Legacy Pension Reforms (Part 1) - Introduction

Without fanfare or prior notice, the Albanese Government has initiated legacy pension reform. While legacy pension reform was proposed by the previous Government, no such reform was achieved before its demise. On the change of Government, it seemed that any such reform was dead and buried, forgotten about and its name would never to be mentioned again in progressive circles. But on Tuesday 17 September 2024 all this changed with a Press Release of the Minister responsible for Superannuation and the issue by Treasury of draft regulations for public consultation.

Legacy Pension Reform is about allowing individuals who currently hold lifetime pensions, life-expectancy pensions and market linked pensions to exit those pensions. To use an often over used expression, legacy pensions are no longer fit for purpose and have not been fit for purpose since the Costello reforms of Superannuation which commenced 1 July 2007.

Legacy pensions are pensions which could be issued before 20 September 2007 (the end date of a transition period which commenced on 1 July 2007) but could not (except for one exception) be issued after 19 September 2007. The exception relates to legacy pensions issued after 19 September 2007 from money which has been entirely sourced from the commutation payment of a legacy pension, which commenced before 20 September 2007, where the pension is either a life expectancy pension (only if the issuing fund has 50 or more members) or a market linked pension (any regulated super fund including SMSFs).

Legacy Pension Reform has two aspects – commutation reform and pension reserve reform. These two aspects are linked. The former is concerned with permitting pensions which currently cannot be commuted, to be commuted. This reform will apply to lifetime pensions, life expectancy pensions and market linked pensions. This reform will allow a five year window in which those pensions can be commuted.

The latter is about permitting amounts, which are no longer required, to support the payment of a commuted legacy pension to be allocated to the pension recipient as an addition to their member account.

The net effect of these two reforms is that any member currently being paid a legacy pension will be able to commute that pension and the entire amount in the fund previously supporting that pension could be allocated to that member as an addition to their accumulation account. This allocated amount will neither be treated as a concessional contribution nor as a non-concessional contribution. The member will then be able to either cash out that allocated amount (which will be tax-fee, if the member is aged 60 or more), be used to commence an account-based pension (transfer balance cap space permitting) or retained in the fund as an accumulation balance.

If these reforms are implemented, they will be, for those members who are currently receiving legacy pensions, the best thing since sliced bread.

Each aspect of the reforms – the commutation reform and the pension reserve reform - is considered in detail below. However, these comments are based upon the text of the draft regulations released on 17 September 2024. The regulations, as promulgated, may be materially different to the draft text with the consequence that the following comments may not apply. The legacy pension reforms will commence on registration of the regulations in the Federal Register of Legislation.

What will SUPERCentral do?

Once these reforms are enacted, SUPERCentral will update the Governing Rules to expressly permit legacy pensions to be commuted and amend the rules relating to allocations to member accounts to accommodate the pension reserve reforms.

Should all legacy pensions be commuted?

SUPERCentral cannot answer this question as it would amount to financial advice and we are neither permitted by law nor qualified to provide such advice. In any event, SUPERCentral does not know the personal circumstances of members who are currently receiving legacy pensions.

However, any individual receiving a legacy pension and any adviser of such an individual, and any trustee of a self managed superannuation fund which is currently providing a legacy pension should very seriously consider whether to take advantage for these “once in a lifetime” reforms.

What about legacy pensions which have special asset test treatment?

One reason to commence a legacy pension was that such pensions were entitled to special asset test treatment. A legacy pension could have either a 100% asset test exempt status (that is where the capital value of the legacy pension is not counted at all for the purposes of the Centrelink asset test) or a 50% asset test exempt status (that is only 50% of the capital value of the pension is counted as an asset for the purposes of the assets test). These pensions are referred to as Asset Test Exempt pensions or ATE pensions.

While the Social Security Act does not prohibit commutations of ATE pensions, there are adverse asset test consequences for a commutation of an ATE pension.

Under current legislation, a commutation of these income streams contrary to the conditions specified in the Social Security Act would cause the income streams to be non-ATE pensions and would trigger a retrospective reassessment of the pensioner’s age pension entitlement for the previous five years on the basis that the income streams were not asset test exempt. This will, in most cases, give rise to a material overpayment of the age pension during previous five years. The position is similar for the commutation of ATE service pensions.