Call to grandfather social security status of legacy products

The failure to address the social security treatment currently applying to legacy pension products risks impeding the Government’s efforts to make it easier for individuals to exit legacy retirement products.

The Federal Treasury has been told that while proposed new regulations will be helpful to both the self-managed superannuation funds (SMSF) sector and for retirees trapped in non-commutable legacy pension products, the Government needs to go further.

The Institute of Financial Professionals Australia (IFPA) has told a Treasury consultation that, amongst other things, there is a need to grandfather social security exemptions to act as an incentive.

In doing so, it pointed to a 2021/22 Federal Budget factsheet that stated that the social security treatment of legacy products would not transition over for those who elect to convert them.

“This means any social security treatment the product carries such as 100% or 50% asset test exemption and/or grandfathering for income test purposes will cease upon commutation,” it said.

“The factsheet also stated that there will be no re-assessment of the social security treatment the product received prior to the commutation. Fortunately, this means that individuals would not be required to pay back any overpaid entitlements.”

“However, we believe not retaining the existing social security treatment that applies to legacy pensions may be a reason why this measure won’t be as successful as it could be because the loss of social security exemptions is a barrier to commute,” the IFPA response said.

“As such, we propose that the existing social security exemption should be grandfathered for affected individuals, if possible,” it said.

Elsewhere in its response, IFPA suggested that allowing legacy pensions to be commuted should also be extended to larger funds overseen by the Australian Prudential Regulation Authority (APRA).

It said it did not see why the measure should be restricted to SMSFs.

“In other words, we question why other legacy pensions, such as lifetime products offered by large APRA-regulated defined benefit schemes or public sector defined benefit schemes are excluded from this measure,” the IFPA response said.

“That said, as members of our association primarily look after clients that have SMSFs, we will leave it to industry bodies representing the large APRA-regulated fund sector to provide their views and make submissions on this matter.”