Small balances to be key focus of CIPR proposals

Small balances remain “stubbornly persistent” within Australia’s superannuation system and how such balances will be handled under the proposed comprehensive income products in retirement (CIPR) regime is one of the key issues to be addressed as this policy initiative develops, according to Willis Towers Watson.

Willis Towers Watson head of retirement solutions Australia, Nick Callil, said that even 25 years after the commencement of the Superannuation Guarantee (SG), accounts at retirement age remain skewed towards small balances.

And given the high incidence of small balances within the system, Callill said it is not surprising that some funds have met an initiative to promote the conversion of retirement balances to income streams with some hesitation.

However, he said there are good reasons why this policy makes sense to pursue – even among funds with a large presence of small retirement accounts.

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“First, many low balances arise due to individuals holding multiple accounts, which tend to be consolidated as they near retirement and engage more closely with their savings,” Callil said.

“Second, it is arguable that even low balance retirees can benefit from gradually drawing their retirement savings in income form, notwithstanding that their overall retirement income will be predominantly sourced from the government age pension.”

Lastly, Callil said any policy development should recognise that the system continues to grow, or that the lengthy lead time in implementing change in this area means that retirement account sizes will be higher than current statistics indicate by the time CIPRs come into effect.

Notwithstanding these arguments, he said the proposal to require funds to offer CIPRs needs to acknowledge that, at low account sizes, the age pension will provide a guaranteed, inflation-protected lifetime income stream which will form the majority of a retiree’s income in retirement.