sideways, you have it right. The chap in question will receive a non-indexed linked pension for over 3 years but at age 55 the indexing against CPI will be applied in a big lump. If he stays in his AFPS75 pension will hardly increase at all and the value of his gratuity will have been eroded by inflation (no pay rise so the only increase in pension will be due to number of years served).
He was surprised how little increase in value his pension would receive by serving the additional 3 or so years and has chosen to take his gratuity and his pension now. The FPS did the calculations for him and it suits his circumstances. I was taken aback by the tiny increase in his pension if he had served the remaining years and it has got a few others I work with in the same age bracket thinking about their life choices!
Comparing an indexed linked pension with non-index linked pay is an interesting prospect for those whose finances have been prepared for retirement.