On 31 July 2024, Luke Barrett, partner and head of superannuation at Gilbert + Tobin, presented at ASFA’s retirement income conference. The session covered his views on the ‘retirement income covenant’ and why ASIC and APRA are (generally speaking) disappointed with the superannuation industry’s approach to retirement incomes so far.

Earlier in the day, the regulators doubled down on recent statements that the industry isn’t doing enough to measure the retirement outcomes being received by real-life members. The regulators revealed that they’re not just looking for incremental improvements: they want to see “step change”. There were indications we may see enforcement action in the next year.

Several forces may be at play.

1. Are there expectations (e.g. regarding product solutions) that go beyond the specifics required by the retirement income covenant?

2. The obligation to review retirement income strategies has been in the legislation since day 1, but previously it may have felt premature to conduct comprehensive reviews so soon after adopting a strategy. Now that the legislation has been in force for 2 years, the time for serious retrospective reviews has well and truly arrived.

3. Super funds need to unlearn some conventional wisdom. Traditionally super funds have been required to focus on the interests of members, as members, with a focus on their interest in the fund. Under the retirement income covenant, super funds are now expected to have regard to members’ interests outside of super for the purposes of assessing the retirement outcomes they receive from the fund. This is different, but is the new reality. Super funds need to lean into that to the extent required.

4. Retirement assistance can take many forms, with there being a spectrum ranging from factual information, a wink, a nudge, a shove to a drag. Assistance to the left of that spectrum is potentially viable under existing advice laws, but the Quality of Advice Review reforms will (if enacted) potentially enable funds to give their members more directional, useful, economical and personalised steers - watch this space.

5. Super funds are right to assess retirement projects through the lens of the best financial interests duty, weighing factors such as project costs versus likely take-up, amongst other factors.

In the meantime, several approaches are observable in the market. There are some longevity products already being offered, with several major funds having announced that they too are developing or exploring longevity products. Account-based pensions are still the most prevalent retirement solution for now, however, as indeed they were prior to the retirement income covenant being introduced. Super funds are typically counting on assistance and financial product advice to help their members get the most out of account-based pensions. This is where success metrics come into play: to see whether members are actually achieving adequate retirement incomes from account-based pensions. One relevant metric might be the percentage of members needlessly remaining in taxed accumulation options instead of switching to tax-free account-based pensions. Another relevant metric might be the percentage of pensioners who withdraw enough from their account-based pension each year to achieve a comfortable lifestyle based on industry benchmarks. This in turn requires super funds to know whether their members generally own their own house when they retire or whether they are still paying rent or servicing a mortgage.

To meet the regulators’ expectations, super funds should therefore be considering the metrics they use, and the additional information needed to apply those metrics, in order to obtain genuine validation that their members are achieving appropriate retirement income outcomes.