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Post-retirement policy potholes
If one thing has distinguished the superannuation debate in 2014 it has been the focus on post-retirement and the role that superannuation funds may play in the lives of members after they have finished working.
The reason for the focus on post-retirement is simple - it is based on the reality that increasing longevity has resulted in Australia having a significant retirement incomes gap.
However, with the focus on post-retirement has come the inevitable acknowledgement that there are no simple answers; that development of appropriate post-retirement products is constrained by adverse tax and legislative settings and that few of Australia's financial services product manufacturers are geared to meet the challenge.
The reality confronting the superannuation industry is that where post-retirement products are concerned, only MTAA Super's arrangement with insurer, MetLife, has so far garnered any attention and MetLife earlier this year signalled it was not inclined to develop the product or the market further.
There is, of course, also Challenger's annuity offering with VicSuper earlier this month breaking new ground by announcing it had partnered with Challenger to provide an integrated annuity offer to members, saying each of the funds guaranteed pensions would be backed by an annuity.
But these represent only little steps in addressing what is widely acknowledged to be a major challenge not only for the superannuation industry but for the broader Australian economy.
That is why so much scrutiny will be directed towards the recommendations of the next report of the Financial System Inquiry - arguably the only vehicle with the terms of reference wide enough to be capable of giving the Government the impetus to make the necessary policy changes.
And once the Government has moved on any policy changes, there will need to be significant legislative changes which, in turn, will have significant impact on the Budget.
The Association of Superannuation Funds of Australia (ASFA) gave a hint of the policy and legislative challenges confronting the Government its recent Review of retirement income stream regulation. Responding to the question, "Do the existing annuity and pension rules constitute an impediment to the development of new products and and if so, what features of the rules are of most concern from a product innovation perspective?", ASFA stated that "there are number of impediments to the development of new retirement income products. Some of these impediments relate directly to the regulation of retirement income products in the Superannuation Industry (Supervision) Regulations
1994 (SIS), while others relate to rules and obligations in other areas, such as social security and taxation law".
In other words, the challenges confronting the industry in dealing with development of post-retirement products do not reside in one Act of the Parliament but in multiple and often inter-linked pieces of legislation.
It then went on to state that, "success will only be achieved if impediments are removed in a consistent manner, across all "rules" and regulations relevant to the consumer of these products". "This will require a coordinated approach to changes in the SIS regulation with the relevant tax and social security legislation." It said.
The ASFA response then went on to specifically itemise the following issues:
i) SIS defines annuity too narrowly - Tax Act interaction
ii) SIS - Deferred lifetime annuities subject to minimum drawdown rules
iii) Tax treatment of deferred Annuities
iv) APRA minimum surrender value requirements in LPS360 - Deferred Annuities
v) Age Pension assets and income test - Social security and tax.
Given all of the above it is a fair bet that even if the FSI recommendations strongly canvass changes to the post-retirement incomes environment and those recommendations are accepted by the Government, it will take nearly five years before they are actually implemented.
In the meantime, few financial services companies will be willing to invest the time and money necessary to create the products superannuation funds and their members might find attractive.
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