The Retirement Income Covenant is the centrepiece of a framework intended to deliver better retirement income outcomes for Australia’s rapidly ageing population.
In July 2023, ASIC and APRA released the findings of their joint review into the first year of operation of the Retirement Incomes Covenant (RIC). That review concluded that super funds had exhibited a lack of progress and urgency in their embrace of the covenant over the past year. By extension, they were saying that super fund members, whose interests the legislation was intended to protect, were being let down.
Several years earlier, in 2019, regulations came into effect which saw Innovative Income Streams become a viable offering for product providers, financial advisers, and clients. Sometimes referred to as Comprehensive Income Products for Retirement (CIPRs), these solutions were given a significant boost by social security law changes that provide them with means testing concessions. While several large providers have released solutions, market awareness and adviser/client uptake remains, at the time of writing, relatively low.
The common thread linking both pieces of legislation is that both are intended to ensure the growing number of Australians approaching retirement were educated about – and given access to – a wider range of contemporary income stream solutions that would optimise their retirement savings and provide more certainty of income during ever their ever-lengthening retirement years. There was an explicit onus on superannuation funds to do more to help their members, by facilitating access to new products, self-help tools, and financial advice – whether that be from internal or external sources.
Many observers believe progress in respect of both pieces of legislation has been disappointing, for a variety of reasons. This means many Australians are planning their retirement in a sub-optimal context, a context that financial advisers are critical to shaping.
In this article, we will revisit the framework of retirement incomes policy and explore the findings of the ASIC/APRA review. We will explore the current retirement context, and examine the role of advisers in what could be a turning point for retirement incomes and retirement planning in Australia.
Pieces of the puzzle – Retirement Income Covenant and Innovative Income Streams
The Retirement Income Covenant (RIC), which became effective on the 1 July 2022, forms part of the SIS Act, and obliges trustees of super funds trustees (excluding SMSFs) to formulate, regularly review and give effect to a Retirement Income Strategy for their members.
This Strategy must be made publicly available, and must articulate how the fund trustees will help those fund members who are retired, or near retirement, to achieve the following outcomes:
- maximising their retirement income (considering the Age Pension and any other relevant income support payments such as veteran entitlements)
- managing the risks to the sustainability and stability of their retirement income, which could include outliving their savings, future inflation, and the uncertainties inherent in investment markets, and
- ensuring flexible access to savings during retirement (for example, to meet large costs such as medical bills, home repairs, or replacing a car).
To the extent these objectives compete with one another, the Strategy should also identify how members will be assisted to make these ‘trade-offs’, and the potential consequences on their retirement income of making certain choices.
Trustees are required to review the Fund’s Retirement Income Strategy once every three years. The individual Fund’s performance against the strategy needs to be reviewed at least annually.
In practical terms, the legislation is intended to have several outcomes.
At a high level, trustees are expected become more engaged with their members, more active in providing guidance and tools, and more collaborative and creative in their product offerings, pre and post retirement.
This could look like
- developing/and or offering specific retirement income products
- providing tools such as expenditure calculators to identify income and capital needs over time
- providing factual information about key retirement topics, such as eligibility for the Age Pension, the concept of drawing down capital as a form of income, or the different types of income streams available, and
- providing guidance to beneficiaries early in accumulation about potential income in retirement through superannuation calculators or retirement estimates.
Importantly, there is also a recognition that retirement is complex, and therefore facilitating access to both general and personal advice is critical.
Innovative Income Stream legislation
Among the architects of the RIC, it was envisaged that the new products developed in order to comply with the covenant would include innovative income streams, or Comprehensive Income Products for Retirement (CIPRs), a product borne of the innovative income stream laws, which took effect in July 2019.
Three key features are required for a retirement income product to be considered a CIPR. These are:
- Efficient and broadly consistent income
- The provision of income for life
- Some flexibility and access to capital.
The specific criteria that must be met are far more complex, including, but not limited to:
- benefit payments must not commence before the primary beneficiary has satisfied a specified condition of release
- benefit payments must be made at least annually throughout a beneficiary’s lifetime following the cessation of any payment deferral period
- after benefit payments start, there must be ‘no unreasonable deferral’ of payments from the income stream
- the amount available on commutation must fall within a ‘declining capital access schedule’ commencing from the retirement phase.
This complexity, and the need for education and advice that becomes necessary as a result, is a key theme of the 2023 ASIC Report 766.
Falling short of expectations
ASIC Report 766 – Implementation of the retirement income covenant: Findings from the APRA and ASIC thematic review[1] – is in effect a report card by ASIC and APRA for the first 12 months of operation of the RIC.
In simple terms, the review found there was significant room for improvement in how trustees were meeting their obligations under the Covenant.
As already mentioned, the report card issued by ASIC and APRA for the first 12 months of operation of the RIC showed significant room for improvement.
Reminding us of the need for the RIC – our rapidly ageing population
At the beginning of the Review Report can be found data which powerfully sums up why the RIC is so important, illustrating the dramatic increase in member accounts and member benefits in the retirement phase. As can be seen in Figure 1 below, between 2015 and 2022, member benefits in retirement phase grew by almost 10% per annum to over $478 billion, while member accounts in retirement phase soared to over 1.3 million.
During the course of their review, ASIC concluded that effective implementation of the covenant centres on satisfying three core elements: understanding members’ needs; designing fit-for-purpose assistance; and overseeing strategy implementation, and their report was structured around those elements.
What did ASIC and APRA find?
The regulators’ report observed that, while licensees of Registrable Superannuation Entities (RSEs) were successful in expanding the assistance and support available to members in or approaching retirement, there was worrying “variability” in the approaches taken.
“Overall, there was a lack of progress and insufficient urgency from RSE licensees in embracing the retirement income covenant to improve members’ retirement outcomes.”[2]
Putting member assistance under the microscope
Arguably the most relevant part of the Review for advisers is that relating to the measures RSE Licensees were taking to assist members. This covers topics including self-help tools, educational resources, and access to financial advice.
The Review found that RSE Licensees were developing a range of measures to assist members in, or approaching, retirement, including:
- updating website content to provide information on a range of retirement topics
- tailored member communication, designed to provide information likely to be most relevant to each individual member’s needs and preferences
- self-serve options including digital tools and calculators
- assistance to access financial advice.
The gaps identified by the regulators include:
- some RSE Licensees did not have concrete plans for how they would implement the new initiatives they had identified
- did not appear to be robustly tracking member usage of the assistance offered, or
- did not have a good understanding of the extent to which members were receiving assistance about retirement income from external sources such as financial advisers
The topic of advice features in the Review several times. Three references in particular (shown below) are of relevance to advisers, referring to ways funds and advisers are interacting, and hinting at potential best practice on how funds and advisers may work more collaboratively for the benefit of members:
- “Many RSE licensees did not have a robust way of identifying which members were receiving financial advice relating to retirement planning or using their superannuation for their retirement income. Most generally relied on data about which members joined through an adviser, or which have an active adviser fee arrangement in place on their superannuation account, to identify advised members. But this approach may not be accurate if a member is no longer receiving advice or is not receiving advice about retirement.”
- “RSE licensees can be more confident in meeting their obligations under the covenant when they understand what assistance members receive from advisers and other third parties.”
- “Better practices included RSE licensees having mechanisms in place to identify assistance gaps. This could be achieved by interviewing a sample of advisers to understand how they use the RSE licensee’s products, including demand for new products, or collecting feedback from some advisers to gain insights on their business and better understand the outcome of the advice provided to members in aggregate. Some RSE licensees also provided training to advisers in relation to the available products and various retirement topics.”
The current retirement context
The observed lack of progress by funds (ASIC and APRA surveyed the 16 funds who represent half of all superannuation members) contributes to an overall retirement context that is perhaps more complex and challenging now than it has ever been:
- market volatility and elevated inflation are likely to remain present for an extended period, exposing retirees to significant market risk and inflation risk
- new product development remains slow, as does take up of annuity style products (APRA data shows they only account for around 3% of retiree assets[3]).
Furthermore, Australians lack ‘retirement literacy and even retirement confidence’.
2023 research[4] by AMP, for example, found that, of Australians over 50:
- 3 in 4 find the retirement system complex.
- 2 in 5 don’t know if they’ll be eligible for aged-pension benefits.
- 7 in 10 don’t know what an account-based pension is.
- 3 in 4 have not sought financial advice for retirement planning.
- 3 in 5 wish they’d started planning for retirement earlier in life.
- 3 in 5 are ‘extremely concerned’ about the rising cost of living.
The extent to which this lack of literacy is leading to sub-optimal retirement product selection can be found in research[5] by SMSF administrator Class, showing that only half of APRA regulated super fund members over age 65 have taken advantage of rules allowing them to move into a tax-exempt retirement income product (compared to around 86% of SMSF members, the majority of whom would be advice clients).
As for a lack of confidence, the Natixis Global Retirement Index[6] found that median retirement age for Australians is 65, compared to a global median of 61, and despite Australia being among the Top 10 countries around the world for retirement security.
Why advisers should feel confident about the RIC
Retirement planning is currently the most significant segment for Australian financial advisers, a fact underlined by research[7] by Natixis Investment Managers, which found around 90% of Australian financial advisers are focused on servicing individuals between 50 and 60 years of age, namely pre-retirees.
But while some observers have predicted that the role for independent financial advisers in this space may decrease, as super funds gradually introduce simpler products, more self-help resources and even develop digital advice capabilities, others feel this may prove premature, if not totally misplaced. They put forward several reasons for advisers to feel confident:
- the innovative income streams legislation is arguably incompatible with simple products, requiring CIPRs to satisfy a comprehensive range of complex criteria in order to qualify, and therefore be eligible for tax-advantaged treatment
- the rules around Centrelink and tax are themselves also complex, and
- there is Federal Government recognition that the RIC can’t work without financial advisers, with Assistant Treasurer Stephen Jones telling attendees at a 2022 event:
“Unless the advice piece gets fixed, the Retirement Income Covenant will fail. Because people will not adopt strategies with which they are unfamiliar unless they have the confidence of someone they trust who says, ‘this is the best way for you to deal with your retirement nest egg’. It will fail until that advice piece is fixed.”[8]
As to the idea that super funds themselves will develop their own advice capabilities, while that has been similarly encouraged by the Minister, as part of his response to Michelle Levy’s Quality of Advice Review (QAR), it is questionable whether all funds want to go down this path, or would prefer to build more robust partnerships with external advisers.
Afterall, building and maintaining a compliant and customer focused advice offering is a complex business, and many super funds have tried and failed in this space. One high profile example is Aware Super, who in late 2021 wrote down $1 billion in value from the advice arm it acquired from First State Super[9].
Summary
The Retirement Income Covenant is the centrepiece of a framework intended to deliver better retirement income outcomes for Australia’s rapidly ageing population. Working alongside the Innovative Income Streams legislation, the RIC is intended as a catalyst for super funds to become far more knowledgeable about their members, in order to develop more contemporary and tailored retirement income products, and to provide more relevant and targeted education, self-help resources, and access to financial advice. However, a recent review into the implementation of RIC has revealed slow progress and room for improvement, at a time when the retirement context has never been more complex and challenging. As a consequence, the need for financial advisers to assist pre-retirees and retirees has never been greater.
