The Federal Government has shown a first glimpse of its preferred retirement income model and it seems to have many of the characteristics of a life insurance policy and few of those associated with a traditional pension.
Minister for Revenue and Financial Services Kelly O’Dwyer late last week published a retirement income covenant position paper titled “Helping make your super work harder in retirement”. It is the first step in changing regulations so that super funds are obliged to advise members on a retirement income stream that best meets their needs.
It follows the Federal Budget 2018’s More Choices for a Longer Life Package that described a new type of retirement income labelled ‘MyRetirement’.
The Government will require superannuation funds to offer members financial products that will pay income to retirees for the duration of their lives, much as annuities do.
These hybrid products will modify the way in which superannuation income can now be accessed.
At this stage, taking up the products – known as Comprehensive Income Products for Retirement (CIPR) – will not be mandatory.
Under the paper’s proposals, fund trustees will not need to offer a CIPR to a person who has a life-threatening or terminal illness, or one who has less than $50,000 in super.
When offering a member the new-style income stream, factors that funds might take into account include:
- age and marital/spousal status
- factors affecting Age Pension eligibility
- that person’s health or life expectancy based on family history
- other superannuation accounts
- outstanding debts
- whether and how cognitive decline may affect outcomes
- whether a member is a smoker or non-smoker
- whether the member is a blue or white-collar worker.
The covenant the Government intends to legislate will add to the responsibilities of trustees. They will be required “to formulate, review regularly and give effect to a retirement income strategy to assist members to meet their retirement income objectives”.
While trustees will be obliged to offer products that are in the best financial interests of members, the Government is considering granting them some immunity from legal action if an investment does not pan out as expected.
“The Government understands that trustees are concerned they may be open to claims for loss or damage if, for example, a member accepts a CIPR offer but later changes their mind or dies before life expectancy,” the paper says. “The framework could provide a safe harbour in the form of a statutory defence to claims for loss or damage arising from the design, offer and ongoing management of a CIPR, provided that various regulatory requirements were met.”
The benefit for members is that there will be an expectation that the product will still be able to make payments even if a person lives beyond their life expectancy.
“The trustee would need to ensure that the CIPR is designed in such a way that even if the member lives to 105, they will continue to receive broadly the same level of income from the product.”
On whether retirees who opt for a CIPR can access lump sums, the paper says: “It is likely that most people will want to retain some ability to access capital. Capital may be required to purchase assets such as a new car, to pay for home maintenance, health costs or to pay for any number of other unexpected events.
“We expect the most common way to provide this flexibility would be for a CIPR to incorporate an account based pension (ABP). Alternatively some pooled lifetime income products may provide some commutable value or access to death benefits.
“Again, trustees would have the freedom to determine the best way to provide this flexibility for their members.”
The paper provides four scenarios for designing the proposed income streams for a person who retires at age 65:
- a standard deferred life annuity (DLA), where the start of payments is delayed for a set period: 20 per cent of the individual’s balance at retirement is allocated to a DLA, 80 per cent is placed in an account-based pension (ABP) with an efficient drawdown profile
- flexible CIPR: $50,000 (12 per cent) of the individual’s balance is placed in a cash account to provide higher access to capital, 18 per cent of the balance is allocated to a DLA and 70 per cent placed in an ABP with an efficient drawdown profile
- ABP (minimum drawdown): 100 per cent of the individual’s balance is placed in an ABP and drawn down at minimum rates
- ABP (6 per cent drawdown): 100 per cent of the individual’s balance is placed in an ABP and drawn down at an initial rate of 6 per cent, reverting to the minimum drawdown rate after 10 years.
The Federal Government’s position paper on offering retirees alternative income has raised more questions than it has answered about a complex and touchy subject.
Both before the Federal Budget 2018 revelation that superannuation funds had to design hybrid income products and during the 10 days it took Minister for Revenue and Financial Services Kelly O’Dwyer to articulate the first stage of the plan, the critics had lined up.
Over the years, the amount of government meddling with superannuation has left most Australian retirees wary. After all, it is their money and they are sick of regimes that can’t help tinkering with it and still cannot ‘get it right’.
Ms O’Dwyer’s rush to force super trustees to become pseudo financial planners so they can design so-called Comprehensive Income Products for Retirement (CIPR) is unbelievable given it is hot on the heels of a Banking Royal Commission that has revealed so much that is rotten in the financial advice sector.
Essentially, super funds will become advisers when the CIPR legislation is enacted. This should have many people worried, as was highlighted recently by Geoff Brooks, the marketing head at Equisuper.
“I think we’re working in a system that was built essentially in 1993 and most of them were in accumulation phase. I don’t even know whether funds are fit for purpose to actually run retirement services. It’s not just about product solutions. It’s about how do you almost package advice and all those sorts of things into the product solution,” Mr Brooks said.
Other superannuation experts have gone further with their critiques of the hybrid products, questioning the ability of many super balances to produce sufficient investment returns to generate more than a trickle of income. They have done the maths and suggest a nest egg would need to be worth $2 million to produce anything resembling a decent retirement income. And even then, they argue that the investments would have to be in risky assets that are more capable of handsome returns, when the wind is blowing their way. But when the financial weather changes, those risky assets strip the wealth from investments. But older investors mostly do not like risk, opting for conservative strategies instead.
And worse, the Government appears to be agreeing with super trustees that while they should take all care in formulating the products, they should not bear full responsibility if your investment goes pear-shaped. “Trustees could qualify for a safe harbour,” the paper says.
To call this irresponsible is an understatement. The fallout of the Banking Royal Commission has already demonstrated that financial advisers, even ones associated with once-respected brands, such as AMP, cannot be trusted to act in the best interests of their clients.
While many retirees craving security will welcome the ‘guarantee’ of a lifelong income from a CIPR, it has to be asked what they will be expected to sacrifice in return. Other questions that need answering include:
- how high will the fees be on these complicated financial products compared with the low costs of an industry super fund today?
- how intrusive will the fund be when it is trying to determine how long a pensioner will live?
- will they require extensive testing to discover if a retiree has early stage cancer?
- and do all retirees need or want to know if they have a lurking disease when they feel perfectly fine?
- if a retiree dies well before their expected longevity, what happens with any untapped deferred life annuity that forms part of the product? Is it sequestered by the fund or returned to a beneficiary?
- plus, what of entitlement to a part or full Age Pension for those who have very little super to convert into a CIPR? Where is the detail on that?
The Government’s paper is open to public submissions until June 15, but where to begin to comment when there are so many unanswered questions in the proposal?
Would you buy a new retirement income product if you were assured of payments until you died? Or do you prefer the flexibility currently offered by the superannuation system? Do you think trustees should be immune from legal action as the Government is proposing?