members who have access to such things and would know how to use them if they had them is rather less than that because many of our members are old and some of them had left the public service already before computers had become widespread. At a recent meeting in Melbourne I actually asked members how many of you have access to a computer or the internet and only 10% of them at that meeting did. In the ACT we have a slightly higher percentage, maybe as high as 30%, but out in the other state capitals where they were in general at lower levels in the public service, they don’t.

So, bearing in mind the results of this survey, we decided that we had to have an Indexation Manager to thoroughly research the subject and to present our views at enquiries such as this and our Indexation Manager is John Coleman. He is here today. I would like to introduce John Coleman to you.

John Coleman: Thank you Annette. Yes, I am John Coleman and prior to taking on the job as Indexation Campaign Manager with the Superannuated Commonwealth Officers’ Association, I held the position of Federal Secretary within that organisation commencing in April 2002.

I would first of all like to thank the review for the opportunity for us to present to you some very important information about this review. Whilst I will be addressing and talking to the terms of reference, there is a considerable amount of background information I propose to give to the review because I think it is essential the review has access to that information if it is to make proper and well researched and well founded decisions or recommendations to the Government. The evidence to support what we are seeking, it’s critical to the conduct of the review, and so I will talk a fair bit about the growing bank of that evidence.

As my colleague, Tom Hayes, has already mentioned, this issue is about fairness and equity and it is my intention to demonstrate to you that what is happening now with the Government’s former employees and former members of the Defence Forces is neither fair nor equitable. It is about responsibility and responsibility of the Government to meet its obligations to appropriately treat its former employees and former members of the Defence Force. That responsibility is referred to at paragraphs 3.9 and 3.91 of the 2001 Senate Committees Report titled A Reasonable and Secure Retirement. It says that whilst the relevant legislation itself doesn’t require Governments to provide a reasonable and secure

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retirement as part of the employment package, there was a founding assumption, and their key words are “founding assumption”, that as a condition of service, requiring compulsory superannuation contributions, the schemes would provide for adequate superannuation in retirement. The CPI certainly does not provide that.

I would like now just to give you some information about who the people are that are affected by this particular unfairness and, of course, you are well aware they are former public servants and former members of the Defence Forces. But there are a few things that I think are often forgotten about those people by not only politicians but members of the general community. Contrary to popular belief, almost two thirds of these people reside outside of Canberra and we have been told by several Labor politicians, very recently in fact, that there is a view within the Parliament, in particular amongst Labor politicians, that this is a Canberra only issue. Well, it’s not a Canberra only issue. The people that this issue affects provided services right around Australia. In many instances, they had fairly lowly paid jobs and they were people, for example, like the people that worked in the Government’s repatriation hospitals, caring for veterans, war widows. They were cooks, cleaners, storemen, and labourers. They were the people who sorted and delivered our mail and the fact that they held down, very often, fairly lowly paid jobs is reflected by the amount of superannuation they receive, on average, and that average pension is about twenty three, in fact it is just under, $23,000 per annum.

So, the point I am trying to make here is, we are not talking about the top end of superannuation town, for the most part. Sure there are some people receiving quite high superannuation pensions, but for the most part they are not. Almost 80% at the 30th of June last year were on a pension of $29,000 or less and almost 50% were on a pension of less that $19,000 and in not all but in many cases, those pensions support both members of a couple and that is something I would ask the review to keep in mind throughout their deliberations.

These people had to compulsorily contribute to a superannuation scheme that they believed would provide them security in retirement. Well, they made a mistake on that count, I would have to say. They had no opportunity to contribute to a fund of their choice.

Now that might not have meant so much at the time but with the Government’s introduction of the Better Super arrangements it does affect them because the scheme that they were compelled to contribute to is now termed or classified as an untaxed scheme and what that means is under the Better Super arrangements any non-superannuation income they have is taxed at a higher marginal tax rate than it is for those people whose employers did the right thing and paid money into a superannuation fund to meet the pension payments of those people when they retired and that is a very important point.

The number of people affected, and I am talking firstly about civilian Commonwealth superannuants not the Defence people, the number of people affected, this is at the 30th of June last year, is 642,000 and I will just explain the composition of that number. It represents the numbers still contributing to the public sector schemes. It includes those who have left the public service but have preserved their superannuation entitlements and includes those, of course, who are receiving a pension. It is also loaded up by a factor of 60% because we believe, very conservatively, that at least 60% of those people have a dependant, mostly a spouse or partner.

The numbers for the Defence people are 290,000 but I will leave that to the Defence people to talk about that.

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Well, what is it that these people want? They want the Labor Government to demonstrate the fairness that Mr Rudd promised in the election campaign last year. And that is to have their pensions indexed by the same percentage movements as applies to the Age Pension. They are not asking for special or favoured treatment. All they want is the community standard. And I would ask the review to remember that when they finally have an improvement to their indexation, unless of course the Government is very generous and we are not too hopeful in that regard, they won’t have any catch up to the erosion that has already occurred to their pension, and my colleague Tom Hayes has already referred to the period over which those erosions occurred, a fifteen year erosion. And I can give you a very good example of the impact of that.

We had an example, this example is a few years old but it makes the point nonetheless. A person retiring on a pension of $20,000 will after 20 years, and most of these people will live for 20 years based on the latest life tables, life expectancy tables, a person retiring on a pension of $20,000 a year after 20 years, if their pension continues to be indexed the way it is at present, will be on a pension of $7,000 a year less than what they would have been on had their pension been indexed fairly, in much the same manner as the age pension. In addition to that, they will have lost almost $70,000. There is not much fairness or equity in that.

And these are some of the remarks and some of the statements and comments people affected by this are making to us. We receive lots of emails and letters, phone calls from people from our members and some non-members as well and one of the first things they say is that they feel like second-class Australians because of the discriminatory way they are being treated. And that is not only because of the way their pensions are indexed. It is also because of the fact that under the Better Super arrangements, which we initially thought would provide some relief, many of them will receive little, if any, benefit from the 10% tax offset because they already pay little, if any, tax because their pension is so low.

When the GST was introduced the Government, quite rightly, provided a one off payment to Age Pensioners to help compensate for the effects of the GST on prices. Commonwealth and Defence superannuants were not included for whatever reason.

Since the Government formalised the use of a wage based index for the Age Pension and other pensions in 1998 and the informal introduction that occurred much earlier than that in 1993, as Tom Hayes has already said. Since that time, in 10 years, our constituents’ pensions have increased by 29%. 29% compared to the Age Pension and other Government pensions which have increased by 51%. In 2007 their pensions increased by 2.5%. Retired Federal MPs’ pensions increased by 7%. In 2008 Federal MPs’ pensions increased by 6.7%. Commonwealth and Defence superannuants’ pensions increased by 4.2%. It’s not hard to see the rather large disparity between the different methods used to index the pensions that the Government is responsible for paying.

They are also saying they’re puzzled as to why the Government saw the necessity to have this review given that there have already been three very in-depth Senate enquiries into this matter, all three of which recommended almost identical, made almost identical recommendations as to the way their pensions should be indexed.

They also say that they took on lower paid jobs and that information has been accepted by three Senate enquiries. They took on lower paid jobs in the public sector, many of them not

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all of them, because they were prepared to trade the higher salary to have a pension that would see them in security and enjoy a good standard of living in retirement.

And, finally, they are saying that they contributed to the Australia we all enjoy today, why shouldn’t they be able to share in the productivity benefits that are reflected in the means used to index the pensions of most other senior Australians?

Tom Hayes: Thanks John. Mr Matthews. I think we will proceed and get right through. Okay? So, David if you could lead off.

David Jamison: I will ask Phil to speak first.

Phil Morrall: Good day sir. My name is Group Captain Phil Morrall. I am a retired Air Force Officer. I appear in two capacities. One as Chairman of the RSL’s National Conditions of Service Committee and as Vice-President of the Defence Force Welfare Association for pay and conditions of service. Perhaps I should also record an interest in that I am a superannuant of the Military Superannuation and Benefits Scheme, the MSBS Scheme. My Air Force career was as an administrative officer in the conditions of service type area, hence I got dobbed in by my mates for the two volunteer appointments.

I would just like to speak briefly to eight points of our submission and you will have noted that the submission is joint between the RSL, the Defence Force Welfare Association, the Naval Association of Australia and the Royal Australian Air Force Association. This is a relatively recent phenomena in as much that for two committees of this type, we have found it more advantageous to do our homework beforehand and get a joint position established.

The first point I would like to talk to is paragraph 2 of our submission which is essentially the scope of our representations. We wish to make representations on behalf of the military members, their dependants and otherwise. However, it is important to understand that in this particular context we are not just talking about geriatrics such as I. We are talking about the 25 year old serving member who was blown up in Afghanistan and is disabled. We are talking about the 23 year old widow of a 20 year old member who has been killed in Iraq and their three year old child. Hence, we have an actuarial horizon of perhaps 20 years for that child. We have an actuarial horizon of 60 years for that widow. We may have an actuarial horizon of a similar 60 years for the member themselves.

The military members are currently covered by three superannuation schemes, the Defence Force Retirement Benefit Scheme, DFRB, the Defence Force Retirement and Death Benefit Scheme, DFRDB, and the Military Superannuation Benefit Scheme, MSBS. The latter is the current superannuation scheme for most of the current members and certainly all of members who joined after about 1992. All three schemes were and are compulsory for serving members of the ADF and each required a minimum contribution from the member’s salary. The size of that contribution varied upon which scheme members were in. However, each of the schemes was designed and predicated on the unique nature of military service and at paragraph 8 and 9 of our submission we draw attention to what is the most recent expression of the unique nature of military service which found its way into the terms of reference for the 2007 review of military superannuation.

I would be extremely surprised if your enquiry does not receive submissions from some of our good friends in the Departments of Finance and Treasury which might use views built around the generosity of the military superannuation schemes. That is a terminology at which we take, not to put too fine a point on it, offence. We find that that is emotive, it is

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usually used in a derogatory fashion and it certainly is used in a divisive manner. The size of military superannuation pensions, it is not a matter of them being generous or otherwise. They are just simply the mechanistic outcome of applying the military superannuation schemes that have been designed and approved by various governments of this country and deemed in their application to be appropriate and an appropriate reflection of the unique nature of military service.

If we turn to paragraph 10 of our submission which is to essentially reinforce some of the statistics you have seen, heard earlier today. Essentially nearly 90% of all military superannuants receive less than $30,000 a year. There are currently about 64,000 military superannuants. To relate that to some of the figures you heard earlier today that of course does not include the 60,000 serving members at the moment, so that is about 124,000. By the time you add dependants etc you start to get the 290,000 figure that was mentioned.

Again, in paragraph 12 we make the point, and would not wish to labour it any further, that CPI is not a measure of indexation. It is not a measure of purchasing power or cost of living type index. The previous reviews and considerations, again we enumerate those at paragraph 15, and we bring to your attention certain campaign activities that were conducted prior to the last election and we don’t blush at all from quoting Mr Griffin and Senator Sherry back at themselves through you. The scope of the disadvantage that military members, as well as public service members, would have suffered in general terms is illustrated in the graph on page 8 and, again, in general terms it shows that military superannuation pensions would be at about 35% less than they otherwise might have been had they been linked to a wage based indexation point.

At paragraph 23, we address the matter of costs and it would be of immense benefit to those assembled at this table if nothing else comes out of your enquiry if we were to have a public detailed and substantiated exposition of the costs involved in this exercise. It is no secret that the competing views on the relative costs swing violently from quite minor amounts to astronomic amounts measured in the tens of billions. You would be aware, more than most, it all depends upon what your underlying assumptions are, the start point you take and the projection parameters you wish to apply. Without having access to that sort of information, which over the years has been promised but has not actually been forthcoming, it is very difficult to engage in a proper and serious debate.

There is one anomaly to which we refer, if I might just go back to paragraph 22, within the DFRB and DFRDB schemes there was a provision for members to commute a portion of their salary. Without getting too technical, the indexation, if a member does not commute the indexation is applied to a pension as though we had commuted. To say that it is an irritant is understating it. Most people feel seriously aggrieved if they find themselves in that sort of situation.

And in summary sir, what do we seek? We seek changes in the indexation methodology for military superannuation pensions in line with those applying to other Government payments, specifically to some wage based indexation. We don’t seek special treatment. We seek that any amended indexation should apply to the whole amount of a person’s military super in an attempt to resolve that commutation anomaly and we certainly do seek a public detailed and substantiated exposition of the full costs involved in this exercise. Thank you sir.

Trevor Matthews: Thank you very much.

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Tom Hayes: Thanks Phil. David, do you want to say something?

David Jamison: Yes, I’m David Jamison, National President of the Defence Force Welfare Association and I would like to sum up our point of view on this issue with you by perhaps illustrating I was castigated by a retired Major General, not so long ago, who wanted to know, to quote his words, “why my bloody pension is less than a corporal gets paid today” and, I have to say, that he really wasn’t exaggerating and it illustrated to me the issue which we have tried to portray in the graph that we have in our submission about the declining value of military pensions over the period of years.

We are not seeking a catch up although that would have been, I think, a justified approach for us to take and it is a part of our desire to compromise, to reach a reasonable outcome that would be acceptable to both the Government and our constituency to see that at least further erosion of purchasing power did not continue. We note that in other payment issues the Government did offer a measure of catch up when they rectified similar issues with the Department of Veterans Affairs payments last year.

We are simply seeking equity. We don’t believe that the Government with its treatment of its, particularly its retired service people but also those still serving, is being fair or equitable in the way it treats its superannuation issues.

The person that joins the ADF joins with the understanding that there is some sort of a compact between the Parliament and the members of the ADF to be properly compensated and looked after in terms of remuneration and other conditions of service that, in a way, protects that person and his family from some of the likely or hopefully unlikely results of putting themselves in harms way for the good of the nation. We believe that this compact has been broken and the superannuation issue, particularly the indexation and some of the remaining taxation issues that we have alluded to, represent a walking away of that compact by the Parliament and we seek to have that addressed.

The issue of superannuation and its taxation treatment and the treatment of indexation is a major source of dissatisfaction throughout both the ex-service community and an increasing source of dissatisfaction amongst those still serving as they realise the situation as it now applies. I, for a long time, did not detect the level of angst and anger amongst the ex-service community that I now see that comes across my desk on a daily basis on this issue. It is the major issue that is gaining the attention of that community and if it is not addressed in a way that is seen to be fair, I think it is going to only exacerbate the situation and of course that has flow on effects to recruiting and retention of the ADF itself and that in turn affects our defence capability and, of course, impacts adversely on the foreign policy of this country and its pursuit of its international interests.

So it is not just that we are seeking to have this addressed from the fairness and equity aspect, it is a major concern for the Government in terms of both its foreign policy and its defence capability. Because at the moment the general thrust out there amongst ex-service people is to dissuade others from joining the ADF whilst these conditions apply. That’s not something we, as an association, necessarily push but it is a fact of life. What we have tried to convey to you is that the community, the ex-service and the serving community feels aggrieved on this issue. We have for some many, many years been asking for it to be addressed in a way that is both transparent and that would produce a fair outcome that can be accepted by all parties. That is simply what we are seeking to do by appearing here today and submitting to you those papers that we have done so.

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Tom Hayes: Okay. Thanks David. Thanks very much. So, let’s roll on.

Trevor Matthews: Well, thank you very much. I do appreciate the efforts you have devoted to put that together and present it so coherently. That’s been very, very helpful. I wonder if I could just explore in a bit more depth the CPI, the fundamental point that you have made, Tom, if I can call you Tom, if that is alright?

Tom Hayes: Yes, you are most welcome.

Trevor Matthews: The CPI has changed in nature is your view, is it, over the last 20 years in this country?

Tom Hayes: It changed in a fundamental way at the end of the ’80s.

Trevor Matthews: And was this a deliberate manipulation of the CPI, do you expect? Or is it just a natural outworking of what was going on in society?

Tom Hayes: It made the CPI totally unsuitable as a means of indexing pensions, for keeping superannuants’ pensions apace with emerging community standards. For years and years there was simply the CPI. We were discussing before we came in whether there was specific mention of the CPI. We were required to join the Commonwealth Superannuation Scheme. It was a fully indexed scheme.

Annette Barbetti: That’s what they said.

Tom Hayes: End of story. It was indexed to CPI, that was the method. There was almost no other conceivable way of indexing and for years it went from year to year and did its job. It kept people abreast of community living standards. Now, it is our contention that from about the late ’80s, early ’90s, it changed in a fundamental way and it changed because of the flood of cheap imports and increasingly cheap imports from Asia, particularly anything associated with the electronics evolution.

The ABS has always put some effort into making corrections for changes in quality but, in the early days, I mean, moving from one model of a Holden to the next model of a Holden, they were three speed Holdens, they didn’t change much. I don’t think the impact from this on the CPI would have been all that great. But with the advent of all that has arrived since the early ’90s, the Bureau has had an enormous problem when manufacturers take one model off the market and bring another model on. There is no continuity that’s half the problem, or two-thirds of the problem. They have to look at the new model and make an assessment of what the quality change has been relative to the previous model.

Now this is very difficult information to access, but all the information that we could get would suggest that this is where, and this is the reason, the CPI has so fallen behind as a means of keeping abreast of community standards.

And our members say to us “the country has never been so prosperous and we have never been so bloody poor”. It’s crazy.

Annette Barbetti: I would like to read out to you what the ABS, itself, says about the CPI. They said in a document called A Guide to the Consumer Price Index Fifteenth Series 2005 “Although the CPI is also commonly referred to as a measure of changes in purchasing power or cost of living index, in an economic context these terms are not strictly

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interchangeable with a measure of price inflation.” In order to have a proper cost of living index, you’d need to have a separate index.

One of the reasons why it has changed over time is because of the floating of the Australian dollar and the need to raise interest rates in order to keep down inflation back in the 1980s and at that time, up till then, there had been for some time things like mortgage payments included in the CPI. That was why the cost of living went up rather quickly in the middle of the 1980s and so it was decided that it was inappropriate to keep the mortgage payments in if you were going to use interest rates as, more or less, the sole mechanism left for regulating the inflation rate because before that they had been able to control it by closely controlling the money supply. But they couldn’t do that anymore. They had made the decision not to and they didn’t want to go back on it. So they changed the basis of the CPI for measuring actual expenditure to an acquisitions basis which is different.

The cost of living index does not include all things that people spent money on. For example, it doesn’t include income tax. And there is a lot of literature out there for the academically minded about how you could have a proper cost of living measure but so far as I know nobody has actually produced one that is actually in use in any country. I’ve searched the internet and haven’t been able to find one.

Tom Hayes: Annette, I would like to come in on the end of that and say, trying to nail down what happened to the CPI is a fraught with all kinds of complexities and difficulties. Annette has just suggested a couple of points. I have suggested what I believe to be the major impact.

In reality it doesn’t matter. The CPI collapsed as a means of keeping pace with living costs. And how do I know that? How can I prove it to you? I can prove it to you in a very simple way. Point out that in 1993 the Government, itself, had to change the indexation for the age pension. Now, I used to work in Treasury and I worked in Finance and I know jolly well the Government would not have done that unless it had to. The Brotherhood of St Laurence, the welfare agencies were on the Government’s back for several years before 1993, pointing out that the CPI indexation was leaving people in abject poverty, those that were totally dependent on the Age Pension. Right through the ’60s and ’70s that hadn’t been the case. CPI was fine. There was no trouble with it.

What changed? Well, we don’t have to agree on what changed. All that we have to agree on is that it became obsolete as a means of keeping pace with contemporary living standards.

John Coleman: If I can just add to what Tom has said. I have actually got a quote which is on page 10 of our submission which you might like to look at and this is a quote that appears, or has appeared, in Centrelink’s publications to mainly age pensioners, whenever it is advising them of a pension indexation increase. It’s the boxed quote roughly in the centre of page 10 and it’s the second part that I’m referring to in particular which says “this ensures pension rates remain in line with the cost of living and that pensioners share in improvements in community living standards as measured by wages”.

Trevor Matthews: I mean, that is an interesting issue. You haven’t been arguing that. You have been talking about the CPI which I found that very valuable, very helpful. This raises the point about keeping up with community living standards as measured by wages but you weren’t arguing that. You were arguing that the CPI was a poor reflector of living costs for pensioners. That’s really what you are arguing. There is a lot of literature and a

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lot of debate around the world about prices or wages. If you link to prices, you should be able to protect your standard of living. If you link to wages you, of course, will share in the onward advances of living standards in the community. If I take it right, you are not arguing that. You are arguing that the prices link that we have is not doing its job.

John Coleman: John Coleman, you have raised a very important point there in as much that, whereas our constituents would very much like to have their pensions maintain relativity with the salary they were on at the time of retirement, they won’t, even if their pensions are indexed according to the way we’d like them indexed or they would like them indexed.

David Jamison: The issue from the military point of view is that we have totally lost confidence in the CPI as a measure of maintaining our purchasing power or relativity in any way, shape or form and it’s discredited in our eyes and the arguments that have been put to justify it have no credibility in our eyes. And, in fact, we look at Government statements and statements from the Bureau of Statistics, themselves, who support, if you like, our attitude and look to other measures to maintain fairness in the indexation of other payments that are Government responsibility.

Trevor Matthews: If it is alright with you, I will go through each of the submissions and see if I have any more detailed questions.

Tom Hayes: If you don’t mind, I will ask Mr Searle to say something about this issue.

Bob Searle: On the CPI. I guess I am concerned there are lots of reasons why governments calculate a CPI. I can’t see that one of the reasons they calculate CPI is to index pensions. So, what I would like to suggest to the review is that, if nothing else, you give us a consolidated statement of why CPI is calculated and what it is used for.

And, I guess, on the “what it is used for” issue, my concern is that one of the uses of the CPI is within the national accounts. You can calculate the inflation rate etc etc and ultimately finish up with increases in the GDP. GDP per capita across the international community is the one figure that Governments cling to to praise their own activities. That’s one of the reasons why CPI became a poor indicator of indexation for our purposes. It was this conflict between the American position on calculating CPI and the European position which I think is in Tom’s submission. If you have a low CPI, you have a high growth rate in your economy. But, let’s not have a high growth rate in our economy to the detriment of our Commonwealth superannuants.

So, if nothing else, I ask that the review give us a statement of how the Government uses CPI so that we can get a better understanding of why we calculate CPI and then, through that, its applicability to our indexation. Thanks.

Annette Barbetti: I would just like to make a further comment that the CPI isn’t the only index used in compiling the national accounts. They also use a thing called the implicit price deflator. And that implicit price deflator takes account of something which is not taken into account in calculating the CPI.

The best example I can give is what happened when we had a big storm some years ago and most of Australia’s banana crop was destroyed and we couldn’t import bananas from somewhere else like Ecuador or the Philippines because they’ve got ghastly diseases that we think we haven’t got here and, therefore, we found that there was a shortage of bananas

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and the few bananas, scrawny little things, that actually appeared in the market had amazing prices and yet the CPI was calculated on the assumption that we were still consuming the same amount of bananas as before, except that they were at these astronomical prices. So, bananas caused that particular category of the CPI to go up by nine point something percent.

And then after the bananas all started growing back again, we had a glut of bananas because for various, no doubt wonderful, economic reasons they weren’t allowed to stagger the replanting of their crops. They were told no you can’t stagger the replanting of the crops, you have to plant them all at once. So, all of a sudden, we had three times as many bananas as we could actually eat and the floor fell out of bananas with a result that the CPI showed no change at all and we got no pension increase in July last year.

Now, the implicit price deflator actually did allow for substitution for bananas because people naturally ate apples or something instead. But the CPI does not and the basket has been fixed since 1989 and they are not proposing to change it until 2011. Which is a very long time. Which means that there is lots of scope for problems with saying what is now the equivalent of something that was in the 1989 basket.

Trevor Matthews: A more minor point. There is a section in the SCOA report, Comparison with State Government Schemes. Could you please explain your points that you made there?

John Coleman: Yes. From memory, we were talking there about the fact that if you were going to make comparisons with other defined benefit schemes of which all the States are, as I understand it, then you should take account of the fact that those State schemes, and I am told on good authority, are classified as taxed schemes. Therefore, the recipients of pensions from those schemes will pay no tax on their superannuation pensions once they reach the age of 60, just like those that belong to schemes in private enterprise won’t pay tax once they reach age 60. I think that is the main point we were making there.

And I guess the other point I would make that relates to that, and that is in our submission as well, is that the review may be told that “well, the state government schemes are only indexed by the CPI, why should the Commonwealth schemes be indexed any differently?”. And the answer to that, of course, is that in the very first of the three Senate enquiries that have been held into this matter, one of the recommendations made by that first enquiry is that not only should the Commonwealth schemes indexation methodology be changed but the change that happens to that, or those, schemes should also be reflected in the State government schemes. And whilst that is outside the power of the Federal Government, it is obviously a clear message that they thought CPI indexation was inappropriate.

Annette Barbetti: Just one more little, or a couple more little points. The people in the state schemes are unhappy about having CPI indexation and they have been conducting their own campaigns to get this changed. And, I would also like to point out that they are at least getting the full benefit of the CPI indexation whereas those of us who have to pay tax are losing part of what little indexation we are getting due to the fact that our pensions are being taxed.

Trevor Matthews: I thought the NATSEM reports, included as appendices, were quite interesting. You have given us some information about members who are also receiving part age pension. Do you have that sort of data for the Defence plans?

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Phil Morrall: No, I don’t. But, to be quite honest, I’m not sure that it’s relevant at all in the sense that military superannuants are Australians. If they are of an entitlement to any other Government benefit then they will be administered as appropriate as any other sector. Whether my income comes from military superannuation or from a small business or from the proceeds of other investments, I don’t see why it is relevant to the issues before you. I think, in fact, it tends to confuse the issue. The short answer is no, I don’t have that information.

David Jamison: We would hate to think we were singled out as a sector of the community where that was a factor in calculating this sort of indexation.

Trevor Matthews: Yes, that is a fair comment. All right, that’s good. Some of the submissions from the military area said that you should be treated differently to the rest of the community.

David Jamison: The Government realises that and it spelt out why in the terms of reference to the military superannuation enquiry and it simply revolves around the factors that the military are there and each of them has made a conscious decision that they’re prepared to be put in harms way on behalf of the nation. And they are also prepared to accept restrictions on their civil liberties and life that other segments in the community do not have to accept at all. And we feel there needs to be recognition of that. The Government keeps saying there needs to be recognition of that. My own rejoinder to the Government, when they say it is, that we need to see some tangible recognition that gives meat to those words.

Trevor Matthews: But you are not saying that the indexation should be different -

David Jamison: No.

Trevor Matthews: Are you?

David Jamison: No.

Trevor Matthews: No. That’s the point. I understand. That’s good.

Tom Hayes: But, if you had a very limited budget, you’d better look after the military first.

David Jamison: I’m with him.

Annette Barbetti: I would also like to suggest that our budget can’t be that limited since we are running these huge budget surpluses and they are supposed to be fifty four point something billion in the Future Fund which was allegedly set up to provide for future superannuation liabilities.

Trevor Matthews: Well, yes, I mean, certainly I have to have regard to the costs of all this and if we change the method there will be an increase in cost. That’s certainly something that we need to take into account.

John Coleman: If I must just dare contradict what Annette has just said, or correct I should say, not contradict, as at the 30th of April the balance in the Future Fund, according to what we were able to get off the web yesterday, the balance stood as of 30th of April at

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$61.48 billion, and one of the arguments we would mount, in terms of the affordability of this issue, is that the earnings on those existing funds, in the Future Fund, would more than pay for the cost of this indexation improvement that we’re seeking, more than pay for it.

Trevor Matthews: I think that’s a complex area indeed.

Tom Hayes: But the Future Fund is very busy bailing out the banks at the moment.

Trevor Matthews: Could you please tell me about the taxation aspects a bit more? You’re saying that the taxation is unfair for these unfunded schemes. How would that be affected by different ways of indexing, would it be affected by different ways of indexing?

David Jamison: Well, as has been said before, because our retirement pay is subject to tax, even though there’s a rebate, some of the indexation gets lost to taxation, to the taxation liability. That is the direct impact, as I understand it, on this. We have a general issue with taxation of military retirement pay. We have got a couple of issues, first of all those DFRB pensioners who predate the 1988, I think, changes, we are at a loss, and that was a fully funded scheme. We’re at a loss as to understand why they should not gain a tax-free entitlement along with the rest of the community. We also believe that there ought to be pro rata for those who predate that time. But in any case, the argument used to continue to impose taxation, and at the marginal rate I might add, for Commonwealth superannuants is at best tenuous, disingenuous, and revolves around some sort of fanciful argument of fairness according to a statement by the then Treasurer. But when you analyse the way the benefits the Government gets from the way it funds its superannuation liability, it’s very difficult to say that the benefits that flowed to the Commonwealth and its finances are not as generous as it claims our pensions are.

Trevor Matthews: Okay, David, do you have any areas you want to pursue further?

David Harris: Yes, one of the issues, ladies and gentlemen, is you mentioned fairness and equity, and it’s a difficult, if you like, measure of what is fairness and what is equity. Do you have any thoughts on what you perceive is fairness and equity, going forward I suppose?

Tom Hayes: I’ll respond to that. Maybe I better preface it by saying that as I said in my opening remarks I hope that you guys accept that fairness and equity is written into anything that you do, that you have regard for fairness and equity. I see Trevor Matthews nodding and I might take that as an acceptance that that’s the case. As to what is fairness and equity, well it’s honouring your promises, and we’re very clear about what was promised to us, when we worked for the Commonwealth, particularly through the ’60s and ’70s.

Phil Morrall: Group Captain Morrall, if I could just add a little bit to that. From our point of view, fairness and equity is to be treated no less than other Government benefit recipients. Now obviously there are a range of indexation measures that one could choose. Depending upon which one one chooses, the costs can be calculated.

I think we start from the premise that it is in fact the Government of the day that changed the rules of the game. As Tom said, if you go back far enough, we didn’t really need to define that indexation was CPI. It just was what indexation was. It was a Government of the day that started to introduce into the arena wage based indexation generally through a

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thing called MTAWE. So, it is the Government that has introduced this second basis here, if you will. I would say that what we seek is not less than that.

If the Government would wish to choose another index that was wage based then, obviously, we could engage in a discussion about it. I mean, the most outside opportunity would be in fact, as has been mentioned earlier through the previous Parliamentary scheme, one could suggest that indexation should be to changes in the current salary of the rank you were when you left. Now that would be very generous indeed, right. If you felt disposed to recommend it I think we would applaud you.

But, generally speaking, what is fair, what is equitable, from our point of view, is for our constituents to be treated no less generously than others.

David Jamison: If I could just add to that. The indexation we would see as being fair would be along the lines of the indexation that is applied to other Commonwealth payments, the bulk of them at the moment. That is at the CPI with reference to movements in the Male Total Average Weekly Earnings, and now an added issue of the CPI, the living cost index for aged pensioner households.

Because of the plethora of indexes, indices, it’s now becoming more complicated from the Government’s point of view presumably, but also from our point of view, to ensure that our retirement pensions maintain relativity, the purchasing power year by year by year. That seems, to me, to be one of the underlying issues the Government is addressing in having those multiple linkages because there is no one way that you can be reasonably sure of a consistent movement of the level of payments to take account of the changes and economic conditions that we’re going through. So, that is why we haven’t said we want a wage based theme or a cost based theme.

We need the similar formula that applies to other Commonwealth payments and, as Phil said, any lesser treatment we see as discriminatory to our constituents and therefore doesn’t pass the equity and fairness test.

John Coleman: If I could just add to that. I would like to refer the review in fact to page 25 of the 2001 Senate Committees report. I would just read one or two sentences from that report where the issue of just what indexation was appropriate is discussed and paragraph 3.13 of the report says “Pollard and Jess”, who are two, I think, actuaries advising the Government at the time, Pollard and Jess, for example, state respectively in recommendations five and six of their report, “the annual indexation of the benefits should compensate for increases in the cost of living”, that is Pollard, “and should ensure that the relativity with average weekly earnings is maintained”, and that is Jess’.

Tom Hayes: I just want to add one more thing and that is, can we ask the review to pay particular attention to differentiating between what is equitable in all of this before they address the cost. What is equitable comes first and then working out the costs and whether the Government can afford it, or can’t afford it, comes second. We would urge the review to really address first what is an equitable approach to all this and I know I am giving you a very tough ask because it throws you right into the middle of the thing we have been trying to discuss and that is, what was the promise, and I think we have had enough on that and I think it is back in your court really.

There are another couple of things I would like to raise and another thing I think I would like to hear from the review is, what on earth happened to the recommendations of the

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Senate enquiries. Especially the last one and why hasn’t it been followed up? What is its fate? If it is going to be rejected, why was it rejected? If it’s because of the cost lets hear about it. We, at the present time, are faced with stony silences on a whole lot of fronts.

And the last point I want to raise is, will there be a draft report we can consult over? Will we have an opportunity to give you our comments on the draft report?

Trevor Matthews: We haven’t considered that. That is a good question.

Tom Hayes: Well, can you take that on board?

Trevor Matthews: Yes, we’ll take that on board.

Tom Hayes: Thanks.

Trevor Matthews: Without a commitment. It’s a good question.

Tom Hayes: No, no.

John Coleman: I might just say, if I could, that in quite a number of letters from the present Government, when in opposition in the lead up to the election, they did make a commitment to consult with our respective organisations in the course of running, and I believe before the actual implementation, or sorry, the commencement of this review. So we would like to see that undertaking honoured, which is pretty much what Tom said I believe.

Trevor Matthews: Well, I think that this has been very, very helpful for me and I do appreciate all the time and effort.

Tom Hayes: Thank you for the time too.

Trevor Matthews: I really do appreciate it and particularly that key issue that you were saying the CPI is not doing the job. Not working from your point of view.

Tom Hayes: It is key. Because otherwise you could say look, whether it is in writing or not, you were promised CPI, you are getting the CPI. That’s our argument, our position is this is very clearly not what we believe we were promised.

Annette Barbetti: Can I just, I am a statistician and I’m very keen on numbers. I would just like to quote a number to you. As of the June quarter 2007, the average wage of all serving Commonwealth public servants was nearly $66,000. Now you look at the size of our pension and given that most of us retire with over 25 years service for women and longer than that for men it is a pretty measly fraction, isn’t it?

John Coleman: And if I might just follow on from that. That pension of $23,000 is 35% of that average public sector salary as of 12 months ago, I think it was, and the relevance of my comment there is that when Commonwealth and Defence superannuants retire their pension is calculated using their salary at the time of retirement as a major factor in the formula. And I can tell you that, almost without exception, that is apart from those who have had a fairly short period either in the Defence Forces or in the public service, their start pension is a lot, lot more than 35%. It could be as high as 60%.

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Annette Barbetti: Could be 60%.

John Coleman: And the relativity with that salary, I think I have mentioned this already, has just ever so slowly but ever so surely deteriorated.

Trevor Matthews: Thank you very much.

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