As InvestorDaily revealed last week, a confidential document outlining voluntary best practice principles to help super funds manage rising withdrawals is being consulted on with funds and industry groups.
The draft principles highlight the need for funds to better understand member needs and develop modern products tailored to three distinct retiree cohorts, with a key point of contention being the document’s apparent push for longevity protection in retirement income solutions.
Essentially, super funds are being encouraged to embed longevity protection into retirement income plans for members with average balances over $200,000, with tailored drawdown pathways to help maximise their account-based pension component.
The document, which sparked debate both within industry circles and the public, was addressed by Treasury secretary Steven Kennedy at Senate estimates this week.
The first in the government to openly talk about it, Kennedy dismissed fears of locked-up retirement savings, saying Treasury is “testing a hypothesis” while stressing the need to preserve choice.
He told Senate estimates the super industry has prioritised accumulation over retirement products and suggested a need for gentle intervention to expand choices for retirees.
“We’ve been a bit concerned that people aren’t being given the choices they possibly should be around retirement products, and that the superannuation industry has tended to focus more on accumulation than offering the services and products they need to offer people in the retirement phase,” the Treasury secretary said.
“I personally think we need be very careful about any form of removing choice, it’s not on my list, but I do wonder whether this is an area that at least some nudging is required to see people offered products.
“We’re just really testing this hypothesis … So, at least from our perspective, it is not about taking away choice, it is more about people being offered enough choice.”
The government fears withdrawals will soon outstrip contributions, prompting regulatory concerns over the impact of large-scale asset liquidations.
This concern is heightened by Australia’s shifting demographics, with forecasts suggesting that over the next decade, the retirement cohort will swell to 9 million, with 3 million more set to tap into their super.
The Reserve Bank added to these warnings last year by flagging that super’s rapid growth, increasing ties with banks, and expanding market footprint could amplify financial shocks in the future. It went so far as to caution that unexpected liquidity demands might force funds into synchronised asset sell-offs.
Meanwhile, APRA and ASIC have both grown frustrated with super funds for prioritising accumulation over supporting members in retirement.
It’s this backdrop, according to the Treasury secretary, that has made it necessary to explore new options.
What’s in the document?
The Treasury document, seen by InvestorDaily, builds on existing regulations and outlines three key principles for funds to adopt, including enhancing their understanding of members’ needs, offering modern retirement products, and improving information clarity to support informed decision making.
“The overall objective of the principles is to provide guidance on voluntary best practice beyond those requirements set out in the covenant and broader trustee obligations,” the document reads.
“The principles are not exhaustive, and trustees may wish to develop and offer retirement income solutions that extend on the principles to provide exemplar product and service offerings to their members. The principles do not replace or vary trustee obligations under existing law.”
However, concerns within the super industry revolve around the possibility annuities may be mandated.
The Super Members Council (SMC), which is involved in the consultations, has previously spoken out against the government mandating the use of annuities for members or specific cohorts.
In a statement issued a year ago, the SMC said: “After a lifetime of building savings, people should be free to spend their money how they choose in retirement.
“The government should not mandate the use of annuities for members or cohorts of members. Trustees are best placed to create investment strategies for their members.”
While ASFA told InvestorDaily it welcomes “further consultation on the role that longevity products can play”, it also highlighted that “trustees are best placed to understand the needs of their member cohorts”.
An extension of RIC
Phil Anderson from the Financial Advice Association Australia told InvestorDaily last week, the confidential document looks like an extension of the Retirement Income Covenant (RIC).
“The Retirement Income Covenant was based around super funds needing to have strategies for retirement and there’s [an area] about identifying particular cohorts, and offering solutions for them based upon that cohort. We would always argue that that works in the default world, it gives a solution for people, but it’s absolutely secondary to getting financial advice which is tailored to the individual’s personal circumstances,” Anderson said.
“I think this whole Retirement Income Covenant is about providing some sort of secondary-type solution where people may not otherwise access advice, and it works in the default context. What’s being proposed, what is being spoken about, potentially goes further than that, but at this stage, we don’t have any visibility of it.”
Anderson’s interpretation that the principles build on the RIC, seems to be correct, with the document itself alluding to it being an extension of the existing obligations set out in the covenant.
“The overall objective of the principles is to provide guidance on voluntary best practice beyond those requirements set out in the covenant and broader trustee obligations,” the document reads.
It remains unclear how consultations on the confidential document are progressing or whether it will shape Labor’s future super policy.
