One of the challenges of the government’s new Retirement Income Covenant for trustees will be finding the balance between providing retirement income solutions without falling foul of the rules regarding the provision of financial advice, according to KPMG’s superannuation partner, Cecilia Storniolo.

Under the new law, superannuation funds will have to provide a retirement income strategy to older Australians from July 1 under rules embedded in the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021.

The idea behind the Covenant seems to have had widespread and, at least politically, bipartisan support but opposition spokesperson for financial services and superannuation, Stephen Jones, warned in a Conexus Financial webcast recently that the move would fail unless the industry could get the “advice piece right”.

It’s a sentiment that Storniolo echoes.

A challenging system

“We know that the Retirement Covenant doesn’t tackle the question of advice,” she said.

“There’s actually some belts and braces in the system that will make it quite challenging.”

Storniolo maintained the Covenant, in the way it had been drafted, hadn’t contemplated the whole system and she also questioned whether “documented legislation” had been absolutely necessary.

“[Before the Covenant] following the CIPR consultation and retirement review, everyone felt that some form of announcement would be made by Government, there seemed to be a vacuum… [but] back to the question of whether any legislation was necessary you could argue that in light of Member Outcome and Design Distribution Obligation legislation, no, there wasn’t a legislative gap.

“[On the other hand] having it called out as a specific legal obligation, it does focus trustees’ minds to ensure that they do address it.”

Looking for solutions

Storniolo pointed out that it was unlikely there’d be any one-size-fits-all solution and there would definitely need to be a mixture of products, most probably ranging broadly from a “bucket approach” that enabled different cohorts to pick the product that’s more appropriate for them through to offering specialist products.

But there were myriad questions that needed to be addressed in the design of these products including longevity, sequencing risk and the question of access to capital.

“If we put everyone into a certain type of product, for example, and there’s no access to capital, what do they do when they need greater levels of income later to use for aged care or health reasons?” she said. “For those [kinds of] reasons, I think there needs to be an element of choice.”

Options for trustees

Storniolo maintained there were ways in which trustees could look at addressing the issues the Covenant had thrown up.

There were “cradle to grave” solutions that could be created where the individual automatically, perhaps at a particular age, went from an accumulation phase into a decumulation phase, or there were ways of designing products to achieve what members needed without having to give advice by using comprehensive and clear disclosures.

“[But] it increases the need for a trustee to enhance engagement and education of its members earlier and explain what’s coming down the track, understand what the options are and how a retirement product solution works [and what] that particular trustee is offering that particular client,” she said. “It’s not without its challenges, but without advice, that’s what a trustee could do.”

The question of advice

But the question of advice was a big one and among the challenges were the fact that there are so many layers of regulation and it was very expensive.

“Advice legislation in its current form is not working effectively if the objective is to enable more Australians to access affordable advice and to support decisions such as retirement investment decisions without an advice,” Storniolo said.

“We recently did a study on the cost of advice and it highlights that it actually costs far more currently to produce advice than advisers are actually able to charge. Which means that only those who can afford advice, get advice.

“What does advice need to look like? That’s the million-dollar question.”

Role of super funds

In answering the question as to whether superfunds should be providing advice or not, Storniolo said it very much depended on the individual trustee and whether it has the risk tolerance to enter into it.

“Without a doubt, there needs to be greater consideration of the advice equation for members, because some products may be too complex,” she said. “And if the product is too complex, is it the right product for that cohort?”

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