Legacy pensions expected to hit solvency issues this year
The investment market falls resulting from COVID-19 are likely to see a greater number of SMSFs with defined benefit pensions experiencing solvency issues this year, says an actuarial certificate provider.
In an online update, Accurium said that despite a partial recovery in equity markets since the lows of March, prices have been impacted across almost all asset classes.
“Add record-low interest rates to the mix and many funds will be looking at lower balances at 30 June 2020 compared to last year,” Accurium said.
The SMSF services provider noted that SMSFs paying legacy defined pensions require an actuarial valuation each year to ensure they remain solvent, and that upcoming solvency tests will be based on asset values as at 30 June 2020.
“Where funds’ asset values have fallen, this may mean that the value of the defined benefit pension liabilities exceeds the value of their supporting assets,” it explained.
“For pensions with an assets test exemption, this can lead to a loss of that valuable exemption and a reduction in age pension entitlements. More severely impacted funds may be forced to commute their pensions and move into new income streams.”
SMSF clients with defined benefit pensions that may have been affected should look to obtain the necessary actuarial valuations so that they can consider the options available.
“For many funds, restructuring into new income streams can actually provide better outcomes for trustees, particularly from an estate planning perspective,” Accurium said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.