Regulators have left superannuation funds in no doubt over the past 12 months about what’s expected of them in meeting their legislated Retirement Income Covenant obligations.
Three years since the RIC came into effect – after years of development and consultation leading up to it – there still remains plenty to do, with the latest CoreData/Conexus Financial Best Possible Retirement analysis lending weight to the view that funds must do better.
The CoreData analysis, done in conjunction with Professional Planner publisher Conexus Financial, found that even though super fund members’ satisfaction with retirement has improved slightly overall from last year to this year, it’s lower than it was two years ago. Industry funds generally performed worst overall, and retail funds performed best, with public-sector funds not far behind the retail cohort.
Whatever funds might be doing behind the scenes to improve retirement for members, the CoreData analysis suggests it’s not having the desired effect. This is bound to heap even more pressure on a sector that has already been taken to task by regulators for not doing enough to support members as they retire.
This is not a new problem. A joint ASIC and APRA statement released in July last year blasted funds for an “underwhelming” response to the RIC. That statement was itself released a full year after a review by the regulators found trustees needed to “make more progress to enhance retirement outcomes”.
The review of RIC progress from two years ago concluded that many trustees were even then falling short of their legal obligation to help members prepare for retirement and, while they might have a retirement income strategy in place, they still had not integrated it into their business plans, as required under Prudential Standard 515.
Fundamentals
Then-ASIC Commissioner Danielle Press said trustees were required to “get the fundamentals right”.
“Their retirement income strategies must be designed with consumer needs in mind and be evidence-based,” Press said.
And APRA deputy chair Margaret Cole also weighed in, saying that even though some trustees had made a good start, overall there had been “a lack of progress and insufficient urgency”.
In a statement provided to Investment Magazine to mark the third anniversary of the RIC on 1 July this year, Cole said “as more and more fund members enter retirement, it’s critical that they receive the equivalent attention and experience that they did in the accumulation phase”.
Cole said that over the past three years APRA and ASIC have collaboratively focused on encouraging trustees to implement robust retirement income strategies, including processes to better understand the needs of members.
“We’re at a point now where we would expect to see real progress and enhanced sophistication in the way the industry is supporting members who are approaching or in retirement,” she said.
“This year’s retirement pulse survey and the work APRA is doing to initiate a new retirement data collection are important steps in assessing trustees’ effectiveness in addressing the retirement income challenge.”
Complexities
Also marking the third anniversary of the covenant, ASFA head of policy and advocacy James Koval told Professional Planner sister publication Investment Magazine that, given the complexities in developing retirement solutions, “it is not surprising that funds are at different stages of sophistication” in their development of solutions over and above the account-based retirement products that most funds offer.
Koval said it’s often claimed that super funds are fixated on the accumulation phase at the expense or to the detriment of their members’ best possible retirement outcomes.
But he noted that APRA data as at the end of March this year suggests that funds have not been idle.
“APRA-regulated funds offered 212 retirement products and 191 transition-to-retirement products,” he said.
“Total assets involved were $490 billion for retirement products and $15 billion for transition to retirement products. These products covered 1,354,000 retirement accounts and 64,000 transition-to-retirement accounts. The average member balance in the retirement accounts was $362,000.”
Koval said that while there is still scope for funds to develop more and better retirement income solutions, there are few jurisdictions that have solved the problem any more effectively.
“Australia regular receives overseas delegations who wish to learn about retirement income arrangements in place or are being developed,” he said.
Indeed, in a recent Investment Magazine roundtable, T Rowe Price global head of retirement Michael Davis said Australian funds are “ahead of the world when it comes to thinking about [defined contribution] systems and how you deliver retirement sufficiency”.
Davis said none of the funds he met on a recent visit to Australia could be described as complacent, and “they feel like there are more questions than answers” when it comes to retirement solutions.
“And I really appreciate that humility,” he said. “But I would also say, I think the world, in a lot of ways, is watching you.”
Flexibility
ASFA said it supports the RIC being principles-based so that funds have flexibility to tailor responses to the specific needs of their members. The individual retirement income strategy for a particular member will be “a function of a complex interaction between a number of different factors”, Koval said.
These will include the member’s age at retirement, life expectancy, likely health issues, relationship status, financial dependents, home ownership, assets and income outside super, level of debt, and their likely expenditure in retirement.
Koval said the effectiveness of the covenant could be “assisted by measures to address some of the challenges faced by trustees… including the availability of data, determining sub-classes of members and the regulatory regime with respect to the provision of advice and guidance”.
However, Press, who was appointed chair of Insignia Trustees in September last year after leaving ASIC, told the Investment Magazine Chair Forum earlier this year that waiting for government to do something amounted to a convenient excuse for funds not to do more until the rules become “clear”.
“I still believe fundamentally that we can do more under the current legislation than we currently are,” Press said.
Communicating
For example, there is nothing currently preventing a super fund from communicating to members that there is 15 per cent tax on money in accumulation but no 15 per cent tax on money in pension phase.
“How we say it is important – you can’t go and say, ‘you should change your fund’,” Press said. “But there is a lot that we can do, and I just don’t think we’re doing it. I don’t think we’re brave enough. And even at Insignia, I’m challenging my communication team to say, ‘Well, what really does the law say?’.”
CoreData’s Best Possible Retirement report makes the point that retirement is just one of a broad spectrum of member services, and it is funds that excel on services that tend to rate best on retirement. But service is pretty patchy across the industry, meaning that the standard most members receive – especially at the critical time of retirement – is largely the luck of the draw and depends on the fund they’ve been defaulted into.
Recognising this, Super Members Council weighed-in yesterday with a timely call for mandatory member service standards, setting out a number of principles that it says underpin a strong service offering
They’re not the first to recognise the potential benefits of mandatory standards. Former Minister for Financial Services Stephen Jones repeatedly warned that if the industry didn’t get its act together the government would act for it – an outcome that Insignia’s Press pointed out to the Chair Forum would be less than ideal. She said the banking and insurance industries already have consumer codes and the superannuation industry should follow suit.
“How do we hold ourselves to account and self-regulate ourselves?” she said. “We’re always waiting for government to give it to us, and I think that’s really problematic.”
