The Association of Superannuation Funds of Australia (ASFA) has addressed a number of criticisms regarding the preparedness of super funds to deliver on their responsibilities under the Retirement Income Covenant.
In July 2023, in a joint ASIC/APRA thematic review, the regulators said trustees need to make more progress on enhancing retirement outcomes for members under the Retirement Income Covenant (RIC).
It examined 15 trustees responsible for 16 funds, representing some $862 billion and over 5 million members, and their progress in implementing the RIC over the past year, including how they understood member needs, offered assistance to members, and executed their strategy.
“Overall, the review found that while trustees are improving their offerings of assistance to members in retirement, there is variability in the quality of approach taken and a lack of urgency in embracing the intent of the covenant,” the regulators said.
In its most recent submission to Treasury, ASFA sought to put these criticisms into perspective and argued that perhaps funds don’t deserve all the blame.
“The joint APRA and ASIC thematic review was conducted during the first year of the operation of Retirement Income Covenant and funds were still developing their proposed actions,” it stated.
“The drafters of the thematic review and of the [covenant] seem to assume that there has been failure by funds in regard to the provision of post-retirement products and guidance to members rather than objectively determining that there have been market failures. The modest take-up of innovative retirement products may have much more to do with a lack of demand rather than a lack of supply and marketing by funds.”
Looking overseas, ASFA said it is hard to identify practices that would be an improvement on the Australian system.
“Compulsory annuitisation (where it still applies) is more a problem than a solution in other countries. The general trend internationally has been to allow greater access to retirement savings rather than requiring the purchase of longevity products,” ASFA said.
“A number of countries actually currently look to approaches being adopted in Australia in regard to provision of retirement income and for the delivery of financial advice and guidance.”
The association further outlined that there are a number of “high-quality financial products” currently offered in the market which are generally available to fund members, which offer some or substantial protection against the financial consequences of longevity.
However, it highlighted that “relatively low take-up rates for such products by retirees has meant that there is not necessarily a clear case for every fund to offer these products or to develop equivalent products”.
“Fund trustees are under an obligation to make decisions which are in the best interest of all fund members,” ASFA said in its submission.
“It is inappropriate for the fund membership generally to cover a substantial part of the implantation and/or operating costs of products used by only a small minority of the members of the fund concerned.”
The association argued that protection against the financial implications of longevity is not the responsibility of the super sector alone, and added that low take-up rates do not reflect a failure of the system.
“For low to middle income households, sufficient protection often is provided by the age pension, in conjunction with home equity release facilitated by private providers or through the Centrelink administered Home Equity Access Scheme. Whether low to middle superannuation account holders need to take up a longevity product is generally a matter of individual choice rather than an objective requirement,” it stated.
Among its recommendations, ASFA called for “objective evidence” for any claims of deficiencies in the provision of these products.
ASFA also challenged the notion that retirees are underspending their super in retirement, noting that this is based on “flawed and dated evidence”.
ASFA stated: “One study cited related to data that was around 20 years old and which was for retirees who generally had little or no superannuation at the start of their retirement. Other studies cited suffer from a strong survivorship bias, with those still with superannuation at the time of their death typically only drawing down their superannuation at minimum rates.
“Such studies ignore the large proportion of retirees who currently exhaust their superannuation well before death. Serial citation of studies over a period of up to a decade makes the material less rather than more relevant as the studies become increasingly dated.”
The association proposed super funds should not be expected or mandated to default members into a product, and that funds and service providers should be allowed to develop innovative retirement income products rather than being required by government to only offer a standardised product set.
“The characteristics of fund members can vary substantially between funds leading to a need for a variety of products,” ASFA said.
Amid recent calls to have the performance of these products tested, the association pointed out that a test is “unlikely” to assist members “given the differing characteristics of longevity products in the market and varying needs and circumstances of retirees”.
Last year, ASIC shared that super funds face a “chicken and egg” situation when it comes to product development under the covenant while appearing at the Senate Economics References Committee.
Answering a question by Senator Jane Hume, ASIC Superannuation and Life Insurance leader Jane Eccleston discussed the barriers towards designing retirement income products focused on member needs.
She replied that there is a “wide range of issues” affecting development, which range from consumer literacy to product take-up.
“There are issues in terms of the business case. It is a bit of a chicken and egg situation. If you are not sure you are going to have a good take-up, can you actually invest in developing the product? There is that tension there.
“There’s probably also a consumer education issue as well. These are products that in some instances lock in people for a very long time. They feel very uncomfortable with that. Depending on where the market is, they can look expensive if people don’t fully value the longevity protection.
“So there are a whole range of barriers. I would say that some trustees have been developing products. People are watching and seeing how they are going to play out over time.”
