Pension indexation

Introduction

Your pension is adjusted twice a year on the first pension paydays in January and July.

The Government has passed legislation that changes the way this adjustment is calculated for DFRDB and DFRB members aged 55 or older.

If you are 55 or older at the pension indexation date (that is on 1 January or 1 July), your pension will be indexed for the following six months the same way as the Age and Service pensions are indexed.

If you are aged 54 years or younger, there has been no change to the way that your pension is indexed.

How is my pension adjusted?

If you are aged 54 years or younger at the pension indexation date

If you are aged 54 years or younger at the pension indexation date (that is on 1 January or 1 July), there is no change to the way your pension is indexed. It will continue to be adjusted by positive movements in the Consumer Price Index (CPI).

If your pension commenced part way through an indexation period, you will receive pro rata indexation to reflect the number of months for which you were receiving the pension.

If you are 55 or older at the pension indexation date

If you are 55 or over at a pension indexation date, your pension will be indexed by the greater of the CPI and the Pensioner and Beneficiary Living Cost Index (LCI) measured against a floor percentage of Male Total Average Weekly Earnings (MTAWE).

What increases are payable for the first payday in July?

If you are aged 54 years or younger on 1 July and have been receiving your pension for the full six months before this, your pension will be adjusted by 1.0%. This is the amount that CPI increased between the September 2016 and March 2017 quarters.

If you are 55 or older on 1 January and have been receiving your pension for the full six months before this, your pension will be adjusted by 1.3%. This is because the LCI increase was higher that the CPI increase over the September 2016 and March 2017 quarters.

How is my pension adjustment calculated?

For an in-depth explanation of how your adjustment is calculated, click the heading below relevant to you. 

Under 55

Broadly speaking, the percentage adjustment is the same as the percentage increase in the CPI between the March and September quarters, with some adjustment to deal with situations where the CPI might fall between quarters.

The percentage increase on your pension is calculated using the following formula:

First Quarter CPI number - Base Quarter CPI number x 100 (rounded to one decimal place)
Base Quarter CPI number

The Base Quarter CPI number is the highest 'all groups consumer price index number for the weighted average of the 8 capital cities' published by the Australian Bureau of Statistics (ABS) in respect of any March or September quarter immediately prior to the last published September quarter (for the January adjustment) or March quarter (for the July adjustment).

The First Quarter CPI number is the 'all groups consumer price index number for the weighted average of the 8 capital cities' published for the March quarter prior to the July adjustment or the September quarter prior to the January adjustment, whichever is relevant.

If this formula would produce a negative percentage, then no increase is payable. This means that should prices fall, your pension will not fall but that no adjustment would be made to your pension.

Example

Using the figures for the July 2017 increase:

The March 2017 Quarter CPI number issued by the ABS was 110.5. This is the 'First Quarter CPI Number'.

The Base Quarter CPI number will be the highest CPI number issued for any March or September quarter before the March 2017 quarter. This was the September 2016 CPI number of 109.4.

The increase on your pension is therefore

110.5 - 109.4 x 100 = 1.00548
        =1.0%1
109.4

11.0% when rounded to the nearest tenth of one cent

55 or older

In general, the increase you receive will be the 55-plus percentage, which is the greater of the Consumer Price Index (CPI) or the Living Cost Index (LCI). This result is also compared with Male Total Average Weekly Earnings (MTAWE) to ensure the relative value of a pension is, at a minimum, maintained against MTAWE (as measured immediately prior to the first indexation period for which the 55-plus percentage applies).

Rather than calculate the relative value of every pension against MTAWE, the concept of an 'indicative pension' is used. This pension was set in the legislation at a starting value of $19,541.91 which is 27.7% of the annualised MTAWE applying as at 1 July 2014.

In every adjustment period, this indicative pension is increased by the greater of positive movements in the CPI or the LCI and is now $20,888.31. But if this is not enough to ensure that the indicative pension is at least equal to 27.7% of the latest MTAWE figure, then it is further increased until it reaches this level. The percentage increase that is applied to this indicative pension is that which will be applied to all pensions for those aged 55 or older.

Example

Using the figures for the July increase:

Step One – calculate the CPI adjustment (the 'prescribed percentage')

This is calculated in the same manner as for those under 55 (see above).

First Quarter CPI number - Base Quarter CPI number x 100 (rounded to one decimal place)
Base Quarter CPI number

The Base Quarter CPI number will be the highest CPI number issued for any March or September quarter before the March 2017 quarter. This was the September 2016 CPI number of 109.4.

The increase on your pension is therefore:

The prescribed percentage is therefore:

110.5 - 109.4 x 100 = 1.00548
        = 1.0% (when rounded to the nearest tenth of one percent) 
109.4

Step Two – calculate the change in the LCI (the 'LCI percentage')

The formula used for the LCI percentage is similar to that for the CPI:

First Quarter LCI number - Base Quarter LCI number x 100
Base Quarter LCI number

This number must be greater than or equal to zero.

The Base Quarter LCI number is that published by the ABS in respect of any March or September quarter immediately prior to the last published September quarter (for the January adjustment) or March quarter (for the July adjustment).

The First Quarter LCI number is that published for the March quarter prior to the July adjustment or the September quarter prior to the January adjustment, whichever is relevant.

The March 2017 Quarter LCI number issued by the ABS was 110.2. This is the 'First Quarter LCI Number'.

The Base Quarter LCI number will be the highest LCI number issued for any March or September quarter before the March 2017 quarter. This was the September 2016 LCI number of 108.8.

110.2 - 108.8 x 100 = 1.28676471
          = 1.3% (when rounded to the nearest tenth of one percent)
108.8

Step Three – Determine the higher of the LCI or the CPI

For July 2017, the LCI was 1.3% and the CPI was 1.0%, so the LCI was the higher.

Step Four – Identify the current indicative pension for the adjustment period

For July 2017, this was $20,620.25.

Step Five – Increase the current indicative pension by the greater of LCI or CPI (the CPI/LCI result)

As determined above, the CPI is the greater, so the CPI/LCI result is:

Indicative amount calculation: ($20,620.25 x 1.3%) = 268.06 + $20,620.25 = $20,888.31

Step Six – Calculate the MTAWE Result

The MTAWE Result is 27.7% of the annualised MTAWE figure published immediately prior to the date of the pension increase.

The most recently published MTAWE prior to 1 January 2017 was $1,395.10. The MTAWE result is therefore:

$1,397.90 x 52 x 27.7%1 = $20,135.35

__________________

127.7% is set in the DFRDB legislation in section 98GA

Step Seven – Calculate the percentage increase to be applied to pensions for those aged 55 or older (the '55-plus percentage')

If the MTAWE result at Step Six is less than or equal to the CPI/LCI result obtained at Step Five, then the 55-plus percentage will be the percentage increase determined at Step Three.

Otherwise, the 55-plus percentage will be:

MTAWE result - Current indicative pension amount x 100
Current indicative pension amount

This number must be greater than or equal to zero.

The adjustment for July 2017 will therefore be 1.3% as the MTAWE result of $20,135.35 is less than the CPI/LCI result of $20,888.31.

The value calculated for the LCI/CPI result will also form the 'current indicative pension' for the next pension adjustment.

 

 

Frequently Asked Questions (FAQs)

For recipients aged under 55

My deceased spouse was over 55. Why did I only receive indexation based on CPI?

Indexation is based on your age, not the age of the original recipient. As the recipient of a DFRB/DFRDB pension you will be eligible for the 55-plus percentage increase on the first indexation date (either 1 January or 1 July) after you turn 55.

My deceased parent was over 55. Why did I only receive indexation based on CPI?

Indexation is based on your age, not the age of the original recipient. Children’s pensions will be indexed by CPI for the period that the pension is payable.

Why don’t recipients under 55 get the higher indexation?

The Government decided to change the indexation arrangements for pensions paid to DFRB/DFRDB pensioners aged 55 and over because age 55 is the age from which many Australians can begin to access a superannuation pension benefit.

 For recipients aged 55 or over

How is my pension indexed?

Your pension is indexed in the same way as the Service Pension or the Age Pension. It is increased by the greater of positive movements in the CPI or the Pensioner and Beneficiary Living Cost Index (LCI) measured against a floor percentage of male total average weekly earnings (MTAWE).

I thought my pension was going to go up to 27.7% of MTAWE like the floor on the Age Pension

The Government committed to indexing your DFRB/DFRDB pension in the same way as the Service Pension or the Age Pension. However, it was not the intent that a minimum pension value would be introduced.

I am in MilitarySuper. Why is my pension only indexed by CPI?

The Government committed to changing indexation arrangements for DFRB/DFRDB pension for pensioners age 55 and over (that is, in the same way as Age and Service Pensions are indexed). There are currently no plans to change the indexation arrangements for other schemes. Any changes to the other schemes is a matter for the Government.

I turn 55 in the middle of an indexation period (eg in September). Will I get partial indexation at the higher rate?

No. Your pension will continue to be indexed by CPI until the next indexation period when you will be age 55 or over. There is no pro-rata indexation when a person turns 55 between indexation dates (either 1 January or 1 July).

Why would my DFRDB/DFRB pension differ to the age pension/DVA pension if they are indexed in the same way?

Although your DFRB/DFRDB pension is indexed in the same way as the Service Pension or Age Pension, they are indexed at different times and use CPI and the pensioner and beneficiary living cost indices for different quarters (Age Pensions are indexed in March).

This means the CPI/LCI and MTAWE rates may differ (sometimes they will be more, sometimes the same and sometimes less).

My deceased spouse was over 55. Why did I only receive indexation based on CPI? [for a spouse under 55 or child]

Indexation is based on your age, not the age of the original recipient. As a recipient of a DFRB/DFRDB pension you will be eligible for the 55-plus percentage increase on the first indexation date (either 1 January or 1 July) after you turn 55.

My deceased parent was over 55. Why did I only receive indexation based on CPI? [for a child under 55]

Indexation is based on your age, not the age of the original recipient. children’s pensions will be indexed by CPI for the period that the pension is payable.

I am a DFRDB member who claimed a pension and has re-entered the ADF as a contributory member. How is the value of my ceased DFRDB pension updated?

Your pension will be recalculated once your discharge from the ADF. Following the recalculation, your new pension amount may be adjusted on the first payday in January and July, in accordance to indexation rules applicable to your age.

I am a DFRDB member who claimed pension and has re-entered the ADF as a non-contributory member. How is the value of my DFRDB pension updated?

Your pension payments will continue without disruption.

I am divorced from my ex-spouse who is a DFRDB member. Does the rate of indexation of my pension depend on my age or that of my ex-spouse?

The different rate of indexation will apply when you turn 55. It is not affected by the age of your ex-spouse. This reflects the Family Law idea of a 'clean break'.

What effect will the new indexation arrangements have on my Service/Age Pension?

You will need to contact the Department of Veteran’s Affairs on 133 254 or the Department of Human Services on 132 300 to discuss the impacts with them.