Written by Partner Simun Soljo
The Government has slowly been changing the superannuation retirement income system, with the aim of increasing the range of retirement products available to Australians. A number of changes have already been implemented, and more are to come with the proposed 'Comprehensive Income Products for Retirement' (CIPRs) regime. We thought it was a good time to take stock and look ahead.
The current system is focused on accumulation, and most retirees take their superannuation benefits in the form of a lump sum or an account-based pension. The Government and various reviewers have been concerned about both the narrow range of retirement products on offer and the apparent reluctance of retirees to buy products that pay an income for life, with the result that the Government carries much of the 'longevity risk' through the Age Pension.
Several reasons have been identified for the lack of choice and unpopularity of lifetime products. The Government's focus has been on fixing a few: the previously restrictive pension standards in the SIS Regulations; unfavourable tax and social security treatment; a lack of incentive for trustees to offer these products; and the difficulty members have in understanding and comparing them. Each of these impediments is being dismantled (slowly).
- The pensions standards in SIS have been loosened
A basic requirement for superannuation income streams is that they must meet the standards in the SIS Regulations. The tax and social security rules hang off these. Until 1 July 2017, the standards required that superannuation income streams pay an annual benefit. This did not work for deferred income streams, which, as the name suggests, defer commencement for some time (possibly many years), such as until the account balance runs out or the member turns 85.
The standards also did not accommodate what are referred to as 'group self-annuitisation products', which involve pooling assets to support income payments to several members and the sharing of longevity risk.
The standards were amended from 1 July 2017 to accommodate these types of products. Additional rules apply – such as: once a deferred income stream commences, it must provide for annual benefit payments throughout the life of the primary or reversionary beneficiary; benefit payments must not be 'unreasonably deferred' after they commence; and there are restrictions on accessing capital.
- Tax rules were also changed in 2017
Changes to the SIS standards would not be enough on their own without changes to the tax rules. From the 2017-18 income year, segregated current pension assets include assets supporting new lifetime products such as deferred products and group self-annuities.
- Changes to social security means testing announced
The new income streams required changes to the social security means test rules for age and disability support pensions.
The Department of Social Services released an updated Position Paper in February 2018, setting out options that included a proposal that deferred products receive the same asset test assessment as products that commence payments immediately, but with income being assessed only once payments from the product commence. Another proposal related to how pooled lifetime retirement income streams would be treated for the purposes of the means test.
The Government announced in the 2018 Budget slightly different means test rules for the Age Pension for recipients of pooled lifetime retirement income stream products. It proposes that:
- for the income test, a fixed 60 per cent of all pooled lifetime product payments will be assessed as income (rather than 70 per cent as proposed in the Department's Position Paper), and
- for the assets test, 60 per cent of the purchase price of the product will be assessed as assets until the life expectancy of a 65 year old male (currently age 84) or a minimum of 5 years, and then 30 per cent for the rest of the person's life (rather than 70 per cent and 35 per cent respectively, as proposed in the Department's Position Paper).
The rules will apply to pooled lifetime products acquire on or after 1 July 2019.
The Government did not announce any changes to the proposed treatment of deferred income streams.
- Another CIPRs position paper released and consulted on – more consultation to come?
There has been discussion of introducing a 'Comprehensive Income Products for Retirement' (CIPRs) since the idea was proposed in the Financial System Inquiry report in 2014. The Government agreed to support the proposal in its response in 2015 and has conducted several rounds of consultation, including with a consumer and industry advisory group set up in February 2018, with the latest being another discussion paper released in May 2018.
The key proposals are:
- A 'retirement income covenant' would be included in the SIS Act alongside trustees' other covenants. It would require trustees to 'formulate, review regularly and give effect to a retirement income strategy to assist members in meeting their retirement income objectives'.
- Relevant factors: The covenant would require trustees to consider various factors when formulating the retirement income strategy, including how members' lifetime incomes may be maximised, their life expectancies, how risks to income stability may be managed, access to capital, member needs and preferences, the costs and benefits of the trustee developing products itself or acquiring products developed by others, and the effect of cognitive decline on members' ability to make decisions about their products. The requirement to weigh up member needs and preferences may be particularly difficult for trustees to comply with, and could turn what may otherwise be general advice a trustee may provide into personal advice.
- Guidance to members: Trustees would be required to assist members to meet their retirement income objectives by providing guidance to help members understand and make choices about retirement income products offered by the fund. If this involves the giving of financial advice, the trustee may need to hold an Australian financial services licence.
- 'Flagship' CIPR: Trustees would be required to offer up to three 'flagship' CIPR to members at retirement (subject to limited exceptions). CIPRs would need to have certain core characteristics: they would need to provide 'efficient, broadly consistent income, in expectation', 'longevity risk management' by providing an income for life, and provide some access to capital. The paper suggests that trustees could offer up to three CIPRs designed for members with various account balances and could offer these without this being financial advice (presumably under an exemption to be confirmed).
- Member consent: CIPRs will not be compulsory, and trustees cannot commence them by default. Member consent will be required. This is likely to limit the success of CIPRs – without compulsion or a default decision by the trustee, they may be just as unpopular as other lifetime products currently are.
The paper notes further work is required on various issues, including how to deal with legacy retirement income products, and whether trustees need a 'safe harbour' from liability in designing and offering a CIPR (they want one).
The Government proposes to legislate the covenant by 1 July 2019, with commencement delayed until 1 July 2020. Given this timetable, we should expect to see draft legislation shortly, with perhaps another round of consultation before a Bill is introduced.
- Product disclosure changes on the cards
The 2018 budget also flagged proposed changes to retirement income product disclosure to require providers to report 'simplified, standardised information on retirement income products'.
The Government may also look to implement the Financial System Inquiry recommendation to require publication of retirement income projections, to shift the focus away from lump sums that may be payable from account balances.
No detailed proposal paper or draft legislation has yet been released, so it is not possible to say whether the rules will be workable, easy and cheap for trustees to implement, and very useful to members.