Retirement villages: the most complicated finance contracts in Australia

by | Feb 7, 2022 | Finance & Tax

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

So devilishly complicated are retirement village contracts that an actuary and lecturer in applied finance, someone at the very pinnacle of mathematics and structured finance, reckons they are harder to understand than even synthetic collateralised debt obligations (CDOs).

CDOs were the arcane finance instruments, understood by very few people, which brought Wall Street banks to their knees during the Global Financial Crisis. They were complex by design; and it seems a fair conclusion that Australian retirement village contracts are also deliberately designed to be impenetrable to the consumer. So it is that, often, a retiree will be deluded 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 senior lecturer in applied finance and actuarial studies, developed an interest in Australia’s retirement village industry following his experience trying to find his mother an appropriate retirement village.

Kyng says that “the glossy brochures and other marketing material she’d been given provided almost no usable information about their fees or other details of the contract.” He found that “the contract and the fee structures were not only complex but cunningly designed to look cheap –  when in fact it wasn’t.”

Almost impossible to compare

After shopping around, Kyng found “huge variability in contracts – but it was almost impossible to compare them.

‘’The entry fees varied widely, as did the maintenance fees and exit fees. The exit fee structures also varied considerably, and the fees were usually substantial. This complexity doesn’t benefit consumers or aid comparison shopping. It was also difficult and time-consuming to get the information. That requires site visits.”

Kyng realised that even though he was “equipped with skills in financial and actuarial mathematics, it was still challenging to unravel the complexity embedded 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 teamed up with Robert Drake, an adjunct fellow at Macquarie University and an international consultant on financial literacy and evaluation, to conduct research into the complex and confusing contracts to which Australian retirees agree.

The contracts, which can stretch up to 500 pages, bewildered all but one of 20 university-educated, retiree-aged subjects in a 2020 study into the financial literacy of consumers looking to enter into retirement village contracts.

Blank looks on faces

The only participant who could accurately determine which out of three contracts would have been the most cost-effective for their circumstances was a career research scientist who had previously had a licence at a caravan park and was familiar with the terms of the contract.

Drake said that “the blank looks on peoples faces said it all.”

“the blank looks on peoples faces said it all.”

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

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

Drake, the former senior executive of financial literacy at ASIC, says that retirement village contracts are the most complex contracts he has ever seen “the only thing which has been similar were dodgy synthetic index products which were taken off the market by the federal government for being too complex.”

These dodgy financial products fell short of the Corporations Act requirements that contracts 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 that operators can make these contracts “as complex as suits them and the onus is put on the retiree”.

The Residents of Retirement Villages Victoria, a lobby group made for and by people living in retirement villages, have only found two Victorian solicitors who can properly understand the complexities of these contracts.

The researchers say that most of the solicitors who have the legal and financial knowledge to understand these contracts already work for the industry itself, and are not available for the public.

Hidden dangers in retirement village contracts…

Living in a retirement village isn’t only a financial consideration. These communities offer important lifestyle benefits. However, Kyng and Drake warn it is important to be able to separate the lifestyle and financial aspects.

The character of most retirement village contracts is that a resident will loan the operator a large upfront amount and then pay a monthly upkeep fee. When the resident moves out, he or she will be returned this initial upfront loan minus fees which can typically range from anywhere between 40 and 100%.

Imagine if a resident in 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 that she will lose moving out of the village, she may be unable to afford a new home.

Another significant consideration is the capacity for a retiree to pay for aged care when she moves out of a retirement village.

“To be frank”, says Drake “there are normally two reasons why someone moves out of a retirement village. Either they pass away, or they require additional aged care. When you agree to an aged care contract, and loan the operator your initial lump sum you are really buying the right to reside in the village so long as you’re alive and healthy.”

Often these contracts have clauses that- enable the operator to withhold returning your capital, minus their accruing fees, for up to five years while they try to fill the vacant property.

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

The solution

Following from their initial research, Kyng and Drake conducted a survey of eight contracts from each state to compare the key features. The survey considered both for-profit and not-for-profit retirement villages.

The aim of this survey was to develop a Retirement Village contract calculator so that retirees could be given a chance and choose the right option.

The first trouble they came across is that it is incredibly difficult to try and ascertain key pricing information without dealing directly with the retirement village sales team. 

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

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

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

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

Given the state-by-state regulation, it is unlikely that this will happen quickly.

However, the Residents of Retirement Villages Victoria is making submissions to the Victorian Parliament’s Review of the Retirement Villages Act 1986 to advocate for more standardised contracts across the sector as well as a dispute resolution mechanism. 

The group’s president, Lawrie Robertson, says that at present “you cannot make a price comparison. Every single detail differs from one contract to another.”

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

Callum Foote is a journalist and Revolving Doors editor for Michael West Media. He has studied the impact of undue corporate influence over Australian policy decisions and the impact this has on popular interests.

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