The Retirement Income Covenant – One Year On

It has been almost a year since the Retirement Income Covenant came into effect on 1 July 2022, requiring superannuation fund trustees to formulate, review regularly and give effect to a retirement income strategy.

In this article, we reflect on two key trends that have emerged over the past year: the emerging discussion about “Frameworks” and the increased prevalence of Head of Retirement roles in the industry.

What are retirement frameworks and how can they be used?

Many market participants have raised the need for a ‘Retirement Framework’ to assist superannuation funds in meeting the complex requirements of the Retirement Income Covenant. In this context, a ‘Framework’ means establishing a consistent, methodical process that a superannuation fund can step through when assessing their retirement income strategy, using specific metrics or criteria that reflect the requirements of the Retirement Income Covenant.

From an investment perspective, this involves assessing retirement investment solutions against their retirement objectives. This forms part of a superannuation fund’s efforts towards continuous improvement.

Key components of a good framework include undertaking both quantitative and qualitative analysis when assessing the investment solutions within superannuation fund retirement offerings and reviewing the appropriateness of retirement investment solutions for different cohorts of the superannuation fund’s members.

JANA’s expectation is that an assessment of this nature will assist superannuation funds in measuring the success of the investment solutions within their retirement offerings.

In addition, we would consider it prudent to undertake an assessment as part of any new retirement product design process.

We have also seen the creation of Head of Retirement roles across the superannuation industry – why is this the case?

The needs of members in retirement are complex and distinct from those in the accumulation phase, and superannuation funds can therefore benefit from having dedicated resources to focus on this important issue. Some organisations have sought to meet this challenge through the creation of Head of Retirement roles.

JANA believes that having a Head of Retirement can elevate the emphasis on this important area, providing a leadership role for setting retirement strategy, with key oversight of a superannuation fund’s retirement income strategy. However, superannuation funds need to consider what makes sense in the context of their organisational structure and governance model. A Head of Retirement position won’t always make sense, nor is it the only means of achieving the benefits that can come from this additional focus and a well-constructed governance framework.

What is critical however, is that superannuation funds are thoughtful about where a Head of Retirement role or other dedicated resources sit within the organisation and how the various parts of the business coordinate together to deliver a holistic retirement offering. It is important to ensure there is sufficient alignment between the product and investment functions while also ensuring that it is clear where accountability for each component and the overall solution lies.

Conclusion

Retirement income strategies are likely to continue to evolve over time as a process of regular review and continuous improvement. The Retirement Income Covenant has provided superannuation funds with greater certainty, creating an environment for superannuation funds to evolve and innovate their retirement offerings to continue to meet the retirement income needs of their members.

Important information

This document is issued by JANA Investment Advisers Pty Ltd (ABN 97 006 717 568) (AFSL 230693) (‘JANA’). It is intended for use only by the addressed recipient on the basis that they are a ‘wholesale client’ (as defined in the Corporations Act).

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Subsequent changes in circumstances may also affect the accuracy of the information.

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