The great retirement rort

If the government is looking for a way to redeem itself in the eyes of the nation’s ripped-off retirees after the CBA financial planning fiasco and its pro-bank FoFA amendments, I have just the answer: the scandal that is retirement villages.

The way most of these things operate is as crooked as bank-owned financial planning and property spruiking. In fact retirement villages and aged care accommodation are the progeny of the worst of both.

Australians get creamed by the financial advice and wealth management industry while they are saving for retirement and then get scalped when they get there.

And by the way, this is a financial industry not controlled by the banks, so the government can be tough on it without upsetting its banking friends, who persuaded them to amend the Future of Financial Advice laws.

Tony Abbott and Mathias Cormann need to step in and clean up retirement accommodation, and what heroes they would be if they did it: their supine performance over the CBA and bank financial planning generally might even be forgotten.

Just as the securities industry used to be a chaotic mess of state laws before the National Companies and Securities Commission was set up in 1979, retirement villages and aged care are regulated by state legislation, and each state regulates it differently, and way too lightly.

The industry is a booming national disgrace, with three very juicy rackets: deferred fees, ongoing fees that keep going when you die, and bonds.

Taking them one at a time, deferred fees are where you buy a unit in a retirement village at full price, but when the time comes to sell you have to pay the village owner a large percentage of what you get.

One village that I’m familiar with requires 25 per cent of the original purchase price to be paid to the owner, plus 75 per cent of any capital gain. Others simply take 30 per cent of the sale price -- 3 per cent a year for a maximum of 10 years.

There are a variety of deferred fee schemes contained in retirement village contracts and they all rely on the fact that when an elderly couple signs it, they tend not to pay much attention to what might happen to the assets when they die.

They usually don’t get legal advice and don’t really understand that the village owner, typically a property development company, will get  a “deferred fee” of more than $100,000 when it’s time to move on to the next phase of life, or death.

In addition to that, the owner usually insists that it act as the selling agent on a fee that’s commonly well over the odds – usually 2.5 per cent or more.

Victoria recently passed a law that allows retirement unit owners to employ their own agent, but one village owner – a big national listed company – simply said that 2 per cent of the 2.5 per cent selling fee referred to preparing the unit and arranging access, so it had to be paid whether it was the agent or not.

On top of the gouge known as “deferred fees”, there are the non-deferred fees – ongoing management fees, usually $100 and $200 a week, but sometimes more.

How they got away with charging both is beyond me, but in the offices of all retirement village owners there must be a handsome bronze bust of the genius who thought of it.

The weekly/monthly management fees are meant to cover the maintenance of the village and the amenities; the deferred fees are meant to cover, err, the maintenance of the village and the amenities.

But the best thing about the management fees is that don’t stop when you move out or die and your unit is empty, the garden unadmired and the bowling green not used, by you – it only stops when the unit is sold. And since the village owner is often the selling agent, this can, and often does, take a long time.

The children of deceased unit owners have found themselves having to pay crushing management fees for months, sometimes years, on top of the funeral expenses and their grief.

And if the next stop is an aged care hostel, there is a bond to be paid - usually somewhere between $300,000 and $500,000. From the beginning of this month, bonds are also required for high-care nursing homes, although these are means tested.

The beauty of the bond racket is that there are no restrictions on what the hostel owner may do with the money, and when it is repaid not only is there no interest, it is minus a fee of a few thousand dollars.

Aged care facilities therefore have a float of at least $15 million and often much more depending on the number of beds, which the owner can mostly spends as it sees fit. All it has to do is keep enough on hand to pay out the steady trickle of departees – usually about 10 per cent.

Apart from that, the cash can earn a tidy profit over and above the pensions that are collected each fortnight, or could also finance a lavish lifestyle – cars, yachts, houses, travel. There are no restrictions.

The skimming of superannuation savings by unscrupulous financial planners and wealth managers is bad enough, but what’s going on with what cash is left at retirement is, if anything, worse.

The government should make a show of cracking down on it and unifying all the various state laws into a national scheme, in which there is no double dipping on fees and interest has to be paid when the bonds are returned.