All indications are that the Government’s retirement policy, including the Retirement Income Covenant scheduled to take effect from 1 July 2022, will be principles-based, promote choice and competition, and emphasise member engagement as the key to success. On Monday Treasury released its position paper and a call for consultation on the proposed Covenant.

So where should fund trustees start in planning how to prepare for the changes ahead?

Deborah Ralston (panel member of the Retirement Income Review), Pamela Hanrahan (Professor of Commercial Law and Regulation at the UNSW Business School) and Geoff Warren (Associate Professor at the ANU) took on the RIC and many other related issues in the latest edition of Exploring Big Ideas with The Conexus Institute, titled Pathway to Retirement.

Transparency from Minister Hume

The Exploring Big Ideas session began with a five minute pre-record of Minister Hume to open the Conexus Financial’s Retirement Conference in June.

Throughout the recent period of significant industry reform, one constant has been the high level of transparency provided by Minister Jane Hume. This open approach has continued as the reform lens has shifted to retirement.

Hume’s introduction highlighted the Government’s vision for the retirement system and clearly emphasised the Government’s ideology for a greater degree of informed choice by consumers.

Advising Trustees on what they need to think about

When asked what advice they would proffer at a trustee board meeting, each panel member offered a breadth of views reflecting the broad array of challenges which lie ahead.

Geoff Warren focused on the challenges of getting the right solutions to members. Understanding the characteristics of members, from their household and financial situation right through to their preferences is important. Working out how best to cohort a fund’s membership will be crucial, he said.

On product and solutions Warren suggested that trustees should consider a modular or building blocks approach which would prove a better foundation for tailoring solutions while reducing the risk of legacy products. And while Warren said that modelling and analytical capabilities were essential, the ability to effectively community and engage with members was arguably more important.

Pamela Hanrahan’s comments focused on the challenge of being able to garner the appropriate member information within the existing legal and regulatory advice frameworks.

Hanrahan suggested that what funds may want to provide to their members and the outcomes that Minister Hume may want to see, might not be possible within existing frameworks. Working out the fact find process, establishing if this is possible, and then engaging as a single industry voice to promote a solution would have significant impact on system outcomes.

Deborah Ralston re-emphasised the theme that engagement is critical and expanded further by saying that engagement should be through a member’s life, not just at retirement. Additionally, the role of information and guidance on areas such as aged care and healthcare can remove uncertainty and improve confidence, leading to more consumers spending appropriately in retirement.

To round out the insights provided by the panellists I shared some additional reflections. Excellence in business case development will reconcile retirement measurements important to members (such as income and certainty) with more traditional measurements (returns and P&L), and account for a range of cross-subsidisation challenges (inter-generational and across cohorts). It would be appropriate to account for legacy product scenarios at the business case/development stage rather than risk the experience without consideration.

There is an important opportunity for trustees to reflect on where to collaborate and on where to compete. And a retirement ethics discussion could be a great scene-setter, particularly the acceptance that providing a better retirement to members may involve paying out higher pensions thereby reducing the net inflow position of the fund.

Much to consider and many challenges ahead, all with the existential purpose of providing improved retirement outcomes.

David Bell is the executive director of the Conexus Institute. Bell is the former chief investment officer of Mine Super and oversees the Sydney-based think-tank's work. The Conexus Institute works with government, publishes original thought pieces as well as showcases the work of others to maximise the impact that research can have on Australia's retirement system.
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