What the new Retirement Income Covenant means for you

All trustees of APRA-regulated superannuation funds are now required to have in place a Retirement Income Covenant for fund members who are retired or approaching retirement. This measure was introduced by the Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Retirement Income Covenant and came into effect on 1 July 2022.

From this date all relevant trustees are required to have a strategy to assist members to achieve and balance three retirement objectives:

• Maximising their expected retirement income
• Managing expected risks to the sustainability and stability of this retirement income
• Having flexible access to expected funds during retirement.

The way the new obligation has been legislated is via an amendment to the covenants (promises) found in Section 52 of the Superannuation Industry (Supervision) Act 1993. This is the section that ensures, among other things, that a fund trustee formulates and gives effect to an investment strategy and an insurance strategy. 

The amendment also requires a trustee to formulate, review regularly and give effect to a retirement income strategy that contains a number of specific elements.

So why has the Retirement Income Covenant been introduced, and what does it mean for you?

A system shifting from accruing savings to retirement spending

The modern superannuation system, as experienced by most Australians, is now 30 years old. Growing from around $148 billion in 1992, it was worth just over $3.4 trillion at the end of March 2022, spread over some 22 million accounts (excluding SMSFs).

Through the 1990s and the 2000s the focus was rightly on super contributions, with the super guarantee (SG) rate rising slowly from its initial 3% to 10.5% for the 2022–23 financial year.

As more Australians with accrued super benefits move into their retirement years, the entire system is having to move beyond a focus on accumulating super to helping members with their retirement lifestyle objectives.

Already, for every dollar of SG contributed to an APRA-regulated fund at present, 48 cents is paid back out to retired members in the form of account-based pensions and other income stream products, according to data from the regulator APRA.

With some 15,000 people moving into the retirement phase each month, the demand on funds from their members for financial strategies, products and advice to help manage the many risks retirees have to navigate will only continue to rise.

Against this background, the Retirement Income Covenant is a prod for super funds to sharpen their focus on helping members replace the income of their working years with spending from various sources, including income products from their fund, perhaps in conjunction with a full or part Age Pension (depending on age, assets and income test eligibility).

Key requirements of the Retirement Income Covenant

The key requirement for super funds under the new Retirement Income Covenant is to formulate and give effect to a retirement income strategy that balances the three overarching objectives outlined earlier.

The retirement income strategy itself must be a governance document that details how the trustee intends to balance these objectives, given the particular characteristics of relevant members (those that are approaching or already in their retirement years). 

The strategy could include providing members with a range of retirement-related assistance, such as:

• Providing guidance to members about their potential retirement income via super calculators or retirement estimates
• Developing and offering specific retirement income products
• Developing specific drawdown patterns to help provide higher retirement incomes
• Providing members with retirement tools such as budgeting calculators
• Providing information on key retirement income topics such as eligibility for the Age Pension or drawing down some capital to supplement income generated by a member’s retirement income product.

Whatever assistance is provided by the trustee within its retirement income strategy must also meet the sole purpose test and be in the best financial interest of relevant members.

What should I look out for with my fund?

Under the new requirements, super funds must create governance documents that contain a highly detailed retirement income strategy.

Funds can, however, have two strategy documents; one a detailed version for internal use and a second published summary of the retirement income strategy that is freely available and accessible to the public. In practice this means hosting this summary strategy on the fund’s website.

The purpose of making the strategy available on a fund’s website is to provide equal information to the public so the opportunity exists to make informed choices about a fund’s approach to retirement income, and potentially compare it with those of other funds.

Unfortunately, the enabling legislation does not specify where on a fund’s website a full or summary version of its retirement income strategy should reside, or how it must appear.

So a fund may make a summary of its retirement income strategy available on its website as a downloadable document (most typically as a pdf file) or elect to have the relevant information available as one or more web pages. 

First impressions of a selection of retirement income strategies

As mentioned earlier, these obligations to have at least a summary version of a fund’s retirement income strategy available online came into effect on 1 July 2022. The first such strategy appeared on a fund’s website on 28 June, with most funds uploading their strategies much closer to the deadline.

Given that the APRA-regulated super sector has been on notice about the need for an increased focus on member post-retirement outcomes since at least the David Murray-led Financial System Inquiry of 2014, the reticence to release strategy summaries early is unfortunate.

As is the approach funds have taken as to where and how to host their retirement income strategies. There is little consistency in where the strategies are located across fund websites, with some electing to host them within the ‘retirement’ sections, others within ‘disclosure’ sections and others still within ‘tools and resources’ sections, from those we have reviewed. 

Add to that a mix of funds that have created downloadable pdfs for their strategies while others elect to provide strategy summaries as web pages, and it becomes apparent that ease of access and comparability of this important information has not been prioritised. That’s a shame.

If you’re a member of an APRA-regulated fund, you should try to locate your fund’s retirement income strategy information. If you can’t locate it readily, you might wish to contact your fund’s member services team to enquire about its location, or to ask that a copy be made available to you. 

Why does your fund’s retirement income strategy matter?

As noted earlier, if you are a trustee of your own SMSF, you are not required to formulate or maintain a retirement income strategy, although there’s nothing to stop you from doing so. In fact, it may be a worthwhile exercise.

If your super is in an APRA-regulated fund, however, it’s in your interest to understand how your fund might help you convert your super benefit on retirement into one or more income streams designed to help you live the retirement of your choosing. This is, after all, a key objective of having superannuation.

A fund that has its governance, investment approach and operational capabilities focused on delivering you a smoother, more flexible and sustainably higher level of spending in your retirement years should be reflected in a well-articulated, detailed retirement income strategy.

Such a strategy may seek to find out more about you (either as an individual or as part of a recognisable group of members) to better tailor retirement information, services, tools and income stream products to your needs down the line.

By contrast, funds that make their retirement income strategy difficult to locate (perhaps not downloadable as a pdf), have strategies that are more generic without reference to types of members or other relevant information, and appear more aspirational than operational, might be indicative of a less developed approach to member retirement outcomes.

The bottom line

The introduction of the Retirement Income Covenant is a long-overdue initiative that should spur super funds to focus on delivering better retirement outcomes for their members. It’s a good start toward super funds that comprehensively guide members in preparing for and creating an appropriate lifestyle in retirement.