www.financialstandard.com.au
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Lakehouse Capital
ETP Forum
Tax cuts, super reforms
10
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Gerwin Bell & Mehill Marku, PGIM
Health & wellbeing
Danielle Wood Grattan Institute
Product showcase:
Opinion:
Budget takes swing at legacy products Elizabeth McArthur
hile it didn’t make the headlines in this W year’s federal budget, a planned reform to the treatment of legacy retirement products is set to be more significant than most may realise, super commentators say. The government announced that retirees would be freed from legacy retirement productsunder a two-year amnesty allowing people in market-linked, life-expectancy, lifetime pension and annuity products that commenced prior to 20 September 2007 to exit without penalty. The amnesty applies to self-managed super funds and will allow people to choose whether they transfer capital into another retirement product or super fund or take a lump sum. Transferred capital under this amnesty will not be counted towards the concessional contribution cap or trigger excess contributions. But it will be taxed at the 15% assessable rate. Rainmaker Information executive director of research Alex Dunnin says this reform is the Financial Services Council, which lobbied for the change, having a wish granted by government. “This reform, while it may seem one for the nerds, is actually very significant,” he says. That’s because 10% of all assets held in APRA-regulated funds, a total of $162 billion, is invested in legacy superannuation products. According to ATO data, around two million individuals are in legacy super products with returns below that of more modern products. The FSC’s pre-budget submission recommended a comprehensive scheme be extended to super. It alleged that 46% of assets in legacy products are in high-fee products. The average fee in this group is 2.2% - more than three-times the industry’s most prevalent fee rate of 0.7%. But the FSC is cautious in chalking the amnesty up as a win. While it said it is pleased that the government is committed to tackling the “vexed” issue of legacy products, the FSC says policy settings need to be carefully calibrated to ensure any solutions will be beneficial for consumers. “The ability to move out of legacy pension products, many of which are outdated and expensive, is a welcome move. However, the tax and social security settings will be the key factor in consumers and their financial advisers in determining whether to take up the scheme,” FSC chief executive Sally Loane says.
According to Dunnin, Australia has too many investment products. “It’s not so much because the managed funds sector is inefficient, it’s because rationalising products is too difficult given doing so can trigger tax events, social security reviews and big fee hits on unsuspecting consumers,” he says. He adds that on top of these considerations, many managed funds are built on trust law. That means promoters can’t force people to change products if they don’t want to. Due to the complexity of the system, Dunnin estimates there are probably legacy products with very few trapped investors. “This means many older wealth groups probably have dozens or even hundreds of legacy products to look after, many with just a handful of people in them, each with their own administration and old-style computer system,” he says. Australia’s largest annuity provider Challenger would not comment on the changes. However, an analyst note from Credit Suisse indicated Challenger might not have too much cause for concern. It said most of Challenger’s lifetime products were written after the 2007 cut-off date. Challenger launched its lifetime annuity in 2012. But the analyst noted that it may still have a small number of legacy products. The budget contained no update on the Retirement Income Covenant (or on the delayed Comprehensive Income Products for Retirement), which could have been good news for retirement income product providers like Challenger. IOOF head of technical services Martin Breckon explains financial advisers must be cautious when assisting clients to make the right choice in regard to these legacy products. While the measure does apply to marketlinked pensions (term allocated pensions), lifeexpectancy pensions and lifetime pensions, it will not apply to flexi-pensions or lifetime pensions in APRA-regulated defined benefit funds or public sector defined benefit schemes, he explains. “Lifetime and life expectancy pensions have not been able to be commenced for over 15 years (since January 2005) [within] self-managed superannuation funds and small APRA-regulated funds,” Breckon says. “In many instances these products no longer provide appropriate or suitable outcomes for members.” fs
17 May 2021 | Volume 19 Number 09 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01
Events:
Feature:
Budget 2021:
Profile:
Disability income faces reckoning Karren Vergara
Martin Breckon
head of technical services IOOF
The former chief executive of TAL has slammed life insurers’ ineptitude in managing disability income products, invoking the industry to come together and find a solution by the end of the year. Speaking at the 2021 Actuaries Summit yesterday, Jim Minto reflected on the “broken” state of disability income benefits, which are increasingly becoming unaffordable and being shunned by people who need it the most. “The community suffers in a wider sense from poorly designed and over-engineered products. Including products, I designed when I was chief executive. They delivered generous benefits in most cases to some, while policyholders generally faced cycles of price increases as companies looked to recoup losses from unsustainable products,” he said. The market is littered with legacy disability products deemed expensive and poorly valued. For example, products created in the 1990s with lifetime benefits had “disastrous consequences” Continued on page 4
Managed funds outlast COVID-19 Elizabeth McArthur
An ASIC review of retail managed funds found that they effectively coped with the challenges presented by COVID-19. ASIC found managed funds largely did not face serious investor liquidity challenges during the height of COVID-19 market disruptions and that their liquidity frameworks were generally adequate. While there was a significant drop in net investor cashflow in the first half of 2020, ASIC reported that responsible entities of these funds did not tighten members’ ability to withdraw their investments. The review looked at four mortgage funds, five direct property funds and five fixed income funds between June and November 2020. These funds accounted for $1.7 billion in assets under management and more than 8000 investors had money in them. ASIC specifically chose to review these funds because it feared they were exposed to liquidity Continued on page 4