All super fund members who meet a relevant condition of release will be allowed to roll over into a retirement income solution, including an account-based pension, irrespective of their account balance, if Treasury’s proposed best practice principles for retirement income solutions are adopted.

The principles, released last week, are designed to help trustees shape the retirement income strategies they are required to implement under their Retirement Income Covenant obligations, which in turn require funds to design solutions that help members achieve a balance between maximising their expected retirement incomes, managing expected risks to the sustainability and stability of their expected retirement income, and having flexible access to funds during retirement.

A consultation paper, Guidance on best practice principles for superannuation retirement income solutionsrefines and builds on a guidelines circulated within the industry in February this year.

Among changes since the initial exposure is the addition of Principle 7, which provides that funds “allow all members that meet a relevant condition of release access to a retirement income solution that includes an account-based pension component, irrespective of account balance”.

Such a condition of release means reaching a so-called nil cashing restriction, such as retirement upon attaining preservation age, or reaching age 65.

The principle addresses a criticism of the superannuation system identified by the Conexus Institute* which identified minimum application amounts for account-based pensions, imposed at funds’ discretion, “may be precluding some low-balance retirees from accessing account-based pensions”.

The institute listed its concerns as including denying members access to a tax-free environment; excluding members from receiving a pension bonus; limiting effective member engagement; and resulting in system design not being made available to all.

On the eve of the Retirement Leaders Summit in Canberra, Conexus Institute research fellow Geoff Warren tells Investment Magazine that Treasury’s latest guidelines are a welcome support to the design and development of effective retirement income solutions.

“[So far] there’s been limited guidance from policy makers and regulators,” Warren says.

“We’ve had two main aspects. First is the Retirement Income Covenant, which basically says that trustees need to develop a strategy to assist members to achieve and balance three objectives, without much prescription at all around that strategy. Second, the regulators have been saying to the industry ‘not good enough’, but without actually setting out what good is.”

“The best practice principles provide a list of things that super funds should be aiming to achieve through their retirement income strategy, giving funds some guidance on what they are expected to do.”

Addressing retirement uncertainty

Joey Moloney, deputy program director of the Grattan Institute’s Housing and Economic Security program, says funds need more guidance and prompting to produce better solutions for members in retirement, but that Treasury’s guidelines alone will not be enough to do that.

“The retirement phase of super isn’t working, and funds are understandably struggling to fix it themselves,” Moloney tells Investment Magazine.

“It’s a failure of policy design, so voluntary principles alone won’t fix it. They’ll probably improve upon the status quo, but what’s needed is more meaningful policy change. We need a system that structurally guides people towards a safe and simple avenue to annuitise some of their super, which is likely to be a government-offered annuity.”

In January this year Grattan Institute released a report, Simpler super: Taking the stress out of retirement, in which – among a wide range of recommendations – it suggested that retirees be encouraged to use 80 per cent of any superannuation balance above $250,000 to purchase an annuity.

Xavier O’Halloran, chief executive of Super Consumers Australia, says the principles are welcome, and “cover useful elements that every super fund trustee should be already doing: understanding their membership base, constructing retirement products that meet consumers’ needs, good communication and supporting consumers’ engagement, and continuous improvement”.

How much hand-holding?

O’Halloran tells Investment Magazine that overall SCA is “frustrated with the lack of progress by trustees on the retirement phase of super”.

“The super system was always about retirement and if it wasn’t already clear the Retirement Income Covenant drove home that message when it was introduced in 2022,” he says.

“Since then the regulators ASIC and APRA have done two reviews that highlighted slow progress by trustees. Now Treasury has had to intervene again to provide more guidance. How much hand-holding does the super industry need to do its job?

“We hope this is a catalyst for trustees to focus on developing great products and great customer service for retirees. If not, more prescription will be needed to ensure funds are delivering the best outcomes to Australians who have entrusted them with their money.”

The Financial Services Council (FSC) said the principles set out by Treasury are “an important step forward in improving retirement outcomes for Australians”, but it said retirement policy should continue to focus on “individual outcomes”.

In a statement FSC chief executive officer Blake Briggs said the association is “pleased to see Treasury’s framing of the principles starting to focus more on individual outcomes, which we think is vital to ensure people have choice when it comes to choosing their superannuation and empowers them to select investment strategies that align with their financial goals and personal values”.

Aiding assessment

In late July the Conexus Institute published a paper, Evaluating Retirement Income Strategies through a capability-based framework, which set out the institute’s vision for a retirement income solutions capabilities framework. Warren and The Conexus Institute executive director David Bell wrote in Investment Magazine that a retirement income solutions  assessment “will become an increasingly important feature of a developing retirement system”.

Treasury’s best practice principles are “similar, but much more granular”, Warren says. The Institute’s capabilities assessment sets out “the capabilities you need, whereas [Treasury’s] principles say these are the things you should be doing”, he says.

Warren says the draft principles in the Treasury consultation are a big step up from the initial principles. They scope out what best practice in retirement income solutions looks like, while giving funds considerable scope to improvise and innovate.

“Treasury appears to have taken on board a lot of feedback,” Warren says.

“For instance, the principles have been written with an understanding that super funds platforms exist, asking them to provide adequate services to advisers. Treasury has done a good job in this regard.

“Prescribing is list of things that funds should aim to achieve without specifying exactly how they should go about is a positive development.”

* The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Investment Magazine.