The Government’s ‘Retirement Income Covenant’ is off to a shaky start following initial reactions to its position paper. There is a complete absence of detail for super funds to ponder.
While welcoming the Government’s move on the subject and the aim for resulting legislation to be non-prescriptive in nature, three influential and apolitical organisations have raised questions about its value as a document for discussion.
Andrew Boal, partner of Deloitte Actuarial & Consulting, Tim Jenkins, the convenor of the Actuaries Institute’s Superannuation and Investments Practice Committee, and Nick Callil, head of retirement solutions in Australia for actuarial and asset consultants Willis Towers Watson, will each be actively involved in their organisations’ submissions to Federal Treasury.
Comments on the 20-page paper, ‘Retirement Income Covenant’, which was published on July 19, are due on August 6. At least no-one is complaining about having to digest too much information.
Deloitte’s Andrew Boal said that there was not much room for disagreement with the position paper. The disagreement is likely to come when it came time to look at details. “The real issue is how we provide guidance and advice to the mass market to support members in making better retirement decisions while protecting them from unexpected or poor outcomes,” he said.
Unlike the previous position paper on a retirement income covenant, in May 2018, there is no mention of anything like a CIPR (Comprehensive Income Product for Retirement) which led to 57 written submissions to Treasury, whose officials met with more than 100 organisations.
The 2018 paper said that consultation revealed there was broad agreement on the importance of what the CIPRs policy was seeking to achieve, but divergent views on the best way to achieve the objectives.
“In addition, some stakeholders stressed the importance of finalising the social security treatment of pooled lifetime income products first. The Government announced the treatment of the social security means test rules for new and existing pooled lifetime income products in the 2018-19 Budget. Having taken steps to remove barriers to the introduction of pooled lifetime income products, the Government plans to prioritise progress on the development of a retirement income covenant,” Treasury said in 2018.
Three years later, the new position paper’s discussion is unlikely to get bogged down in the specifics. They will have to wait for individual discussions with Treasury and/or, even, a Bill before Parliament.
Willis Towers Watson’s Callil believes that CIPR was too prescriptive, allowing little room to move. This paper was moving in the right direction because it was product neutral, he said.
“But will it be enough to change trustee behaviour let alone member behaviour? The key will be how prescriptive the suggestions in the paper are, once legislated.”
The paper notes the key problem with the task at hand which is that the more you try to tailor something to a member’s circumstances, either through an offering to the whole membership base or through a number of cohorts of member groupings, there is an increased risk of tripping over the various rules about giving advice.
“It appears the Government is aware of the problem and doesn’t want advice laws to constrain the development of cohorts and guided solutions by super funds to constitute giving advice,” Callil said.
The latest paper also refers to Treasury’s Quality of Advice Review in 2022, saying that industry feedback on the Covenant paper will help deliberation in that review.
The Actuaries Institute’s Jenkins also said that the Institute strongly supported there being a Retirement Income Covenant. “And we are encouraged that the Government is moving forward with the requirement that all funds have a strategy following the Retirement Income Review,” he said.
The Retirement Income Review, which contained only ‘observations’ rather than ‘recommendations’, was chaired by former Treasury economist Mike Callaghan. He handed down the final report in November last year.
The covenant position paper recognised that the issues were complex and by not being prescriptive this allowed more discretion to adapt. “But it’s so high level that it’s hard to object to the paper itself, and because of that it may be very easy for a fund trustee to comply with the covenant while making little substantive changes to current practices,” Jenkins said.
He suggested three areas which should be addressed:
- The objective of the Australian retirement income system has not been legislated. The paper is built on taking the position of the Retirement Income Review and it would be good if this or a similar clear objective was in legislation first.
- While the paper recognises that an effective retirement income strategy sees super funds providing appropriate guidance, they will be reluctant to develop such guidance until Treasury’s Quality of Advice Review is completed and some of the legal complexities around what constitutes personal advice are addressed.
- To make a strategy effective there is a lot of information about members that a fund doesn’t know, such as whether they are home-owners, have partners or their intended age of retirement. All these are important. If the fund makes efforts to obtain this information, it will then come up against the problem of how it uses this without being seen to provide personal advice.
“It would have been helpful if the Government was bolder and included more detail in the covenant,” Jenkins said.
Some other inferences in the position paper prompt questioning. “One interesting point,” Callil said, “is the way it makes it clear that bequests, other than to a dependent, such as a spouse, are ‘not to be given weight’ in the development of a retirement strategy. This aims to promote strategies which deliver income to members and their partners, but not those which might leave large bequests to children or others.”
In all, the Government was telling trustees that they had to have a retirement income strategy in place by July 2022, but they did not have to have the delivery mechanisms implemented, Callil said. However, they would be required to state their progress from year to year.
Deloitte, which has more than 100 people in its superannuation area in Australia as well as its actuarial department, believes the three main areas that need to be covered with retirement are:
- Product – having the right products for members of all cohorts, perhaps in a building-blocks format
- Advice – which has to be accessible to, and affordable for, all members, and
- Technology – clever use of artificial intelligence and ‘interactive interrogation’ may be required for mass customisation.
Russell Mason, Deloitte national superannuation leader, who has worked with industry funds, public sector and corporate funds since the late 1980s, said that “product” was probably the least important of those three areas.
“What I like about the Covenant is that it will encourage trustees to design strategies to help members. I tend to think that the product is the end result,” he said. “When you define cohorts, the narrower they are the better the advice will be. Super funds don’t have all the information they would require and what information they do have needs to be used better, with analytics.”
Boal said that a key area for funds would be communication with members and the take-up rates of any retirement products they have and will offer. There are always issues in dealing with legacy products, so it is important for any new products to gain sufficient scale quickly enough.
But he believes that, by the time the Covenant becomes legislation, there will be a new wave of innovative retirement products and more providers, compared with 2018 when the proposed CIPRs regime was on the cards.
He also suggested the need for extra attention on an annual assessment process – 12 months being a very short period for an actuary to propose to judge any performance statistics.
Boal said: “You have to have some metrics to measure your performance and outcomes against… What does success look like? You can increase the rate of member take-up of a new product by having it as the default for a cohort of members but that can open up the trustee to new risks in relation to annuites in particular. If a member wants to change their choice down the track, how portable will the product be? Will there be any form of ‘safe harbour’ for trustee defaults?”
Perhaps with the latest position paper the concern is not so much a case of the devil being in the detail, but rather, it’s nowhere to be found. In any case, and at some stage, super funds and the whole industry will have to own the detail in what they provide the members.