Retirement villages: Australia’s most complicated financing contracts

Glossy pamphlets hide baffling retirement village contracts. ImageJoe Hepburn, Unsplash

It is one of Australia’s most complex legal challenges. Experts have found that only 1 in 20 people can fully understand a retirement village contract. There’s a better way if only politicians could agree to help retirees, reports CallumFoot.

Retirement village contracts are so devilishly complicated that an actuary and lecturer in applied finance, someone at the top of math and structured finance, believes they are harder to understand than even bond-backed bonds. synthetic debts (CDO).

CDOs were the obscure financial instruments, understood by very few people, that brought Wall Street banks to their knees during the global financial crisis. They were complex by design; and it seems fair to conclude that Australian retirement village contracts are also deliberately designed to be inscrutable to the consumer. This is how often a retiree will be tricked into thinking they are buying a unit in a village when in fact they are giving an unsecured loan to a property developer – with a byzantine fee arrangement on top.

Tim Kyng, a former lecturer in applied finance and actuarial science, developed an interest in the Australian retirement village industry following his experience trying to find a suitable retirement village for his mother.

Kyng says “the glossy brochures and other marketing materials she received provided almost no usable information about their fees or other contract details.” He found that “the contract and pricing structures were not only complex, but cleverly designed to look cheap – when in fact they were not”.

Almost impossible to compare

After doing the rounds, Kyng discovered “huge variability in the contracts – but it was almost impossible to compare them.

“Entry fees varied widely, as did maintenance fees and exit fees. Exit fee structures also varied widely and fees were generally substantial. This complexity does not benefit consumers and does not facilitate comparison shopping. It was also difficult and time consuming to get the information. This requires site visits.

Kyng realized that although he was “equipped with financial and actuarial mathematical skills, it was still difficult to disentangle the complexity inherent in retirement village contracts” and that “from an actuarial perspective, Retirement village contracts are a complex hybrid of real estate, insurance and financial products.

Kyng has teamed up with Robert Drake, an adjunct research fellow at Macquarie University and an international consultant in financial literacy and assessment, to conduct research into the complex and confusing contracts that Australian pensioners accept.

The contracts, which can run up to 500 pages, baffled all but one of 20 college-educated, retired elderly subjects in a 2020 study of the financial literacy of consumers seeking village contracts. of retirement.

Blank stares on faces

The only participant who could accurately determine which of the three contracts would have been most profitable for his situation was a career seeker who had previously had a license in a trailer park and knew the terms of the contract.

Drake said “the blank looks on people’s faces said it all.”

“The blank looks on people’s faces said it all.”

“Our research investigated whether participants were able to make an informed choice. This is the key question. Can retirees make an informed consumer choice, and the answer was clearly no,” Drake concluded.

Kyng adds, “The way contracts are written, people are bound to misunderstand. It’s a complete blur for people, as you can see in the video we put together.

Duck, former senior financial literacy executive at ASIC, says retirement village contracts are the most complex contracts he’s ever seen “the only thing that’s been similar was dodgy synthetic index products which were withdrawn from the market by the federal government because they were too complex.”

These dubious financial products did not meet the requirements of the Corporations Act that contracts must be “clean, concise and effective”. Unfortunately, being regulated by state governments, retirement village contracts are not bound to the same standards.

As a result, Drake says operators can make these contracts “as complex as they want and the responsibility rests with the retiree.”

Residents of Retirement Villages Victoria, a lobby group created for and by people living in retirement villages, found only two Victorian lawyers who could fully understand the complexity of these contracts.

Researchers say most lawyers who have the legal and financial knowledge to understand these contracts already work for the industry itself and are not available to the public.

The hidden dangers of retirement village contracts…

Living in a retirement village is not just a financial consideration. These communities offer significant lifestyle benefits. However, Kyng and Drake caution that it’s important to be able to separate lifestyle and financial aspects.

The character of most retirement village contracts is that a resident will lend the operator a large initial amount and then pay a monthly maintenance fee. When the resident moves out, they will receive this initial loan less fees which can generally vary between 40 and 100%.

Imagine if a resident of a retirement village wants to move. Her children may have moved to another city and she wants to be close to them. Depending on the amount of capital she will lose by leaving the village, she may not be able to afford a new house.

Another important consideration is a retiree’s ability to pay for elderly care when leaving a retirement village.

“To be frank,” says Drake, “there are normally two reasons why someone leaves a retirement village. Either they die or they require additional elderly care. When you accept an elderly care contract and lend the operator your initial lump sum, you are effectively buying the right to reside in the village as long as you are alive and well.

Often these contracts have clauses that allow the operator to withhold your principal repayment, less any associated fees, for up to five years while they try to fill the vacant property.

For Drake, it means “the difference between quality aged care and a place of last resort for many.”

The solution

Following their initial research, Kyng and Drake conducted a survey of eight contracts from each state to compare key features. The survey considered both for-profit and non-profit retirement villages.

The objective of this survey was to develop a Village Retraite contract calculator so that retirees can have their chance and choose the right option.

The first issue they encountered was that it is incredibly difficult to try and verify key pricing information without dealing directly with the retirement village sales team.

“The key principle of an efficient market is the ability to compare products,” says Kyng. “This is what is fundamentally missing in the Australian retirement village market.”

Even attempts to develop a rent comparison metric, to easily compare different retirement villages, fail. Often, the best financial option for someone entering a retirement village at 55 will not be the same as for someone entering at 85.

After analyzing contracts from across Australia, researchers were able to develop a calculator that can choose the best retirement village for an individual’s situation. The calculator has been developed in association with Macquarie University and can be found here.

Unfortunately, for technology such as this calculator to be effective, retirement village contracts must be made public for comparison purposes. This is what you see in home loan comparison rates and insurance comparison services offered by companies like Trivago.

Given state-by-state regulations, this is unlikely to happen soon.

However, residents of Victoria’s retirement villages are submitting submissions to the Victorian Parliament’s review of the Retirement Villages Act 1986 to argue for more standardized contracts in the sector as well as a mechanism for settling disputes. disputes.

The group’s president, Lawrie Robertson, says that at present “you can’t do a price comparison. Every detail differs from contract to contract.

“In order to create an efficient marketplace, the ability for this easy comparison is paramount,” says Robertson.

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