Deeming: pensioners lose out when rates don’t keep up

The Australian

3 February 2018

John Rawling

Over summer the big four banks quietly cut interest rates for online savings accounts, continuing a trend to squeeze customers. But spare a thought for age pensioners, who have been experiencing a similar squeeze for nearly six years.

For many years banks have offered age pensioners specialised bank accounts under various names: ANZ Pensioner Advantage account, Commonwealth’s Pensioner Security account, NAB’s Retirement account and Westpac’s 55+ and Retiring account.

Alongside the rates earned by these bank accounts is another rate — a deeming rate — which is set by the Minister for Social Services. Deeming rates are the key component of the income test for the pension.

Deeming rates assume that financial investments (including bank accounts, listed securities and managed funds) earn a certain amount of income regardless of the income they actually earn.

If a deemed rate is higher than an actual rate, the pensioner loses out.

For instance, a $200,000 deposit in the Commonwealth Bank’s Pensioner Security account will earn actual interest of $2965 per year. But deemed income is $5747. The end result in this instance is that it will reduce a pension by $26.52 a fortnight.

According to Centrelink, deeming is a simple and fair way to assess income from financial assets.

“By treating all financial investments in the same way the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person’s pension entitlement,” a Centrelink spokesman says.

Banks have offered specific accounts for pensioners/seniors since the deeming regime was adopted by Centrelink in 1996. They were marketed as “deeming accounts” and paid actual interest which closely matched the Centrelink deeming rates. Deeming rates were set at 5 per cent for the first $30,000 for single pensioners and $50,000 for couples. Higher amounts earned 7 per cent.

By 2010, in the wash-up of the global financial crisis, deeming rates had fallen to 3 per cent and 4.5 per cent, respectively — still at or below the cash rate. They remained there for three years, until March 2013.

When the official cash rate fell from 4.5 per cent to 2.5 per cent over a couple of years, the banks followed suit.

By December 2013 — as the official cash rate fell to below 3 per cent — the disparity between the cash rate and the deemed rate had become so great that ASIC stepped in. To avoid action for misleading and deceptive advertising, the banks were forced to remove references to deeming and rename the accounts.

July 2012, six years ago, marked the first time that the official cash rate was lower than the higher deeming rate. Pensioners with large deposits started losing out.

August 2016 was the first time the official cash rate, at today’s rate of 1.5 per cent, fell below the lower deeming rate. Suddenly all pensioners were affected.

Currently the deeming rates are set at 1.75 per cent for the first $50,200 for single pensioners and $83,400 for couples, with higher amounts assumed to earn 3.25 per cent.

There has been no comment from Centrelink or the Minister for Social Services as to why the large disparity between deeming rates and official interest rates has been allowed to occur.

One can only speculate how much pensioners subject to the income test have lost since 2012.

These days, finding a savings account with a major bank that pays an interest rate anywhere near the official deeming rates is close to impossible.

For pensioners not to lose out, either interest rates will have to increase, or the minister will have to lower the deeming rates, or both.

John Rawling is an aged-care consultant at Joseph Palmer and Sons