Growth pensions on the outer

The providers of retirement income products in Australia may be faced with a lengthy and complicated battle to have their proposed growth pensions granted complying income stream status, despite the Government’s election promise to conduct a formal review of the issue.

The Government’s promise to conduct the review was welcomed as a positive step towards bringing to a head an issue that has been simmering away for the best part of five years.

But the promise also created an expectation that the Government would use last month’s Budget to outline its plans for a review of growth pensions.

That did not happen, and has now created some apprehension over the status of the debate on the issue.

In some respects, such apprehension is well placed.

A spokesperson for the Assistant Treasurer Senator Helen Coonan says the Government will keep its commitment to conduct the review.

However, according to the spokesperson, the review may have to take a backseat while other items on the Government’s agenda take pride of place.

“The main priorities at the moment are in the superannuation area, including implementing policies like co-contributions, splitting of superannuation, the lowering of the superannuation surcharge and, of course, choice of superannuation is back on the agenda.”

At least three of those policies — the splitting of superannuation, the cut in the surcharge rate and choice-of-fund — are heading for a troubled passage through parliament, suggesting a review of growth pensions may have to wait some time before it sees the light of day.

But regardless of the status of the review, the debate between the industry and the Government over growth pensions is by all reports delicately poised.

The debate rests in no small part on the costs to the Government’s Budget bottom line of the tax concessions that growth pensions would attract by being classified as complying income streams.

The industry’s position is that growth pensions will be revenue neutral and it has put its version of the cost, through the Investment and Financial Services Association (IFSA), to Treasury.

However, it is understood Treasury had some concerns with these costings, and that the onus is now back on the industry to alleviate those concerns.

For the long time advocates of growth pensions, like Colonial First State head of technical services Peter Hogan, easing the Government’s concerns over the cost of growth pensions is the key hurdle.

“Growth pensions are clearly a product that are going to be popular and that is clearly a concern from a revenue perspective,” Hogan says.

“If we can convince treasury that growth pensions will not have a substantial impact on the Budget, then we will have won half the battle.”

Assuming the industry can convince Treasury and the Government that the revenue implications of growth pensions will not be overwhelmingly negative, the next step will be to persuade Treasury that retirement income stream products, like the industry’s growth pension proposal, are what retirees want.

The latest figures from the actuarial group Plan for Life show that investors are placing approximately $180 million per quarter into complying income streams. Over the same timeframe, however, up to $2.5 billion is being invested in allocated pensions — which share similar characteristics to the proposed growth pensions — despite the fact they do not receive the same tax concessions as complying income streams.

For Hogan, the figures are compelling proof that retirees are calling out for growth pensions style complying income streams.

“If you look at the types of products that are sold to clients it is account-based, growth-oriented investments. Growth pensions are precisely that type of product,” Hogan says.

“We have all heard about the fact that the population is getting older and it is important that we do have products that meet people’s needs.”

The industry will also be pointing out to Government that people are spending considerable resources trying to skirt existing complying income streams rules.

One of the least desirable characteristics of any lifetime pension, which make up a considerable portion of complying income streams, is that on death, any remaining benefits are kept by the pension provider and not paid to a pensioner’s family.

It has become more common of late for people to offer themselves a complying income stream through their own self-managed superannuation fund. That way, when they die, any remaining benefits are paid back to the super fund where the pensioner’s family are trustees.

There is some talk that regulators are taking a much closer look at the legality of such arrangements.

But the argument from industry will be that the situation merely reflects the lack of appropriate complying income stream alternatives for retirees.

There is no doubt the industry will now cling to the promise of a review of growth pensions as the best forum to have such arguments heard.

But with that will have to come some acknowledgment that the growth pension debate could be a long and drawn out one.

“It would seem at this stage that things are a little while off. But we feel that Treasury is still very much open.

“The Government has said growth pensions are still on the agenda. The fact that they did not mention it in the Budget doesn’t mean that they are going to do nothing,” Hogan says.