The Retirement Income Covenant (RIC) remains scheduled for 1 July 2022. Minister Jane Hume and Treasurer Josh Frydenberg have both promised a principles-based approach to retirement strategy and encouraged funds to step forward.
At the recent Retirement Conference (co-hosted by The Conexus Institute and Conexus Financial) it was evident that the super fund industry was strongly supportive of a principles-based approach. The reason is obvious: funds would like to provide solutions which are appropriate to the characteristics of their members.
It sounds like a perfect meeting of minds, but I am a little wary. I’ll outline some of my reservations and the consider a pathway forward (positively, there is one).
What gets measured gets managed
At first glance, a principles-based framework provides significant flexibility for trustees. But in practice, the balance between flexibility and prescription is impacted by how products are regulated and assessed by industry. For instance, a Heatmap style approach by APRA and some sort of ranking process by research houses will create a feedback loop which will inform product design.
In the aftermath of Your Future, Your Super one shouldn’t ignore the possibility for a retrospective assessment to be applied further into the future.
Understanding the consumer
Many funds promote the heterogeneous features of their membership and the desire to design solutions accordingly.
Along a similar vein, funds highlight the benefits of member segmentation. However, a brief review of a sample of recently released super fund member outcomes assessments suggested little in the way of member segmentation or risk-based assessment, which is one of the cornerstones of retirement outcome assessment. Maybe funds have further work to do to incorporate their understanding of members into analytical frameworks.
Further, in a policy setting that encourages informed choice funds may find that their segmentation approaches reflect nudges more than defaults.
Product proliferation… and legacy product
Many retirement products will be developed. Consider the dimensions of guaranteed and pooled products, return-certain and market-linked, present and deferred, and you begin to get some insight into the possible range. The communication challenge is self-evident.
It is also likely that many products will struggle to achieve scale, while others will become obsolete due to mergers and improved solutions. The likelihood of legacy products is high. Given such products likely involve policies or are pooled solutions, unwinds are likely to be difficult (if possible at all) and the complexity (i.e. cost) of legacy management will be high.
Opportunities for improvement
We find ourselves in the exciting position of being able to reflect on policy direction ahead of time. Credit to Minister Hume and Treasurer Frydenberg for their transparency. A principles-based framework provides super funds with the opportunity to provide retirement solutions tailored to the characteristics of their members.
But I have shared my reservations. Fortunately, steps can be taken to mitigate some of these concerns.
First, the principles in the RIC could be defined as explicitly as possible. Policymakers effectively create some sort of implicit guardrails or guidelines; a reasonable trustee would account for these principles and it shouldn’t disrupt if APRA or research houses developed metrics around explicit RIC principles. Similarly, the sooner APRA and research houses show how they will be assessing outcomes, the more informed any product design.
The message for funds is straightforward: it comes back to a quality business case based on skill and discipline.
Skill is required to account for complex benefits such as risk reduction (where presently most benefits in superannuation are measured on a return basis) and cross-subsidisation (both across membership cohorts and intergenerationally).
Discipline takes the form of determining the best cost-adjusted solution, rather than the shiniest one. Formally accounting for and role-playing a product redundancy scenario (i.e. what would happen if the product were discontinued) would reflect strong governance. This could influence trustee product decisions.
It seems like exciting times ahead with a strong opportunity to improve retirement outcomes for many Australians. A well-designed RIC and excellent trustee governance are the key ingredients for success.