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Unravelled: CIPRs – some interesting findings

5 May 2017

Written by Senior Regulatory Counsel Michael Mathieson

We recently hosted some workshops in Sydney and Melbourne to discuss the proposed CIPR framework. The outcomes of those workshops were interesting – in some respects surprising – and this article provides a brief report.

Incentives and compulsion

Most Melbourne participants were quite frank in stating that, in order for the proposed CIPR framework to succeed, there will need to be meaningful incentives, an element of compulsion (or at least a good hard nudge), or a combination. Put another way, most participants were pessimistic about the likelihood of the proposed CIPR framework succeeding as it currently stands, as it includes neither incentives (beyond the proposed safe-harbour for trustees from a contravention of their best interests duty, whatever that is worth) nor compulsion (not even a requirement for a trustee to have a CIPR available for selection, as proposed by the Financial System Inquiry).

The short-lived experiment with term allocated pensions about a decade ago was cited as evidence of what happens when you offer a substantive incentive (ie the product flourishes) and then remove it (ie it withers on the vine). The briefly available incentive in that case was provided through social security. But it is understood that, at the moment at least, measures to support the CIPR framework that would involve a cost to the Budget are ‘off the table’.

Turning to compulsion, one participant remarked, with some surprise, on the apparent level of support for some degree of compulsion. It is understood that Treasury are toying with an ‘if not, why not’ test – if a trustee does not offer a CIPR, it will have to explain why it doesn’t. Given the level of support for some form of compulsion, perhaps this could be an ‘if not, you better have compelling reasons why not’ test. Or perhaps the FSI’s proposal was not such a bad one after all.

Product failure

Given the focus on incentives and compulsion, you might be forgiven for thinking that the primary worry for the Melbourne participants was that CIPRs would suffer from low take-up. If so, you would be wrong. The main concern south of the border was product failure – a life company or trustee defaulting on its promises, specifically its promises under the longevity-protected element of a CIPR. This could happen because of a financial crisis, a miscalculation of expected returns, fraud, mismanagement, poor oversight by the regulator or, most likely, some combination of these.

This worry about product failure relates back to two key themes that emerged during the discussion – trust and safety. The very rationale for a longevity-protected product is the circumstance that most people have very little idea how long they are going to live for. And if you don’t know how long you are going to live for, it is very difficult to be confident that the trustee or life company in question is going to be around until you die.

Simplicity

A theme that emerged in Sydney, and one that would presumably mitigate the risk of low take-up, was that of simplicity. A CIPR must be easy to understand. Like an Apple device, it must be able to work intuitively and without having to refer to a set of instructions. It can be, indeed it will inevitably be, very complex under the bonnet (to switch the analogy from Apple to Tesla), but the CIPR holder cannot be exposed to that complexity.

Advice and technology

A reasonable number of participants thought that advice and technology – presumably the former provided through the latter – were critical to the likely success of the CIPR framework. Conversely, advice provided by individuals was not seen as critical, with one participant noting that a large proportion of financial advisers working today are likely to be removed from the industry – albeit slowly – through the introduction of education and training requirements over the coming years.

Innovative superannuation income streams

When the workshops were held, the proposed new pension standards were still being prepared by Treasury. Since the workshops, exposure draft regulations for ‘innovative’ superannuation income streams have been released for comment. These are the regulations that will set standards for retirement products such as deferred products and group self-annuitised products.

A key question is how these innovative superannuation income streams will play a part in the proposed CIPR framework. The CIPR framework appears to contemplate that a CIPR will be a single ‘product’ whereas the pension standards, as proposed to be amended, do not.

Safe-harbour

There appears to be widespread concern that a trustee could face unwarranted liability in connection with offering a CIPR. For what it is worth, we suspect that the concern, insofar as it relates to the trustee’s duty to exercise its powers and perform its duties in the best interests of fund beneficiaries, is probably more theoretical than real. What is likely to be more real is the possibility that trustees who offer CIPRs will, in practice, be required to communicate with beneficiaries in a way that could come very close to constituting financial product advice that is personal advice.

Magic puddings

References to 'having your cake and eating it too' and to magic puddings were plentiful in both workshops. However, the workshops shed very little light on a central tenet of the proposed framework – that a given level of contributions made into CIPRs will result in higher incomes than would the same level of contributions made into account-based pensions.

That outcome would appear to be undermined by the demand for flexibility and the notion that the dependants of those who die early can or should be able to get back some of the amount contributed. It also depends, crucially, on the formation and existence of risk pools. How do you get a risk pool started? Whether you do or not, the question of risk pool formation leads straight back to where this article started – incentives, compulsion or a combination of the two.

And finally, no, we didn’t find out what ‘mass-customised’ and ‘in prospect’ mean.

Other articles in this edition of Unravelled

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Reporting significant breaches – or something that may (or may not) be a breach?
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