Retirement is a highly emotive, often stressful transition that involves a set of lifestyle choices, many of which have a financial dimension.
Australia’s superannuation system serves as a critical pillar for ensuring financial security during retirement. Superannuation funds have a recently legislated obligation to build strategies to better assist their members entering retirement.
Many funds are concerned that they aren’t doing enough to provide the full decision-making assistance that their members need. This article explores a potential conflict between the Member Best Financial Interest Duty (MBFID) and the types of support they can provide to members about their retirement.
Understanding the Retirement Income Covenant
The retirement income covenant in the SIS Act, compels superannuation funds to have a comprehensive retirement income strategy. This strategy should assist members in balancing three aims: maximising expected income, managing potential risks, and providing flexible access to funds in retirement.
The three aims compete and therefore, require complex trade-offs about future projected outcomes. The decisions required often impact or are impacted by, the member’s broader household financial situation, including Age Pension means-testing issues.
The Scope of Retirement Assistance
As part of the retirement income strategy, superannuation funds have the discretion to determine the type of retirement assistance that they provide their members. This assistance can encompass various forms along an inform-educate-assist-guide-advise-implement continuum, including:
- Tailored Retirement Income Products
Super funds may develop and offer specific retirement income products, including lifetime income streams that align with members’ needs and preferences and can be used on a standalone basis or in conjunction with other products and services.
- Financial Tools and Education
Providing tools such as expenditure calculators, longevity estimators, drawdown modellers and projection tools can help members make informed decisions such as when they can afford to retire or whether they may need to downsize their home. Super funds can also offer factual information on key retirement topics, including eligibility for the Age Pension, capital drawdown as income, and different types of income streams available.
- Personalised Retirement Planning Advice
Superannuation funds that have the necessary license can offer personalised retirement advice to their members. This can help individuals make well-informed decisions regarding their savings, investments, and overall retirement strategy.
So long as there is a robust ‘triage’ process in place to set the appropriate scope of advice for each scenario, this might include single-issue, episodic and complex advice. The government’s response to the recent Quality of Advice Review include making it easier for superannuation funds to provide more personal advice to members.
Superannuation funds might also think about broader support services that their members need around retirement. Examples are services to help people understand and apply for the Age Pension, the Government Home Equity Access Scheme, aged care and wellbeing and counselling services as members prepare to exit the workforce and retire.
Member Best Financial Interest Duty and Justifying Expenditure
In determining the type and scope of assistance to help members with retirement, funds must also meet the MBFID, which was introduced in July 2021.
The MBFID rules require superannuation trustees to build a business case for initiatives they wish to undertake – in order to demonstrate that the expenditure involved is in “members’ best financial interests”.
The MBFID applies to expected outcomes that will arise in future. Such expectations must be reasonable and the process for generating them should reflect good practice.
Good practice also involves reviewing the actual outcomes against those expected and understanding any deviations. Reviews might occur as part of the member outcomes assessment process, for example, and may usefully inform future projects and the quality of the services the fund provides.
To ensure compliance with MBFID, trustees can assess whether their expenditure is essential or discretionary. This classification could have a significant impact on the level of quantitative and qualitative evidence required to support the expenditure.
Essential expenditure is necessary for the ongoing operation of the superannuation entity. These expenses arise from the fund’s obligations and providing core services to members.
According to the Explanatory memorandum (EM), expenditure towards investments in systems, risk management, governance, and the engagement of sufficient resources to operate the trustee’s business operations is an essential expenditure.
Discretionary expenditure refers to spending that is non-essential or considered strategic. These expenses could enhance member services, such as offering financial guidance or additional investment products. Discretionary spending requires much stricter justification under MBFID than essential spending, perhaps in the form of:
- Business Case and Technical Analysis: Trustees should arrange a well-articulated business case supported by a clear description of the benefits members will receive and how they will be achieved. Technical analysis may include qualitative cost-benefit assessments, risk articulation, mitigation strategies and project implementation outlines.
- Financial Outcomes: The emphasis of MBFID is on ‘financial’ interests and trustees must assess the expected financial outcomes. Quantifiable metrics, such as improvements in (risk-adjusted) member benefits and the goals of the retirement income covenant, can be used.
The following is a list of possible analysis types:
- Improved investment returns, either absolute or risk-adjusted;
- reduced fees;
- scale or scope enablement;
- Net Present Value, break-even analysis, project Internal Rate of Return;
- cohort analysis to identify how benefits are spread over the membership;
- improvement in (risk-adjusted) retirement income level for the majority of members or having the potential to do so.
Many benefits are likely to manifest themselves over time and may be probable rather than certain, especially as to their extent, and may not accrue to all members equally.
Some members may be disadvantaged, but the majority must be better off or have the potential to be so. On the other hand, expenditure will be certain and occur in the nearer term. Projects need to justify that the probability-weighted benefits outweigh the certain costs.
It is possible that an initiative will have the potential to benefit all or most members, as in the case of a longevity management option, but the take-up is at the member’s election. This will require an education campaign and member assistance package as part of the expenditure.
The EM suggests that wellbeing and counselling services around retirement are unlikely to be in the best financial interests of the beneficiaries. However, trustees might still explore ways to show support by introducing members to a third-party.
Trustees might find it helpful to understand the background and purpose of the legislation. The EM itself does not provide a justification nor an estimate of the costs and benefit of the MBFID. It instead refers to Recommendation 22 of the Productivity Commission report, which refers to expenditure that members “might reasonably expect” and should “manifest in member outcomes”. The EM suggests that “discretionary items like advertising, sponsorships and corporate entertainment” might not be seen as in the members’ best interests. Trustees should therefore avoid “vanity projects”.
The EM that introduces MBFID highlights that it “is not subject to any materiality threshold”. To avoid scenarios where the cost of documenting a decision is higher than the expenditure item itself, funds might bundle certain items together into higher-level packages. For example, decisions regarding ordering office supplies may fit into a broader policy of ‘office & facilities’ that gets given a budget.
Expenditure relating to providing retirement assistance: Essential or discretionary?
Fund expenditure that relates to complying with the covenants in the SIS Act would appear to be considered essential spending.
In this regard, if a fund considers providing retirement assistance to members under the retirement income covenant, then the cost of doing so could be considered an essential expenditure.
When formulating their retirement income strategy under the covenant, the trustee would need to gather information and provide justification for the types of retirement assistance that the trustee wishes to provide to members. This might be sufficient to justify that the expenditure is essential to the core operation of providing retirement benefits to members.
However, expenditure that is less directly related to the retirement income covenant may have to be considered as discretionary. In some instances, such as wellbeing and counselling services, the costs might need to be paid directly by members who choose to participate, with the fund only acting as an introducer.
The option to use intra-fund financial advice and new products might be considered a benefit to all members even if they do not use them – especially if they may do so in future.
Australian superannuation funds face the challenge of balancing the costs of providing the retirement assistance their members want or need with MBFID.
Determining the classification of expenditure is crucial. Spending on retirement assistance can be considered essential if it relates directly to the retirement income covenant and legislative requirements, while retirement assistance that goes beyond the scope of mandatory requirements may be classified as discretionary spending and require further careful justification.
If an initiative cannot be justified under MBFID, then superannuation funds might still be able to explore ways to provide support by introducing members to a third-party.
Superannuation funds can ensure the best financial interests of their members while providing meaningful retirement assistance.
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