Mercer Australia senior actuarial partner David Knox is confident Parliament will soon pass a law enabling the superannuation industry to start designing retirement income products for investors.

He told Investment Magazine the new legislation – which would change how annuities are to be means tested – could be passed as early as February 12, given the widespread support for the bill from both major political parties.

The Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018 changes how the value of longevity products is assessed for the age pension assets and income tests.

The Senate committee scrutinising the bill is due to report to Parliament on February 11 and Knox says Canberra would be keen to trumpet its passing as a step in its campaign to make retirement secure the following day.

As part of the bill, from July onwards, annuities will be assessed only at 60 per cent of their purchase price for at least five years or until the owner reaches age 84.

“One must recognise that the means-tested age pension drives behaviour and, therefore, these changes will help nudge a significant number to look at the longevity products,” Knox said.

Since the legislative change would allow retirement income product users to claw back some cash, the industry would be incentivised to design products that provide certainty for retirement income, said Knox, who will speak on this topic at Investment Magazine’s Retirement Conference on March 19 in Melbourne.

“The new legislation would kickstart the development of Comprehensive Income Products for Retirement (CIPR),” he said.

In last year’s Federal Budget, the government introduced the Retirement Income Framework and the accompanying “retirement income covenant”, which would, for the first time, require super trustees to help members reach their retirement income objectives by offering a CIPR.

The government’s proposal to legislate the covenant by July 1, 2019, for commencement from July 1, 2020 will remain but funds do not have to offer a CIPR until July 1, 2022.

Knox, who has been at Mercer for 14 years, dismissed criticism that trustees were dragging their feet on the creation of CIPRs, saying they were awaiting draft legislation relating to the covenant before proceeding.

Super funds have had a “fair bit on their plate”, he said.

“Consequently, most don’t want to spend any time on the retirement phase until they know what the rules are. Once we have the means test in place and the covenant, CIPRs will evolve naturally.”

Knox said he expected the draft legislation to be released in the first quarter of the year.

The first major decision for funds is whether they create their own longevity product or outsource it to another provider.

“Some funds are up to the task of developing in-house products; others will think it’s better to outsource,” Knox said.

In October, Assistant Treasurer Stuart Robert announced super funds would not have to offer CIPRS until July 1, 2022 – an extension of two years.

Last week, the Productivity Commission deemed this move “sensible”, as the process to create products best suited to various members’ retirement needs has so far been “beset by design challenges”.

“Trustees do not always want to offer these products, and forcing them to do so may conflict with their obligations to act in members’ best interests,” the PC’s report stated. “The government should thus reassess the benefits and costs of its proposed retirement income covenant, and abandon it if the flaws cannot be sufficiently remediated.”

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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