Since being introduced back in 2022, the Retirement Income Covenant (RIC) has required all super funds to develop individualised strategies for members to help them achieve the retirement they want.
However, recent reviews from the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) show many funds have made little progress in developing these strategies.
Some experts say introducing a ‘retirement licensing’ regime would make funds more accountable and deliver real improvements to the RIC system.
The reports found some funds had more advanced strategies in place for their members, no single fund had everything needed in place to assist all their members with all their retirement needs.
An RIC strategy should guide fund members through a range of retirement solutions that convert assets into income, while simultaneously managing risk.
However, the APRA and ASIC reports showed no fund has the capability yet to offer bundled solutions comprising investments, lifetime income products and a drawdown plan that are tailored to the needs of the member (or member cohorts).
Why aren’t funds meeting the requirement?
In a policy green paper published last month, The Conexus Institute says Australia’s super funds are “struggling to surmount multiple challenges in delivering quality retirement outcomes”
Designing bespoke plans for individual retirees is tough almost by definition, as personal circumstances can be as varied as people themselves.
Variables include people’s available assets, access to the Age Pension, living situation, and how they engage with financial decisions.
Super funds have to be able to ‘personalise’ plans to account for these differences.
But writing for Firstlinks, David Bell and Geoff Warren, The Conexus Institute’s executive director and research fellow respectively, say it’s more than just a matter of funds being disorganised – it’s also a matter of commitment to delivering a quality retirement for members.
“The RIC only requires super funds to have a retirement income strategy, not necessarily to produce a good one,” they say.
As an example, he points out that 27 of the 50 super funds in terms of return performance have less than five per cent of the members in the retirement phase. It probably shouldn’t be a complete surprise, as a super fund will usually favour bring more money in from contributions than paying it out in retirement.
Mr Warren says super funds also face other external business pressures including mergers, organic growth and cybercrime and that the business case for some funds focusing more on the retirement phase of super just isn’t there.
How do we fix it?
The green paper concludes that a regime of ‘retirement licensing’ may be needed if we’re to improve RIC outcomes.
“Establishing a retirement licensing system would help get the super industry progressing in the right direction,” they say.
Under the proposal, super funds would have to meet certain licensing conditions before being allowed to offer retirement strategies to their members.
But, don’t super funds have to offer RIC strategies by law? Yes, so funds would then face a choice, the paper says.
They could commit to actually improving their retirement outcomes within the specified time frame. Or they could decide not to participate in the retirement market.
So, in that case, a fund would be permitted to still accept contributions from members in the accumulation phase, but once that member reaches retirement, they would need to be handled by another fund.
The Conexus Institute argues such a situation would create a need for a new set of regulations.
“Procedures would be required for non-licensed funds to ‘hand-off’ members as they approach and then enter retirement,” they say.
“A retirement licensing regime would be a powerful mechanism for ensuring that only super funds that are committed to delivering a retirement income strategy to a satisfactory standard are operating in the retirement market.”
Has your super fund developed a retirement income strategy for you? How far off retirement do you think you are? Let us know in the comments section below.
Also read: Super funds ‘unprepared’ to meet obligations, says ex-regulator
More red tape. Higher compliance costs. And if a fund is found to be failing and penalized, the investors in the fund pay any fines that are applied so they lose twice. When will society wake up that red tape and compliance costs do NOT fix anything?