Superannuation funds are failing to adequately prepare for and adapt to the Retirement Income Covenant introduced one year ago, the prudential and corporate regulators have concluded in a scathing new report.
A joint review by APRA and ASIC has found trustees need to “make more progress to enhance retirement outcomes”. It concluded that many are falling short of their legal obligation to help members prepare for retirement, which took effect in July last year under the covenant legislated by the previous Coalition government.
Minister for Financial Services Stephen Jones will tell the Investment Magazine Group Insurance Dialogue on Tuesday that the government is unimpressed with the poor progress made on the covenant, which requires trustees to develop, and implement, a retirement income strategy for their members.
“The verdict after 12 months isn’t good,” Jones will say, according to speech notes seen by Investment Magazine. “There has been a lack of progress and a lack of urgency. Funds should know their members. That’s a basic expectation.”
The review, which examined the progress of 15 trustees collectively managing $862 billion worth of assets on behalf of five million Australians in or approaching retirement (that is, over the age of 45), found many trustees had a retirement income strategy in place, but had not integrated it into their business plans, as required under Prudential Standard 515.
“Trustees must get the fundamentals right – their retirement income strategies must be designed with consumer needs in mind and be evidence-based,” said ASIC Commissioner Danielle Press, who will discuss the findings at the Dialogue.
APRA deputy chair Margaret Cole added: “A further three million members will become eligible to draw from their super in the next 10 years. They are entitled to rely upon their super fund for assistance as they plan for a sound financial future.
“Some trustees have made a good start, but overall there has been a lack of progress and insufficient urgency. As more members approach retirement, trustees must step up and deliver both well-considered strategies and action to support members in retirement.”
While some trustees had distributed superannuation calculators to members, or directed them to ASIC’s MoneySmart website, most had not conducted in-depth analysis of their members’ income needs in retirement. Where this analysis did take place, often trustees relied on generic third-party sources such as Australian Bureau of Statistics or HILDA data.
“Referencing a fixed income target based on external data and research was the most common practice,” the report concluded. “Only a small number of RSE licensees analysed drawdown patterns of their retired members, or considered how their members’ retirement income needs may correlate to their pre-retirement income.”
The majority of reviewed trustees (12 of the 15) recognised they had these data gaps, but only four had “concrete plans” to fix the problem, it found.
Some trustees “appeared to have reservations” about collecting data from members because of the associated cost or difficulty, or issues around member privacy or security. But the regulators said this was not a sufficient reason not to comply with covenant obligations.
“[Trustees] need to think beyond this as to what is possible to form a sufficient understanding of their membership upon which to base their strategy,” the report concluded.
As for retirement income products, a flood of which are expected to come to market as a result of the new obligations on trustees, the review found all of the trustees offered an account-based pension, seven provided access to products with longevity protection like annuities and six were still considering developing or offering a new longevity product.
The report urged caution that trustees may trigger the complex financial advice laws when communicating with members about retirement income products.
It comes as Jones has indicated the government may be open to a radical overhaul of the intra-fund advice model to expand the topics able to be advised on by funds beyond a member’s interests in the fund.
Investment Magazine will be hosting a roundtable discussion on the Retirement Income Covenant in coming months. For sponsorship opportunities, please contact commercial director Ben Thomas at email@example.com.