In brief
Yesterday, Treasury released a paper seeking feedback on a framework for Comprehensive Income Products for Retirement (CIPRs). It will permit trustees to offer members on a 'soft default' basis 'mass-customised, composite retirement income products' and, to encourage trustees to do what some might think they can already do, trustees will have no liability to a member who sues them because the CIPR was not in the best interests of the member. It is all most surprising, and for trustees it is a whole new kettle of fish. CIPRs are meant to be available from 1 July 2018, but there is a long way between the cup and the sip as they say and we suspect much of it won't make it into law. The Allens superannuation team reports.
What is a CIPR?
A CIPR will be a mass-customised, composite retirement income product that trustees could choose to offer to their members at retirement.
Mass-customised is defined to mean 'designed to be in the best interest of the majority of members'. You might think that that describes a MySuper product, and the analogy seems to have occurred to Treasury too because they suggest calling a CIPR a 'MyRetirement product'. Although they are seeking feedback on the name. Composite is not defined but an example of a composite product is one that combines 'a pooled product with a product that provides flexibility'. In fact, there are three examples in the paper – 'The cut', 'The stack' and 'The wrap' – we found the names unenlightening and, unfortunately, suggestive of ordering fast food. Finally, the choice element of this is a surprise because the Murray Inquiry recommended that trustees be required to offer a CIPR to members. It is not entirely clear why the Government does not support this at least for some classes of trustees. It is also not clear that the incentives being offered to trustees to offer CIPRs will be enough.
The paper says that tax rules are too rigid and have not supported the development of CIPRs. The tax law has now been amended, although much of the detail will be in regulations that have yet to be made and, as always, the social security issues have yet to be worked through. The paper then speculates that trustees may be reluctant to offer longevity risk management products due to the risk of legal action being taken by members or their beneficiaries as these products 'trade-off flexibility for a higher standard of living for the member'.
Another safe harbour defence?
The proposed response is not, as the Murray Inquiry recommended, to make it mandatory for trustees to offer a CIPR, but rather to provide a safe harbour defence to a trustee that offers a mass-customised CIPR.
To benefit from the safe harbour, the trustee would have to:
- design a mass-customised CIPR to be suitable for the majority of members;
- design the CIPR to meet prescribed minimum product requirements; and
- follow any prescribed disclosure requirements.
You might say that the first condition will make the safe harbour defence pretty hard to rely on because it begs the question – what is a CIPR that is suitable for the majority of members?
It is also really hard to see why a safe harbour is appropriate at all – there is no safe harbour defence against a claim that a trustee has not met its duties to a member in relation to a MySuper product.
What are the minimum product requirements?
Suggested minimum requirements are that a CIPR:
- deliver a minimum level of income that would generally exceed the income from an account-based pension drawn down at the minimum rates;
- provide, 'in expectation', a stream of broadly constant real income for life (we are not sure what 'in expectation' means) – this is the longevity risk management product – the deferred annuity or the pooled savings; and
- include a component to provide flexibility to access a lump sum and leave a bequest – this component might be capped or subject to conditions.
The paper queries whether there should be some regulator authorisation or third party certification that the CIPR meets the minimum requirements before it can be offered to members. APRA or ASIC would approve the product in the first case, much as APRA has approved MySuper products before issuing authorisations. As to a 'third party', they would have to be an individual who is held to high standards; the example given is of an actuary. There is also self-assessment by the trustee, but the identified risk is that the CIPR could enter the market without meeting the minimum product requirements. It is not beyond doubt that the other alternatives would prevent that outcome.
Is a CIPR in the best interests of the majority of members or suitable for them?
Within this framework of minimum requirements, the trustee will need to design the CIPR to be 'in the best interests of the majority of their members'. This expression is scattered throughout the paper and it really troubles us because it not only misrepresents the duty of trustees to exercise their powers in the best interests of beneficiaries, but by using it in this way it suggests that trustees are responsible for things they are not, or at least are not currently. A trustee's duty to exercise its powers in the best interests of beneficiaries is not a duty to act in the best interests of the majority and it is not a duty to act in the best interests of an individual member. Happily, as one reads on, the paper substitutes this phrase with statements that the trustee must design a CIPR that is suitable for the majority of members in the fund. And while we know lots of our colleagues will not like it, we prefer it. It says what the Government means.
This does not mean that we don't appreciate how hard designing a suitable product for the majority of members is, and as to that, the paper is, we think, a bit unclear. On the one hand it seems to think that trustees might come up with different CIPRs according to what it knows about the fund's members, and the trustee's capabilities, but on the other the preference is not to allow a trustee to offer different CIPRs for different groups of members within a fund because there is a concern that trustees won't have enough information about different groups of members to design suitable products for the different groups.
What's it for?
A CIPR is intended to provide a higher standard of living for retirees. The paper quotes the Murray Inquiry's conclusion that incomes from CIPRs could be 'up to 15-30%' higher than drawing minimum incomes from account-based pensions. We can't help but notice that Murray was not suggesting that there would be an increase of between 15-30 per cent, but rather that this was the range of a maximum increase in circumstances where there was an obligation for trustees to offer a CIPR. To be fair, the paper does say that 'that some longevity risk management products with high capital costs (to back a guaranteed level of income) will not necessarily offer higher incomes than the status quo based on current pricing'.
Without the requirement to offer a CIPR and without requiring or permitting CIPRs to be provided to members by default, there seems to be a problem, at least, for getting CIPRs off the ground, and possibly for keeping them going.
CIPRs are to be offered by trustees (if they choose to offer them at all) on a soft default basis. This is a most interesting concept because it is unclear to us what the difference between offering a pension on a soft-default (or 'anchor' as the paper keeps referring to) basis and offering a pension as trustees do now to members who choose to commence a pension.
And without a default, where does the longevity risk pool come from? This is not addressed in the paper.
Some curiosities
We could keep going for a while, but we will end with a couple of the more puzzling parts of the paper. First, the paper says that the trustee can provide CIPRs directly or by 'partnering with third parties' to offer the CIPR. In that case, the paper says the trustee would remain responsible for the CIPRs but it also says that the member would have beneficial interests in the underlying component products and associated rights. Does that mean that a member could sue the third party and the trustee? There is also a question about whether a member holding a CIPR could transfer their CIPR to another fund, or maybe a part of their CIPR?
As to financial product advice, the paper says because the CIPR is 'mass-customised' this 'would avoid the risk that the CIPR would be presented as a product tailored to the individual's needs, and would avoid any appearance to individuals that it is personal financial advice'. Consumers would be able to acquire a CIPR 'through an execution only, no-advice arrangement'. Perhaps for this reason the safe harbour defence would not extend to what the paper refers to as 'financial advice law'. Perhaps more interestingly, the paper assumes that it is appropriate to design and distribute what may be a very complicated financial product without personal advice.
Finally, stepping back from the detail, we can't help but think that the CIPR framework is a very cumbersome and indirect approach to getting people to use their retirement savings in retirement. One can't help but think that all those account-based pensioners drawing down at the minimum rates might ratchet up the rates if the tax consequences for death benefits were different. However, the paper is not canvassing views on that.
Submissions
If you want to let Treasury know what you think or if you want to suggest a name, you can make a submission up until 28 April 2017.