In a paper, Changes to regulatory settings for financial products dealing with longevity, ASFA outlined eight desired changes, including tweaks to the SIS Act, changes to means testing and scaled advice guidelines, and amendments to the tax treatment of deferred annuities.
Acting ASFA CEO Mr Ross Clare said removing regulatory barriers to the development and use of post-retirement products is more critical than ever before in order to address longevity risk and ensure the country’s increasing number of retirees have adequate post-retirement income.
Superannuation Industry (Supervision) (SIS) regulations are too focused on current products and limit the opportunity for innovation, according to ASFA, which said regulations should better permit products with deferred benefits.
ASFA requested changes to Australian Prudential Regulation Authority (APRA) standards on the minimum surrender values of longevity products such as pensions and deferred annuities, which it said currently makes it more expensive to offer those products.
Deferred annuities don’t fit into the structure of that prudential standard as it is currently worded, according to ASFA, which asked for more flexibility in the standards to allow different types of longevity products to be offered during the deferral phase, such as pooling or not pooling longevity risk.
ASFA said deferred annuities should be exempt from the Centrelink means test and the asset and income tests during the period prior to payment.
“The means test should recognise that a product that is not commutable and pools individual mortality, is equivalent to an insurance premium,” ASFA argued.
“This ‘insurance premium’ is used by the manufacturer to fund higher income streams through the later years of a person’s retirement, provided that the individual survives past the contracted age for payment. In both cases, the reliance on the Age Pension may be reduced.”
However, ASFA also noted any changes would need to be sustainable in terms of the government’s budget and would involve a trade off between tax exemptions, budgetary restraint, and Age Pension impacts.
ASFA requested a co-ordinated approval process for new longevity products rather than the current “maze of red tape” through the Australian Taxation Office (ATO), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and Centrelink.
“A one-stop shop offering a prompt and consistent approval process is needed,” ASFA argued.
“It may be appropriate to set up a forum or body through which all the relevant regulators, along with the policy departments, are represented.”
In terms of scaled advice, ASFA said the take-up of longevity products could be improved if super fund members become better advised and educated on such products, but this would require the scaled advice operating guidelines being developed by ASIC to be drafted in a way that allows funds to provide all members with advice relating to retirement products.
“Product providers need to take the lead in illustrating this impact to consumers by modelling a range of returns, volatility and life expectancies, focusing on retirement-related risks such as longevity, sequence, timing and inflation,” ASFA added.
ASFA also said legislative changes are needed to make the tax treatment of deferred annuities and other products comparable to those for existing post-retirement products, to reverse the current inequity for investors in those products.
A broader review of the provisions surrounding the taxation of deferred annuities and life policies may help facilitate an efficient market and innovative design across all types of retirement products, but would need to be comprehensive enough to ensure all facets of the tax implications are adequately clarified, ASFA added.
ASFA also requested changes to the SIS Act to allow SMSFs to purchase deferred annuities and like products.
MySuper products should also be able to pay benefits as pensions, which would allow workplace default funds to transfer accumulated savings to income stream products, as opposed to paying out benefits as a lump sum, ASFA argued.
