Various industry bodies, including the SMSF Association and the Tax Institute, have all raised the need for reform to help retirees trapped in legacy income streams in self-managed superannuation funds (SMSFs). The Actuaries Institute has now joined the chorus for change with its own submission to Treasury.
Legacy income streams include old style defined benefit pensions as well as market-linked pensions. It has not been possible to start new defined benefit pensions since 2006 and the Simpler Super reforms replaced market-linked pensions with the more flexible account-based pensions in 2007. However, as these legacy pensions are non-commutable, retirees who entered into these products in the late 90’s and early 00’s have found themselves unable to get out of them. They are complex and costly to manage, with the potential for some very undesirable outcomes should they become insolvent or when they cease due to death or expiry.
The 2016 Super Reforms added further complications with a raft of complex legislation needed to deal with the transfer balance cap, some of which we are still waiting to be enacted in a workable form.
Accurium has previously noted that defined benefit pensions aren’t well-suited to SMSFs and that perhaps they shouldn’t have been allowed in the first place. As the name suggests, defined benefit superannuation arrangements provide members with a pre-determined benefit, such as an annual pension payment for life. They work best where a fund has a large number of members to pool risks, such as longevity risk, and where the benefit promises are backed by a guarantor in case the fund’s assets prove insufficient. With a maximum of four members and no employer sponsor to guarantee benefit obligations, SMSFs offer neither. SMSF members do not even have the option of topping up their own pensions should the initial capital prove insufficient to meet the benefit obligations.
The Actuaries Institute is now calling for the Government to look at reforms to tackle the many issues faced by holders of legacy pensions. Such changes might include an amnesty allowing members to commute their pensions and convert them to modern account-based pensions. Even the simpler changes suggested to allow any remaining capital to be paid out as a lump sum when a member dies or a term pension expires would solve some of the biggest uncertainties faced by these pensioners.
It is significant that the Actuaries Institute is urging for reform in this area. The requirement for an annual actuarial valuation to ensure solvency means actuaries will be one of the few groups to lose out on work should trustees be allowed to cease these pensions. However, as actuaries dealing with these pensions every day, we see first-hand the difficulties these retirees face. Many of these retirees are now in or approaching their eighties and are looking to simplify their financial affairs by winding up their SMSFs. The restrictions inherent in these pensions means that can be very difficult, if not impossible to do. We support changes to help retirees who want to exit these arrangements.
We hope that another voice calling for change encourages action from the Government on legacy pensions.
