Govt Actuary recommends 17.5% Div 296 DB reduction factor

Mike Taylor

Managing Editor/Publisher, Financial Newswire

18 March 2026

The Australian Government Actuary has recommended a 17.5% reduction factor for defined benefit funds within the regulatory arrangements covering the Government’s Division 296 superannuation tax arrangements.

The Treasury released the AGA’s recommendation as part of the consultation process around the regulations underpinning the Division 296 arrangements.

In a letter to Treasury, the AGA notes that the objective is to recommend a ‘reduction factor for the Division 296 tax that will reduce the earnings base for defined benefit superannuation interests.

It said that the policy intent is to provide a a broadly commensurate reduction to that experienced by defined contribution interests which have shifted from a ‘gross earnings base’ including capital asset growth, to a ‘realised earnings’ base using income tax concepts including only including table capital gains net of any applicable CGT discount.

The letter said the defined contribution approach is intended to reflect earnings from an underlying portfolio of assets.

“I have been advised that the intention is to have a single reduction factor – prescribed in Regulations – that will be used to adjust the earnings of every relevant superannuation interest, regardless of age, payment level, phase, or other features,” the letter said. “Furthermore, there is no intent to routinely revise this factor, it is intended to be set and likely remain unchanged over a longer period.”

“Based on modelling undertaken by this office, I recommend that the reduction factor for defined benefit interests be set at 17.5%,” it said.

The letter from the AGA then went on to explain the methodology underlying the recommendation as follows:

• Construct a theoretical portfolio of assets returning 6% pa and being gradually sold down to rebalance to the target asset mix as pension payment liabilities are met.
• Simulate this investment, payment, and rebalancing activity across the lifecycle of a typical defined benefit lifetime pension fund.
• For each modelled year, establish the proportionate difference between the gross earnings (including unrealised asset growth) and the realised receipts (including capital gains subject to the CGT discount.
• Using this model, derive an aggregate portfolio of assets weighted to reflect an indicative cohort of growth and pension phase members.
• Consider the changes in demographic profile and growth/pension phase liabilities over time, noting that this measure is effective initially for the financial year ending 30 June 2027.

It said the adoption of an asset return of 6% pa is consistent with the assumed asset return used to calculate the value of DB interests for the purpose of family law valuations.

“This rate reflects typical target earnings for balanced portfolios in large pooled super funds and reflects the following further assumptions:

• The asset portfolio mix assumes a simplified allocation of 70% of assets to share investments, with 30% allocated to cash investments.
• The share investments are expected to generate a return of 7% pa comprising dividends of 4% pa and unrealised capital gains of 3% pa. The cash investment return is expected to be 3.8% pa.
• These indicative rates of return, and weighting between revenue receipts and capital growth is broadly consistent with that used in the AGA methodology in January 2026 to recommend deeming rates for use in the means test, as agreed by the Future of Social Security Deeming Rates measure.