Manager, CIPRs
Retirement Income Policy Division
The Treasury
Langton Crescent
PARKES  ACT  2600

14 June 2018

Retirement Income Covenant Paper
Optimum Pension Pty Ltd has been established by David Orford and it has the following core objectives:
To positively change the attitudes of the consumer, financial planners, etc towards lifetime income stream products, so that retirees have at least 30% more income, which should improve their post-retirement lifestyles.
Commercialise an investment-linked product called the Real Lifetime Pension that we’ve designed – a practical application of the first objective. 
We see that the provision of retirement incomes is essential for the provision of an improved lifestyles in retirement for all Australians. Providing secure incomes in retirement will also have a significant impact on the wider community by reducing the cost of the Age Pension that is paid for by all Australian taxpayers.
In addition, with the changes to the Legislation from 1 July 2017, there is now an opportunity to provide a wider range of products to support these objectives. Optimum Pensions have developed products that we believe will provide suitable retirement income solutions and higher incomes than those provided by existing products. We believe that the examples that we have attached illustrate the benefit of innovation in this area and demonstrate that these changes can deliver better outcomes for Australia.
We support the Government’s moves to implement a Retirement Income Covenant for superannuation funds and provide some comments that may help with he implementation of a new range of retirement income solutions. 

Yours sincerely

Peter Rowe
General Manager
Optimum Pensions

Optimum Pensions Response to the
Retirement Income Covenant Position Paper
Stage one of the Retirement Income Framework

No	Covenant Principles
(Treasury material used “as supplied”)	Optimum Pensions
Comments	
1	Retirement income strategy
Trustees should assist members to meet their retirement income objectives throughout retirement by developing a retirement income strategy for members.

	Optimum Comments

We support the proposal
	
2	Engagement
Trustees should assist members to meet their retirement income objectives by providing guidance to help members understand and make choices about the retirement income products offered by the fund.

	Optimum Comments

We support the proposal.

Work will need to be done to ensure that the guidance can be provided without breaching Personal Advice rules. There will be a need to develop guidelines for funds to follow regarding how to provide guidance and this will need consultation with ASIC and potentially the Government issuing direction to ASIC to allow super funds greater freedom to provide guidance.

Engagement regarding retirement needs to become a form of education but from a much earlier age than waiting until retirement.
	
3	Definition of a Comprehensive Income Product for Retirement
A CIPR is a retirement income product which is designed to provide:
•	efficient, broadly constant income, in expectation;
•	longevity risk management (income for life); and
•	some access to capital.
A 100 per cent allocation to an ABP alone would not meet the definition of a CIPR.

	Optimum Comments

We support the three criteria but would recommend that the term CIPR is abandoned (partly because CIPR is not “catchy” and the term become (say) CRIS, meaning Comprehensive Retirement Income Solutions. There is no one product that will meet these competing needs and as such a solution would encompass more than one product. Due to varying needs by retiring person or couple, they could well choose varying proportions allocated to the available retirement products: - immediate and deferred lifetime income streams and Account Based Pensions.

The other aspect is that the term “broadly constant income” needs to be clarified.  Any person using an Account Based Pension as part of its solution will be subject to market fluctuations that will be more than 2.5%. Products like the design offered to super funds and life insurers by Optimum Pensions (i.e. an investment linked lifetime income stream) will also see similar fluctuations where retirees are endeavouring to achieve higher returns by investing in growth assets to a greater degree. In the case of Optimum Pensions’ solutions, there are smoothing mechanisms that can be employed to achieve a more consistent income from year to year.
	
4	Offering a flagship CIPR
All trustees should offer a flagship CIPR to members at retirement, subject to limited exceptions (see principles 7 and 8).

	Optimum Comments

We support the proposal on the basis that funds offer a Comprehensive Retirement Income Solution (or three product Solution).

Optimum Pensions has developed a suite of product concepts that could be used as flagship solutions for funds to offer to their members (Charts showing how the solutions work are attached in Appendices 1,2 and 3).

Depending on the individual circumstances, the flagship solution chosen would have flexibility to enable a retiree to make decisions on the ratio of funds to be invested in each of the ABP and the Deferred Lifetime Pension and the Immediate Lifetime Pension, as well as making investment choices for each one.  Depending on the cohort that the fund has determined, a suggested percentage or range for allocation between the products may form part of the offering.

Flagship 1.
A retire invests their money in an Account Based Pension and a Deferred Lifetime Pension.

Flagship 2
A retiree invests their money in an Account Based Pension and an Immediate Lifetime Pension.

Flagship 3

A retiree invests their money in an Account Based Pension and an Immediate Lifetime Pension and a Deferred Lifetime Pension.

	
5	Third party products
Trustees can fulfil their obligation in part or in full by using a third party.

	Optimum Comments

We support the proposal.

We believe that funds could offer their own solutions, subject to 100% reinsurance of the longevity risk, but Trustees would need to make that choice. This has the benefit that relevant assets backing the lifetime income stream are retained by the individual funds and not one or more life insurers – possibly resulting in aggregation risk. However, it would benefit Australia if the reinsurance was managed by relatively few reinsurers in order to get to scale in aggregate – so that there can be more certainty around the actual mortality rates being experienced.

6	Consent
Consent should be required for a CIPR to commence.

	Optimum Comments

We support the proposal.

The Government may consider whether to make investment of part of the retirement benefit into a longevity product compulsory. This might be justified as part of each benefit at retirement has been derived from taxation concessions. The benefit of compulsion is that lifetime incomes could be perhaps 20% higher for compulsory as compared to voluntary purchase of lifetime income streams at retirement. These may be for future consideration as retirement incomes options evolve.
	
7	Offering an alternative retirement income product through advice
Trustees may offer an alternate CIPR or another retirement income product to a particular person or cohort of people through any form of personal financial advice, including scaled personal advice, intra-fund advice, or full financial planning.

.
	Optimum Comments

We support the proposal.

Care would need to be taken that personal advice rules were not breached, or the intra-fund advice rules are modified.  Either way, an alternative solution would require some form of written advice. Given the relatively high amounts involved and the crucial nature to each person of a once in a lifetime decision, we need to ensure that each person obtains the unbiassed advice that they need	
8	Exception for individuals for whom CIPRs are unsuitable
Trustees may choose not to offer a CIPR at all to a particular person if the trustee has reliable information that a CIPR would not suit that person

	Optimum Comments

We support the proposal.
However, it may better be the retiree’s decision not the trustee’s as increased pension incomes are available in other countries to people in sub-standard health.
This decision could only be taken after completing some form of “fact find” so that the Trustee has enough information to make the decision.  Clearly, terminal illness may qualify depending on whether or not there is a dependant spouse, child or parent - hence the reason for collecting the facts.
	
	Lifetime engagement
Trustees should engage early with members about retirement (from the point of joining the fund onwards) and continue to engage on a slowly increasing basis.

	Optimum Comments

We support the proposal.

Providing statements that refer to retirement income provides a much more sensible message.  Clear rules around future assumptions would be required to prevent nonsensical estimates being provided (e.g. assumptions around CPI, investment earning rates and wage growth would need regulating in some way – similar to what would be required when performing an actuarial valuation for a defined benefit fund).
	
	Legacy products
An approach for managing legacy retirement income products and issues related to these legacy products should form part of the framework.

	Optimum Comments

We support the proposal. 

However, it may also be worthwhile for funds to have a strategy for preventing products from becoming legacy.
Care should be taken to make this as narrow as possible to prevent people opting out. Funds that have retirees only receiving benefits via an Account Based Pension should not be exempt.  Longevity risk is actually more of an issue for these members and lifetime pension rates would be higher at older ages.

APPENDIX 1

Sample of Flagship 1

Case is a male age 66 with $350,000 in superannuation
75% of the superannuation balance invested in an Account Based Pension
25% Invested in an Optimum Deferred Real Lifetime Pension – Deferred for 15 years
Investments in a Balanced Portfolio (5.7% earning rate)

APPENDIX 2

Sample of Flagship 2

Case is a male age 66 with $350,000 in superannuation
30% of the superannuation balance invested in an Account Based Pension
70% Invested in an Optimum Immediate Real Lifetime Pension
Investments in a Balanced Portfolio (5.7% earning rate)

APPENDIX 3

Sample of Flagship 3

Case is a male age 66 with $350,000 in superannuation
60% of the superannuation balance invested in an Account Based Pension
25% Invested in an Optimum Immediate Real Lifetime Pension
15% Invested in an Optimum Deferred Real Lifetime Pension – Deferred for 15 years
Investments in a Balanced Portfolio (5.7% earning rate)