Ahead of the commencement of the Retirement Income Covenant (RIC) on July 1st, APRA and ASIC issued a joint letter to RSE licensees regarding their new obligations.
As you may be aware, the RIC requires trustees of registrable superannuation entities to create a retirement income strategy that meets the following requirements:
Trustees must also define “retirement income” in the context of the above strategy, and that definition must include two types of net income received during retirement: income paid from or supported by a super fund and income from an age pension. The definition may also include income from any other source as deemed appropriate by the trustee.
As explained in the explanatory material accompanying the legislation, the RIC was designed to address the “gap” in the current legal obligations for super trustees. These obligations, it was argued, “focus primarily on the accumulation phase” and do not specifically address the needs of post-retirement beneficiaries.
This wording echoes long-standing criticisms of Australia’s retirement system. As we noted in a past feature on the topic, the 2014 Financial System Inquiry found that the super system was not "operationally efficient" and that assets in super funds were not being "efficiently converted into retirement incomes due to a lack of risk-pooling and over-reliance on individual account-based pensions."
While it took many years for a Government response to materialise - the Retirement Income Review’s final report was issued in 2020 - it appears the law is now catching up and every super fund is adjusting its retirement strategy accordingly.
The APRA and ASIC letter is designed to assist in this process. Along with explaining the requirements the new legislation entails, the regulators have offered an “indicative” approach to implementation.
The approach is indicative because, as the letter explains, “APRA and ASIC do not intend to issue detailed regulatory guidance on how RSE licensees should implement the covenant. Instead, time will be allowed for RSE licensees to drive the strategic direction of their retirement income strategies and to innovate on the implementation of the covenant for their membership.”
While this somewhat hands-off approach to RIC regulation makes it difficult to tell what will become standard procedure in the months and years following the commencement of the legislation, it also reflects the RIC’s broader potential implications for super trustees, fund members - and, yes, even financial advisers.
You see, the RIC envisions a super fund's retirement strategy within the context of everything else the fund does for its members. In order to “[give] effect to a strategy for beneficiaries approaching retirement,” the legislation explains, super funds should not only consider the current and future retirement needs of its member-base but also provide “assistance” to members in the accumulation phase.
This assistance can include:
In APRA and ASIC’s letter, the regulators recommend the development of a “choice architecture” for members which could, for example, see member queries about their future retirement initially fielded through channels such as budgeting tools and expenditure calculators before eventually being escalated to personal financial advice.
The letter suggests that in circumstances where funds are unable (or are not licensed) to provide personal advice to members, RSE licensees should “consider alternatives such as referring members to externally provided financial advice services (i.e. provided by a different entity), and ensuring adequate controls are in place to oversee the deductions from a member’s superannuation account to pay for such advice.”
The accommodating language used here is somewhat surprising given the joint letter APRA and ASIC sent to super fund trustees in July last year, where the regulators warned of increased scrutiny and more rigid rules around how super members are charged for advice services. That letter even argued funds should incorporate random SOA reviews, which AFA CEO Phil Anderson said at the time might constitute a breach of the Privacy Act.
We don’t yet know how those rules will intersect with the suggestions made in this new letter, but it’s clear the RIC has put an emphasis on the relationship between advice and the super system. This legislation presents an opportunity for those advice businesses able to service not only the coming wave of retirees but also younger super members who are starting to think about what their post-working lives might look like.
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