Putting the ‘annuation’ back into Super
The Actuaries Institute is currently preparing a submission about Comprehensive Income Products for Retirement. Darren Wickham, from the Institute’s Retirement Strategy Group, outlines the principles for the submission that have been agreed so far, following discussion with members.
There is some unfinished business in super… Australia has a world class defined contribution system in the ‘accumulation phase’… but as the Financial System Inquiry noted, ‘the retirement income phase of the system is underdeveloped.’
The Inquiry recommended the development of ‘Comprehensive Income Products for Retirement’ (or CIPRs) and the Government has a released a consultation paper (CIPR consultation) and asked for stakeholder input.
CIPRs are proposed to be an ‘opt in’ retirement product for members with “nudges” built into the system to encourage take up. The Government envisages that CIPRs would be a mass-customised, composite retirement income products (for example, combining a pooled product with one or more products that provide more flexibility, such as an account based pension).
This is potentially the most profound change to the superannuation system since the introduction of the Superannuation Guarantee in 1992.
The Actuaries Institute is making a submission to the consultation process and, to facilitate this, Insights sessions were held in Sydney and Melbourne (and via webinar) to gauge member feedback on some principles proposed by the Institute’s Retirement Strategy Group to guide the response.
After receiving feedback and considerable discussion and debate, the Institute’s proposed response suggests the Trustees be required to have a broader Retirement Income Governance Framework instead of focusing solely on a CIPR product.
- A Retirement Income Governance Framework should apply to all superannuation funds (including SMSFs).
- Income streams which draw down on capital gradually should form the basis of retirement system, with benefit projections provided during the pre-retirement period expressed in terms of annual retirement income will support a change in the underlying narrative from a focus on lump sums. Such projections should show the impact of Age Pension payments as a majority of Australians will receive these for some or all of their retirement years. Projections should include either a range of possible outcomes which may arise in the event of adverse investment and longevity experience or, if only a single projection is provided, show what could be expected to be achieve with a high degree of confidence.
- The superannuation system should have sufficient flexibility so that CIPRs and retirement products more generally can be tailored to individual member needs.
- The design of CIPRs and retirement products needs to take into account social security means testing rules and these rules need to be sufficiently attractive for trustees to meet the best interest test and for members to take up these products.
- The regulatory framework applying to CIPRs and retirement products should be product and tax neutral in respect of longevity products (ie between annuities and pooled pensions). In respect of neutrality between different product types (ie. longevity versus non-longevity), slight favoring of longevity products is desirable to overcome behavioural bias to encourage their take-up by members.
- There should be an ‘If not why not’ regime in place for the provision of longevity products, rather than compulsion. After a suitable transition period, consideration could be given to more encouragement/compulsion.
- The ‘if not why not’ regime should apply to the offering of CIPRs by superannuation funds. CIPRs should remain opt-in products for members.
- The CIPR product should be certified as meeting specific minimum requirements by a suitably qualified professional and we believe actuaries operating in accordance with objective professional standards are well placed for this role, and this could improve public acceptance.
- The current market and legislative rules for retirement products are immature and so the policy approach should be reviewed as the product landscape develops.
Treasury have mentioned that the regime is not expected to commence any earlier than mid 2018. There are some key issues to resolve before then – including (and most importantly) the new Age Pension means testing rules for income stream products (which were expected for 1 July 2017, but have not yet been released).
Brace yourselves for more consultation, discussion and debate!
See the Institute’s submission here.
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