08 August 2023
Last month, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) released a joint report (Report) reminding super funds that the time is now to focus on retirement strategies and consider how to best assist retirees in accessing and using the benefits available to them to make the most out of their retirement.
The Report reviewed the implementation of the Retirement Income Covenant (RIC) by 15 trustees responsible for 16 different super funds. Overall, the Report found that trustees had made insufficient progress and lacked urgency in improving retirement outcomes for members. On this particular point, we wish to note that the RIC commenced in 2022 and there was barely enough time for the Regulators to blow the candle out on the cake, before this Report was published. However, there is a reality that the RIC is law, it is also a superannuation trustee covenant, and the regulators have shown their hand; trustees, you are warned.
This article considers the regulators’ findings and what it means for trustees.
The Corporate Collective Investment Vehicle Framework and Other Measures Act 2022 (Cth) introduced the RIC via amendments to the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) to address problems highlighted by the Treasury’s 2020 Retirement Income Review (Review), which showed “that the majority of the Australian community do not make the most of their superannuation assets in retirement” and are leaving the bulk of their retirement savings behind when they die. Therefore, according to that Review, many retirees may be spending their lives operating at a lower living standard than necessary.
To combat this issue, section 52(8A) of the SIS Act includes the covenant requiring trustees to:
Section 52AA, which informs trustees as to the scope of the covenant’s strategy, requires trustees to:
The strategy is to be general in nature, rather than specific to members.
The Report considered how trustees met three overarching requirements:
With the above in mind, the regulators found that, overall, “there was a lack of progress and insufficient urgency from RSE licensees in embracing the retirement income covenant to improve members’ retirement outcomes”. This finding was based on the regulators’ observations that the trustees were missing data which is critical for developing an effective retirement income strategy and that trustees were not robustly tracking whether members were using the assistance on offer. Further, and most importantly, the regulators found that most trustees were lacking metrics to assess the retirement outcomes they provided to members.
With regards to how trustees identify and understand their members’ retirement needs, the Report found that many trustees had significant gaps in critical member data used to formulate an effective strategy for each retiree, including a lack of information around both members’ financial positions and their developing income needs in retirement. Evidently, only 12 trustees explicitly acknowledged that they had data gaps, and only four had proper plans in place to address them.
When considering how trustees were designing fit-for-purpose assistance and what product offerings they were providing, the Report found that trustees:
Further, the regulators found deficiencies in how trustees track their strategies’ performance. Some trustees failed to embed the initiatives arising from their strategies into their business plans and did not consider and/or measure the success of the strategies on member outcomes, retirement income and decision-making.
On a positive note, while the Report mostly considered the RIC areas for improvement, it did state that trustees were found to be focusing most of their efforts on expanding the assistance and support available to members in or approaching retirement, though noting it is the variability in the quality of approach taken which requires consideration in the coming years, especially in light of APRA Deputy Chair Margaret Cole’s statement earlier this year that:
“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.”
Looking forward, both ASIC and APRA have called for trustees to use current data and consider the full financial profile of a member when creating their strategy. This would mean considering a member’s membership in different sub-classes beyond their superannuation balance, considering their home ownership, partner/marriage status and material assets from both internal and external data sources, such as statistics from the Australian Bureau of Statistics or industry knowledge, and considering any income the member might have outside of the superannuation system.
The regulators have also publicly encouraged trustees to consider a broad range of metrics to objectively measure the outcomes delivered to members against internal benchmarks and peers in the market where relevant and available. For instance, trustees could assess the product take-up rate, changes to member confidence scores and even consider the performance of pension investment options against their stated objectives and peers to measure their strategies’ success.
The Report outlines a better practice option in which trustees could conduct a sample member survey to better understand their retirement lifestyle preferences and potential spending so products and assistance can be tailored to meet their projected retirement wants and needs. However, we question option this from a number of angles, though it is clear that the regulators expect trustees to develop and sustain a certain level of sophistication in meeting the RIC.
Ultimately, the Report has found that greater monitoring of a trustee’s strategy must be implemented for the long term. Not only should the strategy’s success be measured, but where gaps in data and/or assistance become known, funds must undertake a robust analysis and establish a clear plan and accountable persons to address any missing information or assistance. Further, this monitoring must consider how members will use the assistance on offer and whether their strategy is tailored to those more vulnerable to scams or who may experience cognitive decline.
The above is not an exhaustive list of the regulators’ requirements or better practice recommendations. Providing a compliant strategy or strategies on these terms alone can prove difficult for trustees who are already struggling to navigate the long list of requirements under this principles-based requirement and provide sufficient detail in their strategies, while threading the needle through financial services laws.
A breach of the RIC is a civil penalty breach and a failure to comply with RSE licensee law, which constitutes a breach of a RSE Licence condition and raises breach notification questions. In certain circumstances, a breach of the RIC can lead to a criminal penalty but this would require some form of intent leading to the breach.
If the RIC covenant is breached, APRA may argue that the covenant to act in the best interests of members is also breached. Breaches of the best interests covenant can raise a burden of proof on trustees to evidence that they acted appropriately if civil proceedings are commenced. Therefore, it is a timely reminder for trustees to ensure that their houses are in order when implementing the RIC.
The extent of the covenants’ consequences will likely not end there. With APRA stating earlier this year that its prudential framework will, with proper consultation, be enhanced to reflect the Report’s key findings, the superannuation industry can expect more change and further regulation ahead.
If you have any questions about the Report or how to comply with the RIC, please get in touch with our team below.
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.