In welcome news to the superannuation industry, the highly anticipated Retirement Income Covenant bill has been introduced to Parliament. This is significant progress and rightly moves the spotlight away from the accumulation phase, towards income in retirement for older Australians.
The covenant presents a real opportunity for the sector to develop solutions that deliver tangible benefits to members in retirement.
Broadly speaking, the outlined principles-based approach to the covenant has considerable merit. While some aspects of the covenant lack clarity, the absence of a rigid framework will allow super fund trustees the flexibility to enhance, support and tailor retirement income strategies that are suitable for members based on their unique financial needs.
Ultimately, this means fund trustees will invest in getting to know and understand their members, both before and during retirement to ensure they have access to the most appropriate products and strategies.
It’s well known that retirees struggle to develop effective retirement income strategies without advice. Navigating investment market risks and forecasting unknown costs associated with later years in life are difficult and complex tasks. So, while this desirable outcome is an important one, there are some key considerations for trustees.
For instance, what form should assistance from superannuation funds take? Given guidance to members could include everything from the provision of factual information through to tailored personal financial advice, what expectations should members have? What data is available to develop appropriate cohorts of members? And importantly, how would assistance from a superannuation fund align with the current regulatory framework for the provision of financial advice?
While not deal-breakers, these considerations highlight some potential barriers to funds implementing this aspect of the covenant, namely assisting members to plan their retirement. Given the Quality of Advice Review to be conducted by Treasury will not be completed until after the covenant becomes effective, any assistance required by members will need to be provided under the current regulatory parameters.
So, with that in mind, there are two key steps that all super funds can and should take now to better assist members with their retirement goals.
Firstly, many funds already have sophisticated calculators which can take into account individual member (and even household) circumstances, and some provide future income estimates for their members in line with relevant ASIC guidance.
Industry experience shows that these estimates significantly improve member engagement and assist members in understanding their possible financial position when they reach retirement. Funds should therefore be reviewing their web-based calculators to see if they can be improved. Given the significant impact household circumstances can have on retirement income, consideration should be given to allowing for Age Pension, couple status and other assets.
Secondly, income projections on annual statements give members a greater understanding of how their likely income in retirement compares to their current income, and to industry benchmarks. We therefore believe personalised income projections in retirement should be provided on annual statements for all members above the age of 45. This development will reframe their perspective from a focus on lump sum to income. We shouldn’t wait until retirement to start assisting individuals with their retirement income. We must start far earlier.
This, alongside a better understanding of members that leads to more suitable solutions will make a real difference to members’ outcomes in retirement.
Trustees, however, have a short runway. They will need to develop their Retirement Income strategy by 1 July 2022. As part of the strategy design, trustees should identify which elements will be implemented after 1 July and what can be in place before. It’s clear there is an opportunity for funds to build on their current engagement with members. They must play an enhanced role, and provide greater guidance and information on how members can plan for and use their super in retirement alongside a growing range of meaningful retirement options.
It’s critical that Australians, particularly those approaching retirement, shift their perception of superannuation as being a nest egg to providing an income for consumption. The covenant provides the right strategies to empower retirees to spend with confidence in retirement and enjoy a better quality of life.
First published in FS Super.