By Mark Bland, Partner and Emma Higgs, Special Counsel

Two years on from the implementation of the Retirement Income Covenant (RIC), trustees of registrable superannuation funds (RSE licensees) are still falling short of regulatory expectations, according to ASIC and APRA in their joint Report 784 Industry Update: Pulse check on retirement income covenant implementation (Industry Update).  RSE licensees who have failed to respond to the expectations set by the Regulators will need to ensure their retirement income strategy is fit for purpose and fully integrated into their business plan by 1 July 2025 when the new prudential standard SPS 515 Strategic Planning and Member Outcomes commences.

RSE licensees may well need to invest additional resources to ensure they have in place the tools to conduct member outcomes assessments for beneficiaries in or approaching retirement in compliance with the new standards. In this article we provide an overview of the incoming requirements and offer suggestions on steps RSE licensees can take to prepare for the new standards and reduce the risk of being the target of an inevitable enforcement action.

Industry observations

The Industry Update was based on a survey of how RSE licensees were tracking against the Regulators’ expectation that they would urgently take action to address gaps identified in Report 766 Implementation of the retirement income covenant: Findings from the APRA and ASIC thematic review published in July 2023 (Thematic Review Report).

The Regulators note that RSE licensees are actively engaged in the areas identified in the Thematic Review Report as requiring improvement, such as increasing their understanding of member needs by interrogating existing data and identifying and addressing data gaps and updating or expanding website content and member communication or advice offerings.  However, the Regulators were concerned that insufficient progress has been made to measure and track the effectiveness of their retirement income strategies, indicating that many RSE licensees will need to enhance their efforts in this respect to comply with SPS 515. The Regulators consider that a mix of specific, measurable, qualitative and quantitative metrics are critical for monitoring the appropriateness and effectiveness of the retirement income strategy.

SPS 515, SPG 515 and the RIC

The updated SPS 515 and prudential practice guide SPG 515 were released two days after publication of the Industry Update. Effective from 1 July 2025, they strengthen the existing standard and expressly integrate the RIC obligations into the requirements of setting strategic objectives, conducting business planning, financial resource management, performance monitoring, outcomes assessment and transfer planning.  APRA describes SPS 515 as “the core prudential standard in the business operations pillar of APRA’s superannuation prudential framework”.

Retirement income strategy review

An RSE licensee’s strategic objectives must be informed by certain matters, including the retirement income strategy.  The retirement income strategy itself is subject to a review of its appropriateness, effectiveness and adequacy at least every three years, and performance outcomes against the strategy will form part of the annual business performance review.  As retirement income strategies were required to be implemented on 1 July 2022, the review will be required on 1 July 2025.  SPG 515 sets out APRA’s expectation that the review will consider whether the retirement income strategy:

• is fit-for-purpose, factoring in any changes to the RSE or the RSE licensee’s business operations or membership profile;
• responds to changes in the external environment and relevant risks, including longevity, investment and inflation risks;
• achieves the outcomes sought for members;
• can be evaluated, including if there is enough quality data and information to make decisions and measure success; and
• makes appropriate provisions for any relevant service providers which offer retirement assistance to members.

Expenditure management

The RSE licensee’s business plan must specify the key initiatives the RSE licensee will undertake to achieve its strategic objectives, including those in its retirement income strategy, and the expected costs, how they will be funded and the expected results.  Strengthened requirements relating to expenditure management will apply to all expenditure, including that related to the formulation and implementation of the retirement income strategy, and will require a sound rationale based on expected contribution to member outcomes.

Member outcomes assessment

The RSE licensee’s business performance review will be required to assess the outcomes achieved for different cohorts of beneficiaries, including beneficiaries who are retired or approaching retirement (and sub-classes of those beneficiaries).  APRA expects RSE licensees to articulate member outcomes including retirement offerings and assistance available to beneficiaries, member services, engagement and education and identify whether outcomes for specific member cohorts are appropriate.  For members approaching or in retirement APRA considers that target outcomes should be underpinned by evidence-based member-needs assessment considering the financial profile and future spending needs of members using internal and external data to support outcomes for retired members.

Challenges

It is not surprising that RSE licensees are challenged by their obligations under the RIC.  It requires them to address complex issues arising from Australia’s aging population and maturing superannuation system.  Australians retire with their own unique situation, assets and income and experience their individual retirement needs and objectives differently.  The RIC puts the onus on RSE licensees to understand and address the retirement needs of a large, motley cohort of retirees with a life expectancy, on average, of 20 years post preservation age[1] .

This is requiring RSE licensees to extend beyond their traditional role of protecting trust assets and complying with obligations to beneficiaries under the terms of the trust and proactively assist beneficiaries to achieve and balance competing retirement objectives, which can be impacted by matters that are unrelated to the superannuation fund administered and managed by the trustee.

The broader, systemic challenge for RSE licensees is a fact that was widely acknowledged in the Senate Economics Legislation Committee hearing on the Superannuation (Objective) Bill 2023 – that superannuation is only one part of the retirement system.

A frustration amongst RSE licensees is that they do not have the tools to do the job they are being asked to do. They may well sympathise with Sisyphus, rolling a boulder up a hill for eternity.  The revised SPS 515 and associated SPG 515 and the examples provided by the Regulators in the Thematic Review Report and Industry Update go some way to demonstrating to RSE licensees how to identify the tools they need, and how they can utilise the tools they do have, applying the lessons learned from strategic approaches to member outcomes in the accumulation phase, to those in retirement phase.

Prudent expenditure

While RSE licensees are being urged to invest the resources necessary to meet their obligations under the RIC, they need to balance this with their obligations under other covenants, particularly ensuring they are acting in the best financial interests of beneficiaries and acting fairly between classes of beneficiaries. This will require RSE licensees to set specific and measurable metrics and monitor member outcomes against expenditure.  It also brings issues of cross-subsidisation into scope, which should be considered in an assessment of the appropriate basis of setting fees attributed to different products and product options, and the appropriate use of reserves.

With the pace of innovation and AI-generated technology, there is an opportunity to adopt digital tools to address some of the problem spaces that have been identified by the Regulators since the RIC came into effect.  Whilst the risks of pursuing digital solutions and the associated development costs must be carefully considered, digital tools can assist with collecting and analysing data, informing product development and design, and defining services, communication and advice strategies.

The Regulators observed in the Industry Update that RSE licensees with greater member accounts and assets in retirement or approaching retirement are making better progress than the rest of the industry.  Yet all RSE licensees are subject to the same obligations and all RSE licensees will need to ensure that they are delivering targeted assistance to beneficiaries in or approaching retirement to assist them to achieve and balance their retirement objectives and effectively monitoring member outcomes.

From cradle to grave

Segmenting beneficiaries into meaningful cohorts and defining sub-classes of beneficiaries in and approaching retirement will assist RSE licensees to meet the requirements of the RIC and SPS 515.  Segmentation enables RSE licensees to consider the different types of assistance that can be offered to each sub-class so that product, education, services and communications can be tailored specifically and cost effectively, and so that member outcomes can be effectively assessed.  The Regulators expect RSE licensees to monitor take-up rates and member feedback to assess whether the assistance offered is useful and fit for purpose.

Sub-classes of beneficiaries in or approaching retirement could be defined taking into consideration account balance, age, gender, marital status, home ownership, employment status product choices risk profile, retirement age, postcode and other demographics. This can then be analysed against draw-down patterns, member engagement and decision-making and help RSE licensees create the member-centric retirement income strategies that are expected by the Regulators to support each member’s journey to retirement and beyond.

RSE licensees can (and are expected to) start on this path now, despite the shifting regulatory landscape of financial advice.  Many RSE licensees are understandably cautious in their approach to advice in retirement, as solutions to the issues are not provided in the current tranche of reforms (Delivering Better Financial Outcomes Bill) and, while they are promised for the second tranche in 2024, an election is also looming.  ASIC’s RG 244 provides helpful examples on providing general and limited personal advice to retirees, although it was last updated in 2012 and, since then, the High Court (in Westpac Securities Administration Ltd & Anor v. Australian Securities and Investments Commission) has cast a shadow over the capacity of RSE licensees to give general advice at all, considering how much they know about their members, without intentional strategies. Focusing on fund membership on a segmented basis can assist in navigating those challenges.

Looking ahead

APRA and ASIC will continue to monitor industry progress on the implementation of the RIC and expect RSE licensees to adopt a member-centric approach in monitoring and reviewing members’ retirement outcomes, which must be integrated with the business plan and members outcomes assessments from 1 July 2025.  The Regulators will look to leverage all regulatory tools available to ensure trustees are improving retirement outcomes for beneficiaries. After these repeated warnings, enforcement action cannot be far away.

If you would like our help to ensure your retirement income strategy meets the expectations of the Regulators and that you are ready for the commencement of SPS 515, please contact us.

[1]  Australian Institute of Health and Welfare – Life Expectancy (based on ABS data).