From 1 January 2023, superannuation trustees who formerly relied on ASIC's retirement estimate relief, and all those who relied on ASIC's generic calculator relief, will need to comply with the conditions of the ASIC Corporations (Superannuation Calculators and Retirement Estimates) Instrument 2022/603 (Relief Instrument). The Relief Instrument allows financial product advice to be given by superannuation trustees through retirement estimates provided with periodic statements or through online member portals. It also allows financial advice to be provided through superannuation calculators, subject to conditions.
Inflation assumptions in the relief: does inflation know or care if you have retired?
There has been some controversy about the default inflation assumptions used in the Relief Instrument to show the 'present value' of amounts payable or accruing at a future time, such as the dollar value of the user's retirement benefit. To recap, the reason it is important to show the output in today's dollars is to address the risk of overstating the buying power of the benefit. For example, if a fund member or user (both referred to in the Relief Instrument as 'user') were to be told that their projected retirement benefit in 2060 is $2 million, that might suggest a very comfortable retirement, but if the compounding effects of inflation are taken into account, at an assumed rate of, say, 4%, that $2 million would be worth a little over $450,000 today.
For interactive retirement estimates and electronic superannuation calculators, the user must be able to input their own inflation assumptions (and can therefore override any default assumptions). The Relief Instrument does not allow a provider to choose its own default inflation assumptions.
ASIC's aim in standardising default inflation assumptions was to 'achieve a degree of consistency across forecasts where providers are able to set their own nominal investment earnings assumptions'. This makes sense – particularly when it might be in the interests of some to assume low long term inflation (so that users are more likely to believe that their contribution levels are adequate) and in the interests of others to assume high long term inflation (so that users are more likely to believe that their contribution levels are inadequate).
One new feature of the Relief Instrument is that its prescribed default inflation assumptions differ depending on whether the period of inflation is in the user's accumulation phase (i.e. they are working and saving for retirement) or whether the period is within the user's retirement phase. During retirement, the default inflation assumption is 2.5% per annum, intending to reflect long-term CPI growth, but before retirement, the default inflation assumption is 4% per annum, intending to reflect long-term nominal wage growth. (Under the former relief, a uniform rate of 3.2% per annum was specified as the default, without making a distinction between pre and post retirement periods.)
To point out the obvious, inflation doesn't care if you're retired or not. The objective value of your cash decreases at the same rate along with everyone else's, at any given life stage.
ASIC's justification for the difference is that wage growth is the appropriate way to adjust for the increased cost of living during a user's working life whereas CPI growth is the appropriate adjustment for users to compare the purchasing power of their retirement income. ASIC's view is that workers might be more concerned about their standard of living remaining on par with their peers in the workforce, while a retiree may be willing to accept a static (in real terms) standard of living so long as it takes account of the price increases of the goods and services captured in the CPI index. It appears that ASIC developed the approach which was reviewed and endorsed by the Australian Government Actuary.
We find it curious that the Relief Instrument prescribes default inflation assumptions based on the notion that after retirement, the present value of future money decreases more slowly based on the idea of how a retiree subjectively values the money. Using two different rates for the same function (translating nominal dollars into 'today's dollars') also adds complexity, making it more difficult for a user to understand the calculations underpinning the results provided.
Do you need a default?
If you don't like the idea of your superannuation calculator (or interactive retirement estimate) assuming different inflation rates for pre and post retirement periods, what can you do? There is no requirement under the Relief Instrument to use a default. You could simply force the user to input their own assumed inflation rates and do away with the default inflation assumptions altogether.
Do you need to rely on the Relief Instrument?
If you haven't updated your calculator or interactive estimate to conform to the conditions of the Relief Instrument, it may be worth considering whether you actually need to rely on it. In some cases, the relief provided by the Relief Instrument isn't needed.
For example, some calculators or estimates don't give a recommendation or opinion that could be reasonably regarded as intending to influence someone's decision in relation to a superannuation product. In that case, there is no financial product advice being given and therefore no need to comply with the Relief Instrument.
Maybe you can take the view that any recommendation or opinion provided by the calculator or estimate is only about the potential allocation of funds into superannuation and therefore does not qualify as a financial service. If so, there is no need for relief and no need to comply with the Relief Instrument.
Get in touch if you would like to discuss the Relief Instrument and what the new changes mean for you.
