Thought Leadership

An update on the Retirement Income Covenant

24 Aug, 2021

The retirement income covenant will create a new obligation on super fund trustees to formulate, review regularly, and give effect to a retirement income strategy. 

What is it? 

The retirement income covenant will create a new obligation on super fund trustees to formulate, review regularly, and give effect to a retirement income strategy. The strategy will set out the trustee’s plan to assist its members to achieve and balance three objectives: 

  • Maximise retirement income; 
  • Manage risks to the sustainability and stability of retirement income; and 
  • Allow some flexible access to retirement savings. 

APRA, ASIC and the ATO will regulate trustees’ compliance and will provide information on how trustees can comply with the retirement income covenant.  

When does it start? 

Trustees will have to have their retirement income strategy in place by 1 July 2022. However, some stakeholders are suggesting to Treasury that a retirement income strategy should allow for up to two more years for full implementation if needed. The Government’s position on this is not yet clear.  

Do any particular products have to be used as part of the strategy? 

No. The Government has been very clear that there will be no product prescription involved. However, certain combinations of products lend themselves to a more effective implementation of the three key objectives than others. Over time, it is expected that best practice strategies will emerge as the preferred approach for particular cohorts of members.  

Do funds have to give guidance to members about the strategy? 

It seems like there will be no specific requirement on trustees to provide advice or guidance to members, but where they choose to do so the advice laws, DDO, sole purpose test and the SIS Act more broadly will apply as normal.  

Will the advice rules change to facilitate the covenant? 

No. Not initially anyway. There is an understanding that the Quality of Advice Review to be conducted by Treasury in 2022 will be the first opportunity for the Government to look at whether any changes are required to be made to the advice regime.  

Will the covenant change things much? 

This will depend on a number of factors, including member preferences and effective implementation by ASIC and APRA.  

How will it apply to SMSFs? 

SMSFs will also be required to have a retirement income strategy.  

A bit more detail: 

The strategy can be for all members in retirement or for separate cohorts of members in retirement.  

The strategy will identify the retirement income needs of the members of the fund and present a plan to build the fund’s capacity and capability to service those needs.  

Trustees will need to evaluate the products they offer to their members and determine whether their product offerings can be improved to better meet the needs of their members. 

The objective of maximising retirement income includes the consumption of capital over the course of the member’s retirement.  

The objective of managing risk to the sustainability and stability of retirement income means managing the risk that retirement income will not be reliable and durable over a member’s retirement.  

Market risk and longevity risk both need to be addressed in the strategy 

The objective of allowing some flexible access to savings must not include consideration of a bequest motive on the part of the fund, but a member can plan to leave a bequest.  

The Government will review and refine the member outcomes arrangements for retirement income products to ensure their design supports measuring and comparing how retirement products deliver retirement outcomes.  regularly, and give effect to a retirement income strategy.