By Ruth Stringer and Preeta Seshachari
After a long gestation period, the Federal Government’s proposed retirement income covenant (RIC) for superannuation trustees has finally been revealed with the publication of Exposure Draft legislation (available here). The new covenant will require superannuation trustees to develop a retirement income strategy for the benefit of beneficiaries who are retired or are approaching retirement. The reform should bring about an increased focus on how trustees can better support their members to design retirement income solutions that are fit for purpose.
What does the RIC require trustees to do?
The RIC requires trustees to formulate and give effect to a retirement income strategy that addresses how trustees will assist beneficiaries to achieve and balance the following objectives:
- to maximise expected retirement income over the period of retirement;
- to manage expected risks to the sustainability and stability of retirement income over the period of retirement; and
- to have flexible access to expected funds over the period of retirement.
Additionally, trustees will be required to:
- take reasonable steps to gather information necessary to inform the formulation and review of the strategy;
- record the strategy in writing;
- record a number of actions and decisions relating to the strategy; and
- make a summary of the strategy publicly available on the fund’s website.
Key matters to be determined by trustees
For the purposes of formulating and giving effect to the strategy required under the RIC, trustees have discretion to determine a number of matters such as:
- the class (and sub-classes) of beneficiaries who are retired or who are approaching retirement. This corresponds to the idea of “cohorts” for whom the strategy may make different provision;
- the meaning of “period of retirement” (which is likely to vary across different funds, based on the member demographics and potentially also across different categories of beneficiaries);
- the meaning of “retirement income” which must include income produced by the superannuation fund and the age pension and may also include any other income the trustee determines is appropriate (again, this is likely to vary across different categories of beneficiaries and also, different trustees may have differing appetites to do the work necessary to factor in, and accommodate for, any income that members may derive from other sources);
- the type and scope of assistance to be provided by the trustee, noting that the assistance must also meet the sole purpose test and be in beneficiaries’ best financial interests; and
- the approach to balancing the three key objectives referred to above.
The legislation makes reference to investment risk, inflation risk and longevity risks as risks that will need to be addressed in the formulation of the strategy as a minimum. It also contemplates “any other risks to the sustainability and stability of the retirement income”. Trustees will need to consider what other risks ought to be considered for this purpose. These could include, for example, risks associated with access to insurance cover and risks associated with declining health and cognitive decline.
The Exposure Draft Explanatory Memorandum notes that the retirement income strategy is expected to express the general actions the trustee will take to assist their members to balance key retirement income objectives (i.e. trustees are not expected to give effect to the strategy by giving personal advice or by considering the circumstances of individual members).
So it seems that trustees will be expected to gather data and make an assessment of the needs of members but not so as to drill down to the individual needs of each member. Rather, this is more akin to the best interests obligation in the sense that trustees will be required to consider attributes of the member group as a whole (or of particular cohorts) and use this information to develop its strategy. This seems to be the basis for the statements in the Exposure Draft Explanatory Memorandum that trustees will be able to fulfil the requirements of the RIC without providing personal advice.
The task of complying with the RIC will have some parallels and overlaps with what is required of trustees in fulfilling their Design and Distribution Obligations (DDO). It raises a question as to whether superannuation trustees should be relieved of their obligations under DDO with respect to retirement income products, given that the RIC creates a bespoke and more targeted statutory regime for the provision of suitable retirement income products to retirees.
The legislation uses the terms “expected retirement income”, “expected risks” and “expected funds”, which seems to be intended to require trustees to make determinations about what is “expected” in each area, and for those expectations to be communicated to members. This is an interesting concept to use in legislation – it begs the question: whose expectations? The trustee’s? The member’s? APRA’s? In context, it seems to refer to expectations that the trustee would formulate and articulate in its strategy however once communicated to members, these expectations will inevitably become adopted as member expectations, for better or worse.
Arguably, trustees could be doing more under the current regime to educate members about what to expect in retirement, however there are regulatory impediments to doing so and some in the industry have been waiting to see the final shape of the RIC before looking at ways of enhancing their retirement income product offerings. The RIC is an invitation to find new and more compelling ways for trustees to engage with their members on this vitally important topic, within the guard rails of what is allowed under the financial product advice rules.
While momentum seems to be building around the prospect of reforming and simplifying the financial product advice regime, any reform process is not going to happen overnight. We anticipate that retirement income strategies will develop and evolve over time. Ideally, reforms to financial product advice laws will happen in tandem with this evolution and will support trustees to be able to engage more meaningfully with their members as they navigate from the relative simplicity of the accumulation phase into the retirement phase.
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