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Why the PLS interest rate needs to be fairer for seniors

16th September, 2021

Since I launched Pension Boost in 2019, the team and I have been advocating on behalf of Australian seniors. Our goal has always been for the government’s Pension Loans Scheme (PLS) to be enhanced to open the Scheme up to more seniors and to make it fairer.

So far our efforts have yielded some very positive outcomes with the 2021 Federal Budget announcing that from 1 July 2022 seniors on the PLS will benefit from the:

  • Introduction of a no negative equity guarantee, meaning seniors (or their estates) will not be left with a debt to the government if the property sale price is less than the PLS loan debt;
  • Introduction of a lump sum option, of up to 50% of the full age pension rate;
  • Launching of education and awareness programmes for seniors about the PLS; and
  • Rebranding of the Scheme to be inclusive of self funded retirees

You can read a more detailed update on these changes here.

One major initiative we’ve been pushing for since starting Pension Boost, is for the government to introduce a fairer, more transparent PLS interest rate mechanism for seniors.

What you can do to help

You can join our advocacy for a fairer, more transparent PLS interest rate mechanism by simply signing the change.org petition that we’ve set up. Click the link below to read more and sign.

Sign the Petition

Please note: Pension Boost will not ask you to make a donation for this petition and does not benefit from any donation you may make to change.org.

Since writing that first article in mid-2019, the government announced in December 2019 that effective 1 January 2020, the PLS rate would be reduced from 5.25% pa to 4.50% pa, the rate it remains at today. While this felt like at least a partial victory at the time, what happened next is why we’re still pushing for a transparent PLS rate setting mechanism to protect seniors.

What happened next?

Let’s roll forward just a few months to March 2020. COVID-19 has changed all our lives in a very significant way and the government, to its credit, realised the potentially devastating consequences to lives, livelihoods and the economy. A number of, what Prime Minister Morrison deemed ‘Team Australia’ measures were launched to help us get through the pandemic including the RBA making 3 downward adjustments to the Official Cash Rate (OCR), dropping it to the current record low of 0.10% pa (from 0.75% at the end of February 2020). And while we saw banks and commercial lenders pass the rate cuts through to borrowers and savers alike, in a seemingly bizarre outcome for ‘Team Australia’, the government did not adjust the PLS rate (which is a variable rate) but yet it adjusted the ‘deeming rates’ applied to age pensioners savings and investments.

The Minister’s response is that the PLS rate is set relative to the market rates of commercial reverse mortgages and that it remains competitive, which is generally true even today. However, if that’s the context in which the Minister sets the PLS rate then we should review how it was last reset in December 20191. The table below compares the PLS rate to the two major commercial reverse mortgage providers still writing new business in the market and clearly demonstrates that the PLS rate:

  • Was not adjusted when the RBA dropped the OCR, whereas the commercial providers reduced their rates; resulting in
  • The difference to the commercial competitors reduced from 1.18% to 0.78%.
Comparison of the PLS rate to RBA OCR and commercial reverse mortgage providers
December 2019
1 January 2020
September 2021
RBA OCR
0.75%
0.75%
0.10%
Household Capital
5.15%
5.15%
4.95%
Heartland Bank
6.20%
6.20%
5.60%
Average of commercial providers
5.68%
5.68%
5.28%
Pension Loans Scheme
5.25%
4.50%
4.50%
PLS rate lower by
0.43%
1.18%
0.78%

To further highlight my point about the need for a transparent rate setting mechanism, in the 20 years to June 2021 the RBA has adjusted the OCR 46 times yet the PLS rate has been adjusted only once.

What should the PLS rate be?

Based on the analysis above, if the Minister determined that a 1.18% difference was justified when adjusting the PLS rate effective 1 January 2020 then, applying that same logic, the PLS rate today should be around the 4.10% pa mark. Given the commercial providers passed on only an average of 0.40% of the 0.65% OCR reduction it can be argued the PLS rate should be even lower at 3.85% (being 4.50% less 0.65%).

Another government benchmark for an interest rate that impacts seniors is that applied to residential aged care financing arrangements. Where a resident of an aged care facility decides to pay a Daily Accommodation Payment (DAP) in lieu of a Residential Accommodation Deposit (RAD) the government stipulates that the Maximum Permissible Interest Rate (MPIR) aged care providers can charge is, currently, 4.04%. Importantly, the MPIR is reviewed every quarter and benchmarked against the General Interest Charge (GIC)2 by the ATO less 3%. It’s also worth noting the MPIR is an unsecured rate whereas the PLS is a loan secured over real property so there is an argument the PLS rate should be lower than the MPIR.

In the end it doesn’t matter what I think the PLS rate should be, the more critical issue is that a fair and transparent PLS rate setting mechanism needs to be introduced to the PLS so that senior consumers can have greater confidence and trust in relation to the rate they are will be charged given that it compounds each fortnight directly impacting the residual net equity in their property and their estate.

To help us advocate for seniors across Australia, sign our petition below. Our efforts have made a difference in the past, and we will continue to push for better outcomes for our seniors into the future.

Your support is appreciated

Paul Rogan

Founder and CEO

Join our petition

Please note: Pension Boost will not ask you to make a donation for this petition and does not benefit from any donation you may make to change.org.


1 A historic moment given this was the first time the PLS rate had been rest in more than two decades

2 The ATO’s General Interest Charge (GIC) is set quarterly at the 90 day Bank Bill Rate plus 7%. Rates as at 30 June 2021: RBA’s OCR 0.10%; 90 Bank Bill Rate 0.04%; GIC 7.04%; MPIR 4.04%

 

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