The Retirement Income Covenant (RIC) represents a significant milestone in the development of a high quality retirement income system for Australians. As super funds develop their Retirement Income Strategies (RIS), the next essential next step is to assess the quality of the RIS they are delivering to create accountability, and provide a framework for ongoing improvement.
The design of any assessment framework is critical. A light touch framework does little to enhance accountability. But a heavy-handed approach could result in a prescriptive environment that dominates the principles-based spirit of the Retirement Income Covenant and stifles innovation.
However, a major problem needs to be overcome. It is impractical to wait potentially decades to observe the retirement income that was delivered to members in order to evaluate if fund trustees are doing a good job. A way is needed to establish whether trustees are delivering retirement solutions to members that are likely to meet their specific wants and needs looking forward. The creates a need for “ex ante” or forward-looking assessment.
We propose using two complementary approaches to help gauge the effectiveness by which trustees are designing and delivering their RIS – a qualitative checklist, and a quantitative model in research published last week.
The checklist would examine the various activities that trustees should be undertaking to ensure a strong likelihood of good member outcomes, and meet their obligations under the RIC. The checklist would do this by addressing whether a suitable set of retirement solutions is being offered to members, whether those solutions are being managed effectively, and if appropriate guidance is being provided to assist members in identifying a suitable retirement solution.
The checklist would also capture the range of structures, processes, capabilities, products and services that a superannuation fund has in place. Examples of aspects that might be assessed include: how funds form and cater for member cohorts; whether a suitable set of building blocks is being used to construct solutions; investment processes; governance and resourcing; guidance mechanisms, such as advice and tools; engagement efforts; member take-up rates; and more.
The quantitative model would play a supportive role by generating the range of outcomes that a strategy might deliver and assess them versus objectives. We envisage combining some overall scoring system (perhaps a “utility function”) with a balanced scorecard of metrics. The latter would speak to how strategies deliver on each of the three RIC objectives of maximising expected income, managing income risk and providing flexible access to funds.
Assessment does more than just evaluate how effectively fund trustees are assisting their retired members to achieve their retirement goals. A second – and arguably more important – role would be to guide and support RIS development.
By listing out the areas that trustees should be addressing to best assist their retired members, the checklist can help highlight gaps to fill and areas for improvement. Further, the quantitative model can act as a device to analyse the potential benefit of making adjustments to the strategies being offered. The impact of proposed adjustments could be gauged through examining the change in the overall strategy ‘score’ and movements in the metrics on the scorecard
We envisage assessments being undertaken by super funds, research houses, consultants and regulators. However, each would implement the assessment differently, in particular regarding the quantitative model. Funds could frame the analysis around their existing solutions and member segmenting process. Meanwhile, external assessors might use the model to better understand the outcomes that various solutions deliver, and assess how effectively those solutions meet the needs of a representative set of key member types.
Development of RIS assessments should start now and be approached as an evolutionary process. Setting the assessment framework early will provide guardrails for the industry around what comprises an appropriate RIS. This should help avoid too much disparity in RIS offerings across funds, and limit the risk of leaving some strategies stranded if assessment criteria were brought in later.
The challenge is to not be too prescriptive and leave room for innovation. Initially assessment should be viewed as an opportunity to learn about the interaction between RIS and their assessment. Only after the assessment process becomes more ‘seasoned’ and funds have had time to adapt should the consequences of a poor assessment become more meaningful.
Geoff Warren is an associate professor at the Australian National University and David Bell is the executive director of the Conexus Institute.