Introductory Info

Date introduced: 29 November 2018
House: House of Representatives
Portfolio: Families and Social Services
Commencement: Schedules 1 and 2 on 1 July 2019; Part 1 of Schedule 3 on 1 July 2019; Part 2 of Schedule 3 on 20 March 2020; and Schedule 4 on the day after Royal Assent.

The Bills Digest at a glance

The Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018 comprises four Schedules:

• Schedule 1 will establish means test rules for new retirement income stream products, and amend the rules for existing lifetime income streams.
  • These new products include deferred lifetime annuities (which start making payments to a person when they reach a certain age) and group self-annuitisation products (where individuals pool capital but income stream payments vary depending on investments and the mortality of pool members).
  • The products are aimed at addressing the risk that person will outlive the income stream payable from a standard account-based superannuation product.
  • The proposed means test rules for these products will see the income test assess 60 per cent of all product payments as income and the assets test would assess 60 per cent of the nominal purchase price until the person reaches the life expectancy of a 65 year old male (currently age 84)—or a minimum of five years—and then 30 per cent of the purchase price for the rest of the person’s life.
  • The proposed model addresses many concerns raised by stakeholders during a consultation process.
  • The proposed means test rules for these products appear to favour those with significant financial assets (who are also better able to purchase a mix of products). Government modelling also suggests that investments in lifetime products appear to reduce Age Pension entitlements across a lifetime, resulting in fiscal savings.
• Schedule 2 will:
  • increase the pension Work Bonus, which exempts an amount of income from earnings from the pension income test, from $250 to $300 per fortnight
  • increase the amount of unused Work Bonus amounts that can be saved for later use from $6,500 to $7,800 and
  • allow for the Work Bonus to apply to any remunerative work involving personal exertion, including self-employment and contract work.
  • The Department of Social Services estimates that around 88,750 social security pensioners and 1,000 allowance recipients will receive an increase in their payments as a result of the changes. Around 1,150 people will become eligible for the first time. In addition, around 3,000 Veterans’ Affairs pensioners will also benefit.
• Schedule 3 proposes to expand the Pensions Loans Scheme which allows some people of Age Pension age to receive a top-up payment as a loan secured against their property in Australia—to two groups who are currently ineligible: those who do not qualify for a social security payment under both the income and asset tests, and maximum-rate pensioners. The maximum amount that can be borrowed under the PLS will increase from 100 per cent of the maximum fortnightly rate of the relevant social security payment to 150 per cent of the maximum fortnightly payments as payment plus loan.
  • Very few people (around 650) currently make use of the PLS and the changes are expected to see around 6,000 make use of the scheme over the forward estimates.
  • The changes will remove provisions which allowed for participants to nominate a guaranteed amount of the value of their assets to be set aside from the loan which could not be claimed by the Commonwealth in collecting any debts owed.
• Schedule 4 makes technical amendments and fixes an oversight dating from 2009 where income support recipients aged over the Age Pension age were meant to be able to qualify for the employment income nil rate period. It is unclear if anyone has been affected by this issue.

Schedules 1–3 implement 2018–19 Budget measures and are expected to cost $258.6 million over five years, with the Work Bonus changes alone costing $227.4 million.

Purpose of the Bill

The purpose of the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018 (the Bill) is to amend the Social Security Act 1991 (the SS Act) and the Veterans’ Entitlements Act 1986 (the VE Act) to:

• establish means test rules for new retirement income stream products, and amend the rules for existing lifetime income streams
• increase the pension Work Bonus, which exempts an amount of income from earnings from the income test, to $300 per fortnight and allow for the Work Bonus to apply to any remunerative work involving personal exertion, including self-employment and contract work
• expand the Pension Loans Scheme and
• make technical amendments and clarify that income support recipients aged over the Age Pension age qualify for the employment income nil rate period.

The new means test rules, changes to the Work Bonus and the expansion of the Pension Loans Scheme were announced as the 2018–19 budget measure, ‘More Choices for a Longer Life—finances for a longer life’.[1] In total the measures are expected to cost $258.6 million over five years, with the Work Bonus changes alone costing $227.4 million.[2]

Structure of the Bill and the Bills Digest

The Bill is divided into four Schedules. The Bills Digest will provide background and analysis of each Schedule in separate sections.

Committee consideration

Senate Economics Legislation Committee

The Bill was referred by the Senate to the Senate Economics Legislation Committee (the Economics Committee) on 6 December 2018.[3] In its report, published 11 February 2019, the Economics Committee acknowledged some concerns about having appropriate disclosure and regulatory frameworks for retirement income products in place before making changes to means testing rules (as proposed by Schedule 1). However, the Committee stated that innovative products would not be able to developed and brought to market without the new means test rules. The Economics Committee recommended the Bill be passed.[4]

In their Additional Comments, Australian Labor Party senators raised concerns regarding the regulatory framework for new retirement income products:

Labor Senators recognise that there are potential risks associated with Schedule 1 of the Bill, as noted above. Labor Senators believe it would be preferable for disclosure frameworks, trustee obligations, financial advice frameworks and behavioural impacts to be well understood and improved alongside any changes to pension means testing.[5]

However, the Labor senators stated that the risks did not warrant delaying passage of the Bill.[6]

Senate Standing Committee for the Scrutiny of Bills

In its initial consideration of the Bill, the Senate Standing Committee for the Scrutiny of Bills requested the Minister’s advice as to why it was appropriate to make a number of instruments under the Bill notifiable instruments rather than legislative instruments.[7] Notifiable instruments are not subject to parliamentary scrutiny or disallowance, and are not subject to sunsetting provisions.[8]

The instruments of concern are proposed in Schedule 1 to the Bill and relate to how asset-tested income streams (lifetime) are to be valued for the purposes of the social security and veterans’ entitlements assets test, respectively. The instruments set out the conditions of release for an income stream that determine when a person’s assessment day will commence; and detail how the life expectancy of a man aged 65 is to be worked out as part of the calculation of a person’s threshold day for an asset-test income stream (lifetime).

The Minister for Families and Social Services provided a response dated 9 January 2018 which stated that in the case of the two notifiable instruments:

... an instrument made under these provisions would not be a legislative instrument, as it does not purport to determine or alter the content of the law, or have the direct or indirect effect of affecting a privilege or interest, imposing an obligation, creating a right, or varying or removing an obligation or right.[9]

The Minister’s response explained the purpose of the instruments and the constraints on the instruments imposed by the Bill.

The Committee requested that that the key information provided by the Minister be included in the Explanatory Memorandum but stated that, in light of the information provided, it had no further comment on the matter.[10]

Policy position of non-government parties/independents

As noted above, Australian Labor Party senators raised some concerns regarding Schedule 1 in their Additional Comments to the Economics Committee report on the Bill but stated that these did not warrant delaying passage of the Bill.[11]

Centre Alliance MP Rebekha Sharkie supported the Bill stating, ‘I welcome and support the speedy passage of this Bill, which I believe will be of great benefit to older Australians, but I think we can do much, much more’.[12]

At the time of writing, it was unclear what the positions of other non-government parties and independents were on the measures proposed in the Bill.

Position of major interest groups

Consumer peak body for older people, COTA Australia, in its submission to the Economics Committee inquiry into the Bill, stated that it ‘strongly supports the proposed amendments to the Social Security Act and the Veterans’ Entitlements Act’.[13]

Consumer lobby group National Seniors Australia, in its submission to the Economics Committee inquiry, stated that it supported the proposed changes to the Work Bonus (Schedule 2) and the Pension Loans Scheme (Schedule 3). National Seniors Australia did not comment in its submission on the amendments in the other Schedules in the Bill.[14]

A number of submissions to the Economics Committee inquiry raised concerns that the means testing rules for lifetime income stream products (proposed by Schedule 1 of the Bill) were being legislated prior to the development of an appropriate regulatory and disclosure regime for these products. Industry Super Australia, the Australian Institute of Superannuation Trustees and Australian Super all raised issues with the implementation of Schedule 1 prior to the development of such a framework.[15] However, other stakeholders, including Mercer and the Association of Superannuation Funds Australia argued that the means testing rules needed to be implemented without delay to provide for the development of new superannuation products.[16]

Comments and positions of stakeholders on specific issues are included in the analysis of each Schedule.

Financial implications

The Explanatory Memorandum sets out the estimated financial impact of the Bill’s schedules over the forward estimates period:

• Schedule 1—Lifetime income streams will cost $20.2 million
• Schedule 2—Work Bonus will cost $227.4 million
• Schedule 3—Pension Loans Scheme will cost $11.0 million and
• Schedule 4—Other amendments will have no financial impact.[17]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[18]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[19]

Schedule 1—Lifetime income streams

Schedule 1 creates new means test rules to apply to new retirement income stream products following recent changes to the Superannuation Industry (Supervision) Regulations 1994.

Background

New superannuation products

The 2016–17 Budget included changes to the superannuation system to remove barriers to the development of new lifetime income stream products such as deferred lifetime annuities (which start making payments to a person when they reach a certain age) and group self-annuitisation products (where individuals pool capital but income payments vary depending on investments and the mortality of pool members).[20] The main change was extending the tax exemption on earnings in the retirement phase to these products. This change took effect from 1 July 2017 via the Treasury Laws Amendment (2017 Measures No. 1) Regulations 2017.[21]

Most Australian retirees currently receive income in retirement by drawing down regular amounts of superannuation from an account-based income stream purchased using the funds they have accumulated in their superannuation scheme. These income streams are withdrawals from the amount in the account—while the account balance may earn returns on investment, it will gradually reduce through withdrawals and fees until it runs out, the balance is withdrawn, or the recipient dies and the remaining money is paid to nominated beneficiaries or the recipient’s estate. Non account-based income streams, such as annuities, do not have an account balance. These products generally have a purchase price in which a lump-sum is exchanged for an income stream over a fixed period of years, or for the person’s lifetime.

The other main type of retirement income stream is defined benefits. Members of defined benefit funds can receive their benefits as a lump sum, income stream or combination of both and the amount is generally a final salary or average salary amount multiplied by a factor usually worked out using length of membership in the fund and a percentage of the member’s final salary in each year of service.[22]

The risk that a person outlives their account-based income stream is known as a longevity risk. Many of the new products are aimed at reducing this risk or deriving a benefit from it. Deferred lifetime annuities are intended to address the longevity risk by delaying payment of the income stream until the recipient reaches a certain age but guaranteeing a certain rate of payment from that point on. Such products carry the risk of the purchaser dying before they become eligible for payment. However, the deferred annuity could complement an account-based pension.[23]

Group self-annuitisation products pool the mortality risk in order to deliver a higher income in retirement than an account-based income stream.[24] Participants contribute funds to a pool that is invested in financial assets and regular payments are made from the pool to surviving members. The level of the income stream cannot be guaranteed as it depends on the mortality of participants and the return on their investments. Participants do not have flexible access to the funds they invested and they are unable to bequeath residual amounts to beneficiaries.[25]

To meet the requirements of the new superannuation regulations, and to qualify for the earnings tax concessions, lifetime products must satisfy a declining ‘capital access schedule’. This limits the amount of the initial purchase price of the product that can be returned as a surrender value (if they decide to withdraw from the product) or paid as a death benefit (if they die). The proportion of the capital that is surrendered or paid as a death benefit gradually declines until it reaches zero at the point the person reaches their life expectancy.

Current means test treatment of superannuation

Social security payments are means tested to ensure they are only provided to those who do not have adequate means to support themselves. The pension means testing regime attempts to calculate an individual or couple’s ability to support themselves in retirement via tests on both income and assets. Income or assets over certain threshold values can either reduce a person’s pension payment rate or preclude them from receiving a pension at all. Both the income and assets tests are calculated with the test that results in the lowest rate of payment being applied.[26]

Assets test treatment

To assess retirement income streams the assets test uses either:

• the current market value or account balance or
• capital reduction rules.[27]

The current market value or account balance is used where this is readily identifiable—primarily for account-based income streams and short-term annuities (under five-years). Generally, social security means tests assess the market value of assets.

Capital reduction rules are used where there is no readily identifiable account balance or market value—this is primarily used for annuity products. This approach uses the purchase price of the product in the first year and then reduces that amount over a specified period of time (reflecting the return of the capital investment in the product in the regular amounts paid to the purchaser).[28]

Defined benefit income streams are generally not subject to the assets test because the payments from these schemes do not relate to an underlying capital investment or amount.

Some income streams are considered asset-test exempt depending on their specific characteristics and whether they were purchased in particular periods of time.[29] The types of income streams that meet the criteria for being considered asset-test exempt are generally lifetime and lifetime annuity products but they must have been purchased prior to 20 September 2007 to have any exemption from the assets test. Asset-test exempt income streams purchased prior to 20 September 2004 are considered 100 per cent exempt, those purchased from 20 September 2004 to 19 September 2007 are only eligible for a 50 per cent exemption, while those purchased from 20 September 2007 are not eligible for an exemption from the assets test.[30]

Under the pension assets test, any assessable superannuation assets will be added together with an individual or couple’s other assessable assets (such as shares, savings or real estate other than the family home).

An individual’s pension rate will be reduced if their total assets exceed the amounts in Table 1.

Table 1: Asset value limits for full-pension

Family circumstances	Homeowner	Non-homeowner
Single	$258,500	$465,500
Couple, combined	$387,500	$594,500
Couple, separated due to illness, combined	$387,500	$594,500
Couple, 1 partner eligible, combined	$387,500	$594,500

Source: Department of Human Services (DHS), ‘Assets’, DHS website, last updated 20 March 2019.

For every $1,000 that an individual or couple’s assets exceed the amounts in Table 1, their fortnightly pension rate will be reduced by $3 (single or $1.50 for a partnered person).[31]An individual’s pension rate is reduced to zero when their asset value is higher than the amounts in Table 2 (these amounts can be higher if the person receives Rent Assistance).

Table 2: Asset value limits for part-pension

Family circumstances	Homeowner	Non-homeowner
Single	$567,250	$774,250
Couple, combined	$853,000	$1,060,000
Couple, separated due to illness, combined	$1,005,000	$1,212,000
Couple, 1 partner eligible, combined	$853,000	$1,060,000

Source: DHS, ‘Assets’, DHS website, last updated 20 March 2019.

Income test treatment

The application of the pension income test differs depending on the type of superannuation income stream.

Since 1 January 2015, deeming has been used for superannuation products with an account balance. Deeming was already being used to assess income from most financial investments such as shares, savings or bonds. Deeming assumes that financial investments are earning a certain rate of income (via dividends or interest for example), regardless of the amount of income actually earned. The deemed rate of income increases with the value of the assets. The rate is applied to the total value of all financial assets subject to deeming. Currently a deeming rate of 1.75 per cent applies to the first:

• $51,200 of a single person’s total financial investments
• $85,000 of a pensioner couple’s total financial investments or
• $42,500 of total financial investments for each member of a couple in receipt of an allowance payment (such as Newstart Allowance).[32]

A deeming rate of 3.25 per cent applies to financial investments above these amounts. The thresholds at which the higher deeming rate applies are indexed in line with movements in the Consumer Price Index in July of each year.[33]

Those with account-based superannuation income streams and who were receiving the Age Pension prior to 1 January 2015 continue to be assessed under the previous income test rules for those pensions unless they have chosen or choose to invest in a product subject to the deeming rules after this date.

The rules for account-based superannuation pensions prior to 1 January 2015, and those that still apply to other superannuation products such as annuities, use a ‘deduction amount’ approach which is intended to not treat the drawdown of the original capital investment as income.[34] In order for the income test to only assess income earned from the asset (not the value of the asset itself which is being drawn upon), an amount is deducted from the income stream which represents the ‘return of capital’ or a return of the purchase price of the product. The deduction is equal to the initial value of the account divided by a factor which is either the term of the income stream or life expectancy as derived from life tables. The way this return of capital is calculated often results in little or no income being assessed for these products as it falls under the relevant income test threshold.[35]

Under the income test for pensions, a pensioner’s fortnightly rate of pension will not be reduced unless they have income of more than $172 per fortnight (if single) or $304 per fortnight (if a couple—combined).[36]

A single person’s fortnightly pension is reduced by 50 cents for each dollar in fortnightly income over $172. Their pension rate will be zero if their fortnightly income is $2,024.40.

A couple’s combined fortnightly pension is reduced by 50 cents for each dollar of combined fortnightly income over $304. Their pension rate will be zero if their fortnightly income is $3,096.40.[37]

These cut-off points can be higher if the pensioner receives Rent Assistance, or if some of their income is from paid employment and they are eligible for the Work Bonus (see Schedule 2 below).

Means test treatment of new superannuation products

As noted above, the current income test treatment of annuities uses a ‘deduction amount’ approach where an amount representing the return of capital is deducted from the amount to be assessed. Similarly, the asset test assesses the purchase price depreciated over the term of the annuity or the person’s life expectancy at the time of purchase.[38]

Explaining the need to change the means test to accommodate lifetime products, the Department of Social Services stated:

The existing rules for lifetime income products do not provide an adequate framework for assessing the diverse range of complex and pooled lifetime products that are expected to emerge as the retirement phase of the superannuation system becomes more fully developed ... the existing rules have concessional elements. They were not designed or intended to accommodate market innovations or increasing product complexity and may provide unfair, inconsistent or unduly concessional outcomes if applied to a broader range of retirement income products. This may result in uncertainty for industry and retirees, and risks distorting investment decisions.[39]

As part of the changes proposed in the 2016–17 Budget, the Government committed to a consultation on how new lifetime products would be treated under the Age Pension means test.[40] The Department of Social Services released a discussion paper on the means testing of lifetime retirement income products in early 2017.[41] A position paper detailing the proposed new means test rules was released on 16 January 2018.[42] Following consultation on the position paper, the Government announced new rules in the 2018–19 Budget that varied from those proposed in the position paper.[43]

The position paper proposed that for pooled lifetime income streams:

• the income test would assess 70 per cent of product payments as income
• the assets test would assess 70 per cent of the nominal purchase price until the person reached their life expectancy at purchase, and then 35 per cent from that point on.[44]

The position announced in the Budget proposed that for pooled lifetime income streams:

• the income test would assess 60 per cent of all product payments as income and
• the assets test would assess 60 per cent of the nominal purchase price until the person reached the life expectancy of 65 year old male (currently age 84) – or a minimum of five years – and then 30 per cent of the purchase price for the rest of the person’s life.[45]

Lifetime products held as an investment inside an account-based income stream will also be assessed under the new rules.

Rationale for initial proposal

The position paper stated that the proposed means test parameters ‘were designed to ensure that the new rules do not unfairly disadvantage people who choose to make use of a pooled lifetime product’.[46] They were developed with a focus on their impact on an individual’s total retirement income—including income from the Age Pension.

The position paper states that assessing a fixed assets test value over the duration of a pooled lifetime product produces more consistent Age Pension outcomes over time, and that assessing 70 per cent of the purchase price recognises that people who have committed to pooling their savings in a lifetime product cannot flexibly draw on these pooled assets for self-support. It states that this results in more favourable asset test outcomes in early years compared to the current rules, and those that apply to account-based income streams.[47]

Similarly, the position paper found that assessing 70 per cent of payments as income produces ‘sustainable social security outcomes across retirement at various levels of savings’. It found that the current income test rules assume that all capital is returned to a person by the time they reach their life expectancy, but continue to offer a deduction on assessable income indefinitely. This results in a low proportion of payments from lifetime products being assessed in the early years and overly concessional outcomes beyond life expectancy.[48]

Rationale for changed parameters

No rationale was given for the differences in the means test parameters between the position paper and those announced in the 2018 Budget.

Some stakeholder submissions to the position paper did include proposals to modify the parameters. It would appear that the Government has adopted some of the suggestions made in these submissions.

The Actuaries Institute noted that when total outcomes were considered (including bequests or death benefits), there appeared to be a significant disincentive to purchase lifetime income streams.[49] The Actuaries Institute observed that the position paper proposals had a greater adverse impact on those with lower asset levels and suggested that the income test percentage was high compared with the proportion of an annuity payment that is made up of earnings—it suggested a rate of 60 per cent which would be reduced to 30 per cent at age 85.[50] The Institute suggested that using life expectancy for the asset test percentage change (the ‘step down’) could create complexities where individuals had multiple products and it would be better to have a set age (it suggested 85).[51]

The Association of Superannuation Funds of Australia (AFSA) also argued that the income test percentage was high and did not accurately show the proportion of an annuity that reflected a return of capital.[52] AFSA recommended a rate of 60 per cent for the income test. It also recommended a 60 per cent rate for the asset test, stepping down to 30 per cent from life expectancy.[53]

The Australian Institute of Superannuation Trustees (AIST) was supportive of the 70 per cent income test parameter but raised issues with the design of the asset test treatment of these products.[54] The AIST argued that while the value of payments from a pooled lifetime product would not change over time (other than indexation or in the use of non-guaranteed income streams), the value of the asset notionally declined as there were an ever-decreasing number of payments left to be paid as the holder reached the end of their life, and a declining capital access schedule could be seen as affecting the value of the asset over time. The AIST suggested a gradual decrease in the percentage of the purchase price assessed over time (rather than a single step-down).[55]

The Financial Services Council, a peak body for retail and wholesale fund managers and superannuation funds, also raised concerns that the parameters disadvantaged those with lower asset levels who invested in lifetime products at age 65 as well as deferred products.[56] It also observed that the income test reflected a slow rate of return of capital. The Council also raised the issue of the application of the assets test to products with no surrender value or death benefit. The Council recommended that the 70 per cent parameter for both the income and assets test should be adjusted downwards to reflect the impact of factors such as return of capital, implied lifetime insurance, lack of access to capital and deferral periods on lifetime products.[57]

Industry Super Australia noted that the new income test was less concessional than current arrangements and this would make it less likely for pooled products to be taken-up by retirees.[58] However, it suggested that the income test treatment of deferred annuities (with no income test applying until payments began) was ‘excessively concessional’ in that it could encourage retirees to game bequests and could see Age Pension resources allocated to those who could otherwise support themselves if they invested in an immediate income stream.[59]

Consultancy firm Rice Warner recommended that the assets test be simplified so that the step-down occurred at a specified period after purchase (for example, 20 years for a person who purchased an annuity at age 65) rather than using life expectancy.[60]

Investment and superannuation firm, Mercer, argued that the position paper’s proposals did not taken into account the issue of access to capital for lifetime products and that the asset test should compensate for this by reducing the assessed percentage from 70 per cent and 35 per cent to 60 per cent and 30 per cent respectively.[61] Mercer also recommended that the income test be modified to use deeming rules or that it be halved in a similar way to the assets test from life expectancy (or a specified age).[62]

Key issues and provisions

Final rules provide greater incentive to purchase lifetime products

Many of the issues raised during the consultation period on the position paper appear to have been addressed in the proposals announced in the Budget. These include lowering the percentages assessed under the income and assets test and providing for the life expectancy of a male at 65 to be the step down point under the assets test, rather than the life expectancy calculated for the individual who has purchased the income stream.

While the Department of Social Services has published modelling of the position paper and the final proposals, the assumptions underlying the models have changed so they do not offer a means of comparing the different settings.

The tables below show the differences in outcomes for two of the lower superannuation scenarios (single homeowner with $300,000 in superannuation assets and a homeowner couple with $400,000 in superannuation assets) as presented in the position paper and the modelling of the final rules as proposed in the 2018–19 budget. The results are not comparable due to changes in parameters and assumptions; however, they illustrate how some of the concerns raised by stakeholders have been addressed, and how lifetime products are generally more attractive under the final rules.

Acronyms used in the tables:

• ABIS: Account Based Income Stream
• LA: Life Annuity
• GSA: Group Self Annuity
• DLA: Deferred Lifetime Annuity
• DGSA: Deferred Group Self Annuity.

Note that the sum of columns do not always add up to the totals shown. This appears to be due to rounding.

Table 3: Position paper results for single homeowner with $300,000 in superannuation and no other assessable assets ($)

		Lifetime Annuity Products		Group Self- Annuity Products		Deferred Products
	ABIS (min. draw down)	100% LA	30% LA / 70% ABIS	100% GSA	50% GSA / 50%ABIS	30% DLA / 70% ABIS	20% DGSA / 80% ABIS
Age Pension	395,566	369,414	392,867	356,676	381,735	394,298	398,527
Product Income	210,400	238,557	218,847	274,953	242,676	242,644	245,549
Total Income	605,966	607,971	611,714	631,629	624,411	636,942	644,075
Death Benefit / Bequest	62,929	19,957	50,037	0	31,464	25,782	22,623
Total (including bequest)	668,895	627,928	661,751	631,629	655,875	662,724	666,698

Source: Department of Social Services (DSS), Means test rules for lifetime retirement income streams: position paper, DSS, Canberra, 7 February 2018, p. 16.

Table 4: Final modelling results for single homeowner with $300,000 in superannuation and no other assessable assets ($)

		Life Annuity Products		Group Self- Annuity Products		Deferred Products
	ABIS (6%)	100% LA	30% LA / 70% ABIS	100% GSA	50% GSA /50%ABIS	30% DLA /70%ABIS	20% DGSA / 80% ABIS
Age Pension	406,432	380,371	403,697	378,734	398,234	406,582	410,112
Product Income	222,286	269,410	236,423	274,866	248,576	253,693	257,090
Total Income	628,718	649,781	640,120	653,600	646,810	660,274	667,201
Death Benefit / Bequest	58,491	19,378	46,757	0	29,246	24,070	20,865
Total (including bequest)	687,209	669,159	686,878	653,600	676,056	684,345	688,066

Source: DSS, Final modelling results for the new means test rules for pooled lifetime income streams, DSS, Canberra, July 2018, p. 8.

Table 5: Position paper modelling for couple homeowner with $400,000 in superannuation and no other assessable assets ($)

		Lifetime Annuity Products		Group Self- Annuity Products		Deferred Products
	ABIS (min. draw down)	100% LA	30% LA / 70% ABIS	100% GSA	50% GSA /50% ABIS	30% DLA / 70% ABIS	20% DGSA / 80% ABIS
Age Pension	616,049	581,759	612,312	564,774	600,059	606,187	614,825
Product Income	280,533	318,076	291,796	366,604	323,569	323,525	327,398
Total Income	896,582	899,835	904,108	931,378	923,627	929,711	942,223
Death Benefit / Bequest	83,905	26,610	66,717	0	41,953	34,376	30,164
Total (including bequest)	980,487	926,445	970,825	931,378	965,580	964,087	972,387

Source: Department of Social Services (DSS), Means test rules for lifetime retirement income streams: position paper, DSS, Canberra, 7 February 2018, p. 25.

Table 6: Final modelling results for couple homeowner with $400,000 in superannuation and no other assessable assets ($)

		Life Annuity Products		Group Self- Annuity Products		Deferred Products
	ABIS (6%)	100% LA	30% LA / 70% ABIS	100% GSA	50% GSA /50%ABIS	30% DLA/ 70% ABIS	20% DGSA / 80% ABIS
Age Pension	630,223	597,811	627,425	595,629	623,059	622,911	630,537
Product Income	296,382	359,213	315,231	366,488	331,435	338,257	342,786
Total Income	926,605	957,024	942,656	962,117	954,493	961,167	973,323
Death Benefit / Bequest	77,988	25,837	62,343	-	38,994	32,094	27,820
Total (including bequest)	1,004,593	982,862	1,004,999	962,117	993,487	993,261	1,001,143

Source: DSS, Summary modelling results for the new means test rules for pooled lifetime income streams, DSS, Canberra, July 2018, p. 17

The results in the position paper indicated that pension and product income from lifetime products were higher than account-based products at the minimum draw down. However, when death benefits and bequests were included, the account-based products were generally higher. The results were not the same for those with higher levels of superannuation assets. In the final modelling, the pattern is replicated for pension and product income, but there are more balanced outcomes when the value of death benefits and bequests are included. The final modelling results present the lifetime products more favourably than the position paper for people in these scenarios. However, results vary significantly depending on the mix of products chosen.

The proposed means test rules for these products appear to favour those with significant financial assets (who are also better able to purchase a mix of products). The modelling also suggests that investments in lifetime products appear to reduce Age Pension entitlements across a lifetime, resulting in fiscal savings. The modelled scenarios are for individuals living much longer than current life expectancies meaning that the total incomes presented may not be very realistic for most retirees.

Replacement Explanatory Memorandum issued due to error in the original

The original Explanatory Memorandum described a provision at item 11 which defines the term ‘preservation age’ which is not actually included in the Bill. Preservation age generally refers to the age at which a person can become eligible for superannuation payments. The original Explanatory Memorandum also described the term preservation age being used in relation to amendments proposed by item 36 which detail how to determine the ‘assessment day’ of a lifetime income stream not regulated under the Superannuation Industry (Supervision) Act 1993. The Bill refers to ‘pension age’ (the age at which a person becomes eligible for the Age Pension) in these instances rather than preservation age.

This issue also affects the numbering of the items referred to in the original Explanatory Memorandum.

A replacement Explanatory Memorandum was issued on 13 February 2019.[63]

Key provisions

Social Security Act 1991

Items 1, 8, 10, 11, 13, 15, 17, 18, 22, 23, 29, 30 and 31 remove references to deferred annuities from various sections of the SS Act to avoid confusion with deferred lifetime income streams. The Explanatory Memorandum states that deferred annuities ceased to be offered in 1994 and there are no existing pension recipients with deferred annuity assets.[64]

Item 2 adds asset-tested income stream (lifetime) to the definition list at subsection 9(1) with the meaning of the term to be given in proposed section 9E (inserted by item 21).

Item 9 adds proposed paragraph (n) to the definition of income stream to specifically exclude from that definition any compensation payments to a person under an insurance scheme made in relation to an inability to undertake remunerative work or, to a total and permanent disability or incapacity. This amendment does not appear to be related to the purpose of Schedule 1. The Explanatory Memorandum states that the purpose of the amendment is to ‘remove ambiguity present in the existing legislation’.[65]

Item 12 inserts proposed paragraph 9(1B)(h) to include an asset-tested income stream (lifetime) that is not regulated under the Superannuation Industry (Supervision) Act in the definition of managed investments for the purposes of the SS Act. A note inserted by item 14 (at the end of subsection 9(1B)) and proposed paragraph 9(1C)(j) inserted by item 16 clarify that such income streams should only be assessed as managed investments if the person’s assessment day has not yet occurred. Generally, a person’s assessment day will be when they first receive a payment from the income stream. Assessment day is defined in new section 1120AB (inserted by item 36). This means that where an asset-tested income stream (lifetime) is deferred (and payments do not commence until a later period) they are treated as a managed investment for the purposes of the assets test. Once payments commence the deferred asset-tested income stream (lifetime) will be assessed in the same way as non-deferred products of the same type.

Item 21 inserts proposed section 9E which defines asset-tested income stream (lifetime). An asset-tested income stream (lifetime) is one where:

• the contract or governing rules for the provision of the income stream ensure that once payments commence, the income stream is to continue for the remainder of the life of one or more individuals
• the contract or governing rules for the provision of the income stream ensure that the amounts of those payments are determined by the age, life expectancy or other factors relevant to the mortality of those individuals
• it is not an asset-test exempt income stream nor a defined benefit income stream and
• it meets any conditions set out in any legislative instrument made by the Secretary of the Department of Social Services for the purposes of subsection 9E(2).

The definition also allows the Secretary to determine, via legislative instrument, that an income stream is an asset-tested income stream (lifetime) even though it does not meet the other conditions set out in section 9E as long as it is not an asset-test exempt income stream or a defined benefit income stream.[66] The Explanatory Memorandum states that the use of these instruments is intended to provide flexibility so that products which emerge in the future can have the new means test rules applied to them.[67]

Item 26 inserts proposed section 1099DAB which provides the formula for calculating the amount of income a person is taken to receive from an asset-tested income stream (lifetime) each year, for the purposes of the income test. The formula is: the annual amount payable to the person under the income stream multiplied by 0.6. This means that 60 per cent of the income stream’s annual payment is assessed.

Item 36 inserts proposed sections 1120AA and 1120AB. New section 1120AA provides for the value of asset-tested income streams (lifetime) that are managed investments—that is, those lifetime income streams that are not regulated under the Superannuation Industry (Supervision) Act and have not yet reached their assessment day. The assessment day is generally the day the income stream is released to the person or they receive their first payment amount. The value of these income streams for the purposes of the assets test is the purchase amount of the income stream. This can be the sum of any compounded amounts paid in relation to the income stream minus any commuted amounts, or an amount worked out in accordance with a legislative instrument made by the Secretary (under subsection 1120AA(7)).

Subsection 1120AA(5) sets out how to work out the value of compounded amounts in relation to the purchase amount of these income streams—this is done to determine the value of the deferred income stream which earns investment returns during the period between the purchase date and the date payments from the income stream commence. The formula multiplies the value of the purchase amount on each 12-month anniversary from the purchase date, by one plus the ‘above threshold rate’ used for deeming in the income test. The above threshold rate is the percentage amount that applies to asset values over the relevant threshold used for deeming—the above threshold rate is currently 3.25 per cent with the threshold for singles currently $51,200 and the threshold for pensioner couples currently $85,000.[68] The below and above threshold rates are set by the Minister for Social Services (the thresholds are indexed according to movements in the Consumer Price Index).[69]

New section 1120AB provides for the value of asset-tested income streams that are not considered managed investments on or after their assessment day (when payments commence). The basic formula for working out the asset value of these income streams is to multiply the purchase price by 0.6 if the day the income stream is being valued falls in the period from the assessment day to the person’s ‘threshold day’, or by 0.3 if the period is after the person’s threshold day.[70]

New subsection 1120AB(4) provides for the Secretary to make a legislative instrument to set out one or more methods for working out the value of an asset-tested income stream (lifetime). The Explanatory Memorandum states that it is intended that this power will be used to make additional rules for working out the value of products that do not meet the capital access schedule limits on death benefits and surrender values.

New subsection 1120AB(6) sets out the meaning of assessment day (subject to new subsection 1120AB(7) which sets out the meaning of assessment day as it applies to reversionary benefits). Where an income stream is regulated under the Superannuation Industry (Supervision) Act, the assessment day is the later of:

• the day the person first satisfies a condition of release mentioned in regulations under the Superannuation Industry (Supervision) Act that is also of a kind determined in a notifiable instrument made by the Secretary under new subsection 1120AB(8)
• the day the first amount is paid for the income stream or
• the day the person acquired the income stream (if no amount is identifiable as being used to pay for the income stream).

Where an income stream is not regulated under the Superannuation Industry (Supervision) Act, the assessment day is:

• the commencement day of the income stream, if it is before the day the person reaches pension age or
• the latest of the day the first amount was paid for the income stream, the day the person reaches pension age and the day the person acquired the income stream (if no amount is identifiable as being used to pay for the income stream).

The Replacement Explanatory Memorandum states that the conditions of release to be determined in a notifiable instrument made by the Secretary under new subsection 1120AB(8) will mirror the specific conditions set out in sub-regulation 1.06A(3)(a) of the Superannuation Industry (Supervision) Regulations 1994.[71]

New subsections 1120AB(9) to (11) set out how to calculate the person’s threshold day and new subsections 1120AB(12) to (13) set out how to calculate the purchase amount. A person’s threshold day is the later of:

• the day before the person reaches the life expectancy of a man aged 65 on the person’s assessment day (regardless of how old the person is or whether they are a man or a woman) rounded down to the nearest whole year or
• the last day of a five year period commencing on the person’s assessment day.[72]

New subsection 1120AB(11) provides for the Secretary to make a notifiable instrument for determining the life expectancy of a 65 year old man but it must be consistent with the Life Tables published by the Australian Government Actuary. Currently, the life expectancy of a 65 year old man is around 85 years.

New subsection 1120AB(10) sets out how to determine a threshold day in a situation where the lifetime income stream is received by another person as a reversionary benefit, where the person originally entitled to the income stream has died after their assessment day.

The purchase amount is worked out in a similar way to that of managed investments (set out above), where the purchase amount equals the sum of any compounded amounts worked out using the above threshold deeming rate to account for any investment returns between payment or payments for the income stream and the assessment day.

Item 38 inserts proposed section 1121B which provides for the assessment of life insurance policies purchased after a person has reached pension age where the sum of amounts paid for the policy in any 12 month period exceeds 15 per cent of the value of any death benefit payable under the policy. The value of the policy, for the purposes of the assets test, is the higher of the amount payable under that policy if it were surrendered, or the sum of each amount paid for the policy (less any commuted amounts).

The Replacement Explanatory Memorandum states that the intent of this section is to treat such life insurance policies in a similar way to the rules that are intended to be introduced through an instrument under new subsection 1120AB(4) for new products that do not meet the limits for death benefits in the capital access schedule.[73]

Veterans’ Entitlements Act 1986

Items 40–79 make amendments in near equivalent terms to the VE Act to provide for the means test treatment of lifetime products for the purposes of veterans’ income support payments.

Schedule 2—Work Bonus

Schedule 2 amends the SS Act and the VE Act to:

• increase the pension Work Bonus, which exempts an amount of income from earnings from the pension income test, from $250 to $300 per fortnight
• increase the amount of unused Work Bonus amounts that can be saved for later use from $6,500 to $7,800 and
• allow for the Work Bonus to apply to any remunerative work involving personal exertion, including self-employment and contract work.

Background

Work Bonus introduction

The Work Bonus was announced as part of the Rudd Government’s 2009 Secure and Sustainable Pensions Package, in the 2009–10 Budget.[74] The Package included an increase in the rate of single pension payments (by $30 a week) while at the same time the income test was tightened so that pension rates were reduced by 50 cents for each dollar over the relevant threshold, rather than by 40 cents.[75] The Package also announced a gradual increase in the Age Pension eligibility age from 65 to 67.

The Work Bonus commenced from 20 September 2009.[76] It effectively replaced the Pension Bonus Scheme, a program introduced by the Howard Government in 1998 which was aimed at encouraging older people to remain in the workforce after they had reached pension age. The 2009 Secure and Sustainable Pensions Package closed-off the Pension Bonus Scheme to new entrants. The Pension Bonus Scheme provided a tax-free lump sum to those who deferred receiving an Age Pension and who remained in the workforce.[77] The value of the lump sum increased each year the person remained in the workforce for a maximum of five years. The 2009 Harmer Pension Review, which led to the Secure and Sustainable Pensions Package, had found:

... the Pension Bonus Scheme is not a particularly effective means of increasing workforce participation by older Australians and that this goal would be better pursued through the design of the pension means test to ensure that there are appropriate incentives for employment.[78]

The Harmer Pension Review found that a more effective mechanism to support age pensioners to maintain or take up paid work would be a concessional treatment of low to moderate levels of income from employment under the means test.[79]

The Work Bonus in place from 20 September 2009 to 30 June 2011 operated differently from the current arrangements.[80] Under the initial Work Bonus, 50 per cent of a pensioner’s first $500 in employment income in a fortnight was exempted from the income test. Employment income over $500 in that fortnight was added to the reduced amount to be assessed. If employment income was under $500, then 50 per cent of the actual income was exempt—this meant that the initial Work Bonus was less generous than current arrangements which allow up to $250 in employment income to be exempt. For example, under the initial scheme, a person with $200 in employment income in a fortnight would have $100 exempted from the income test. Under the current scheme, the full $200 amount would be exempted. The initial scheme also did not allow for unused amounts of the Work Bonus to be banked (see below). The current arrangements commenced 1 July 2011.[81]

Eligibility for the Work Bonus

Recipients of any Centrelink pension payment (with the exception of Parenting Payment Single) or Bereavement Allowance, who are over Age Pension qualifying age, are eligible for the Work Bonus. Most of those eligible are receiving the Age Pension but some are receiving other pension payments including Carer Payment or the Disability Support Pension.[82] Those who receive a transitional rate of pension are not eligible—transitional rate pensioners were those who were grandfathered from the 2009 pension changes because they would have been worse-off under the new income test.[83]

As at September 2018, there were 105,283 age pensioners with earnings from employment (representing four per cent of all age pensioners).[84]

Operation of the Work Bonus

The Work Bonus consists of a fortnightly income concession amount and an income concession bank. The income concession amount allows up to $250 of fortnightly income from employment to be deducted from the total income assessed under the income test. The income concession bank allows any unused portion of that $250 to be accrued to offset future amounts of employment income.[85]

Employment income is income from remunerative work undertaken by an employee in an employer/employee relationship and includes salaries, wages and employment-related fringe benefits.[86] Income from self-employment is not currently regarded as employment income.

The pension income test currently allows a single person to earn up to $172 per fortnight before their pension rate is affected (not including the Work Bonus).[87] A couple, combined, can earn up to $304 per fortnight before their pension rate is affected (not including the Work Bonus). Each dollar of income over these amounts reduces a single person’s and a couple’s combined fortnightly pension rate by 50 cents. Using the Work Bonus, a single person who only had income from employment, could earn up to $422 per fortnight before their pension rate was reduced.

Key issues and provisions

Schedule 2 proposes to:

• increase the fortnightly Work Bonus income concession from $250 to $300
• increase the income concession bank from $6,500 to $7,800 and
• expand the definition of income eligible for the Work Bonus from employment income to include income from ‘gainful work’—which is any work involving the personal exertion of the individual but excluding specific activities such as domestic duties and managing personal financial investments or property.

Rationale

The aim of the measure is to boost the incomes of those of pension age who are working. Minister for Social Services Paul Fletcher stated in his second reading speech that the changes ‘will allow pensioners of pension age to earn more from working without reducing their pension payments’.[88] The Minister stated that measures in the Bill, of which the Work Bonus changes represent the most significant in fiscal terms, are ‘to enhance the standard of living of older Australians by giving retirees greater choice and flexibility when it comes to managing their finances in retirement’.[89]

The measure does not appear to be aimed at encouraging more older people to remain in the workforce for longer, rather, it is to improve the incomes of those of pension age who are already working.

Impact

The $250 income concession has not been changed since it was introduced in 2011, despite increases in wages and adjustments to pension income test thresholds in line with movements in the Consumer Price Index. Increasing the income concession by $50 a week will allow for pensioners to earn more income from employment before having their pension rates reduced, and will allow some people currently working to qualify for a small part-pension. The increase in the income concession bank from $6,500 to $7,800 represents the annual value of the fortnightly increase in the income concession.

Allowing those undertaking gainful work to qualify for the Work Bonus, as well as those in employment, provides for a greater range of income-generating activities to access the income test concession. The definition of gainful work excludes activities such as managing a person’s own company or assets such as a self-managed superannuation fund and requires some level of ‘personal exertion’. ‘Personal exertion’ is not specifically defined in the Bill or the SS Act and it would appear to be up to the Secretary to set a policy for determining acceptable levels of exertion.

Numbers affected

The Department of Social Services estimates that around 88,750 social security pensioners and 1,000 allowance recipients will receive an increase in their payments as a result of the changes. Around 1,150 people will become eligible for the first time. In addition, around 3,000 Veterans’ Affairs pensioners will also benefit.[90]

Around 21,250 social security pensioners, 200 allowance recipients and 1,650 Veterans’ Affairs pensioners will benefit from the measure to expand the Work Bonus to earnings from self-employment.[91]

Key provisions

Item 2 amends subsection 1073AA(2) of the SS Act to substitute work bonus income for any references to employment income. Work bonus income encompasses both employment income and the new concept of gainful work income, as set out in proposed subsection 1073AA(4BA) inserted by item 17. Other references to the term employment income in section 1073AA are repealed and replaced by references to work bonus income by items 1, 5, 7, 9, 10, 13, 14, 21.

Item 17 inserts proposed subsections 1073AA(4BA), (4BB) and (4BC) which set out how to determine an individual’s work bonus income. For a relevant instalment period (the fortnight a person’s payment rate is calculated for), an individual’s work bonus income is the sum of any employment income and any gainful work income earned during that period. Gainful work is defined in proposed section 1073AAA which is inserted by item 22. Gainful work income is determined on an annual basis but for the purposes of determining an individual’s work bonus income the annual amount is converted into a daily amount by dividing the annual total by 364.[92]

Items 18 and 19 amend paragraphs 1073AA(4C)(a) and (b) (formula), respectively to increase the work bonus income concession amount from $250 to $300. This means that up to $300 of any work bonus income in an instalment period can be exempted from assessment under the income test.

Item 22 inserts proposed section 1073AAA which defines gainful work. Gainful work is work for financial reward or gain other than as an employee where:

• the work involves personal exertion of the individual and
• is undertaken within or outside Australia.

Some types of activities are specifically excluded from this definition, including:

• work which consists of the management of any financial investment or real property which the individual or one of their family members has a legal or equitable interest in, or of any family companies or family trusts has a legal or equitable interest in
• any domestic, maintenance, gardening or similar tasks done in relation to the person’s residence or residences (where they have more than one).

Item 23 amends subsection 1073AB(2) to substitute any reference to ‘$6,500’ with ‘$7,800’ to increase the limit on unused income concessions that can be stored as credit against further work bonus income to $7,800.

Item 25 is an application provision which provides for the amendments to the SS Act in Schedule 2 to apply to any instalment periods that include 1 July 2019 and any later instalment periods.

Items 26 to 52 make amendments in near equivalent terms to the VE Act to increase the work bonus income concession amount from $250 to $300 per fortnight, to increase the unused concession amount limit to $7,800 and to allow for gainful work income to be included in the work bonus.

Schedule 3—Pension loans scheme

Schedule 3 to the Bill proposes to expand the Pensions Loans Scheme (PLS)—which allows some people of Age Pension age to receive a payment as a loan secured against their property in Australia—to two groups who are currently ineligible: those who do not qualify for a social security payment under both the income and asset tests, and maximum-rate pensioners. The maximum amount that can be borrowed under the PLS will increase from 100 per cent of the maximum fortnightly rate of the relevant social security payment to 150 per cent of the maximum fortnightly payment as payment plus loan.

Background

The PLS is a government-provided reverse mortgage scheme that allows people of Age Pension age to access an income stream by borrowing against their housing equity.[93] The PLS allows eligible individuals to top up a part pension to the full rate or, for those not eligible for any pension, receive fortnightly payments equivalent to the full rate.[94] To be eligible, an individual or their partner must have equity in Australian real estate that they can use as security for the loan. The person or their partner must receive no pension or a reduced rate of pension due to the income or assets test (but not both). It is currently not available to those receiving the full rate of pension. Compound interest is charged on the loan and it is normally repaid if the home is sold or from the person’s estate after their death.

The PLS was created in 1985 when the Hawke Government reintroduced an assets test for pensions.[95] It was based on a recommendation of the Panel of Review of Proposed Income and Assets Test, headed by Professor Fred Gruen.[96] The Panel had recommended including a person’s principal residence in the assets test but recognised that this could disadvantage those for whom selling an asset would be difficult (due to few buyers or for social or psychological reasons). The Panel thus proposed a way around this issue by allowing people to receive a ‘pension-sized’ amount as a loan that could be recovered from their estate.[97] The Hawke Government rejected the proposal to include the family home in the assets test, but did take up the proposal for the PLS for those whose pension rate was affected by the assets test.

Take-up of the loan scheme was low with only 13 applications for loans in its first two months.[98] In 1996, the Keating Government sought to encourage take-up by expanding the scheme with a key change allowing those affected by the income test to access the PLS.[99]

Take-up of the PLS has remained low. In 2010, the Productivity Commission found that there were only 710 loans outstanding.[100]

As at July 2018, there were 642 participants in the Pension Loans Scheme.[101] The average loan amount was $45,366.85 and the median of total loans owed was $30,036.47.[102]

In recent years, there have been a number of proposals to expand the PLS—usually as a way of offsetting the impact of a linked proposal to include the family home in the pension assets test.[103]

Qualification for the PLS

To be eligible for the PLS, a person must be of Age Pension age (currently 65 years and six months) or the partner of someone who is and in receipt or qualified for:

• Age Pension
• Disability Support Pension
• Wife Pension
• Carer Payment
• Widow B Pension or
• Bereavement Allowance.[104]

Recipients of some veterans’ affairs payments may also be eligible if they have reached the applicable pension age and are qualified for:

• Service Pension or
• Income Support Supplement (paid to war widow/widowers).[105]

Part-rate recipients of these payments are eligible for the PLS, as are those who receive one of these payments but for the rule where the lower rate worked out under the income or assets test is applied. If a person is not eligible for a payment under both the income and assets test then they are not eligible for the PLS.[106]

The person must also own real estate in Australia of sufficient value to secure the payment of any debt that might become payable.[107]

Security

Only real estate in Australia can be used as a security for the PLS.

A person applying for the PLS can choose to exclude a property or part of a property from the real estate offered as security on the loan. They can also nominate a guaranteed amount to be secured—part of the equity to be kept aside from the total value of the secured asset. This may be an amount the applicant wants to pass on as an inheritance or to use to pay aged care costs for example.[108]

The value of the assets offered as security (minus any exclusions or guaranteed amounts) can determine the maximum amount available to loan.[109]

The debt arising under the PLS is secured as a statutory charge over the property—this means that the Commonwealth has a caveat over the property and no sale of the property can proceed until the Commonwealth is granted a hearing.[110] The applicant bears any cost for registering the charge and their estate will bear any cost for removing the charge.

Calculating the maximum loan and payment amount

The maximum loan amount is determined by the total security amount (minus any guaranteed amount) and the person’s age or the age of the youngest member of a couple. The formula for the calculation is set out in section 1135A of the SS Act. It is the ‘age component'—set out in a table—multiplied by the real value of the assets offered as security divided by $10,000. For example, a the maximum loan amount for a couple aged 72 and 68 offering $600,000 in assets (minus $200,000 guaranteed amount) would be worked out as follows:

• age component of the youngest member of the couple: $2,850
• multiplied by $400,000 divided by $10,000
• equals $114,000.

The maximum loan amount is recalculated annually.[111]

An individual in the PLS can nominate how much they wish to receive as a fortnightly amount as a top up to any pension payment they receive—either up the maximum rate of the pension they receive, including any supplement amounts such as the Energy Supplement or Rent Assistance, or a lesser amount.[112] The loan amount is the difference between their income and asset tested payment rate and the maximum amount payable for that payment (including any applicable supplements).

Interest

The interest rate for the PLS is compound and set by the Minister for Social Services. It is applied to the outstanding loan debt each pension payday.[113] The interest rate is currently 5.25 per cent and has not changed since 25 December 1997.[114]

Repayment

The PLS loan is generally repaid when the payment recipient chooses, sells the real estate used as security or the recipient dies.[115] Where the person dies, the loan will be recovered from their estate or surviving partner. However, if the partner is eligible to receive a PLS payment in their own right they may remain in the scheme.[116]

Key issues and provisions

The amendments proposed by Schedule 3 will:

• increase the maximum PLS plus pension amount to 150 per cent of the maximum rate of the pension (plus any available supplements)
• allow people receiving the maximum rate of pension to access the PLS and
• allow those of Age Pension age who would not be eligible to receive any pension under both the income or assets test to access the PLS.

The amendments will also create new qualification requirements relating to participants not being bankrupt or insolvent. The amendments will transform the guaranteed amount into a ‘nominated amount’, and will remove the unconditional entitlement to this amount upon the sale of the assets used as security—that is, the Commonwealth will be able to collect amounts owed to it from the full proceeds of the sale, including any nominated amount.

Rationale

Minister for Social Services Paul Fletcher stated in his second reading speech for the Bill:

These changes will give older Australians more choice to draw on the equity in their homes to support their standard of living in retirement

...

Currently, there around 1.8 million Age Pension recipients who own their own home. This includes around 1.1 million maximum rate age pensioners who are unable to access the existing Pension Loans Scheme.[117]

Relatively low take-up

Despite the large number of pensioners who would become eligible for the PLS under the amendments, the Government expects only 6,000 pensioners to take up a loan under the scheme over the next three years.[118] While this would be a significant increase on the 648 participants in the PLS as at July 2018, it represents only around 0.3 per cent of the 1.8 million Age Pension recipients who own their own home.

Stakeholder response

The Australia Institute, a think-tank which had previously proposed an expansion of the PLS, welcomed the Budget announcement of the changes.[119] Executive Director Ben Oquist stated:

The PLS, which is effectively a government run reverse mortgage, has the potential to make a real difference to people’s lives. Giving older Australians extra cash, at no cost to government, will allow many people to live in their own home with more financial security. The scheme deserves more promotion generally.[120]

Newspaper commentator Daryl Dixon was positive about the proposed changes to the scheme, noting that the 5.25 per cent compound interest rate was below the rates charged for commercial reverse mortgages.[121]

The Combined Pensioners and Superannuants Association described the measure as ‘minor’ stating that the current scheme is small and that it would remain small given the expected take-up:

The Pension Loans Scheme is a Government-backed home equity release scheme and like all such schemes it limits the ability of people to downsize or move. Home equity release is a last-resort option for older people to raise money.[122]

Finance journalists Neale Prior and Nick Bruining raised concerns that participants in the scheme could quickly accumulate high levels of debt and that there were no criteria the Minister had to follow in setting the interest rate: ‘The big issue here is that people will be borrowing from a lender who is not subject to forces of competition and, going by what the Department of Social Security [sic] told us this week, is a law unto itself’.[123]

A group representing reverse mortgage advisers, Reverse Mortgage Finance Solutions, criticised the proposed changes in its submission to the Economics Committee inquiry into the Bill. The submission raised concerns that:

• legal advice was mandatory for reverse mortgages provided by private providers but not for PLS
• there was a requirement for reverse mortgages offered by the private market to include discussion of a person’s future needs including aged care but this was not a requirement for the PLS
• the PLS was restricted to residential real estate and
• applicants for the PLS might not meet face to face with the Department of Human Services, unlike most reverse mortgage applications.[124]

Key provisions

Social Security Act 1991

Section 1121 provides for a charge or encumbrance over an asset to be disregarded for the purposes of the social security assets test. Items 8 and 9 in Schedule 3 to the Bill insert proposed subsections 1121(1A) and (5), respectively, to clarify that the value of a debt owed by a person under the PLS is to be deducted from the value of their assets for the purposes of the assets test (not the value of the charge under the PLS).

Item 10 repeals the definitions of assets reduced rate, guaranteed amount, and income reduced rate, at subsection 1133AA(1). The term guaranteed amount is replaced by the new term, nominated amount, inserted by item 11. The other terms are no longer needed due to the Schedule expanding eligibility to those ineligible for a payment under both the assets and income tests.

The Explanatory Memorandum states that guaranteed amount is being changed to nominated amount because the current provisions relating to the guaranteed amount entitle the PLS participant to the full amount of any guaranteed amount upon sale of their asset, and this can prevent the recovery of the full charge amount owed to the Commonwealth.[125] The guaranteed amount is nominated by the PLS participant and can be altered at any time. The Explanatory Memorandum states that ‘this could be used by a person participating in the PLS to render some, or all, of their PLS debt unrecoverable’.[126]

Item 30 repeals paragraph 1136(1A)(b) which provides for the guaranteed amount to be what the person ‘is to be entitled to retain out of the proceeds of the enforcement of a charge’ and replaces it with a paragraph providing only that a person can specify an amount to be ‘the nominated amount’. Further amendments (see item 41 below) remove the reference to an entitlement to the nominated amount before the Commonwealth recovers any debt owed to it under the PLS. While maximum loan amounts will still be calculated without the person’s nominated amount being included in the amounts specified as security, the new nominated amount removes any of protections around this amount. This could mean that, where an asset is sold for a much lower price than was previously estimated as the value, the person may not receive some or the entire nominated amount once the Commonwealth has collected the amounts owing to it. It will also mean that participants will need to ensure that their debt levels do not encroach on the amount they have nominated.

Item 12 repeals paragraph 1133(1)(b) which currently restricts a single person’s eligibility for the PLS to those with either an income reduced rate, an assets reduced rate, or where the rate calculated under the income or assets test is not a nil rate. This will allow those receiving a maximum rate payment, and those who do not qualify under both the income and assets test to access the PLS.

Item 13 inserts proposed paragraphs 1133(1)(ca), (cb) and (cc) which add to the qualification requirements for a single person to access the PLS that the person not be bankrupt, not be subject to a personal insolvency agreement under Part X of the Bankruptcy Act 1966 and that the Secretary be satisfied there is adequate and appropriate insurance in relation to the person’s real assets.

Items 18 and 19 make similar amendments to those in items 12 and 13 but apply to members of a couple: repealing paragraph 1133(2)(b) and adding new qualification requirements in proposed paragraphs 1133(2)(ca), (cb) and (cc).

Item 24 adds proposed subsection 1133(4) which provides for section 1121 (see above) to be disregarded in working out the value of real property for the purposes of determining qualification for the PLS, and so the Secretary ‘may take into account’ any charge or encumbrance over the property. This will allow the department to take into account any charges or encumbrances over the property being used as security for the PLS when assessing a person’s qualification, and any charges or encumbrances arising while a person is a participant in the PLS that may affect their continued qualification.

Item 25 amends subparagraphs 1134(1)(e)(i) and (ia) to set the maximum rate payable to the person under the scheme at 1.5 multiplied by the maximum payment rate or, 1.5 multiplied by the maximum payment rate less the Defence Force Income Support Allowance (where payable).[127]

Item 29 repeals and replaces the age component amount table set out in subsection 1135A(3)—used in the formula for calculating the maximum loan available—and provides for the Minister to set the age component amount via legislative instrument. The Explanatory Memorandum states that the:

...age component amounts are sensitive to the PLS interest rate and assumptions around growth in property values. When these change, the age component amounts also need to change. Providing the age component amounts as a legislative instrument allows the Minister to respond effectively to such policy and economic changes.[128]

Given the PLS interest rate and age component amounts have not changed in more than 20 years, it is unclear why it is only now that the age component amounts need to be taken out of the SS Act and put in a legislative instrument. This suggests the Government intends to adjust these amounts more regularly, and those considering making use of the PLS will need to consider that the maximum loan amounts available to them could fluctuate.

Item 34 inserts proposed section 1137A to clarify that a person’s participation in the PLS does not entitle the person to additional benefits that would ordinarily be available to people who receive a social security pension or payment, such as a concession card. Such additional benefits are only available to PLS recipients who would, but for their participation in the PLS, still be entitled to a social security pension or payment.

Item 41 amends subsection 1140(1), relating to the enforcement of the charge on assets that are sold, to enable the Secretary to recover the whole or part of the debt secured by the charge from the proceeds of the sale without consideration of the guaranteed amount. Currently, subsection 1140(1) provides for the Secretary to recover the debt amount from the proceeds of the sale only after the deduction of any guaranteed amount.

Item 43 inserts proposed section 1141A which will allow the Secretary to determine that a person can no longer participate in the PLS if satisfied that the person ceases to be qualified for the scheme. The Secretary must give the person notice of this determination.

Item 51 provides application and transitional provisions. It is worth noting that the amendments in the Schedule, including changes to qualification requirements and the changes to the guaranteed amount will apply to existing PLS participants.

Items 101 and 102 are contingent on the commencement of Schedule 4 of the Social Services Legislation Amendment (Welfare Reform) Act 2018 on 20 March 2020. Schedule 4 of that Act ceases the Bereavement Allowance.[129] Therefore, items 101 and 102 remove references to ‘allowance’ where relevant in relation to the PLS.

Veterans’ Entitlements Act 1986

Items 52–100 make amendments in near equivalent terms to the VE Act as were made to the SS Act to provide for the changes to the PLS scheme.

Schedule 4—Other amendments

Schedule 4 makes primarily technical amendments. The most significant is to provide for income support recipients over Age Pension age to qualify for the employment income nil rate period.

Where an income support payment recipient’s payment is not payable because of the level of their employment income assessed under the income test, the recipient may qualify for an employment income nil rate period. During such a period, which can run for up to six fortnights, the person is still considered to be receiving a social security pension or benefit for certain purposes, including being eligible for a Health Care Card or Pensioner Concession Card.[130]

The Explanatory Memorandum states that income support recipients over Age Pension age were meant to be given access to the employment income nil rate period provisions as part of the 2009 Secure and Sustainable Pensions Package (see Schedule 2 above).[131] However, appropriate amendments were not made at the time, and up until 20 March 2019, the Department of Social Service’s policy guide still stated that people over Age Pension age are not eligible for the employment income nil rate period.[132]

Affected individuals could have had their social security payment cancelled or suspended and may have lost access to their concession card. However, the Department of Social Services stated in its submission to the Economics Committee inquiry into the Bill that there would be no impact from the amendments as ‘income support recipients over Age Pension age have been allowed to access to [sic] the employment nil rate period provisions since September 2009’.[133] This would have been done contrary to the Department’s policy guide.