Super funds have been bedding down significant changes to the way they handle the transition to preservation age and retirement in the past two years.

In a change that signals a significant maturation of Australia’s superannuation system, funds have been required to prepare retirement income strategies for members.

The change is the culmination of a long campaign by stakeholders to get trustees as interested in helping clients manage decumulation as they have been in recruiting new members and growing assets under management.

It’s been a significant change that encompasses broad obligations for trustees for formulate and regularly review retirement income strategies for members approaching or in retirement.

Known as the Retirement Income Covenant this legal obligation requires super funds to have a strategy to assist their members in retirement, which came into force on 1 July 2022.

The RIC requires super funds to develop a Retirement Income Strategy with a view to improve the retirement outcomes for APRA-regulated super fund members.

The covenant has required trustees to hone their focus from investing strategies in the accumulation phase to a greater focus on planning for divestment, balancing the expectations of members, outlining and mitigating expected risks and yet still being flexible in their approach.

However, a review last year reveals that there is room for improvement. The industry watchdogs explored how 16 super trustees have worked to improve retirement outcomes, uncovering a need for trustees to focus more on understanding member needs, designing a fit-for-purpose solution and overseeing a strategy implementation.

The review, conducted by APRA and ASIC, announced that while trustees are improving their offerings of assistance to members in retirement, the quality of approach taken and a lack of urgency in embracing the intent of the covenant

A further three million members will become eligible to draw from their super in the next 10 years the time to act is now,  APRA deputy chair Margaret Cole said last year during the first review of the progress made by funds to address their covenant obligations.

“Some trustees have made a good start, but overall there has been a lack of progress and insufficient urgency. As members approach retirement, trustees must step up and deliver both well-considered strategies and action to support members in retirement,” Cole said.

The Conexus Retirement Conference, held by the publisher of Professional Planner, heard from the regulators again in August who said that while funds have made some progress on the covenant there is still much more yet to achieved.

But other hurdles lie ahead. Trustees will need to navigate the needs of the next generation of retirees, who may not end up owning their own home during their lifetime. The Intergenerational Report, released in August last year, points out that fewer and fewer people own a home, which poses an issue for the retirement system.

It points out that those who own their home generally have lower housing costs in retirement compared with renters, as well as a store of wealth that can be drawn on in retirement. Changing trends to home ownership rates in mortgage indebtedness present a fiscal risk to patterns of how superannuation is drawn down in retirement.

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