C15/2009 Secure and Sustainable Pension Reform

Amends DI No.

NA

Replaces DI No.

NA

Purpose

The purpose of this Departmental Instruction is to outline the changes to the pension system under the Government's Secure and Sustainable Pension Reform package

Background

The Prime Minister announced in the 2008 Budget a review into retirement incomes including the age pension as part of the inquiry into Australia's Future Tax System.  A significant part of the inquiry was to look at the adequacy of existing support for seniors and carers and to suggest measures which could strengthen their financial security in the long term.

Other issues included the effectiveness of lump sum payments and achieving a balance that targets people with the highest need and retains incentives for people who want to keep working.

The Budget of 200 — 9-20 — 10 saw a commitment by the Australian Government to addresses these issues with the Secure and Sustainable Pension Reform and the introduction of a “new pension system”.

Who will be affected

The key changes in the Pension Reform package include:

• an increase in the pension rate;
• introduction of new Supplements which consolidates existing allowances/payments;
• new way of indexing pensions;
• income test changes:

• taper rate increase from 40¢ to 50¢ per dollar over the free area;
• introduction of a Work Bonus employment income concession;
• t — ransition arrangements for pre 20 September pensioners who would be disadvantaged by immediately moving to the new income test rules;

• closure of the Pension Bonus Scheme to new entrants;
• enhancements to advance payments from 1 July 2010;
• a gradual increase to non-veteran pension age starting in 2017.

These topics are described in this DI.  As a result of the pension restructure, there are some consequential technical changes which are also outlined.

Legislation

The legislative amendments relating to the Pension Reform are contained in the Veterans' Affairs and Other Legislation Amendment (Pension Reform) Act 2009 No. 81 (the Act) which received Royal Assent on 10 September 2009.

Implementation

The individual changes introduced by the new pension system commenced on 20 September 2009 unless an alternative date is indicated.

Mailout

All Australian residents who receive a pension or supplement from DVA were sent an advice letter shortly before the 24 September payday explaining the Pension Reform changes.  Letters were not sent to veterans and widows resident overseas.

Fact sheets

The two fact sheets below have been prepared to summarise the changes arising from the Pension Reform.

• IS171 Servi — ce Pension Changes Effective 20 September 2009
• IS17 — 2 War Widow Pension Changes Effective 20 September 2009

In addition, existing fact sheets have been reviewed to include information about the new entitlements and pension assessment rules.  New fact sheets for the individual topics are highlighted under the topics discussed in this DI.

Policy updates – CLIK

Policy references in the CLIK Library have been reviewed and updated to clarify how they relate to the new entitlements and pension assessment rules.  The key policy references for the individual topics are mentioned in the relevant sections.

Note: some of the links in the updates may not be accessible until the VEA compilation incorporating the Pension Reform amendments becomes available in CLIK.

Forms

DVA forms are being reviewed and updated as a result of the changes.  There are no new claim forms relating to the Pension Reform.

More Information for clients

There are a number of resources available for clients seeking information about the Pension Reform:

• September advice letter;
• DVA hotline 1300 307 901;
• http://www.australia.gov.au/pensions

Contact

The contact officers for this initiative are:

Elaine Tse, Income Support Policy Implementation x16011

Mark Tonkin, Military Compensation x — 50391

Summary of pension Increases

Under the Pension Reform, from 20 Sep 2009, the rate of single Service Pension and War Widow/er Pension have been boosted in addition to the scheduled indexation increase.

There is n — o rise for partnered rate Service Pensioners but there is an increase in their supplement.  The Income Support Supplement (ISS) ceiling rate has also been lifted.

September rates “real” increase before indexation

The figures below represent the maximum increase to payments (before indexation) to these pensioner groups:

              per fortnight

Single Service pensioner              $65.00

Partnered Service pensioner              $20.30 comb — ined

War Widow pensioner              $60.00

I — ncome Support Supplement (ISS)  $5.00

Pension Increases for all

Only those pensioners on the maximum rate of service pension will receive the full rise.  The $65.00 increase for singles will decline proportionally as income rises from above the income free area.

Transitional provisions will ensure that no service pensioners will benefit by less than $20.20 per fortnight for singles, or $20.30 per fortnight for couples combined.

All war widows/widowers will benefit from the $60 increase and those with ISS will benefit from a $65.00 real increase in pension.  The ISS ceiling rate will now incorporate Telephone Allowance (TA) and Utilities Allowance (UA).  There is a small real increase to the ISS ceiling of $5.00 per fortnight.

Assets tested pensioners

Assets-tested pensioners and who remain assets-tested will benefit from the whole fortnightly rise of $65 for singles and $20.30 (combined) for couples  despite being on a reduced rate of pension.

Improved Indexation

A new Pensioner and Beneficiary Living Cost Index (PBLCI) has been developed by the Australian Bureau of Statistics.  The PBLCI is a measure of the effect of changes in prices on the out-of-pocket living expenses experienced by age pensioner households and other households whose principal source of income is a government pension or benefit.

Service pension will now be indexed by the higher of the CPI or PBLCI and then the combined partnered rate will be benchmarked to 41.76% of MTAWE.

Single rate pension will be maintained at 66.33% of the combined partnered rate.  This will result in 27.7% of MTAWE for a single person up from the long standing 25%.

Note: transitional rates will be indexed by CPI only

References

Factsheets

IS159 Indexation of Income Support Pensions and Allowances

CLIK Policy Library

Part 9 Chapter 7 Statutory Increases

Pension Supplement

A new fortnightly Pension Supplement will be paid to service pensioners from 20 September 2009.

Pension Supplement will incorporate the value of the payments previously identified as the GST supplement, Pharmaceutical allowance (PA), Utilities allowance (UA), Telephone allowance (TA) at the internet rate, plus a top-up amount.

The rate of Pension Supplement is not linked to the pensioner's telephone or internet subscriber status but some components may not be payable if the pensioner is overseas.  (see Portability below)

ISS will not attract a pension supplement.  This is because PA and the GST supplement will be incorporated into War Widows pension and UA and TA will be rolled into the ISS ceiling rate.  War Widows who do not receive ISS may be eligible for Seniors Supplement or Veterans Supplement.

Pension supplement components

Pension supplement has three components:

Component

• Basic amount
• Minimum amount (flexible component)
• Remaining portion of the pension supplement that exceeds the basic amount

Besides tax status, these components have different characteristics which are outlined below.

In VIEW, the “remaining portion of the pension supplement that exceeds the basic amount” is shown as the payability Pension Supplement Non Tx.

Portability

Only the basic rate of pension supplement can be paid to pensioners who live permanently outside of Australia.  Pension supplement is payable for up to 13 weeks for pensioners travelling outside of Australia temporarily.

Flexible component

From 1 July 2010, pensioners will be able to choose to be paid the Flexible Component of their Pension Supplement either q — uarterly or f — ortnightly.  Where a person elects to receive the flexible component quarterly, their first instalment will be adjusted for any fortnightly amounts they have already received in that quarter.

Minimum amount

All service/ age pensioners and ISS recipients will receive a minimum payment amount.  Reduced rate recipients will receive at least the minimum amount unless their payment is reduced to nil.  The minimum amount is equal to the rate of Seniors Supplement.  The rates as at 20 September are:

per fortnight

Not a member of a couple       $30.20

Partnered (each)                     $22.80

Order of Reduction

The order of reduction has changed as a result of restructuring the allowances.  The principle of reducing non-taxable components last is unchanged.

For service pensioners the order is:

• the maximum payment rate, apart from pension supplement amount and rent assistance, or additional amounts for saved children,
• the pension supplement basic amount,
• any remaining portion of the pension supplement amount that exceeds the minimum pension supplement amount,
• rent assistance (if any),
• additional amounts for saved children (if any), then
• the minimum pension supplement amount.

For ISS recipients the order is:

• the maximum payment rate apart from rent assistance and the minimum pension supplement amount, then
• rent assistance (if any), then
• minimum pension supplement amount.

For details about the order of reduction for a particular payment see Part 9\Chapter 1\Section 5 of the CLIK Compensation & Support Policy library.

Transitional rate and pension supplement

Those assessed under the transitional arrangements will effectively have their payment calculated under the pre 20 September pension system.  The transitional calculation does not include the new Pension Supplement.

However, the legislation does provide for the transitional rate of pension to be identified as Pension Supplement components so that the pension can be apportioned into taxable/tax-exempt parts and the minimum amount rules can be applied.

References

Factsheets

IS16   Pension Supplement

CLIK Policy Library

Part 5 Chapter 12 Pension Supplement

Part 11 Chapter 6 Taxation

Seniors Supplement

The September 2009 instalment of Seniors Concession Allowance to Commonwealth Seniors Health Card (CSHC) holders and Gold card holders (over veteran pension age and not in receipt of Utilities Allowance) was the final quarterly payment of that allowance.

From December 2009 these card holders will instead be paid the new Seniors Supplement of :

$196.30 per quarter for singles;

$1 — 48.20 per quarter for couples (each)

The Seniors Supplement incorporates TA at the internet rate, regardless of the person's telephone or internet subscriber status.  (TA is no longer paid as a separate payment after 20 Sep 2009.)

Veterans

Supplement

DP only veterans who are currently paid PA and/or TA will now receive them as a Veterans Supplement.

Veterans who were eligible for both allowances from DVA will receive the high rate ($12), while veterans who only received one of the allowances will be paid at the low rate ($6).

War Widow Pensioners who do not receive ISS or Seniors Supplement will receive low rate Veterans Supplement to replace their TA.  (PA will be incorporated into War Widows pension.)

Eligibility for the TA replacement is no longer linked the person's telephone or internet subscriber status.

Orphans who are gold card holders will receive Veterans Supplement to replace their PA.

References

Factsheets

IS17 Seniors Supplement

IS18 Veterans Supplement

CLIK Policy Library

Part 5 Chapter 11 Seniors Supplement

Part 7 Chapter 1 Veterans Supplement

Eligibility

The MRCA Supplement is payable to a person who is:

• eligible for a Repatriation Health Card (White or Gold) under the MRCA; or
• eligible for the Special Rate Disability Pension (SRDP) safety net payment; or
• assessed as having a permanent impairment at or above 80 points; or
• a wholly dependent partner of a deceased ADF member who is eligible for compensation in respect of the member's death.

Amount of the Supplement

The MRCA Supplement is payable at a rate of either $6.00 per fortnight (low rate) or $12.00 per fortnight (high rate), depending on eligibility.

A person will be entitled to payment of the Supplement at the low rate if they have a Repatriation Health Card under the MRCA (and are not already receiving an equivalent allowance under the Veterans' Entitlements Act 1986 (VEA) or the Social Security Act 1991 (SSA)).

A person will be entitled to payment of the Supplement at the high rate if they are either:

• eligible for the SRDP safety net payment; or
• assessed as having a permanent impairment at or above 80 points.

Note – Payment of the MRCA Supplement as a replacement for TA will occur fortnightly (and at the higher internet rate), not quarterly as was previously the case.

Wholly Dependent Partners

In the case of Wholly Dependent Partners (WDP) of deceased members, the MRCA Supplement will replace TA.  PA will cease being paid as a separate allowance.  Instead, a $6.00 fortnightly amount (in lieu of PA) will be “rolled” into their ongoing periodic payments or lump sum commutation amount.

WDPs who elected to receive a lump sum payment prior to 20 September 2009 will continue to receive the MRCA Supplement (high rate) of $12.00 per fortnight, provided they are not receiving an equivalent allowance under the VEA or the SSA.

Summary

The following table provides a summary of the new payment arrangements for the MRCA Supplement:

Current allowances (Pre 20/9/09)

New arrangements (Post 20/09/09)

White or Gold card holder under the MRCA in receipt of PA only

MRCA Supplement (low rate)

SRDP eligible persons or persons with 80+ impairment points in receipt of PA and TA.

MRCA Supplement (high rate)

WDPs (who commuted their periodic payments to a lump sum, prior to 20/09/09) in receipt of PA and TA.

MRCA Supplement (high rate)

WDPs (who commute their periodic payments to a lump sum after 20/09/09) in receipt of PA and TA.

MRCA Supplement (low rate)

WDPs (who elect to receive periodic payments) and in receipt of PA and TA.

MRCA Supplement (low rate)

Advices

All DVA payment recipients will receive an advice letter starting from about 21 September 2009.  It will include an explanation of the payment changes relevant to the recipient.

For MRCA clients, the term “Veterans Supplement” should be read as “MRCA Supplement”.

References

Factsheets

MRC40 MRCA Supplement

Income Test taper up to 50 cents

The Income test taper will increase from 40¢ to 50¢ for every dollar of income over the free area.  The additional income free area amounts for children will be abolished.

The Assets test taper remains at $1.50/$1,000 over the Assets Value Limits.

Transitional provisions

There are transitional provisions to ensure that no pensions will fall because of the income test changes.  Those better off on the old income rules will remain on the old rules: with the 40¢ taper, access to additional income free area for children (if applicable) and no work bonus income concession.

The transitional pension rate will be indexed by CPI alone, and not wages benchmarking (ie no MTAWE increase to apply to transitional cases).

How the transitional provisions work

A consequence of the transitional provisions is that there will be two sets of maximum rates of pension (MBR).  Pensions will be calculated under the “new rules” and the transitional rules, to determine the rate payable:

1. Calculate under old income test, with transitional MBR
2. Calculate under the assets test, with transitional MBR.
3. Select the lower from (i) and (ii) = answer A.
4. Calculate under new income test, with standard MBR.
5. Calculate under the assets test, with standard MBR.
6. Select the lower from (iv) and (v) = answer B.
7. Pay the higher of A or B.

The individual pension rate can rise and fall within the transitional provisions.  Each pensioner will have a “one-way step” to new rates.  That is, once the person has left the transitional provisions they cannot return to the old rules, except for respite care assessments.

See Factsheet IS86 Transitional Arrangements and CLIK Policy Library Part 9 Chapter 1 Income and Asset Test Principles for more information.

Work bonus

As an incentive for older Australians to remain in the workforce, from 20 September 2009, only half of the first $500 wages income per fortnight will be held in the assessment for pensioners over qualifying age.  However, pensions calculated under transitional rules will not attract the work bonus.

Examples of work bonus concession:

• if wages are $400 per fortnight, then $200 will be assessable income;
• if wages are $1,200 per fortnight, then the assessable income will consist of $250 f — r — om the first $500 and all of remaining $700 for a total of $950.

See Factsheet IS99 Work Bonus and CLIK Policy Library Part 10 Chapter 1 Section 4 Income from Employment for more information.

Pension Bonus Scheme closing

The Pension Bonus Scheme will be closed to new entrants from 20 September 2009.  That is, a person must have reached their special date of eligibility before 20 September to be able to register. Existing accruing members can continue in scheme and claim a bonus when they decide to take up the pension.

The calculation formula for the bonus has changed as a result of the new pension structure.  The Businessline “Closure of the Pension Bonus Scheme to new registrations” (TRIM 09179803E) has been issued and provides more information on the changes.

See also Factsheet IS07 Pension Bonus Scheme and CLIK Policy Library Part 5 Chapter 6 Pension Bonus Scheme for more information.

Pension Advances

Currently only one lump sum advance a year of $500 is allowed.

From July 2010 multiple advances will be allowed with a new minimum and maximum advance amount.  These amounts are proportions of the pension rates so will automatically be indexed.

A DI will be issued closer to July next year with further information.

Age Pension age increase to 67 years

The Government has decided to progressively increase the Age Pension age to 67 for both men and women.  Age pension age will increase by six months every two years.  The first increase to 65 years and 6 months will occur on 1 July 201 — 7, reaching 67 on 1 July 20 — 23.

The table below shows how age pension age will change:

For persons born (both dates inclusive)

Pension age is

1 July 1952 to 31 December 1953

65 years and 6 months

1 January 1954 to 30 June 1955

66 years

1 July 1955 to 31 December 1956

66 years and 6 months

On or after 1 January 1957

67 years

Impact on veteran community

Veteran pension age remains at 60 years for males, or progressively moving to 60 years under a — ge equalisation for females.  The age requirement for partner service pension (PSP) to attain qualifying age and the exemptions under specified circumstances are also unchanged.

However, section 5QB which specifies p — ension age for non-veterans will be amended as per the age pension increase.  As such, it will potentially affect those born on or after 1 July 1952 where the age criterion is by reference to section 5QB.  For example, in the application of means-tests rules relating to superannuation, tax status of the pension, eligibility of separated partners to remain on PSP.

See CLIK Policy Library Part 3 Chapter 4 Age for more information.

Compensation recovery

For compensation recovery purposes, a Compensation Affected Pension (CAP) includes the new Pension Supplement amounts.

CAPs include invalidity and partner service pension (before attaining pension age) and income support supplement (before attaining qualifying age).  These payments comprise:

• the Maximum Basic Rate (MBR) of pension as set out in SCH6-B1, together with
• the Pension Supplement amounts set out in the new SCH6-BA3 of the Rate Calculator.

For recovery of periodic compensation payments on a dollar for dollar basis against a CAP, there has been no change to the existing provisions contained in section 59T.

Preclusion period formula

For the calculation of the preclusion period in respect of a lump sum compensation payment, the formula contained in section 59Q has been amended to reflect the new Pension Supplement amounts.

The revised formula to determine the number of weeks in the lump sum preclusion period is:

52  X   Compensation part of lump sum

2  X  (MBR  +  Pension Supplement)  + Income Free Area

with yearly amounts used in all cases.

The three pension terms used in the formula (MBR, Pension Supplement and Income Free Area) are the "not a member of a couple" rate.

See CLIK Policy Library Part 9 Chapter 11 Section 3 Lump Sum Compensation Payments  for more information.

Public housing

The changes to pensions and allowances will affect rental assessment by State and Territory Housing authorities (SHAs). It is expected that public housing tenants will receive the full benefit of the Pension Reform increase.

A separate Businessline will be issued with procedural information regarding the provision of pensioners' income details for public housing rent/rebate purposes.

Aged care

To ensure there is an equitable pension increase flow-on to re — sidents and aged care providers, there are a number of changes to the calculation of aged care fees and charges.

A resident's b — asic daily fee will be set by the Department of Health and Ageing at one of four categories, which are linked to their date of entry, pensioner status and income:

• standard rate (8 — 4% of single age pension base rate) for residents not in the other groups;
• protected rate (76.75% of single age pension base rate) for those in care prior to 20 September 2009, including part-pensioners who meet an income threshold and self-funded retirees;
• phased rate (76.75% of single age pension base rate with gradual fee increases), for new entrants to care, including part-pensioners who meet an income threshold and self-funded retirees;
• non-standard rate – for certain pre 20 Mar 2008 residents including pensioners who have agreed to pay a big bond, self-funded retirees, or residents who have chosen not to disclose their financial details.

The formulae for the aged care income-test and the minimum asset amount have also been revised to account for the pension restructure and to balance the effects of the significant one-off increase to the base pension.

See Factsheet IS82 Fees & Charges for Aged Care and CLIK Policy Library Part 9 Chapter 2 Section 4 In Care – Assessment Rules for more information.