In brief
The Government has released a consultation paper on the regulation of retirement income streams. It says that the Government wants to encourage the development of more retirement products. But this is old news and the paper offers few concrete policy proposals, other than in the area of deferred lifetime annuities where the issues have already been identified and only require Government resolve to address. Any change to the regulatory regime is likely to be some way off given the Financial System Inquiry is considering retirement income policies. Any further delay will be disappointing, given the regulatory impediments have been discussed before. Partner Michelle Levy and Senior Associate Simun Soljo report.
Overview
The process for reform has been drawn out and more than one review has already been conducted without any change to the regulatory settings. Proposals for regulatory change to deferred lifetime annuities announced by the previous Federal Government were scrapped late last year when the current Government announced that it would be undertaking a review of the retirement income policy. After more than six months, the short consultation paper is somewhat disappointing as it offers little by way of concrete reform proposals beyond the obvious ones in relation to deferred lifetime annuities, and mainly seeks further views from the industry. It also seeks views on possible changes to the minimum drawdown requirements, which appears driven by a desire to fulfil an election promise rather than any obvious need for change in that area.
The consultation paper notes that the Financial System Inquiry is also looking at the retirement phase of superannuation and the development of retirement products. The interim report of the Inquiry has identified the key issues perhaps better than this discussion paper, the impediments to the development of retirement products, and the policy options. It also notes the possible need for government intervention if the financial system cannot develop a market to develop longevity risk effectively.
Regulation of retirement incomes generally
The consultation paper sets out a very high level overview of the types of retirement income stream products currently available and an overview of the regulatory regime. It then poses a series of open-ended questions as to the types of products which would enable retirees to better manage longevity and investment risk, whether the current regulatory requirements are an impediment to the development of these products and what changes are required. It gives few clues as to the Government's policy position on further reform.
Deferred annuities
The consultation paper provides some detail about the impediments to the development of deferred lifetime annuities. Income payments under a deferred annuity will commence at a pre-agreed time and some time after the purchase date. They may be acquired to manage the risk of an account-based pension running out during retirement, and could be structured so as to commence after a defined period of time, when the retiree reaches a specified age, or when the account-based pension is completely drawn down.
Currently, the main impediment to the provision of deferred lifetime annuities is their tax treatment. Prior to the payment phase, earnings on assets supporting the annuity do not qualify for the concessional treatment that applies to earnings on complying income streams. The earnings on assets supporting a complying income stream are tax free under current law.
There are a number of other issues on which the Government is seeking views, including whether to require deferred annuities to only be purchased with superannuation money, how the premium should be paid (either as an upfront amount or premium payments over time) and whether there should be a cap on the amount invested, whether there should be a minimum deferral time and how it should be defined, and whether a death benefit should be available.
The regulatory impediments to the development of deferred annuities have been well understood and were identified in previous reviews. The former Government proposed amendments to extend the pension tax concessions to deferred annuities, but the current Government scrapped the proposal late last year. It is back to consulting on it. The obvious issue for government is the fiscal cost of extending the tax exemption to assets supporting deferred annuities.
Drawdown requirements
The account-based pensions rules include a requirement that the pensioner draw a prescribed minimum percentage of their pension account as income each year. The minimum pension amounts were reduced in recent years in response to the falls in investment markets and pension account balances resulting from the Global Financial Crisis. The paper asks about the appropriateness of the current levels and whether there should be an automatic mechanism for adjustment in response to market movements. The paper notes the difficulties in designing a 'variable' minimum pension drawdown mechanism that responds to market movements.
Feedback and comments
Industry participants who are looking to develop retirement products should consider responding to the Government consultation paper or speak to us. While the existing regulatory and tax regimes do present obstacles they are not insurmountable – there are many innovative retirement products that can be issued now, and there are some already in the market place. In our experience, the bigger impediments are low account balances at retirement and confidence – retirees will not buy a lifetime income stream or a deferred annuity if they are worried about whether the provider will honour its promises. The closing date for submissions is 5 September 2014.