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On 27 September 2021, the Government released Exposure Draft legislation that will introduce a Retirement Income Covenant for Trustees of registrable superannuation entities (RSEs) as part of the Superannuation Industry (Supervision) Act 1993. This follows the release of the Retirement Income Covenant position paper by the Treasury on 19 July 2021. The consultation period for the draft legislation closes on 15 October 2021. The Retirement Income Covenant is proposed to be legislated from 1 July 2022.
JANA has summarised the key requirements of the September 2021 exposure draft legislation for registrable superannuation entities (RSEs) below. The covenant does not apply to trustees of self managed superannuation funds. The draft legislation is proposed to be added to the Superannuation Industry (Supervision) Act 1993. This summary is based on JANA’s interpretation of the September 2021 exposure draft legislation and is not a legal opinion.
Key Requirements of September 2021 Exposure Draft legislation
The exposure draft legislation also includes the following requirements regarding beneficiaries who are retired or approaching retirement, as well as requirements for determining retirement income and the period of retirement.
Determining the class of beneficiaries who are retired or who are approaching retirement
Determining meaning of retirement income and period of retirement
The Trustee must also:
The September 2021 Exposure Draft Explanatory Materials also provide further guidance for Trustees. JANA has highlighted the below comments from the Exposure Draft Explanatory Materials which provide further detail relating to retirement offerings and retirement income:
JANA’s summary of the key takeaways from the 19 July 2021 Retirement Income Covenant Position Paper is contained below.
Proposed Retirement Income Strategy
JANA supports the Treasury’s position on Retirement which proposes that trustees of superannuation funds be required to develop a Retirement Income Strategy.
JANA believes the requirement for trustees to “formulate, review regularly and give effect to a retirement income strategy”* both for the benefit of retired beneficiaries or those who are approaching retirement is in the best interest of members. In our role as investment adviser to our superannuation fund clients, we have been working with our clients on their investment strategy for many years, and JANA is accordingly supportive of this policy initiative.
Focus on Retirement Income
JANA supports the Treasury’s focus on income in retirement – we believe that income is of key importance for retirees.
JANA believes it is important to change the conversation with members from being focused on maximising superannuation account balances at retirement, to one of sufficiency of income streams in retirement.
Retirement Product Design
JANA believes that retirement product design should remain a priority for super funds.
JANA believes the Treasury’s objective of increasing the availability of better retirement income products is a positive move for members of superannuation funds, particularly in the context of Australia’s ageing population, which is driven in part by improvements in life expectancy.
JANA notes that the position paper and Exposure Draft legislation did not propose that Trustees would need to offer members a Comprehensive Income Product for Retirement (CIPR), and JANA is supportive of this. We had previously expressed our areas of concerns regarding CIPR products to the Treasury in our 14 June 2018 Consultation submission paper. We believe that flexibility of retirement product design remains vital.
Instead, the focus has shifted to Trustees evaluating the products they offer to their members and investigating whether their product offerings can be improved to better meet the retirement income needs of their beneficiaries. JANA is supportive of this approach.
Advice and Member Communications
JANA is also supportive of the role for super funds to provide affordable advice or appropriate guidance to members. JANA supports measures to encourage superannuation funds to engage with their members about retirement from a young age (and on an ongoing basis).
Whole of Life Strategy
JANA notes that the Your Future Your Super (YFYS) requirements do not apply to superannuation interests that are supporting a superannuation income stream in the retirement phase. JANA believes that a Retirement Income Strategy should apply to both pre and post retirement products. JANA is supportive of the Exposure Draft Explanatory Materials highlighting that trustees may consider assistance that could be provided during the accumulation phase, for beneficiaries approaching retirement.
Interaction with existing Regulatory Guidance
JANA believes that consideration should be given to how the Retirement Income Covenant interacts with existing regulatory guidance e.g. Superannuation Prudential Standard SPS515 – Strategic Planning and Member Outcomes (SPS515) which includes reference to retirement income objectives.
JANA is supportive of the recent further detail that has been provided by Treasury in the Exposure Draft Explanatory Materials which notes that as part of meeting obligations relating to member outcomes assessments, Trustees are required to conduct cohort analysis. Identifying sub-classes for the purposes of formulating a retirement income strategy is expected to involve similar analysis.
Behavioural Aspect of Retirement Income
JANA notes that the Treasury is supportive of retirees spending the bulk of their retirement balance in their lifetime, with a “maximising retirement income” objective. JANA is of the view that, in practice, members are naturally cautious in their spending patterns, largely due to the uncertainty of their income requirements and longevity. In response, members tend to build up a ‘reserve’ to guard against future income requirements, for example, uncertainty around health costs and aged care requirements which might be large expenses that occur later in life. This is arguably an entirely rational response by retirees given that retirees often do not have the benefit of future income derived from employment or capital contributions to “top up” their account balance.
JANA prefers a more flexible approach to accommodate members with differing risk tolerances and life expectation. JANA is supportive of the additional guidance provided by Treasury in the Exposure Draft Explanatory Materials that notes that maximising retirement income should involve considering current and expected member behaviour (e.g. regular drawdown behaviour or the size and frequency of lump sum withdrawals); potential volatility (including situations of varying investment returns, inflation scenarios and mortality outcomes); and appropriate modelling and analysis, including modelling of expected Age Pension entitlement.
Your Future Your Super (YFYS) and the Retirement Income Covenant
The implications of the YFYS reforms mean that the current benchmarks do not apply well to accumulation products that bridge accumulation to post retirement. Under a Whole of Life strategy, a fund may begin to de-risk their members approaching retirement (but still in the accumulation phase) to manage sequencing risk (typically in the last 5-7 years of accumulation phase).
This de-risking and use of investment strategies such as lower beta equities (to target “stability of returns”) do not lend themselves well to an assessment against listed market benchmarks or higher beta unlisted benchmarks. It is JANA’s understanding that the YFYS requirements do not apply to superannuation interests that are supporting a superannuation income stream in the retirement phase.
Granularity of Data
JANA notes that the proposed data in the Retirement Income Covenant and the Exposure Draft Explanatory Materials is, in some cases, of a granular nature (e.g. other income support payments to members such as the other non-superannuation assets, income from a partner, other income support payments under the Social Security Act 1991 or the Veterans’ Entitlements Act 1986 or superannuation interests held outside the fund if the Trustee considers it suitable.
JANA is very supportive of targeted retirement income (defined by salary replacement or other relevant measure), projected salary (and contribution rates), age, superannuation account balance(s), assumed retirement age, life expectancy, and Age Pension considerations (home ownership, etc) being incorporated into cohort analysis but notes that some of the other additional suggested data considerations would be difficult to obtain at this stage.
JANA believes that the value of the granularity of the data needs to be assessed for the value it adds to cohort analysis, improved member outcomes versus introducing additional complexity and cost.
Fund Mergers and Legacy Products
A further consideration as the market evolves is the issue of superannuation fund consolidation, and the potential legacy issues that having longevity solutions (such as pooled lifetime income products) could create for funds that have already offered these products to their members prior to merging with another fund.
* All quotations and data marked with an asterisk are sourced from The Australian Government the Treasury.
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