Improving retirement outcomes: new retirement income covenant requirements
As noted in our blog on corporate collective investment vehicles (click here to read), the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022 (the Act) received Royal Assent in February. The Act not only introduces a new company structure for investments but also inserts new covenants into the Superannuation Industry (Supervision) Act 1993 (SIS Act), requiring trustees of registrable superannuation entities (RSE) to develop a retirement income strategy for beneficiaries in or approaching retirement.
The retirement income covenant will take effect from 1 July 2022 and is intended to encourage trustees to focus on the needs of members in retirement and “improve retirement outcomes of individuals, while enabling choice and competition in the retirement phase”.
This blog outlines the requirements of the retirement income covenant, obligations for trustees, the applicable scope of members, timeframe for implementation, implications of non-compliance and how to prepare in the lead up to and beyond 1 July 2022.
What is the retirement income covenant?
Under the retirement income covenant, trustees of RSEs will be obligated to formulate, regularly review and give effect to a retirement income strategy. This strategy must outline how they plan to assist their members to achieve and balance three key retirement income objectives:
Maximising their expected retirement income
Managing expected risks to the sustainability and stability of their expected retirement income. Such risks include: longevity risks, investment risks, inflation risks
Having flexible access to expected funds during retirement
It is the trustee’s discretion as to how these objectives will be balanced based on their understanding of the needs and preferences of their members. Additional objectives may also be considered as relevant to the pre-retiree and retiree membership.
These retirement income covenant requirements do not apply to trustees of self-managed superannuation funds.
What are the covenant obligations for trustees?
The retirement income covenant will require trustees of an RSE to:
Take reasonable steps to gather the information necessary to inform the formulation and review of the strategy.
Record the strategy in writing.
Record a range of matters as part of the strategy: each determination made by the trustee for the purposes of the strategy, the steps taken to gather information, each decision the trustee considers to be significant in the process of formulating, reviewing or giving effect to the strategy, and the reasons for those determinations, decisions and steps.
Make a summary of the strategy publicly available on the RSE’s website.
In formulating the strategy:
Trustees must also prepare a governance document that outlines in general terms how the trustee intends to assist members covered by the strategy to achieve and balance the three key retirement income objectives previously outlined.
Trustees would be expected to identify the likely retirement income needs of members and develop a plan to build the fund’s capacity and capability to meet those needs.
For members approaching retirement, trustees may consider how they can assist such members during the accumulation phase, within the requirements of the sole purpose test and the best financial interests of members.
Review of the strategy outcomes is expected to occur annually and reviews of the strategy itself to be performed every three years.
What types of members are covered by the strategy?
The retirement income strategy applies to members (beneficiaries) who are retired or approaching retirement. A trustee has the discretion to determine the class of beneficiaries that meets this description and can exclude members who only hold a defined benefit interest in the fund and cannot commute that benefit into a lump sum.
A trustee can also choose to develop sub-classes of beneficiaries and differentiate the strategy for those sub-classes. This is similar to the cohort analysis performed in relation to the member outcomes assessment obligations. A trustee must also determine the meaning of “period of retirement”, which can differ across the sub-classes of beneficiaries.
What is the timeframe for implementation?
The retirement income covenant takes effect from 1 July 2022. It is expected that by this date, trustees will have formulated a retirement income strategy and have a summary publicly available on their websites.
Note that trustees are not required to implement all components of their strategy by 1 July 2022 as implementation will be an ongoing process from that date. APRA and ASIC are allowing time for trustees to drive the strategic direction of their retirement income strategies and to innovate on the implementation of the covenant for their membership.
What happens if trustees don’t comply?
As the retirement income covenant forms part of the SIS Act section 52 covenants, failure to comply with the requirements may incur a civil penalty. If non-compliance involves dishonesty or an intention to deceive or defraud, a criminal offence will apply.
How should trustees prepare?
By now, trustees should have commenced embedding the retirement income covenant requirements into their business operations.
Typically, with the introduction of new regulatory requirements, associated regulatory guidance is a good starting point for how to implement. However, APRA and ASIC have communicated that they do not intend to issue detailed regulatory guidance and instead will allow trustees flexibility in implementing the retirement income covenant.
A critical first step to develop an effective retirement income strategy is the information gathering process. Given the general nature of the strategy, reasonable steps should only involve gathering information to the extent necessary to form a broad understanding of beneficiaries as a group in order to identify the types of assistance that could be offered to achieve and balance the three objectives. Information gathering may involve:
Reviewing existing data
Reviewing publicly available data from government sources such as the Australian Bureau of Statistics, the ATO, APRA, and the Department of Social Services
Considering qualitative data such as research reports by peak bodies or academic literature
APRA expects trustees to have performed the following by 1 July 2022:
Prepare retirement income strategies
Assess outcomes of existing products and assistance offered to members (in business performance review and annual outcomes assessment)
Update business plan to reflect retirement income strategy
Take reasonable steps to gather the information necessary to inform the strategy
APRA has highlighted the following key areas for trustees to consider in order to develop an effective retirement income strategy:
How we can help
To help you meet the new retirement income covenant requirements and effectively support your pre-retiree and retiree membership, Hall Advisory provides the following services:
Assist with formulating your retirement income strategy;
Perform an independent review of your retirement income strategy prior to implementation;
Perform annual reviews of strategy outcomes and/or triennial reviews of the strategy content; and
Facilitate training sessions for your Board and/or employees in relation to the covenant obligations.
If you need support in any of these areas, contact us for a confidential, no-obligation consultation.