Comprehensive Income Product for Retirement - "CIPR" or "MyRetirement"
A key recommendation of the Financial System Inquiry (Murray Report) in 2014 was that superannuation funds should provide access to Comprehensive Income Products for Retirement (CIPR's) for members in retirement. This is a long, awkward acronym for a product that would provide members with a regular and stable income stream through retirement at low cost and provide reasonable flexibility. "Flexibility" in this context means some access to capital at the member's request.
The Government supports the construction of CIPR's, and sees them as a way of better managing a situation in which retirees are generally opting for account based pensions and "self insuring" against longevity risk, sometimes by living more frugally than required. There is also some appreciation that, although the system and circumstances retirees face can be extraordinarily complex, many will nevertheless not seek appropriate professional advice - and consequently a simpler product choice would be very beneficial.
In the May 2018 Budget, the Government announced that it would introduce a "retirement income covenant" that would require super funds to offer their members CIPR products - these are called MyRetirement products by the Government, which simply adds to the confusion. Whilst this is clearly a "good idea", with broad support, there is no clear cut understanding at the moment regarding the structure of such a product.
One industry commentator, lamenting the need to provide such a product, said there was no point in developing a product that would, "only be used by 10% to 15% of the population". Whatever the merits or otherwise of a CIPR the comment is misguided, the problem is that no retiree knows whether they will be in that "10% to 15%" and this causes over-saving across a broad section of the community.
The Government certainly sees the product as having many of the features of an annuity, but as we discuss elsewhere, there are significant problems surrounding annuities in Australia - particularly their relatively low rates of return and lack of providers. In essence, the problem is that annuities are typically a complex and costly product and, in order to generate attractive rates of return, they would need to be invested less conservatively than is presently the case - and that has significant implications in terms of income volatility and risk.
Volatility could be addressed to some degree by pooling risk and effectively smoothing income returns - which is reminiscent of how returns on some old-fashioned life insurance policies were managed - but this adds to the complexity of the product. We also think there is some room for the use of tontine products in retirement, if appropriately regulated. These are products where investors receive a regular income which comprises both investment and mortality income - with the latter increasing as the shareholder ages.
Finally, in an effort make the purchase of longevity products - those that provide a life income - more attractive, it was announced in the 2018 Federal Budget that a reduced proportion of the purchase price of "pooled lifetime income streams" would counted towards the age pension asset and income test from 1 July, 2019. " The rules will assess a fixed 60 per cent of all pooled lifetime product payments as income, and 60 per cent of the purchase price of the product as assets until 84, or a minimum of 5 years, and then 30 per cent for the rest of the person's life".
Note that the Government has clearly indicated that no one will be forced to take up a CIPR at retirement. That doesn't mean, of course, that it can't make it difficult or unattractive to do so through use of tax or pension policies. At the moment, however, the Government's intentions with respect to CIPR's remain largely "aspirational" - a "work in progress" except for QSuper's Lifetime Pension, on which we provide a commentary in our blog.
Given the release of the Lifetime Pension product in April 2021, we hope and expect that it will be followed by a raft of similar products from major super funds, focused on providing reliable retirement income, and providing an alternative or complement to annuities.
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