Comprehensive income products for retirement (CIPRs) should move to a modest level of compulsion by quarantining a portion of the asset base at retirement to support a defined income at older ages, Rice Warner believes.
In its CIPR development framework submission to Treasury, Rice Warner said this could be a solution as the current proposal suggest that the products are voluntary and that the potential uplift in income compared to an account based pension (ABP) is modest at best.
“Our suggestion is that, say 15 per cent of the retirement balance must be allocated to a CIPR with limited return on death,” the submission said.
“This is not appropriate for small balances so it could be limited to balances at retirement between, say, $250,000 and $1,000,000. Members would also be able to allocate more on a voluntary basis (or to opt-out if they were not interested in a CIPR).”
Rice Warner said that this would:
- Ensure growth of a non-selected mortality pool of a sufficient size;
- Allow for a more appropriate long-term investment strategy supportive of long-term returns;
- Reduce the flow of assets to voluntary and involuntary bequests;
- The performance of these pools would provide a solid base from which to attract voluntary purchases (although the pricing would still need to reflect the nature of the purchase); and
- The combination of a standard ABP with the mortality pooled CIPR would provide the flexibility for access to assets that retirees desire as well as greater flexibility of asset allocation.
Rice Warner noted that while an analysis by the Australian Government Actuary showed that CIPRs could achieve an uplift in income of 15 to 30 per cent compared to an ABP with minimum pension drawdowns, it ignored the value to the member of any residual capital in the ABP, relative to the CIPR.
“…and further omits the fact that an ABP invested in a diversified portfolio could be drawn down at a rate higher than the minimum and last to (say) age 100,” the submission said.
“The analysis also does not take the Age Pension into account or the interaction of CIPR and ABP products with the means tests. This is a shortcoming as members will base their decisions on their total income.
“When we take the Age Pension and the benefits of a diversified investment portfolio (and its extra returns courtesy of the equity-risk premium) into account there is very little income uplift.”
Rice Warner also did not believe that many members would be attracted to CIPRs under the voluntary regime and that the self-managed superannuation fund (SMSF) segment would not have any coverage.
“As retirees within SMSFs will likely leave the largest bequests, one of the government’s objectives will not be met,” the submission said.
