Retirement Income Covenant Presents Opportunity to Understand Members’ Needs

07/03/2022

The Corporate Collective Investment Vehicle Framework and Other Measures Act 2021 (Act) received Royal Assent on 22 February 2022. The Act inserts new covenants into the Superannuation Industry (Supervision) Act 1993 (SIS Act) that require the trustee of a registrable superannuation entity to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement (retirement income covenant).

The retirement income covenant is more than a compliance exercise. It is an opportunity for RSE licensees to get to understand their membership better and to develop products and other tools to meet their needs. Ultimately, an RSE licensee needs to find the right balance between:

maximising the expected retirement income over the period of retirement;
managing the expected risks to the sustainability and stability of retirement income; and
having flexible access to expected funds over the period of retirement.

To make the most of this opportunity, we suggest that RSE licensees start work on the retirement income strategy well in advance of the 1 July 2022 deadline to formulate a retirement income strategy and publish a summary of it on the fund’s website. Work undertaken to understand the needs of members in retirement can be carried out on a no regrets basis.

What is the new retirement income covenant?

The Act inserts subsection 52(8A) into the SIS Act which contains the following retirement income covenants:

to formulate, review regularly and give effect to a retirement income strategy that meets the requirements in proposed section 52AA of the SIS Act;
to take reasonable steps to gather the information necessary to inform the formulation and review of the strategy;
to record the strategy in writing;
to record the following in the document in which the strategy is recorded:
- each determination made by the trustee for the purposes of the strategy, and the reasons for the determination;
- each other decision made by the trustee in formulating, reviewing or giving effect to the strategy that the trustee considers to be significant, and the reasons for the decision; and
- the steps taken to gather the information that informed the formulation of the strategy, and the reasons for taking those steps; and
to make a summary of the strategy publicly available on the website of the RSE.

Subsection 52(8A) will not apply to risk only superannuation.

What requirements must the strategy meet?

The strategy must meet the requirements in proposed section 52AA of the SIS Act. Therefore, the strategy must be for the benefit of beneficiaries of the entity who are retired or who are approaching retirement and must address how the trustee will assist those beneficiaries to achieve and balance the following objectives:

to maximise expected retirement income over the period of retirement;
to manage expected risks to the sustainability and stability of retirement income over the period of retirement of the following kinds:
- longevity risks;
- investment risks;
- inflation risks;
- any other risks to the sustainability and stability of the retirement income; and
to have flexible access to expected funds over the period of retirement.

The trustee must determine the class of beneficiaries of the entity who are retired or who are approaching retirement for the purposes of the strategy. However, the trustee has the option of excluding any beneficiaries who only hold a defined benefit interest in the RSE and are not eligible to commute that benefit.

The trustee also has the option of dividing the class of beneficiaries into different sub-classes and making different provisions for those sub-classes, which enables it to develop appropriate and tailored strategies for its membership base.

The trustee must also determine the meaning of retirement income for the purposes of the strategy, which:

must include income, net of tax, received during the period of retirement of the following kinds:
- income paid from, or supported by, a superannuation interest in the fund; and
- income from an age pension; and
may include income from any other source if the trustee determines that it is appropriate to include income from that source.

The trustee must determine the meaning of period of retirement for the purposes of the strategy.

When do the amendments apply?

The amendments commenced on the day after Royal Assent. However, a trustee of an RSE is not required to have formulated a retirement income strategy or publicly publish a summary before 1 July 2022.

Importantly, trustees are not required to give effect to all the components of their strategy on 1 July 2022. Implementation will be an ongoing process required from that date.

Where should a trustee start?

The starting point for a trustee should be gathering the information necessary to formulate the strategy.

Given the general nature of the strategy, reasonable steps should usually only involve gathering information which is necessary to form a broad understanding of beneficiaries as a group in order to identify what type of assistance could be offered to beneficiaries to achieve and balance the three objectives. The information gathered should be used to inform elements of the strategy that are to be determined by the trustee.

If a trustee is determining whether it is appropriate to include additional sources of income as retirement income, gathering information about those elements not known to the fund may also be a reasonable step.

Potential sources of information may include:

surveying beneficiaries;
reviewing existing data;
using existing publicly available data from reliable resources (e.g. the Australian Bureau of Statistics, the Australian Government Actuary, APRA, the ATO, the Department of Social Services and the Household Income and Labour Dynamics of Australia survey); and
qualitative sources (e.g. reports by peak bodies or academic literature).

Once a trustee has taken reasonable steps to gather the information necessary to inform the strategy then it can begin to record the strategy, including each determination made for the purposes of the strategy, and the reasons for the determination.

A trustee’s strategy may ultimately include providing a range of assistance to beneficiaries, such as:

developing and/or offering specific retirement income products;
developing specific drawdown patterns that provide higher incomes throughout retirement;
providing budgeting tools or expenditure calculators to identify income and capital needs over time;
providing factual information about key retirement topics, such as eligibility for the Age Pension or aged care, the concept of drawing down capital as a form of income, or the different types of income streams available; and
providing forecasts to beneficiaries during the accumulation phase about potential income in retirement through superannuation calculators or retirement estimates.

In our view, due to the superannuation tax concessions, a strategy to maximise the income of members in retirement is likely to encourage beneficiaries to spend their non-superannuation savings before looking to super. This would be a win-win for members and trustees.