One of the most common arguments used to defend the ESSS Defined Benefit scheme is that it is "risk free" and provides a "guaranteed return".
The argument usually goes like this. An accumulation scheme is risky because your super is invested in the market. The share market can fall, and therefore your retirement savings are at risk. A defined benefit, by contrast, is a promise. Safe. Certain. Guaranteed.
It sounds reassuring. It is also only half the story.
DB does not remove risk. It shifts it.
A defined benefit scheme largely insulates members from investment market movements. That much is true. But the value of your DB entitlement is heavily dependent on something members have very little control over: future salary growth through Enterprise Bargaining.
Your final benefit is built on your salary. If wage growth stalls, so does the value of your super. In a DB scheme, your salary is your super.
An accumulation scheme has the opposite characteristic. Your retirement savings are exposed to investment markets, but you are not relying on the outcome of the next EBA to grow the value of your super.
So the real question is not whether risk exists. It does, in both schemes. The question is which risk has actually cost members more.
What the numbers show since 2008
2008 is a deliberately tough starting point for this comparison. It includes the Global Financial Crisis and one of the worst share market periods in modern history. If the market was ever going to lose this contest, it would be over a window that starts there.
Here is what has happened since 2008:
- Qualified Firefighter salary: up 43%
- First Constable salary: up 77%
- ALS 1 paramedic salary: up 99%
- Inflation: up 62%
- ASX: up around 239%
Look at those figures for a moment.
A firefighter's salary has increased by just 43% while inflation has increased by 62%. In real terms, a firefighter today earns less than a firefighter did in 2008. For a DB member, that is not just a pay problem. It is a retirement problem.
Police have only just beaten inflation.
Paramedics have done considerably better on paper, but much of that result comes from the exceptional 34% increase achieved in the 2015 EBA through the introduction of the Rolled in Rate. Strip out that one-off gain and Ambulance Victoria wage growth barely ekes past inflation.
Now compare all of that with the share market. Despite the GFC, market crashes, a pandemic recession and plenty of volatility along the way, the ASX has delivered a return of around 239% over the same period.
That is dramatically greater than the salary growth achieved by even the most successful EBA outcome across the emergency services.
This is not just about one window of time
Across the history of enterprise bargaining in all three services, there have been periods where members received little or no wage growth for years at a stretch.
Every one of those periods quietly ate into the retirement outcomes of DB members. There was no market crash to point to. No headline. Just a benefit formula tied to salaries that were going nowhere.
An accumulation member faces a different risk. Their super is invested and exposed to volatility, and some years will be ugly. But over the long term, investment returns are not dependent on whether the next EBA delivers 0%, 2%, 5% or 34%. They are not dependent on the mood of the government of the day, or on how a protracted bargaining campaign plays out.
The real choice
Defined benefit does not eliminate risk. It exchanges investment risk for salary risk and bargaining risk.
Put the two side by side over the last eighteen years and the historical record raises an uncomfortable question for anyone told their DB is "guaranteed":
Which should we really be more afraid of? A volatile share market, or a volatile government and shaky Enterprise Bargaining outcomes standing between us and our retirement?
