CC, I think that you might have missed a couple of the salient points.
Seniority will accrue normally whilst instructing so there would be no delay in being promoted to F/O.
They will be paid normal S/O rates with superannuation paid at standard rate so there will be no reduced retirement nest egg.
Yearly pay increments (up to 12 years) will be paid as per normal.
This plan is aimed at instructors currently at flying training schools - not at S/O's currently employed (as you said no spare capacity)
Five of the recent QF recruits were high rated instructors from one of the larger flying training schools and I believe that the schools management complained big time to QF as the schools capacity to check out trainees had been sevely restricted by the loss of these instructors.