SMSFs with legacy defined benefit pensions (DBP) should be given an amnesty to move to account-based pensions (ABP) to prevent solvency issues related to investment market downturns, which may inadvertently penalise the pension recipients, an SMSF technical expert has suggested.
SuperConcepts SMSF technical services executive manager Mark Ellem said while legacy DBPs continued to decline in numbers, their continued use within parts of the SMSF sector during the current market downturn could create issues for trustees and SMSF practitioners.
“With the volatility of share markets in the second half of the 2019/20 financial year and the talk of GFC (global financial crisis)-type conditions, where values end up at 30 June 2020 could present solvency issues for SMSFs running old legacy defined benefit pensions,” Ellem said.
He added that where a DBP was a 100 per cent asset test exempt (ATE) pension for Centrelink purposes, an adverse solvency certificate could result in the pension failing to meet the superannuation law and Centrelink requirements, and in turn it could lose its asset test exemption status, leading to the loss of Centrelink benefits.
DBPs affected by the solvency requirements were usually lifetime complying pensions and life expectancy pensions, and both were required to have an actuary provide an annual opinion on the solvency of the DBP and the level of certainty of the ongoing solvency of the pension, he pointed out.
If the DBP did not meet the required level of certainty for solvency according to the actuary, it would fail the requirements mentioned above, he added, and be required to roll over the capital backing the DBP to a retail complying annuity if the member wanted to retain the ATE status or commute the DBP to commence a market-linked pension.
He said the solvency issues for DBPs within SMSFs were important to remember in the current market because the value of the assets that back a DBP from a non-SMSF were the responsibility of the trustee who was contracted to pay the pension and also to address the movement in value of the assets backing the pension.
“In an SMSF, this [the trustee] is usually one or the same person, so market value movement of fund assets backing these pensions are of great concern to SMSF clients and their advisers,” he said.
He said the age of legacy DBPs and the ongoing changes to superannuation law had added to these concerns, highlighting the need for them to be replaced with modern alternatives.
“The major changes to the superannuation law in 2007, known as Simpler Super or Better Super and the recent 2017 super reforms simply do not cater for the old legacy pensions, particularly the defined benefit pensions,” he said.
“Given that there are many predications that we are headed for another economic period similar to the GFC, the solvency issues that this may cause and the unresolved TBC issues that exist, is it time now to allow these old legacy pensions to be restructured as modern day account-based pension?
“Yes, there will be a need to sort some aspects, like the Centrelink consequences, but surely dealing with them now is better than simply playing the waiting game and hoping they’ll just go away.”