Additional Comments from Labor Senators
1.1
Labor Senators support Schedules 2, 3 and 4 of the bill, which relate to
the work bonus, the pension loans scheme and other technical amendments.
1.2
Labor Senators do have concerns about the consideration of Schedule 1,
relating to new means test rules for lifetime income streams. Given the recent
publication of both the Productivity Commission report Superannuation:
Assessing Efficiency and Competitiveness and the publication of the Royal
Commission final report into Misconduct in the Banking, Superannuation and
Financial Services Industry, it is important that disclosure frameworks,
trustee obligations, financial advice frameworks and behavioural impacts are
well understood and improved alongside any changes to means testing.
1.3
The concerns in question are outlined below.
Inquiry Process
1.4
The submission by AustralianSuper makes it clear that the Government has
not completed complementary work regarding the framework for Comprehensive
Income Products for Retirement (CIPRs):
In summary, Schedule 1 to this Bill is but one of a series of
measures supporting the Government's developing retirement income framework.
This framework envisages the development of Comprehensive
Income Products for Retirement (CIPRs). The CIPRs framework is still being
developed with the following outstanding items yet to be actioned by the
executive government to complete this framework for implementation by industry:
- The passing of legislation for retirement income covenant
designed to protect member interests in the development of retirement products.
-
The disclosure regime for such products which is presently under
consultation.
- The creation of a framework that enables trustees to offer a CIPR
product, which is inherently complex, without personal advice, and include
measures to protect consumers at the same time.[1]
1.5
In a similar way, the Australian Institute of Superannuation Trustees
indicated that insufficient context and preparatory work has been completed for
the passage of Schedule 1:
Taken out of context, the measure proposed in schedule 1 of
the Bill appears to go a considerable way to satisfying one of the aims of the
Government, being the goal to remove regulatory barriers to the use of
innovative (in this case, lifetime) income streams. However, viewing this in
context is problematic, since we do not have a context to view this in.
...
In any event, as Treasury indicated in their Retirement
Income Disclosure Consultation Paper, there are remaining parts to the proposed
Retirement Income Framework that remain before "consumers are supported to
make informed decisions about the income, risk and flexibility associated with
different retirement income products", including retirement income
projections and changes to the regulatory framework.
...
We are also concerned that, in the absence of basic consumer
protections which, at the very least, must include sufficient consumer
disclosure to enable fund members to have informed consent when selecting these
products, social security incentives commencing on 1 July 2019 are badly timed
and inappropriate.
Whilst we are aware that the industry requires certainty in
relation to the new rules, we believe that these are being implemented in the
wrong order, and the unintended consequences of incentivising Australians to
potentially choose the wrong retirement income product at this early stage are
too great.[2]
1.6
Industry Super Australia also outlined concerns about other unresolved
"moving parts" relevant to implementing the Government's CIPRs-based
framework:
- The introduction of a retirement income covenant to the
Superannuation Industry (Supervision) Act 1993 that will include a requirement
that trustees develop and offer CIPRs to their members.
- The design and implementation of a disclosure framework
that will provide consumers who wish to purchase a retirement income product
with a factsheet for each product containing simplified metrics that will
enable meaningful comparisons to be made prior to purchase.
- Proposed new means testing rules
...
In short, the proposed rules [means testing rules] are
intended to promote the sale of complex retirement income products before
implementing measures that would help to protect consumers from buying products
that may not be in their best interests.
In particular, many of the products that will be sold from
July 2019 are likely to comprise annuities that purchasers may not be able to
exit from should they later conclude (perhaps when a disclosure regime is in
place) that a different product is better.[3]
1.7
Labor Senators agree that the Government has failed to provide the
supporting architecture necessary to properly support the take-up of lifetime
income products and guarantee that pensioners will be protected.
1.8
Finally, submissions make it clear that there are concerns about the
obligations these products will place on superannuation trustees:
Further, as a superannuation trustee, we have concerns about
the operation of the means testing rules and the need for a consumer to
understand that they are entering into a long-term trade-off for means testing
purposes (see Appendix A). AustralianSuper as a fiduciary is concerned as to
application of these rules to new CIPR products which are designed to be offered
by superannuation trustees to their members without personal advice.
Traditionally, these types of products have been sold to customers directly not
through the fiduciary overlay of superannuation. A higher duty is owed by
superannuation trustees as fiduciaries than applies under contract law.[4]
Productivity Commission Report
1.9
A number of submissions outlined findings from the recent Productivity
Commission final report into superannuation. Labor Senators understand that the
Government is considering its response to this report and as yet has not made
public its final position on recommendations.
1.10
A number of findings were made with regard to retirement income
products.
1.11
The most pertinent is Recommendation 10:
The Australian Government should reassess the benefits, costs
and detailed design of the Retirement Income Covenant — including the roles of
information, guidance and financial advice — and only introduce the Covenant if
design imperfections (including equity impacts) can be sufficiently remediated.
In conjunction with this reassessment, the Australian
Government should also:
-
consider cost-effective options, including possibly extending the
Financial Information Service to provide retirees with access to a one-off,
impartial information session to help them navigate complex retirement income
decisions
-
explore the business case for investing in digital technology
that assists people’s financial decision making.[5]
1.12
Supporting this recommendation was the finding that lower-income
households might be worse off with an annuity in terms of total benefits and
access to the Age Pension when compared to an account based pension (ABP):
The opposite pattern applies to lower-income households,
where most annuity types reduce total benefits and decrease access to the Age
Pension compared with an ABP. These contrasting outcomes appear inconsistent
with any income distributional function of the Age Pension, and imply that
choosing an annuity may not be favourable for households with lower net
superannuation assets. Given that lower educational qualifications tend to
reduce earnings and ultimately retirement balances, low-balance households will
have fewer sophisticated investors able to make an informed decision about the
desirability of CIPRs — especially given their complex variants (as shown in
figure 4.10). This would become more problematic if the proposed Retirement
Income Covenant nudges people into such products. The same equity concern would
arise for groups with systematically lower life expectancy for whom longevity
insurance is less valuable.[6]
1.13
The second supporting issue that Labor Senators wish to raise is that
there is currently limited competition in the offering of lifetime income
products. As noted by the Productivity Commission:
Putting aside the practical issues of implementing the
Covenant, government-sponsored nudging should demonstrably be for people’s
good. As discussed in the previous section, CIPRs almost certainly suit some
people, especially those who do not value bequests or will benefit from the
more favourable access to the Age Pension.
...
On the practical front, there are also several concerns.
- Requiring funds that are unable to develop pooled products
in-house to still offer a third party product may provide some degree of market
power to the few current incumbent providers.[7]
Royal Commission Report
1.14
The Royal Commission Final Report has expressed concerns about the
ability of the financial services industry to provide independent advice to the
public:
Second is poor advice – which, too often, is the result of
the conflicts of interest that continue to characterise the financial advice
industry. Other professions are not so pervaded by conflicts of interest and do
not have such a high tolerance for the continued existence of conflicts of interest.
Other professions do not have such faith in the notion that conflicts of
interest and conflicts between duty and interest can be effectively managed.
Until something is done to address these conflicts, the financial advice
industry will not be a profession.[8]
1.15
Industry Super Australia has expressed concerns that the current state
of the financial advice regime is inadequate to support retirement income
products:
In short, the current financial advice regime cannot be
relied upon to protect consumers.
Until appropriate regimes for retirement income products,
disclosure and financial advice are in place, legislating concessional means
testing rules for retirement income products amounts to ‘putting the cart
before horse.’
It risks exposing consumers to significant, and unnecessary,
financial harm.[9]
Conclusion
1.16
Labor Senators are supportive of efforts to improve the superannuation
system, particularly as people move to the retirement phase. It is important
that there be a suitable suite of retirement income products available to
people in retirement and that older Australians and pensioners are properly
protected.
1.17
Labor Senators also note that COTA Australia is supportive of the
proposed changes to the pension means testing of pooled lifetime income stream
products.[10]
1.18
Labor Senators recognise that there are potential risks associated with
Schedule 1 of the Bill, as noted above. Labor Senators believe it would be
preferable for disclosure frameworks, trustee obligations, financial advice
frameworks and behavioural impacts to be well understood and improved alongside
any changes to pension means testing.
1.19
That said, Labor Senators do not believe that these risks warrant
delaying passage of this Bill. Accordingly, Labor will carefully monitor the
implementation and impacts of Schedule 1 of the Bill and the regulation of
related financial services products to ensure they operate fairly and that
older Australians and pensioners are protected.
Senator Chris Ketter Senator
Jenny McAllister
Deputy Chair Senator
for New South Wales
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