Last week the Government issued a set of proposed principles that would require all SMSFs to implement a retirement income strategy for members.
A new ‘Retirement Income Covenant’ for superannuation funds will be introduced in the SIS Act and will sit alongside existing covenants such as investment and insurance covenants, and be a fundamental obligation of trustees.
The retirement income covenant requires trustees to formally consider members’ retirement income needs and preferences and consider what product(s) maximise their standard of living in retirement.
These principles are part of an increasing government focus on the fact Australia’s retirement phase is under-developed and needs to be better aligned with the purpose of superannuation – to provide broadly constant income for life in retirement. In particular, the framework makes it clear that a 100% allocation to account based pensions is not considered an efficient way to provide lifetime retirement income.
The government wants individuals to be offered more choice and assistance to use products that may provide higher incomes and that more efficiently manage longevity risk. This is not restricted to lifetime annuities however. A number of other rule changes have occurred recently that allow and incentivise new types of retirement income products to emerge. For example, some products insure longevity risk but still allow member investment choice.
SMSF trustees will have to formulate, review regularly and give effect to a retirement income strategy that takes into account:
- maximising income for life for members;
- the potential life spans for members and the costs and benefits of managing longevity risk for members;
- managing risks that affect the stability of income, including inflation;
- providing members with access to capital;
- member needs and preferences for the factors above;
- the costs and benefits of developing a Comprehensive Income Products for Retirement (CIPR) in-house compared with offering a CIPR developed and managed by a third party or a combination of both in-house and a third party
- expected member eligibility for the Age Pension;
- whether and how cognitive decline may affect outcomes.
The optimal strategy may involve trustees offering products that are managed or provided by third parties if this is the most cost-effective approach.
Development of a retirement income strategy would be the only principle that would apply to SMSFs (out of a set of six new proposed principles for other superannuation funds). The government proposes to legislate the covenant by 1 July 2019 but to delay commencement until 1 July 2020.
The full consultation paper can be read here: https://treasury.gov.au/consultation/c2018-t285219/
A.S.A.P. is uniquely placed to help SMSFs and other SMSF suppliers to adhere to these requirements. Our digital advice tools and our partnership with Optimum Pensions and 10E24 ensures that our clients have everything they need to apply best practice in this area