The Retirement Income Covenant has been passed…now what?

The Retirement Income Covenant (RIC) has been a long time in the making. Will this change the superannuation industry’s focus to what really matters?

Advocates have been pushing for many years for the focus to shift from maximising superannuation account balances to what should really matter to super fund members – having access to income in retirement. With the RIC now legislated and part of the Superannuation Industry (Supervision) Act (the SIS Act) covenants, will members change their focus over time from protecting and managing their lump sum nest egg to maximising their retirement income?

Saving vs spending

Often, retirement is framed as a ‘savings’ objective. The fear of ‘not having enough’ is unfortunately (mis)used by some to drive their own agendas. How would the conversation change if instead it is being considered through a spending lens? This is not a new concept, in fact it has been referred to by many across the globe to date.

The fear of not having enough results in many hanging their livelihoods on some mythical superannuation account balance number, which again is often ill-informed. The challenge with these mythical accumulation numbers are that unless they translate into something tangible which can be consumed, the average member would find it challenging to do the translation into an income stream themselves.

Therefore (re)framing the objective to a ‘spending’ challenge makes it much more palatable for the average[1] member to consider how much is actually required in retirement. It also makes it easier to consider what delaying spending now could mean for a member in the future i.e. income in retirement. This is the essence of the thinking that led to the RIC. If the RIC leads to reframing to a ‘spending’ challenge, it will have helped enhance member outcomes. 

Retirement Income Covenant recap

The RIC requires ‘trustees of registrable superannuation entities to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement’[2]. The RIC was included as part of the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022[3].

Specifically, trustees are required:

(A): To formulate, review regularly and give effect to a retirement income strategy that meets the requirements in section 52AA.

(B): To take reasonable steps to gather the information necessary to inform the formulation and review of the strategy.

(C): To record the strategy in writing.

(D): To record in the document in which the strategy is recorded:

  • Each determination made by the trustee for the purposes of the strategy, and the reasons for the determination.

  • Each other decision made by the trustee in formulating, reviewing or giving effect to the strategy that the trustee considers to be significant, and the reasons for the decision.

  • The steps taken to gather the information that informed the formulation of the strategy, and the reasons for taking those steps.

(E): To make a summary of the strategy publicly available on the website of the entity.

Section 52AA requires trustees to assist members who are retired or who are approaching retirement achieve and balance the following objectives:

  • Maximise expected retirement income over the period of retirement.

  • Manage expected risks to the sustainability and stability of retirement income over the period of retirement.

  • Have flexible access to expected funds over the period of retirement.

Each of these three retirement income objectives requires a trade-off versus another objective; e.g. maximising flexible access to funds is likely to decrease overall expected levels of retirement income.

The introduction of the RIC requires trustees to be explicit and transparent about their retirement income strategies for their members. This is a significant step forward as the ultimate purpose of the retirement system is to give the money back to members. The challenge will undoubtedly be in the detail, but narrows the focus. The covenant applies immediately, with a requirement to have developed and published a retirement income strategy by 1 July 2022.

Will super funds innovate?

A handful of super funds have looked to help their members maximise retirement income by creating innovative retirement income solutions. However, too often we hear of retirement income products that have won awards but not attracted members. Superannuation providers are rightly nervous of introducing new products and solutions. Indeed, the rapid industry consolidation and the all-consuming nature of these Successor Fund Transfer (SFTs) activities has arguably distracted from innovation, including in retirement income products and solutions for members.

The likelihood in the short-term is that the RIC will lead to super funds placing a greater focus on improved awareness, education and advice for those members approaching and in retirement, rather than a rush to innovate and launch new products and solutions. Nevertheless, as retirement income strategies mature, and with the focus on members’ best financial interests, we can expect retirement product and solutions innovation to follow.

So, the expectation is that the RIC will reframe the conversation over time. The relevant question is how soon this happens, and how effectively.

References

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