This week marks the third anniversary of the Retirement Income Covenant taking effect. The RIC places an obligation on super fund trustees to assist members with their retirement. Specifically, it requires trustees to formulate, regularly review and give effect to a retirement income strategy (RIS) for their members.
We view the principles-based RIC as a clever foundation for Australia’s retirement system. It affords super fund trustees the flexibility to meet the varying needs of members. However, the RIC provides limited guidance as to what is required from trustees. We wonder whether an appropriate balance has been struck between principle and prescription.
Three years in and there remains much to be done. APRA and ASIC remain concerned at the rate of progress. Advancements have been made, but they have been sporadic, with some super funds leading the way while others lag. There have been some developments in product offerings, advice and guidance services. However, very few funds are yet to offer ‘integrated’ retirement solutions that combine investments, lifetime income streams and a drawdown plan for all of their members.
There are now many funds marketing their expertise in retirement. But this is not the time to self-congratulate – there is much more to be done.
The concerning challenge we consider in this article is how to stop it taking ten years for the retirement phase of super to reach high standards – a timeframe over which a large demographic wave will enter retirement. Our theme is that not only is more required from the super industry, but that policymakers and regulators must also play a greater role.
Step 1: Define what is good
While the strength of a principles-based approach is the flexibility to self-define what is good, the challenge in practice has been the difficulty of determining what is actually good. We think the industry would benefit from stronger direction around what constitutes a quality RIS. Industry could also benefit from knowing how they will be assessed beyond member outcomes self-assessments.
Why is more prescription important? First, it provides more certainty, enabling clearer business planning. Second, well-framed requirements can be fed into governance frameworks.
We empathise with the challenges faced by policymakers and regulators in defining what is good, as there are limited learnings to be derived from offshore. Specifically there are no case studies of defined contribution (DC) retirement savings systems that have implemented the retirement phase particularly well. Australia is leading the way to a large extent.
Our research in this area leads to some reflections. First, desired retirement outcomes are difficult to define, and probably best expressed as a narrative (e.g. every retiring member is supported into a retirement solution matching their needs and preferences). Gauging success when outcomes are hazily defined and delivered over long periods will be tough. Second, the capabilities required to support a quality RIS are more amenable to being defined and assessed (albeit in a qualitative fashion) than measuring outcomes.
Step 2: Remove blockages
A range of blockages are slowing down the development and implementation of quality RIS by super funds. Some could be addressed through policy and regulation. Other constraints reside within the funds themselves.
Policy blockages that can be addressed include:
1. Operational frictions around the point of retirement, namely the challenges with opening, consolidating and switching account-based pensions.
2. Frameworks for the provision of scaled personal advice by super funds. While we acknowledge and support the advice through super provisions in DBFO Tranche 2, we view this as the start of reform in this area. Further policy and/or regulations will probably be required for super funds to make this type of advice effective and more broadly available
3. Policy and regulatory certainty, noting that any policy area where uncertainty resides represents a risk to business cases and hence a rational incentive to defer investment.
Issues that are specific to industry include:
1. Allocating (in some cases limited) capital and other resources to RIS development when funds are facing into a large range of important and competing projects.
2. Addressing weaknesses in the underlying operating infrastructure of many funds: a poor starting point as funds transition their operating models to a world where they are required to cater for diverse member needs through greater personalisation.
3. Retirement needs to be a high (ideally top two) priority. However, the business case for developing a quality RIS is lacking for some super funds for a range of reasons including membership demographics.
Step 3: Consider policy and regulatory options to get the industry moving
We fear that relying on super funds to fully embrace their obligations under the RIC will leave significant parts of the industry wallowing with partially developed RIS a decade after the RIC was introduced. To avoid this outcome, policymakers and regulators need to do more to help move the industry forward. Below are a few directions that policy might take:
1. Enhanced guidance around what is required: This links to the work on establishing best practice principals by Treasury (one of four policy reforms announced by Treasurer Jim Chalmers last November). Retirement-focused regulatory standards and/or guidance from APRA would also create more clarity around what is required.
2. Assessment and disclosure: In line with “what gets measured gets done”, introducing a RIS assessment regime would place considerable pressure on funds to develop their RIS. Similar albeit lesser pressure might be afforded by greater disclosure. Another of Treasurer Chalmers’ announced reforms was for APRA to create a Retirement Reporting Framework. APRA will collect and publish data on an annual basis, with specific metrics and process determined via a Treasury-led public consultation next year. To what degree any assessment might attempt to focus on outcomes versus capabilities is unclear.
3. Heightened regulatory pressure: If progress continues to be slow with persistent laggards, the regulators could look to heighten pressure on super funds over RIS development. Pressure would likely come from APRA, but don’t rule out ASIC where legal obligations are involved (e.g. in the area of disclosures). Approaches might take the form of general statements of intent, private engagement, public naming of laggards and escalating to more legal measures such as enforceable undertakings.
4. Licensing regime: By requiring super funds to develop the capability to deliver a RIS to a certain quality level in order to offer retirement products and services, a retirement licensing regime would get the industry moving while providing an element of protection through imposing minimum standards. It would also act as a mechanism for allowing super funds who are unable or unwilling to meet the licensing requirements to opt out of the retirement market.
5. Mandated solutions: Mandatory rules around solution design such as defaults, ‘first offers’ or solution composition (such as the proposal to annuitise 80 per cent of a member’s balance over $250,000 by the Grattan Institute) may greatly simplify the problem. The risk with this approach is to what degree it diverts members away from a solution that is more appropriate to their personal circumstances.
6. Government provision: The government could provide services in the area of product (e.g. the government providing an annuity product, as suggested by Grattan) and advice and guidance services (proposed by both Grattan and Super Consumers Australia). We have concerns about the government’s ability to be an effective and efficient provider in these areas relative to industry.
As we reflect on the list of options above, it is important for policymakers and regulators to consider how members will be best served. The issue of laggard funds is one which particularly concerns us.
The Conexus Institute has advocated for an industry-led solution, with limited direct government involvement. We also consider that the retirement licensing regime would be the most effective approach to ensuring baseline outcomes for all Australian retirees.
The industry controls its own destiny. But a broader frame is required.
The retirement challenge needs to be framed through the lens of meeting the needs of retirees. Through this lens super funds have an important role to play. But so too does government and regulators.
We believe the super industry can and must do more – and do it in good time. Otherwise they are failing the purpose for their existence, which is providing for retirement. We also think that policymakers and regulators should – and probably will – take further steps to ensure that industry delivers. In our opinion, these next steps should entail going beyond the principles conveyed in the RIC to provide the industry with more direction over what is required. This will undoubtedly be difficult and care needs to be taken not to over-prescribe. But it is critical to get the balance right and do so with some haste as a large demographic wave moves into retirement.
David Bell is executive director and Geoff Warren is research fellow at The Conexus Institute, which is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Professional Planner.
