In brief
Written by Senior Regulatory Counsel Michael Mathieson
Going into the 2013 election, the present Government promised a review of the regulatory framework for retirement income streams. Today, the Government finally released its report. It has been a long time coming. And while the main outcome – a new category of tax effective pensions and annuities – will be welcomed by many, there are unanswered questions and implementation may take a while.
A new category of pension
The Report says that the existing regulatory framework for retirement income stream products is 'a barrier to the development of other annuity-style products that could help individuals better manage the risk of outliving their retirement savings'. It identifies two main impediments. First, there is the minimum annual payment requirement. This impedes deferred annuities. Secondly, there is the prohibition on non-account based products paying income that varies from year to year, other than in line with factors such as CPI or average weekly earnings. This impedes products such as group self-annuitisation products and collective defined contribution schemes, where income payments vary from year to year depending on investment and mortality experience.
The Report goes on to say that the 'comprehensive income product for retirement' (CIPR) that the Financial System Inquiry recommended 'would depend on these pooled annuity type products being developed'. That statement is, with respect, not correct. CIPRs can be offered right now. It is open to trustees to offer a product which involves an account-based pension in tandem with a pension backed by an annuity. In my view, the need for regulatory change, in order to facilitate CIPRs, has been overstated.
The Report's main recommendation is to create a new category of pension, defined by a 'capital access schedule'. The Report says:
The proposed capital access schedule would impose a maximum cap on the value of any lump sum that could be returned to the product holder if they withdrew from the product (a 'commutation amount'). The maximum cap would be a percentage of the original purchase price and would decline in a straight line from purchase to life expectancy.
In the case of death benefits, however, it is proposed that 100 per cent return of the original purchase price would be allowed for half of the life expectancy period. After that, the maximum death benefit would be the same as the maximum commutation value.
There would be no restriction on the actual income stream from the product. The income stream may be deferred, it may be variable and it may go on beyond the point where the commutation value and death benefit have reduced to zero.
The capital access schedule would only be available for lifetime pensions. The maximums under the schedule are just that – maximums. In this way, the schedule would provide flexibility for the design of products – while still protecting 'the policy objective that the primary purpose of products should be to provide income throughout retirement'. Although the purchase of deferred annuities by instalments would be permitted, the rule that the capital supporting a pension that has commenced must not be added to, would be maintained. These pensions would not be able to be offered by SMSFs or small APRA funds.
Amendments to the SIS Regulations and Income Tax legislation will be required and the social security treatment of these pensions will also need to be resolved.
Minimum annual payments
The other issue examined by the review was the aged-based levels of payment required under the minimum annual payment standard (which will continue to apply to most pensions other than those issued under the new capital access schedule). Here, the conclusion is: 'the minimum drawdown rules work well for account-based pensions and the current minimum drawdown rates are about right'. That's correct, a very slow review process has concluded that the status quo should be maintained.