It has now been more than half a decade since the Government initiated the debate around Comprehensive Income Products for Retirement (CIPRs) but with the Treasurer, Josh Frydenberg, having flagged a review of Australia’s retirement income system, do not hold your breath waiting for a definitive outcome.
Frydenberg flagged the review of Australia’s retirement income system in the lead-up to the 18 May Federal Election but, at the time of writing in late September, he had still not delivered on the terms of reference for the inquiry.
But it seems almost inevitable that any review of the retirement income system must traverse the issue of CIPRs which, as has been written elsewhere in the guide, explains why major groups such as Willis Towers Watson have no great expectation of new products being brought to market any time soon.
However, it is a measure of just how long the issue of CIPRs has been in the market that it was early 2017 that the then Minister for Revenue and Financial Services, Kelly O’Dwyer released draft superannuation income stream regulations for public consultation.
In circumstances where the tax settings around annuities had always been the sticking point for the development of retirement income products, the former minister’s words were strongly welcomed by the superannuation industry.
“Superannuation funds and life insurance companies will receive a tax exemption on income from assets supporting these new income stream products provided they are currently payable or, in the case of deferred products, held for an individual that has reached retirement,” O’Dwyer’s March 2017 statement said.
“These new rules will remove taxation barriers to the development of new products that will provide greater flexibility in the design of income stream products to give more choice to consumers, while ensuring income is provided throughout retirement,” she said.
“The development of these new products is a precursor to the development of Comprehensive Income Stream Products for Retirement, or CIPRs.”
It was notable that allied to the 2018 Federal Budget, O’Dwyer then released the framework of a retirement income covenant stating it would “form the cornerstone of the new framework”.
“It will be added to the Superannuation Industry (Supervision) Act 1993, which will elevate the consideration of members’ retirement income needs to sit alongside the other fundamental obligations of trustees, such as the investment, risk management and insurance needs of their members,” she said.
“To fulfil the overarching purpose of superannuation, it is essential that trustees develop a retirement income strategy and consider the retirement income needs of their members,” O’Dwyer said.
The Government announcement said the framework would also include supporting regulations that obliged trustees to offer their members a comprehensive income product for retirement and to guide and support members to select the right retirement solution.
“The Government is prioritising the retirement income covenant and supporting regulations as the first phase of the retirement income framework. The disclosure metrics, also announced in the Budget, are another crucial part of the framework to better inform consumers and aid comparison of retirement products,” the minister’s statement said.
The problem was, of course, that while the Government provided the superannuation industry with the opportunity to provide submissions on the proposed covenant principles by 15 June, last year. More than a year and one Federal Election later, there has been no definitive outcome and the issue has again become clouded by Frydenberg’s pre-election review announcement.
But what became clear in the various submissions filed with Treasury around the retirement incomes covenant and the development of CIPRs is that the superannuation industry wanted more detail than the Government had thus far provided.
The reservations of the superannuation industry were probably best reflected in the views expressed by the Association of Superannuation Funds of Australia (ASFA) which urged both a lengthy transition period and a specific legislative regime around the requirement for CIPRs.
As well, the ASFA submission suggested that an industry working group had concluded that, perhaps, CIPRs were not, of themselves, the ultimate answer.
“It was observed that there are activities that could improve income in retirement, other than offering longevity risk products, including:
- Providing projections of income on member statements, to start effecting the shift in thinking from ‘accumulation of a lump sum’ to ‘entitlement to an income stream’;
- Improving financial literacy and educating Australians about superannuation, including the benefits of compounding returns and other benefits with respect to investing for retirement. This could extend to inclusion in school curriculums, with reinforcement in senior school as young Australians enter the workforce for the first time and receive contributions to superannuation;
- Improving the provision of information and advice to members, especially in the form of projections, guidance and information as to their level of superannuation as compared against default or selected benchmarks, as an engagement strategy; and
- Provide more guidance and advice at the time of, and after, retirement, including how to manage the various investment risks and how to invest, and drawdown, appropriately through retirement.”
Indeed, the ASFA submission suggested that CIPRs should be an opt-in exercise for superannuation fund members.
For its part the SMSF Association was more bullish about the concept of a retirement covenant declaring that the “superannuation system has been too accumulation phase focussed and the retirement covenant will serve as an important instrument to correct this”.
However, the SMSF Association was less enamoured of self-managed super funds (SMSFs) being required to develop CIPRs.
“We believe the proposed application of the retirement covenant for SMSFs, which only requires them to consider the first covenant principle of developing a retirement income strategy, is appropriate,” it said. “This is appropriate as SMSF members operate as the trustees of their fund and this close connection between fund and member does not necessitate needs for enhanced engagement and developing CIPRs.”
The Association of Financial Advisers (AFA) was even more clear-cut in its view of CIPRs, arguing that such products would not be for everyone.
“Whilst we do not disagree with the stated objectives of a CIPR, we question the practicality of achieving a broadly constant income over time. There will always be transition points, particularly where a deferred lifetime annuity might kick in and where an account-based pension (ABP) is declining rapidly. We also question whether the charts in the Appendix actually demonstrate that such an outcome is achieved by what is proposed. This seems inconsistent,” the AFA submission said.
“We also make the point that spending may naturally decline over time in retirement as people are less capable of overseas and domestic travel and are less likely to spend money on entertainment. This will be partly offset by an increase in health costs. Nonetheless, the need for income in retirement is unlikely to be constant over the course of an extended period of retirement.
“Whilst it is suggested that the use of a deferred lifetime annuity will give members greater confidence to spend at a higher rate whilst in retirement, we expect that this would simply add an additional stage point and since members will have less money in their ABP, they will still have concern about whether their ABP assets will last until their DLA [deferred lifetime annuities] commences.”
It is our view that for clients who have a high risk appetite and significant assets, a 100% allocation to an account-based pension may be the most appropriate outcome. Given that the ABP will typically be invested in a higher proportion of growth assets, as compared to the underlying investment allocation for annuities, they should be expected to overperform over the longer term. Thus, where there are significant assets available to invest, the investment return should be higher in an account-based pension, and there should be little risk of assets running out.”
So what has changed since the Treasury closed off the receipt of submissions to the Retirement Income Covenant Position Paper and the Treasurer’s proposed retirement income inquiry?
Very little, unless the Treasurer has something in mind for the 2020 Budget.