The Retirement Income Covenant – Opportunities for Policymakers,
Trustees and Members
Thank you for the opportunity to speak to
you today in this Colloquium on behalf of APRA. We are very supportive
of, and draw great insight from, the work of CEPAR in this and other
In considering the retirement income covenant
from the perspective of the prudential regulator and, indeed, other
regulatory perspectives, I was asked to talk about regulatory issues
Depending on your mindset, issues and
challenges can connote problems and hurdles to be overcome. However,
when APRA considers the retirement income covenant, we see beyond this
to the opportunities. Opportunities for: policymakers and regulators
to make meaningful headway into a wicked industry and societal
challenge in terms of efficient consumption of retirement savings by
Australians; trustees to best serve the needs of their members as they
reach retirement and to innovate and add value through their
offerings; and members to improve quality of life in the various
phases of their retirement, to understand and better manage their
income needs and risks in old age.
In the hurly burly of
implementation of proposed new legislation, these opportunities can be
easy to miss. But forums such as this provide the chance to step back
and reflect upon what a unique opportunity we have now to improve the
lives of millions of Australians in retirement.
So on that
note, let me run through how APRA views the opportunities, and how
we’re working with peer agencies to assist the superannuation industry
in harnessing these. What is APRA doing?
by industry participants and stakeholders to Treasury as part of its
consultation around the proposed covenant emphasised an appetite for
guidance from APRA in a range of areas, from matters that could
reasonably be interpreted as clarification of points of law, through
to insights into supervisory expectations.
Firstly, let me
make clear that APRA will not issue guidance that would seek to
clarify the intent of the law. The Explanatory Memoranda accompanying
legislation is the appropriate place to seek this information.
APRA does, however, see beneficial opportunity to outline its
expectations of trustees at commencement of the proposed new covenant,
which will assist trustees in meeting their obligations.
therefore intends to communicate with trustees once legislation has
passed, outlining our views on pathways to implementation. We will
wait for the legislative process to run its course, so we can focus on
potential changes to APRA’s prudential framework that target the
issues that matter.
APRA also sees an opportunity for
trustees to show leadership in driving the direction of strategic and
product innovation. We see an opportunity for industry participants to
observe, learn from and compete with each other in this space. And we
see great opportunity in regulators taking a measured approach to
evolving regulatory expectations in the initial stage of industry
implementation and iteration.
In time, trustees can expect
APRA to consult upon adjustments to existing and the introduction of
new prudential standards and guidance in support of the proposed
covenant, having observed evolving practices and evaluated necessary
Trustees can expect APRA’s laser focus on robust
governance, clear measurement of outcomes and the core tenet of
members’ best financial interests to be themes that run through our
policy-setting and supervisory approach.
To be able to
measure outcomes in the post retirement space, APRA will first need
meaningful data on retirement offerings. An area of focus, therefore,
will be on ensuring that we have appropriate data on retirement
offerings, which will be targeted in phase 2 of our super data
transformation project. What does APRA expect of trustees?
The proposed addition of a new retirement income covenant, to
be added to the existing covenants in the Superannuation Industry
(Supervision) Act 1993 (SIS Act) is a significant milestone for the
industry. This change will require trustees to innovate in support of
improving retirement outcomes for individuals, and to provide
superannuation members with more financial confidence in retirement.
Stepping back and looking at the opportunities for trustees,
the proposed covenant seeks to address concerns that members struggle
to develop effective retirement strategies on their own and, in the
absence of a strategy, take benefits as a lump sum or, where income
streams are selected, favour account-based pensions drawn down at
Set in this relief, the introduction of the
proposed covenant provides trustees with an opportunity to take a
quantum leap in making a difference to the quality of life of their
members in retirement.
As a trustee director, if this type of
change doesn’t inspire and excite you, you are likely to be in the
From a commercial standpoint, as my colleague
Helen Rowell outlined to attendees at the Australian Financial Review
Super and Wealth Summit earlier this month, this is a space that is
ripe for good innovation by those organisations with the acumen – and
possibly courage – to grasp the opportunity.
As with any
opportunity, I agree with Helen that this one is not risk-free. In
seeking to meet rising demand for retirement income products, it is
critical that the challenge to innovate is undertaken in a thoughtful
and considered way, without creating the legacy issues we have seen in
the past. We also do not want to see a proliferation of high cost,
poorly performing new retirement products, as seen in the choice
sector of the superannuation industry, where consumers are bamboozled
by having too many (often not very different) products to choose
Over the coming months, in support of the
implementation of the proposed covenant, it is likely that trustees
will start to formulate a retirement income strategy in anticipation
of the covenant becoming law. We think this will have trustees asking
themselves questions about what membership data they have and need,
how their product governance could be invigorated and whether the
Business Performance Review conducted as part of SPS 515 has revealed
opportunities for improved retirement outcomes.
all of the tools needed to make this work. The challenge is to take
the first step and then iterate from there.
that step, however, APRA does expect that it will be necessary for
trustees to give careful consideration to whether they have in place
the resources (be those human, technical and financial) needed to
implement and then continue to evolve a retirement income strategy and
take necessary steps to access those resources.
Taking up the
theme of APRA’s Margaret Cole’s challenge to the Fund Executives
Association at its Members’ Discussion Forum last week, this evolution
will also require trustees to consider whether their boards have the
right mix of skills and capabilities, to ensure their entities are at
the forefront of good practice – not waiting to be cajoled by
Consistent with the theme of many of APRA’s
public messages in recent times and, frankly, our private
conversations with certain trustees, the outcome of that careful
consideration – for some trustees – will be that this milestone is a
jumping-off point for their fund and its members, acting in their best
financial interests. If your board, or a board that you are advising,
is gulping at the work involved in meeting the proposed new covenant,
APRA expects you to do the right thing by members now, rather than
waiting. How is APRA working with other agencies?
earlier linkages between the proposed covenant, the business
performance review and the design and distribution obligations. You
can infer that there is a close linkage between APRA and the
Australian Securities and Investments Commission (ASIC) in terms of
the implementation of the proposed covenant, which also runs to
matters such as our agencies’ interactions with the provision of
quality financial advice and member-centric tools such as retirement
APRA and ASIC are also closely collaborating
with Treasury and the Australian Tax Office on both the regulatory
framework aspect of this set of reforms, and – importantly – in terms
of new product innovation, sandboxes and regulatory approvals. The
clear message from us is that we expect to see innovation and we are
open for business in considering well thought-through, risk-aware
products and concepts that will better serve members in retirement.
With that invitation to innovate, I will pass back to the
moderator and I welcome your questions.
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