In brief
Earlier today, Treasury released exposure draft regulations for 'Innovative Superannuation Income Streams'. They set out income stream standards that will be relevant for products such as deferred annuities and group self-annuitised products. The Allens Superannuation team reports.
Four main requirements
An innovative income stream will need to satisfy four main requirements:
- Benefit payments must not commence before the primary beneficiary has satisfied a specified condition of release.
- Benefit payments must be made at least annually throughout a beneficiary's lifetime following the cessation of any payment deferral period.
- After benefit payments start, there must be 'no unreasonable deferral' of payments from the income stream.
- The amount available on commutation must fall within a 'declining capital access schedule' commencing from the retirement phase.
Set out below are some further details of, and comments on, requirements 2, 3 and 4.
Annual payments throughout a beneficiary's lifetime
While annual payments must be made throughout a beneficiary's lifetime after any initial deferral period ends, the amount of those payments is not prescribed by requirement 2. The question of the amount of those payments is addressed by requirement 3.
'No unreasonable deferral' of payments
This rule is intended to prevent the payment amounts being determined so as to circumvent the commutation rules or to provide estate planning benefits to beneficiaries.
In determining whether payments are unreasonably deferred, it will be necessary to consider the timing of payments and returns (if they are linked), the age or life expectancy of other beneficiaries (if payments are linked to these, for example in a collective pool), the relative sizes of the annual totals of the payments from year to year (indexation may be acceptable), and 'any other relevant factors'.
The draft explanatory statement says that these factors 'will also enable benefit payments to be set within a targeted but not guaranteed range, with scope for reserving to be applied to meet future payment targets'.
The exposure draft explanatory statement provides these interesting examples:
By way of example, a reversionary annuity purchased for $250,000 at age 60 with payments starting at age 80 would likely be considered unreasonable if the payments for the first twenty years were $1000 per annum, but then were very large, such as $50,000 per annum for any following payment year. A further example of an unreasonable deferral might be a pooled product where the payments, although not necessarily wholly deferred for any period, are very heavily weighted to higher payments in later years and do not represent any alignment with investment returns or mortality experiences.
These examples identify the central problem with the requirement – cases that clearly fall foul of the requirement will be easy to identify but cases that are borderline will be very difficult to assess.
Declining capital access schedule for commutations
The draft regulation contains a formula that will restrict the maximum commutation amount that can be accessed after the retirement phase starts on a 'declining straight line basis over the primary beneficiary’s life expectancy'. The maximum commutation amount at a point in time will also be reduced on account of earlier commutations.
CIPRs
A key question is how these innovative income streams will play a part in the proposed framework for comprehensive income products for retirement. The media release by the Minister for Revenue and Financial Services describes the development of innovative income streams as 'a precursor' to the development of CIPRs. It is worth noting that 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. The exposure draft explanatory statement says:
… interests in the new income streams could still be offered as an investment option for, or as a separate interest as an add-on to, an interest in an [account-based pension] ...
Other
The closing date for submissions is 12 April 2017.