Military Superannuation and Benefits Scheme (MSBS) vs ADF Super - Productivity Benefit as a component of Employer Benefit

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For members who have not reached Maximum Benefit Limits, your Employer Benefit (EB) formula is:

Employer Benefit = EBM x FAS
Where "FAS" is Final Average Salary (average of your last three years) and where "EBM" is Employer Benefit Multiple, which is the same as "LengthOfServiceFactor".

This is a cumulative value which increases according to how long you have served for: 0-7 years = 0.18 per year; 7-20 years = 0.23 per year, 20+ years = 0.28 per year. This corresponds with the 18%, 23%, 28% employer contributions advertised for MSBS. Eg. Serving for exactly 25 years would give an EBM of (7 x 0.18) + (13 x 0.23) + (5 x 0.28) = 5.65

The Employer Benefit formula above does not take into account whether any productivity benefit is being paid or not (note: the Employer Benefit calculations for those who have reached their Maximum Benefit Limit do not factor in the productivity benefit either). It therefore doesn't affect your final payout or pension at all.

What the Productivity Benefit does affect, however, is the tax treatment of your payout/pension. The overall effect in the grand scheme of things is minor, and this effect is proportional to how much the Employer Benefit makes up of your total Employer Benefit.

Of this Employer Benefit, it is split into "funded" and "unfunded" portions.
"Funded" means actual, 'real' money has already been put aside for it. The Productivity Benefit is funded. It is taxed now; but either tax free or concesionally taxed later when the benefit is paid.
"Unfunded" means the 'IOU' money. The one that government is harping on about right now because it will cost them later. It is untaxed now, because it is a 'notional', non-existant amount. It is taxed later each time you receive benefits from this source, at marginal rates. (less a tax offset for you if you are old enough).

Tax on MSBS pensions vary according to the proportion of Productivity Benefit as a percentage of Employer Benefit. They calculate the proportion of your Productivity Benefit as a percentage of your Employer Benefit, and the amount originating from that proportion is according to the tax rules for a "taxable taxed" (funded) component.
The remaining proportion is deemed to come from a "taxable untaxed" (unfunded) component, and treated accordingly tax-wise.

A higher Productivity Benefit is always better. Unfortunately, you cannot change the investment option, so it is always stuck at the default (Balanced). Being only 3% out of a possible 18%, 23%, 28%; the Productivity Benefit is likely only going to be a very small proportion of your Employer Benefit (even after factoring in investment growth), so you will likely pay tax on the majority of your pension. The Productivity Benefit can still grow, however, once you hit your Maximum Benefit Limit – so the ratio of PB:EB could rise depending on market conditions.

the consequence is the tax paid on the unfunded component when its paid, compared to the tax you may have to pay when you draw your productivity component

as your Final Average Salary increases they make the difference to match your Final Average Salary up from an unfunded component

The TLDR version of all this is:
- For EB, they start with your PB amount (real money), and then make up the rest of your EB with IOU money ("unfunded").
- When you draw your pension, you pay less tax/don't pay tax (depending on age) on the PB amount; but you always pay marginal tax rates on the IOU money (less a tax offset if you're old enough).
- When on the pension, you 'draw'* upon the PB and unfunded amounts simultaneously; and the % is proportional to what each is of the total EB.
- A higher PB is better, but the PB is not something we have any control over.
- If your PB gets stopped due to reaching MBL, it is not that significant in the grand scheme of things.