The investment market falls as a result of COVID-19 are likely to mean a greater number of SMSFs with defined benefit pensions experiencing solvency issues this year.
SMSFs paying legacy defined benefit pensions require an actuarial valuation each year to ensure they remain solvent. Upcoming solvency tests will be based on asset values as at 30 June 2020. Despite a partial recovery in equity markets since the lows of March, prices have been impacted across almost all asset classes. Add record low interest rates to the mix and many funds will be looking at lower balances at 30 June 2020 compared to last year.
Where funds’ asset values have fallen this may mean that the value of the defined benefit pension liabilities exceeds the value of their supporting assets. For pensions with an Assets Test exemption this can lead to a loss of that valuable exemption and a reduction in Age Pension entitlements. More severely impacted funds may be forced to commute their pensions and move into new income streams.
If you have clients with defined benefit pensions that may be affected, please engage with us early to obtain the necessary actuarial valuations. If you do encounter solvency issues, we can help explain the options available to trustees. For many funds, restructuring into new income streams can actually provide better outcomes for trustees, particularly from an estate planning perspective.
Accurium has a wealth of useful resources on defined benefit pensions on our dedicated page.