The 2020 Retirement Income Review noted the success of the super system in helping Australians save for retirement, but it also highlighted the need for better solutions that allow retirees to spend their super savings with confidence throughout retirement. The Retirement Income Covenant (RIC) which comes into effect 1 July, will bring retirees a step closer to achieving this.

The RIC requires super funds to help members maximise their expected retirement income while managing risks and providing flexible access to their funds. This can involve retirement products, and education or both. Each super fund must publicly share their RIC strategy by 1 July 2022.

How retirees make their money last

In retirement, super fund members are faced with choices about how to allocate their retirement savings and how much to spend as income. They must do this while facing two uncertain outcomes – how long they will live and how their investments will perform during that time. Put together, these two factors mean they cannot be certain their savings will last until they die.

Behavioral research tells us this uncertainty creates fear which leads members to take longevity protection into their own hands. This is why it’s common for retirees to conserve their super savings and drawdown from their account-based pension at the minimum rate. This was a key finding of the retirement income review, which has raised awareness about the issue of super fund members ‘self-hedging’ – spending less to preserve their savings. This perceived income gap can significantly reduce their quality of life, particularly in the early years of retirement when they’re in good health and able to enjoy travel and spending on experiences to share with friends and family.

The challenge: keeping all income elements in balance

The RIC recognises there is no one lever super funds can use to provide members with the income security they seek in retirement. Requirements of the RIC take into account the balance that must be struck across interdependent elements of a successful retirement income strategy.

Maximising investment returns is not the complete answer

It can be tempting to throw the weight of an RIC strategy behind investment risk. To some extent it makes sense for super funds seeking to maximise retirement income to follow investment strategies used to maximise the savings pool, as they would during accumulation. But the RIC avoids the trap of focusing on a better savings balance and/or an investment strategy as the sole solutions for income security in retirement.While good accumulation outcomes for members are certainly helpful and desirable, the RIC goal is to maximise expected income from a savings balance at retirement regardless of how high or low it is at that time. This calls for a solution that delivers predictable income to members during their retirement whether that term is three, 15, 30 years or more. It’s a solution that is required in addition to an investment strategy that maximises (risk-adjusted) returns from retirement income.

The opportunity: helping to give peace of mind for members

As the deadline approaches for super funds to complete their RIC strategies, members stand to benefit from better outcomes in the retirement phase of super, just as they have from the introduction of the Super Guarantee 30 years ago. In the time since then, we’ve seen Australians benefit from our world-class accumulation system. With the RIC, super funds have an opportunity to distinguish themselves in helping to meet the needs of their members to spend their super with more confidence that it will last as long as they need it to. 

Challenger are experts in longevity risk management. We offer a solution which allows super funds to provide members with income for life. Contact our Institutional Solutions team to find out more.