“The questions are: what are the Centrelink issues and has the statutory instrument defused the issue?”

Hallinan said the issue is that a non-commutable pension that is asset-test exempt must not be commutable except in very limited and specific conditions.

“Under the asset test rules, an asset-test exempt pension which is merely potentially commutable, meaning the pension can be commuted in circumstances other than those set out in the Social Security Act, will cease to qualify as an asset-test exempt pension,” he said.

“The entitlement to the age pension for the previous five years will be reassessed on the basis that the pension was not an asset-test exempt pension. This reassessment of the age pension entitlement will usually result in a determination that there has been an overpayment of the age pension and will constitute a debt owning by the recipient to Centrelink.”

Hallinan added that SUPERCentral understands Centrelink is not currently seeking to reassess the entitlement to the age pension that arises merely because a previous asset test exempt pension is now commutable due to the application of the reforms.

“Presumably, in due course, the government will introduce retrospective legislation to amend the asset-test exempt income stream provisions to ensure that the exempt status is not lost merely because the pension is now potentially commutable.”

“In the case of lifetime pensions, this may involve an amendment to section 9A, the effect of which is that an asset-test exempt lifetime pension still satisfies the non-commutation requirements despite the reforms. In the case of the other types of asset-test exempt pensions corresponding amendments will have to be made to section 9B (life expectancy pensions) and section 9BA (market linked pensions).”

An alternative is that the Secretary of the Department of Social Services could issue guidelines under s9A(6) to treat lifetime pensions that no longer satisfy the asset test requirements because of the reforms, as continuing to satisfy those requirements unless and until the pension is commuted.

“Unfortunately, while the specification does address and solve one issue arising from the reforms it only partially addresses another issue,” Hallinan said.

There is one good aspect of the specification, he said, in that if and when an asset-test exempt pension is fully commuted in accordance with the reforms, the pension will cease to exist and the entitlement to the age pension is retrospectively reassessed for the previous five years.

“This reassessment will normally determine that the age pension has been overpaid as the pension is treated as an asset-tested pension for the purpose of the reassessment, and a debt will be payable by the member to Centrelink. The specification completely waives any debt which arises by reason of the reassessment.”

“Consequently, if the asset-test exempt pension can be fully commuted within the five-year window, there effectively is no reassessment as the debt is waived and the commutation amount is now either a balance in a super fund, cash in hand, or the opening balance of an account-based pension with the entitlement to the age pension.”

A less favourable aspect of the specification is that in respect of each fortnightly instalment period commencing on or after 7 December 2024, the pension is no longer an asset-test exempt pension, and the entitlement to the age pension should be determined on the basis that the pension is not asset-test exempt.

“As the entitlement to the age pension is determined in respect of each fortnightly instalment period, there is an overpayment of the age pension in respect of each such period as Centrelink has not changed the status of the pension from asset-test exempt to assets tested.”

“The solution is to waive, in respect of the affected fortnightly instalment period, the overpayment of the age pension in respect of that period. This solution treats the consequence and not the cause of the issue.”

The issue is that a pension that immediately before 7 December 2024 was asset-test exempt is now asset tested merely because of the legacy pension reforms.

“The better solution would have been to amend the relevant definitions (sections 9A, s9B and s9BA of the Social Security Act 1991 respectively applying to lifetime, life expectancy and marked linked pensions) so that commutability solely due to the reforms is disregarded unless and until there is a commutation.”