After releasing a position paper on the retirement income covenant back in May this year, the government has now released a consultation paper on the development of simplified, standardised metrics in the product disclosure of retirement income products. You can access the paper here.
Assistant Treasurer Stuart Robert said that when people currently approach retirement, they are confronted with complex legal and financial information and complex documents.
“Typically, these documents do not provide clear information on the expected level, variability and duration of retirement income,” Mr Robert said.
The government has therefore proposed introducing an easy-to-read and understand document to supplement existing documents, the Assistant Treasurer said.
Treasury is currently seeking views on what this disclosure fact sheet for retirement income products should look like.
The consultation will examine the appropriateness of the proposed metrics in providing information for consumers to select a retirement income product, the method of calculating risk to retirement income and how the metrics should be presented in the fact sheet.
One of the proposed metrics is that product providers would need to provide an estimate of the expected level of real income that their product can generate for a purchase price of $100,000.
The paper defines income as a disbursement to a member, inclusive of both investment earnings and distributions of capital.
“Income would be displayed net of any fees and charges and reported in real terms, adjusted to expected inflation of 2.5 per cent,” the paper said.
“This would enable consumers to compare the level of income across retirement products on an equivalent basis.”
Another metric which the paper is proposing is the variation in expected income which would show the trade-off between income and risk.
“A measure of the dispersion of decreased payments [would allow] for the size and frequency of negative variations to be taken into account, as well as the possibility of fund exhaustion. This metric would take account of investment strategies, mortality variations, product rules and any protection features a product might have,” the paper stated.
It also suggests including a section about the elements of the product that contribute to the ratings such as information on inflation, longevity and market risks, counterparty risk and guarantees.
“This should give consumers some indication of why products get certain risk rankings and allow easier product comparison.”
The paper noted that there should also be information about the ability to access underlying capital.
“Accessibility of capital in retirement varies depending on the type of product. Products such as ABPs offer very high accessibility to funds and bequests upon death, whereas a product with an annuity component would provide less accessibility but a more stable income. Accordingly, there is a trade-off between that accessibility and volatility of income,” it said.
While several options have been considered when providing information regarding lump sums, including disclosing information on partial withdrawals and full withdrawal, the preferred approach, it said, is to focus on commutable value or the maximum amount of the purchase price a consumer could cash out as a lump sum at any period during the life of the product.
Information should also be provided on what the ongoing income payments to partner would be to or the remaining underlying cash balance to be paid on death and any lump sum death benefits.
“For example, an ABP would outline the underlying cash balance remaining that can be paid to a spouse or partner. For annuities, the percentage of reversionary benefits available for a partner or spouse can be provided,” it said.
The consultation period finishes on 23 March next year.
