Recent ABC 4 Corners presentation and Fairfax media articles drew attention to problems within the retirement village industry and highlighted issues within some Aveo villages. Since these presentations aired there has been public outcry for reforms with state governments, regulators, and even the commonwealth government making noises about immediate and long term reforms to the industry. Ongoing fees, complex contracts and the complexity of the Deferred Management Fee calculations have now come to the attention of legislators through television, newsprint, and the public response to them.
The focus on the industry has been so strong that welcome reform may now come to the Deferred Management Fee model used by most retirement village operators. The Deferred Management Fee model of retiree living was initially designed for charitable groups where residential accommodation for retirees was made available at an entry cost below general values, the deferred payment being part 2 of a two step payment plan. The concept works well so long as retirees obtain accommodation at an initial cost well below market values. Today the DMF model is still used but retirees now pay an entry amount more commensurate with a purchase price but without obtaining ownership of the property.
In 2007 a House of Representatives Committee report into Older people and the law recommended that the matter of exit fees be fully reviewed including consideration as to whether they should be abolished. In light of current industry revelations and how far the Deferred Management Fee model has moved from the original çharity organisation concept, it is clear an opportunity was missed by legislators and regulators to improve protections for retirement village residents from as far back as 2007.
The amount of attention drawn to the plight of Australian retirees in retirement villages by the Aveo exposure begs the very question, why the deferred management fee model is still permitted given the accelerated transfer of capital value from retirees to operators as a result of this model.
Australia generally uses the well understood property ownership or property rental models, both these models of residential accommodation deliver dramatically better financial outcomes for retirees.
The table below quantifies the capital value lost by the retiree and the capital value gained by the operator in just one 7 year occupancy period. Just one unit in one village plus the operator has the capacity to repeat this scenario over multiple occupancies of this one unit during the life of the village. The average occupancy of a retirement village unit is around 8 years.
The Deferred Management Fee model is truly the goose that lays the golden egg for the retirement village industry.
The following table quantifies the options for a retiree of staying in the family home or renting residential accommodation and compares them to entering a retirement village using the deferred management fee model. The numbers speak for themselves but of course each retiree has to consider issues outside of just dollars and cents when giving consideration to entering a retirement village. The tables show that there is a substantial cost to living in a retirement village beyond just the entry price. Many retirees who have entered retirement villages now consider this cost to be far too high and claim they and/or their professional advisers were unable to identify these punishing impacts before entering.
SUMMARY.
The question for legislators and regulators is:
Continue to make reforms to retirement village legislation, regulation, contractural, explanatory information, consumer protections. Reforms made in the hope that retirees will eventually identify the impacts of the deferred management fee model and the sizeable negative impact it will have on the value of their capital base.
OR
Create retirement villages that are the same as any other residential accommodation where you either buy it to own outright or you rent it. A residential accommodation model already fully understood by the great majority of retirees with existing legislative and regulatory frameworks and consumer protection mechanisms.
OR
Totally reform the current legislative framework that facilitates the deferred management fee model while at the same time prohibiting the rental of retirement accommodation within a legally defined retirement village.
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