Legacy Pension Commutations – Centrelink Implications Solved?

The recent legacy pension reforms of December 2024 allows non-commutable pensions to be commuted if the commutation was a 100% commutation and the commutation occurred within a five year window commencing on 7 December 2024. The legacy pension reforms also amended the rules relating to the allocation of surplus pension reserves – this aspect of the reform is not presently relevant.

Now that all non-commutable pensions – such as lifetime pensions, life expectancy pensions and market linked pensions can be commuted what are the Centrelink implications of the commutability?

If the non-commutable pension had no asset test exemption – whether 100% or 50% - there is no Centrelink implication.

However, if the non-commutable pension did have an asset test exemption – whether of 100% or 50% - there is a considerable Centrelink issue. A recently made statutory instrument – Social Security (Waiver of Debts – Legacy Product Conversions) Specification 2025 has attempted to defuse the Centrelink issue. The questions are – what are the Centrelink Issues and has the statutory instrument defused the issue?

The Centrelink Issue is that a non-commutable pension which is assets test exempt must not be commutable except in only very limited and specific conditions. Unfortunately, the legacy pension reforms make every non-commutable pension commutable during the five year commutation window. Consequently, every legacy pension which is assets test exempt has been in breach of the “non-commutation” requirement since 7 December 2024 (the start date of the Legacy Pension Reforms).

Under the asset test rules, an asset test exempt pension which is merely potentially commutable (that is the pension can be commuted in circumstances other than the circumstances set out in the Social Security Act) will cease to qualify as an asset test exempt pension and the entitlement to the age pension for the previous five years will be reassessed on the basis that the pension was not an asset test exempt pension. This reassessment of the age pension entitlement will usually result in a determination that there has been an overpayment of the age pension. This overpayment will constitute a debt owning by the age pension recipient to Centrelink.

SUPERCentral understands that Centrelink is not currently seeking to re-assess the entitlement to the age pension which arises merely because a previous asset test exempt pension is now commutable due to the application of the Legacy Pension Reforms.

Presumably, in due course, the Government will introduce retrospective legislation to amend the asset test exempt income stream provisions to ensure that asset test exempt status is not lost merely because the pension is now potentially commutable. In the case of lifetime pensions, this may involve an amendment to section 9A, the effect of which is that an assets test exempt lifetime pension still satisfies the non-commutation requirements despite the Legacy Pension Reforms. In the case of the other types of asset test exempt pensions corresponding amendments will have to be made to section 9B (life expectancy pensions) and section 9BA (market linked pensions).

Alternatively, but less satisfactorily, is that the Secretary of the Department of Social Services could issue Guidelines under s9A(6) for the exercise of the power conferred on the Secretary by s9A(5) to treat lifetime pensions which have ceased to satisfy the asset test requirements only because of the Legacy Pension Reforms, as continuing to satisfy those requirements unless and until the pension is commuted.

Unfortunately, while the Specification does address (and solve) one issue arising from the Legacy Pension Reform the Specification only partially addresses another issue arising from the Reforms.

The good aspect of the Specification

If and when an assets test exempt pension is fully commuted pursuant to the Legacy Pension Reforms the pension will cease to exist and the entitlement to the age pension is retrospectively reassessed for the previous 5 years. This reassessment will normally determine that the age pension has been overpaid (as the pension is treated as an assets tested pension for the purpose of the reassessment) and a debt will be payable by the member to Centrelink. The Specification completely waives any debt which arises by reason of the re-assessment.

Consequently, if the asset test exempt pension can be fully commuted within the 5 year window, there effectively is no reassessment (as the debt is waived) and the commutation amount is now either a balance in a super fund, or cash in hand or the opening balance of an account-based pension with the entitlement to the age pension after the commutation determined on this basis that the commutation amount is now a financial asset which is subject to deeming.

The less good aspect of the Specification

The less good (because it addresses a symptom and not the cause) aspect of the Specification, attempts to deal with the issue that the pension which before 7 December 2024 satisfied the requirements for asset test exemption now no longer satisfies those requirements. In short, in respect of each fortnightly instalment period commencing on or after 7 December 2024, the pension is no longer an asset test exempt pension and the entitlement to the age pension should be determined on the basis that the pension is not asset test exempt.

As the entitlement to the age pension is determined in respect of each fortnightly instalment period, there is an overpayment of the age pension in respect of each such period as Centrelink has not changed the status of the pension from assets test exempt to assets tested.

The solution is to waive in respect of affected fortnightly instalment period the overpayment of the age pension in respect of that period. This solution treats the consequence and not the cause of the issue.

The issue is that a pension which immediately before 7 December 2024 was asset test exempt is now assets tested merely because of the Legacy Pension Reforms. The better solution would have been to amend the relevant definitions (sections 9A, s9B and s9BA of the Social Security Act 1991 respectively applying to lifetime, life expectancy and marked linked pensions) so that commutability solely due to the Legacy Pension Reforms is disregarded unless and until there is a commutation.

The Specification is better than nothing.