Treasury called upon to clarify uncertainties with legacy pensions

While the draft regulations released by the government have provided some insights into how to deal with non-commutable income streams, some aspects of how the rules will operate remain unclear and in need of clarification.

Colonial First State executive manager Craig Day said the draft regulations released by the government suggest that super funds will be able to commute those old non-commutable pensions in order for them to maintain their existing account base pension.

“Now the interesting thing there is that, even if the rules are implemented as suggested to give funds or members the ability to commute, it will also be up to funds to agree to that, and you may have a lot of large funds out there, retail funds or funds paying these retail pensions that may refuse a commutation,” said Mr Day.

This would mainly be due to liquidity issues with the larger funds, he explained.

“With SMSFs [however] there’s a bit more flexibility there to commute out, and enough of their pension to allow them to maintain something like an account based pension, the uncertainty there though is if it’s something like a term allocated pension, exactly how much are you required to commute to create that space?”

Mr Day said it’s not entirely clear in the draft regulations how that will work.

“Another thing that’s not clear in the draft regulations is that it’s allowing people to commute where it’s expected that they will have an excess,” he said.

“Now, how do we quantify what that expected excess is? And what requirements will be imposed on the trustee to be satisfied that there is an expected excess? So all of these issues need to be determined.”

Mr Day said he expects that’s the feedback the industry has given the government in the consultation ending this week.

“Hopefully those types of issues will get resolved,” said Mr Day.

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