Parliament recently passed the retirement income covenant reforms. These require superannuation trustees to have a strategy to assist members to achieve and balance objectives relating to maximising retirement income, managing risks to the sustainability and stability of retirement income, and having flexible access to capital.
Trustees have flexibility on how to implement the new covenant. Both ASIC and APRA expect implementation to be a continuous improvement process as trustees embed retirement income considerations into their business operations. As we set out in our joint letter, ASIC and APRA do not intend at this stage to issue detailed regulatory guidance on how trustees should implement the covenant.
ASIC and APRA want to see trustees taking a thoughtful, evidence-driven approach to the retirement challenges facing their members. This article poses some questions trustees may wish to ask themselves as they prepare for the retirement income covenant, with a focus on actions they could take to assist their members.
Product design: What members’ needs are met by your retirement products?
We expect many trustees will already be reviewing their retirement income product offering in preparation for the retirement income covenant. Strong product governance will greatly assist trustees with implementation of the covenant. The covenant does not require trustees to offer new types of products, though some trustees may choose to do so having regard to the needs of their members.
The design and distribution obligations (DDOs) provide a useful framework for evaluating whether retirement income products are meeting members’ needs and being held by the members for whom they are intended. The member outcomes obligations will have required trustees to have evaluated the quality of the outcomes delivered by retirement products. These regulatory obligations together with the retirement income covenant require trustees to adopt a member-centric approach.
In reviewing their retirement income products, or developing new products, trustees should be asking themselves:
- What type of member is each product suitable for? How will it meet their financial situation, objectives and needs?
- What type of member is this product not suitable for?
- How should we monitor how well our products are meeting members’ objective needs in practice? What feedback from our members can we access to help?
- What adjustments should we be making to the product?
There are several ways that the DDOs and the retirement income covenant could be implemented in a complementary manner. These include using the determinations of products’ target markets (developed for the DDOs) to help identify gaps in the product offering for retiring members. Alternatively, trustees can use the retirement income strategy to frame retirement product development and to help identify the target market for products. There will also be complementarities with trustees’ member outcomes assessment obligations, including the obligation to monitor and review product offerings and member outcomes on an ongoing basis.
Trustees in the process of developing innovative income stream products can test concepts and seek guidance from the Cross-Agency Process for Innovative Retirement Income Stream Products. This is a voluntary process that enables product developers to engage with ASIC, APRA, the ATO and the Department of Social Services. It can be used at any time, though our experience has been that the process can be especially valuable in the early stages of product development.
Product distribution: Who are your products being offered to?
We expect trustees are also considering their distribution strategies for retirement income products. This is another area in which the covenant complements the DDOs. In meeting their DDOs, product issuers need to document how they will distribute their products to consumers in the target market and put in place controls to ensure products are distributed in line with the target market determination.
Distribution has many aspects that can influence members’ choices, such as marketing, financial advice and the timing, content and delivery method of communications by trustees. These elements often come together to form a ‘choice architecture’, which can have a powerful effect on the decisions members make about products.
In considering the distribution of retirement income products trustees should be asking themselves:
- How should we monitor whether products are being distributed in line with the target market determination?
- How should we harness insights from member outcomes in practice, as well as members’ feedback and complaints, to identify ways to improve our distribution practices?
- What is our strategy for assisting members in situations where none of our current retirement income product offering is likely to be well-suited for a member’s needs?
Trustees are encouraged to reflect on some of the adverse outcomes for members that could arise where members end up in products that are manifestly unsuitable, and what steps they should take to minimise these risks. For example, a member may suffer significant detriment if they did not understand that a retirement income product into which they had invested their entire balance did not allow for lumpsum withdrawals.
Member guidance: Are your communications fit for purpose?
We know that many trustees find it challenging to engage members on superannuation and retirement. However, this is one of these areas where trustees taking a thoughtful and member-centric approach reaps rewards.
A recent review of consumer-facing documents issued by 20 large super funds suggests a significant scope to improve even the basic readability of trustees’ communications. Ethos CRS found that the average readability score of these documents was just 45.6 of out 100, with no fund scoring above 50.
The importance of refining communications by testing and monitoring how they are used and understood by members in practice is highlighted by the evidence that consumers do not always use disclosure materials in the way issuers might have intended. Report 632 Disclosure: Why it shouldn’t be the default, which ASIC published jointly with the Dutch Authority for Financial Markets, is compelling reading on this point. It includes a range of examples of how disclosures can struggle to compete for consumer attention, backfire in unexpected ways, or fail to deter consumers from products that are unsuitable for them.
We are very much aware that disclosure on its own is insufficient for achieving good member outcomes. However, this does not mean it is unimportant. Effective communication involves more than just meeting the minimum disclosure requirements in the law and not being misleading or deceptive. ASIC wants to see trustees engaging with and assisting members in a way that supports genuine understanding, avoids confusion, and leads to good consumer outcomes.
In considering how to communicate with members about retirement income products and other retirement issues, trustees should be asking themselves:
- What are the biggest risks for a member that could arise if the member doesn’t read fund communications? What measures are in place to ‘error-proof’ missed or misunderstood messages that have important consequences for consumers?
- Is the information tailored and delivered in a way that considers members’ different circumstances and needs?
- Does our communication strategy consider and monitor how we can layer or deliver information in a way that motivates and helps members to access useful content without being confused or overloaded?
- How can we identify situations where communication may not be an adequate tool on its own to assist consumers?
- Are there systems in place to identify and deal with situational or other vulnerabilities (for example, is the communication method or content appropriate for members with low English language literacy, are unable to access online services, or are suffering from cognitive decline)?
- How should we track how members are using the information and whether they are using it as intended? What other evidence could we draw on to develop more effective communications, such as behavioural studies?
Monitoring how members engage with the fund and use the communications can also assist trustees to evaluate how their broader ‘choice architecture’ is operating, and to support a continuous improvement approach to implementing the retirement income covenant.
Financial advice and anti-hawking: Are you operating within the law?
In distributing products and engaging with members as part of their retirement income strategies, trustees still need to comply with other key consumer protections in the law. These include the financial advice and anti-hawking regimes. As the Explanatory Memorandum for the retirement income covenant has made clear, trustees can implement the retirement income covenant without breaching these and other obligations.
Good quality and affordable advice can make a significant difference to members’ retirement. Some trustees may choose to include an advice offering in their retirement income strategy. Where they do, they should be asking themselves:
- Will we provide financial advice to members as part of our retirement income strategy? If so, what sort of advice (for example, general or personal advice)?
- If we provide personal advice to a member, what steps should we take to ensure recommendations are being made in their best interests?
- How should we provide advice – through the fund website or digital tools, a salaried adviser, or by partnering with an external advice licensee?
- What steps should we take to ensure that we will not inadvertently provide unlicensed or non-compliant advice?
- How will advice be paid for? If we are giving intra-fund advice, is the advice related to topics that fall within the scope of intra-fund advice?
- What controls should we put in place to ensure advice given to members is compliant with our legal obligations?
Trustees are not required to give financial product advice to members in order to meet their retirement income covenant obligations. It is worth emphasising that there are also a range of ways trustees could assist their members without providing advice. For example, they can ask themselves:
- Can we provide factual information to members about retirement income topics, including factual information about products?
- Can we draw on or link to existing resources provided by a reputable source, such as the Moneysmart website (which has information and calculators to help interested consumers learn more about super and retirement)?
- Can we rely on ASIC’s relief to provide members with a superannuation calculator or a retirement estimate? (discussed below)
Whatever the approach is, care must be taken not to pressure members into making an instant decision about whether to purchase a retirement income product by contacting them when they did not make any request nor give consent to it. Specifically, the anti-hawking obligations prohibit the making of unsolicited offers of financial products to members or potential members in realtime. But these obligations do not prevent a trustee from contacting a member who is approaching retirement with information about different retirement income products that the fund has, nor do they generally prevent trustees from making offers or invitations to apply for products through non-real-time channels, such as written communication.
ASIC has a range of regulatory guidance (listed at the end of this article) that can help trustees understand their financial advice and anti-hawking obligations. ASIC is also engaging with and supporting the Government’s Quality of Advice Review, which is currently examining the regulatory framework for financial advice and will have regard to the retirement income covenant as it applies to financial advice. The Review is currently seeking submissions on an Issues Paper by 3 June.
Superannuation forecasts: Can you use simple tools to help members?
Superannuation calculators and retirement estimates can be useful tools for helping members to think about how their superannuation could form a part of their retirement income. Trustees can consider how these tools could be used to assist members as part of their retirement income strategies.
ASIC currently offers relief from personal advice obligations for trustees who provide these tools to their members. A key principle is that forecasts given under our relief should not be used to advertise or promote specific financial products. Trustees wishing to make product-specific recommendations will need to do so consistent with their financial advice obligations.
We are currently reviewing the scope of ASIC’s relief, with our proposals set out in Consultation Paper 351 Superannuation forecasts: Update to relief and guidance which was released on 18 November 2021. Our review is considering ways to give trustees greater flexibility to align the assumptions they use in forecasts with the products they offer, and to clarify how retirement estimates could be given in an interactive manner. We plan to put in place a new relief instrument and regulatory guidance by the end of June.
As an interim measure, ASIC has decided to extend the existing relief for retirement estimates to the end of 2022. Without doing so, this relief would have expired on 1 April. This temporary extension should give industry certainty and will allow trustees to rely on the existing relief when giving 2021-22 periodic statements to members.
The coming months will require trustees to think carefully about what actions they should incorporate into their retirement income strategies. There are no easy answers as to how Australians should engage with their retirement income, but we think putting members front and centre of any strategy is a good place to start. We encourage trustees to make use of the flexibility afforded to them in the new obligations when rising to this challenge.