In response to increasing life expectancies, the 2018-19 Budget introduced a ‘More Choices for a Longer Life Package’. One of the focuses of the package was on helping retirees prepare financially for a longer and more secure life. To support this, the Government developed four measures:
1. allowing more income to be exempt under the Pension work bonus;
2. a work test exemption for retirees aged 65 to 74 with a total superannuation balance under $300,000;
3. expanding the Pension Loans Scheme eligibility to anyone Age Pension age and over, and
increasing the maximum 'top-up' amount; and
4. strengthening retirement income choices by introducing a retirement income framework (RIF).
For the purposes of this article, references are from the Commonwealth of Australia 2018,’Retirement Income Covenant Position Paper’, unless otherwise noted.
Strengthening retirement income choices
Up to now, the Government has removed barriers to the development of pooled lifetime products as described below:
1. introducing an alternative superannuation income stream definition based on a new capital access schedule effective 1 July 2017; and
2. proposing amended social security assessment for these products if purchased on or after 1 July 2019, with grandfathering applied to income streams purchased prior
to said date.
As the Government moves to implement a RIF, the first step involves the introduction of a retirement income covenant as described in figure 1.
Figure 1. Retirement income framework
Retirement income covenant
The Government is proposing an additional covenant to those already in place under the Superannuation Industry (Supervision) Act 1993. A retirement income covenant would codify requirements and obligations for superannuation trustees, aiming to improve retirement outcomes for individuals. The Government proposes to legislate this by 1 July 2019 with delayed commencement till 1 July 2020.
Underpinning the covenant are two key principles to ensure trustees:
1. assist members in meeting their retirement income objectives throughout retirement by developing a retirement income strategy for members; and
2. provide guidance (which may or may not be financial advice) or intra-fund advice tools to help members navigate between the retirement income products offered by the fund. These tools should assist members in making the most appropriate choice, given their needs and preferences. For example, where trustees provide a single comprehensive income product in retirement (CIPR) and an account-based pension offering, a side-byside comparison of the two products.
Notably, Australian eligible rollover funds and defined benefit (DB) schemes that offer a DB lifetime pension would be excluded from both measures and self-managed superannuation funds would be required to adhere to the first key principle only.
The following factors need to be considered by trustees when designing their retirement income strategy:
- maximising income for life for members;
- the potential life spans of members and the costs and benefits of managing longevity risk for members as a whole;
- managing risks that affect the stability of income, including inflation;
- providing members with access to capital;
- member needs and preferences for the factors above;
- the costs and benefits to members of developing a CIPR in-house compared with offering a CIPR developed and managed by a third party or a combination of both in-house and a third party;
- expected member eligibility for the Age Pension; and
- whether and how cognitive decline may affect outcomes.
Trustees would be required to offer a flagship CIPR that may be tailored for up to three cohorts differentiated by account balance. CIPRs may incorporate products from third party providers, require consent from members to commence and must be designed to provide
- efficient, broadly constant income, in expectation;
- longevity risk management (income for life); and
- some access to capital.
There is an exception from offering a flagship CIPR or personal advice to individuals who have a life-threatening or terminal illness or have less than $50,000 in superannuation assets in that fund. It is also noted that ‘a 100 per cent allocation to an account-based pension alone would not meet the definition of a CIPR’.
Trustees may also offer an alternative income product through advice, whereby personal financial advice (including scaled personal advice, intra-fund advice, or full financial planning) can be offered to ‘a particular person or cohort of people’.
In line with the Government focus on helping retirees prepare financially for a longer and more secure life, advisers can help improve retiree outcomes by implementing longterm strategies that address longevity risk, lifetime income needs and access to capital.