By Mark Spring*

After spending years accumulating savings in superannuation accounts, many Australian retirees face the dilemma on what to do with their nest egg once they leave the workforce.

It’s a question many Australians face with they reach retirement age but the answers aren’t always clear.

To help address this issue, the Australian government legislated in 2021 that super funds develop strategies to address the broad retirement needs of their members. The strategies must balance the objectives of maximising income, managing risks and allowing flexible access to funds in retirement. 

The so-called Retirement Income Covenant (RIC) came into effect on 1 July 2022 with a mandate that super funds develop flexible strategies for members to maximise retirement income and allow access to funds. 

Two Stages

Up until now, super funds focussed on the ‘super’ stage which is about accumulating the highest balance possible to support people so they can meet their financial obligations in retirement. Many members can be disengaged in this process, especially when retirement can feel like it’s far in the future. 

Retirement is about how members may consume their savings while balancing the fact that there are various unknowns – like their health, life expectancy and the possibility of outliving their savings.

Members have a choice to either leave the money in the super system by rolling it over into an income stream (like an account-based pension) or to withdraw the money.   

Members in the ‘retirement’ stage are often more engaged as they need to understand how their retirement savings, plus government entitlements and other assets are able to support them and generate the required retirement income to cover life’s expenses. 

How it will help

The RIC requires trustees to implement a framework as part of a strategy to ensure they understand members’ needs and to create solutions in line with those needs.  

The financial solutions offered within the framework need to balance the need to maximise retirement income, while managing risk and ensuring members are able to reasonably access their capital when required.

The RIC also states that the strategy needs to address both the planning and retirement needs of members.

In order to develop the solutions and support required to meet member needs, trustees will be required to have strategies in place to better understand their members’ financial position.   

This is a significant change as the information held by super funds about their members has historically been limited to their account balance, contribution history and personal details. The need to understand what other assets they have, including other super accounts and non-super assets (like the family home, shares and other investments) is critical in order to build an assessment of what support or other solutions are required to be made available by the trustee to maximise members’ retirement income.  

This also coincides with the need to ensure compliance with the personal advice rules and how this can be achieved without the need for comprehensive advice.  

Super funds are now busy assessing their priority initiatives which will be determined by membership demographics. The focus for the majority of funds has been to ensure compliance with the new covenant requirements which include the development of a framework/strategy and publication of a summary on their website.  

Better support in retirement

Those people planning for retirement, or already in retirement, should be excited about the additional services and solutions that will be made available to them over the next few years.  

As there will be more resources allocated to understanding member needs, preferences and concerns, this should drive the evolution of support, services and solutions. The key challenge is for trustees to assess the most efficient and cost-effective way to provide them.

The introduction of the RIC is a significant step in ensuring super funds provide their members with the required support and solutions in both the super accumulation and retirement stages of their lives.   

Given the fact these requirements are new and regulations are not specific in what has to be done, there will be significant variations in how different trustees approach this need. 

Members should therefore spend time comparing the retirement stage solutions on offer to ensure their needs are being met and, where appropriate, move to the right fund and the right products for them.  

If you require further advice on your retirement needs, then contact one of Active Super’s financial planners. Feel free to contact us on 1300 547 873 or make an appointment to see how we can help you live your best life.^

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*Mark Spring is the Head of Strategic Implementation at Active Super and has over 25 years of experience working in financial services.