Treasury is getting mixed messages from the superannuation industry about whether the proposed Comprehensive Income Products for Retirement (CIPR) framework’s ‘safe harbour’ provision for trustees is a good idea.
On March 21, 2017, Treasury released an updated exposure draft of new laws governing “Innovative Superannuation Income Streams”. This follows the release of a discussion paper in December 2016, canvassing industry views on the proposed framework for the types of retirement income accounts super funds should offer their members. Submissions to the government review close April 12, 2017.
One of the most vexed questions about how the new regime should work is whether it should include a ‘safe harbour’ carve out.
A safe harbour provision would give protection to superannuation trustees should a member decide to sue because a soft-default product failed to meet their specific needs.
Treasury manager, retirement income policy division, Darren Kennedy, recently told a gathering of retirement income specialists that CIPRs were intended to help ensure that the majority of retirees were better off.
“[CIPRs] may not be the perfect product for everybody, but then again, if you don’t get tailored individual advice, you are unlikely to receive a perfect product. We see mass-customised CIPRs as a safe landing zone for those people who don’t seek a customised solution,” he said.
But he added the industry was sending mixed messages on the need for a safe harbour provision – a split that was evident among the other members of the panel on which he was speaking.
Kennedy made his comments at the Conexus Financial Post Retirement Conference, which was held in Sydney, March 14-15, 2017.
Mercer and Willis Towers Watson call for safe harbour
Mercer principal Clayton Sills said a safe harbour was “absolutely essential” to being able to develop and offer CIPRs, particularly if they were to include longevity protection, which might have negative consequences for members in certain scenarios.
Willis Towers Watson head of retirement solutions in Australia, Nick Callil, said if a fund asked questions to guide members into appropriate CIPRs, there was a high exposure to risk for trustees if the member’s life events diverged from the expected path – such as in the event of a premature death.
“Which is why, I believe, we need some sort of safe harbour protection,” Callil said.
UniSuper head of product Ian Lorimer, however, was convinced the proposed framework’s safe harbour was pointless, because it would not cover important scenarios. Lorimer stressed this was his personal view and was not necessarily shared by the UniSuper executive and board.
“If you look in the CIPR paper, there are a number of exclusions to the safe harbour. [The very things for which trustees want safe harbour, it doesn’t cover],” Lorimer said.
An example he gave is where a trustee knew a member was of ill health because they claimed related insurance through the fund. In that case, safe harbour protection would not apply if that member were directed into a CIPR that was designed for long-life expectancy.
“But that’s the sort of thing [a super fund] might not pick up and link together, because claims are arranged under different systems. That’s where a trustee would want some safe harbour protection,” Lorimer said.
Third-party authorisation of CIPRs in the mix
Whether or not to include a legal safe harbour is just one of many aspects of the design of the CIPR framework yet to be decided.
Kennedy said Treasury was still considering the relative benefits of regulating CIPRs under a full-scale licensing regime. Doing so would be following the same model as MySuper, which regulated default accumulation phase super accounts. (MyRetirement was floated as an alternative name for CIPR in the December discussion paper.)
To be a CIPR provider under such a regime, trustees would be required to hold a specific licence issued by the Australian Prudential Regulation Authority and gain approval for each CIPR the fund offers.
“This is a relatively expensive model; nevertheless, that is still an option on the table,” Kennedy said. “But we are also interested in exploring third-party authorisation.”
This milder regime would necessitate objective requirements – as opposed to a subjective one – so that a third party, such as an actuary, could certify that a product meets the minimum standards.
Kennedy said he believed the establishment of a third-party authorisation regime for CIPRs was far more likely than leaving funds to their own devices to assess the appropriateness of their products.
“It would be a very brave government that went [with a] self-assessment approach, given recent experiences in financial services, so I don’t think that is a particularly likely option at this point,” he said.