Submission to the Review of Indexation Arrangements in Australian ...

Additional information - impact on the military superannuation unfunded
liability
The estimates in relation to the impact on the unfunded liability in respect of the
military superannuation schemes are also based on the MSBS remaining open with no
changes to military superannuation arrangements.
Explanation of the increase in the unfunded liability
This may be illustrated by considering the effect of a once off hypothetical pension
increase of CPI plus 1.5% 38 for just one year only (ie. back to normal CPI every other
year). As next year’s pension is linked to this year’s pension, all future pension
payments for current pensioners would be 1.5% higher than they otherwise would
have been. This once off additional increase adds 1.5% to the pension liability (as all
future payments have increased by 1.5%).
If another special increase of 1.5% above CPI was given in the next year as well, this
would add close to a further 1.5% increase to the pension liability at that time (which
would partly depend on the numbers of pensioners dying and the number of new
pensions commencing in the year). That is, the two special once off increases (one
this year and another one next year) would add up to an increase of just under 3% in
the unfunded pension liability.
Increasing to MTAWE instead of CPI is equivalent to committing to 45 years (which
is the estimated life of the unfunded liability) of 1.5% increases above CPI.
Increasing by the higher of CPI or MTAWE is equivalent to providing 45 years of
2.1% increases above CPI. Therefore the immediate impact on the unfunded
liabilities of $27 billion (for MTAWE indexation) or $40 billion (for the higher of CPI
or MTAWE) reflects the commitment to these future pension increases.
38 This is the assumed difference between MWATE and CPI.
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