The Bills Digest at a glance

The PLS allows Australians over Age Pension age to get a voluntary non-taxable fortnightly loan from the Government up to a maximum value of 150 per cent of the rate of the Age Pension, using their real estate assets as collateral.

The Social Services and Other Legislation Amendment (Pension Loans Scheme Enhancements) Bill 2021 makes two key changes to the PLS. It introduces a no negative equity guarantee (Schedule 1, Part 1) and allows borrowers access to two lump sum advances in any twelve-month period (Schedule 1, Part 2).

From 1 January 2022 the Government renamed the PLS the Home Equity Access Scheme (HEAS). However, as the Social Security Act 1991, the Social Security (Administration) Act 1999 and the Veterans’ Entitlements Act 1986 continue to refer to the scheme as the Pension Loans Scheme, this is the term used in this Digest.

There has been relatively little controversy over these changes since they were announced as part of the 2021–22 Budget.

Purpose of the Bill

The purpose of the Social Services and Other Legislation Amendment (Pension Loans Scheme Enhancements) Bill 2021 (the Bill) is to amend the Social Security Act 1991, the Social Security (Administration) Act 1999 and the Veterans’ Entitlements Act 1986 to:

• introduce a no negative equity guarantee and
• enable participants in the scheme to access capped lump sum advance payments.

Background

The Australian Government has renamed the Pension Loans Scheme (PLS). From 1 January 2022 the PLS will be known as the Home Equity Access Scheme (HEAS).[1] However, as the Social Security Act, the Social Security (Administration) Act and the Veterans’ Entitlements Act continue to refer to the scheme as the Pension Loans Scheme, this is the term used in this Digest.

The PLS allows people allows Australians over Age Pension age to get a voluntary non-taxable fortnightly loan from the Government up to a maximum value of 150 per cent of the rate of the Age Pension, using their real estate assets as collateral.[2]

Currently the PLS does not allow borrowers to access lump sums. Instead, borrowers take the loan as a series of fortnightly payments. The debt can be paid back from the borrower’s estate after they die or when the property is sold.[3]

The PLS is administered by Services Australia and the Department of Veterans’ Affairs.

The changes proposed by the Bill were announced as part of the 2021–22 Budget.[4]

Eligibility

The PLS is available to people of Age Pension age[5] or older (or the partner of someone who is) who qualify for the Age Pension, Disability Support Pension, or Carer Payment and own real estate in Australia.[6] The PLS is also available to veterans and partners of veterans who have reached Age Pension age and are eligible for the Service Pension or Income Support Supplement.[7] To access the PLS a person must also:

• not be bankrupt or subject to a personal insolvency agreement
• own real assets in Australia of sufficient value to secure the payment of the debt they take on as a participant in the scheme
• have appropriate and adequate insurance covering the secured real asset/s.[8]

According to subsection 1133AA(1) of the Social Security Act, real assets ‘in relation to a person or couple, means the real property (including the principal home) of the person or couple in Australia’. The common term for ‘real property’ is real estate. It includes land and buildings that are attached to the land.

How the scheme works

The scheme allows participants to access an income stream by drawing down on the value of their real estate assets.

Borrowers can nominate how much they want to receive each fortnight. The maximum fortnightly amount is linked to the value of the Age Pension. Currently, a person (or their partner ^[9]) can use the PLS to top up their pension to 150 per cent of the maximum fortnightly rate of the Age Pension. Those who do not receive a pension (self-funded retirees) can get the entire 150 per cent as a loan.[10]

There is a cap on the amount a person can borrow which takes into account the value of the borrower’s real estate assets and their (or their partner’s) age.[11]

The scheme charges borrowers compound interest. Interest is calculated fortnightly, and the amount is added to the outstanding loan debt. The Minister for Families and Social Services sets the interest rate through a notifiable instrument. The current interest rate is 3.95 per cent and is set by the Social Security (Pension Loans Scheme – Rate of Compound Interest) Determination 2021.[12]

While the Government normally recovers the debt from the borrower’s estate after they die, borrowers can repay all or part of the loan and accrued interest at any time.[13]

History of the scheme

The PLS was created in 1985 when the Hawke Labor Government reintroduced an assets test for pensions.[14] It was designed to enable

a person who has attained age pension age… and the spouse of such a person, to have [illiquid] property disregarded and be paid a pension subject to the income test. The difference between the pension (if any) paid to the person under the income test. The difference between the pension (if any) paid to the person under the income test and the pension (if any) otherwise payable under the assets test is a loan by the Commonwealth which becomes a statutory charge on the person's property.[15]

The scheme was first proposed by the 1984 Panel of Review of Proposed Income and Assets Test.[16] This review, chaired by economics professor Fred Gruen, argued for an assets test that included the family home. The proposal attracted strong opposition because it would have reduced the pension entitlements of retirees with higher value homes. There was particular concern over the effect on retirees in Sydney where property prices were higher than elsewhere.[17] The Government chose to exempt the family home from the means test.[18]

This meant the PLS was initially caught up in the broader debate over the assets test. When first proposed, the Opposition dubbed it the ‘pay as you die’ scheme.[19] However, the scheme became less controversial as opposition to the assets test declined.

Few people took advantage of the scheme at its inception. There were only 44 borrowers as of June 1996.[20] In 1996, the Keating Government made several changes to make the scheme more attractive. These changes broadened the range of people eligible for the scheme.[21] The Government also changed the way interest was calculated on borrowing—from a simple rate of interest to compound interest.[22] By 2010 there were 710 outstanding loans under the scheme.[23]

The Government made further changes to the scheme on 1 July 2019. The Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Act 2019:

• increased the maximum PLS plus pension amount to 150 per cent of the maximum rate of the pension (including any available supplements)
• allowed people receiving the maximum rate of pension to access the PLS and
• allowed 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.[24]

The number of participants in the scheme increased from 642 in June 2018 to 2,288 in March 2020.[25]

Committee consideration

At the time of writing, the Bill has not been referred to a committee for inquiry.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.[26]

Policy position of non-government parties/independents

At the time of writing, there was no significant public comment on the Bill by non-government parties or independents.

Position of major interest groups

At the time of writing, there was no significant public comment on the Bill by major interest groups.

Financial implications

The Government estimates the financial impact of amendments in the Bill at $21.2 million over the forward estimates. This includes the cost of an information campaign.[27]

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.[28]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[29]

Key issues and provisions

The Bill makes two key changes to the PLS. It introduces a no negative equity guarantee (Schedule 1, Part 1) and allows borrowers access to two lump sum advances in any twelve-month period (Schedule 1, Part 2).

The no negative equity guarantee ensures that borrowers will not have to repay more than the market value of the property they used to secure the loan. This brings the PLS in line with private sector schemes. Since 2012, the National Credit Code has required protection against negative equity for private sector reverse mortgages.[30]

The lump sum advance payments make the scheme more flexible. Borrowers will be able to access part of the payments they normally receive over the course of a year, as an up-front lump sum advance. The maximum advance will be capped at 50 per cent of the maximum annual rate of the pension (this rate includes pension supplement, energy supplement and rent assistance, where applicable).

Schedule 1—Part 1—No negative equity guarantee

Part 1 of Schedule 1 makes amendments to the Social Security Act and the Veterans’ Entitlements Act to provide for the no negative equity guarantee as well as changes to the requirements for requests to participate in the PLS.

Social Security Act 1991

Paragraph 1136(1A)(a) of the Social Security Act requires an individual who makes a request to participate in the PLS to specify any ‘real property’ that is to be excluded when working out the value of the person’s real assets which will be used as security for the loan.[31] Item 4 repeals and substitutes paragraph 1136(1A)(a). The proposed paragraph requires that the request to participate specify real property that is to be included when working out the value of a person’s real assets, not the property that is to be excluded. The Explanatory Memorandum states the intention of the amendment is:

… to provide participants with the choice as to what property is to be taken into account for the purposes of the Scheme. This also makes clear that if a person acquires a new property after commencing participation in the Scheme (for example, if a property is inherited) then that property will not be taken into account for the Scheme and will not be subject to a charge.[32]

Items 5, 6 and 7 amend paragraphs 1136(3)(b), 1136(3)(c) and 1137(3)(b), respectively, to remove a requirement that requests to participate or requests to change a person’s rate be ‘lodged at an office of the Department’. The Explanatory Memorandum states that such requests are already made electronically without a printed request being lodged at an office of the Department of Social Services (or Services Australia which processes PLS requests).[33]

Item 8 adds new section 1144AA which provides for the no negative equity guarantee. The guarantee means that the Commonwealth is not entitled to recover a PLS debt amount that exceeds the adjusted value of a debtor’s real assets or property. The debt and charge securing the debt is discharged to the extent of the amount that exceeds the value of the debtor’s real assets or property.

The guarantee only applies:

• when the person is seeking to repay the outstanding amount of the debt or the Commonwealth is seeking to recover the debt and
• new subsection 1144AA(3) does not apply.

New subsection 1144AA(3) applies where:

• the charge or encumbrance on the participant’s real assets has increased with their express consent after they began to participate in the PLS (for example, the person increases their mortgage) or
• the person engaged in fraud or made a misrepresentation in relation to their participation in the scheme.

New subsection 1144AA(4) provides for the Secretary to make guidelines for making decisions via a legislative instrument for the purposes of subsection 1144AA(3). The Explanatory Memorandum does not provide any information on what considerations might be included in any such guidelines.

New subsection 1144AA(6) requires the Secretary to determine via a legislative instrument a method or methods to work out the market value of real assets or real property and for making adjustments in relation to different kinds of charges or encumbrances. The Explanatory Memorandum to the Bill states that this mechanism is ‘intended to ensure that the true market value of real assets or real property is the value determined’ at the time the participant seeks to repay their debt, or the Commonwealth seeks to recover the debt.[34] The proposed provision does not set out any restrictions or considerations that must be included in this legislative instrument, but provides that it may:

• specify that adjustments are to be made in relation to specified kinds of charges or encumbrances and
• determine different methods to be used and adjustments to be made in different circumstances.[35]

The Explanatory Memorandum states that the instrument:

.. may provide for determining the market value of an asset as follows:

if the property has been sold, the market value is its sale price; or

if the property has not been sold, or has been sold and circumstances exist which have reduced its market value (as specified in the instrument, such as deliberately reducing the market value, or the sale was not undertaken in good faith), the market value must be determined by an accredited valuer.[36]

 

The method or methods to be set out in this instrument will be key to determining whether the guarantee applies to a particular debt.

Veterans’ Entitlements Act 1986

Items 9–13 make similar amendments to the Veterans’ Entitlements Act as items 1–8 make to the Social Security Act to provide for a no negative equity guarantee to PLS participants receiving an eligible pension under the Veterans’ Entitlements Act.

Application provisions

Item 14 sets out the application of the proposed amendments in Part 1:

• the changes to requests to participate will apply from commencement—that is, to new requests to participate
• the no negative equity guarantee will apply to all eligible debts under the PLS from commencement, including those incurred prior to commencement.

Schedule 1—Part 2 — Pension loans scheme advance payments

Part 2 of Schedule 1 proposes amendments to the Social Security Act, Veterans’ Entitlements Act and the Social Security (Administration) Act to provide for up to two advance PLS payments to be made over a 26-fortnight period. The maximum advance payment that can be made in a 26‑fortnight period is 50 per cent of the maximum annual pension rate a PLS participant would be eligible for (including supplementary amounts). Where a participant receives two advances during a 26-fortnight period, the maximum combined value is 50 per cent of the maximum annual pension rate for which the participant is eligible. Any advance amount is deducted from the participant’s PLS fortnightly instalment amounts over the following 26‑fortnight period.

Social Security Act 1991

Item 16 adds a note to the definition of ‘home equity conversion agreement’ at subsection 8(1) of the Social Security Act to specify that a pension loans scheme advance payment is an example of a payment under such an agreement. This means that advance payments will be subject to the asset test arrangements for payments under home equity conversion agreements—the first $40,000 of such a payment is exempt from the asset test for up to 90 days.[37] If the payment has not been spent after 90 days (for example, it remains in the participant’s bank account) then it is counted towards the person’s assessable assets.

Item 18 adds two definitions to the PLS definitions at subsection 1133AA(1). A pension loans scheme advance payment is defined by new section 1134A (inserted by item 20). A pension loans scheme advance payment period means the period of 26 fortnights starting on the day in relation to which a person’s advance payment was worked out under new subsection 1134A(2).

Item 19 repeals and substitutes subsection 1134(1). Section 1134 sets out the effect of participation in the PLS on a participant’s pension rate. The current section provides for the participant’s pension rate to be the lower of:

• 1.5 multiplied by the participant’s maximum pension rate (the maximum rate the person would be eligible for before any reductions under the income and assets test and including Energy Supplement, Pension Supplement and any Rent Assistance payable to the person) or
• another rate nominated by the person.[38]

Under new subsection 1134(1A), the rate of pension payable to a participant will be:

• if the pension will not be received in relation to a PLS advance payment period for the participant (the person has not received an advance payment in previous 26 fortnights):
  • 1.5 multiplied by the participant’s maximum pension rate or
  • a lower rate nominated by the person
• if the pension will be received in relation to a PLS advance payment period for the participant (the person has received an advance payment in the previous 26 fortnights):
  • the greater of the maximum payment rate, and 1.5 multiplied by the maximum payment rate less any amounts of pension loans scheme advance payment received by the person in relation to the period or
  • a lower rate nominated by the person.

Item 20 inserts new section 1134A which provides for the PLS advance payment. Under the new section, a PLS participant is qualified for an advance payment if they make a request for an advance payment under new section 1137AA (inserted by item 24) and the person has not received more than one advance payment in relation to a PLS advance payment period commencing during the previous 26 fortnights.

Under new subsection 1134A(3), the amount the advance payment is the lower of:

• where the person has not received another advance payment during an advance payment period commencing during the previous 26 fortnights: half of the maximum pension rate payable to the person on the day the advance payment is worked out
• where the person has received an advance payment during an advance payment period commencing during the previous 26 fortnights: half of the maximum annual PLS payment rate payable to the person on the day the advance payment is worked out minus the amount of the previous advance payment
• the maximum loan available to the person under the pension loans scheme, less the amount of the debt owed by the person under the scheme (applies where the participant is approaching the maximum loan amount available to them under the scheme)[39] or
• the amount requested by the person.

This means that the maximum amount that can be paid in an advance (or two advances) in a 26‑week period cannot exceed half the annual pension rate payable to the participant. A participant can nominate lower amounts. Participants will not be able to receive an advance amount that would result in their total borrowed loan under the PLS exceeding their maximum loan value.

Items 21 and 22 amend the method statement at subsection 1135(3) so that any advance amounts are added to a recipient’s PLS primary loan amount.

Veterans’ Entitlements Act 1986

Items 26–37 propose similar amendments to the Veterans’ Entitlements Act as the amendments to the Social Security Act proposed by items 15–24.