TAL’s submission to the Retirement Income Covenant Position Paper

The release of the Retirement Income Covenant Position Paper (the “Position Paper”) represents an important contribution to the public policy dialogue surrounding the Australian retirement income system.

As one of Australia’s leading life insurers TAL protects people, not things, so we can help them look after what matters most, from their first job through to their retirement. Australian’s face different risks in the lead up to, and during retirement, compared to those in their working years. Particularly with respect to managing the risk of outliving their savings (longevity risk) and the increased risk of cognitive decline.

As with many in the industry, we were pleased to see the policy direction outlined in the Position Paper continues to embrace a flexible, principles-based approach. This is important as it will enable trustees to use their knowledge of their member base to develop retirement income strategies that are best suited to their members.

We have prepared this summary of the key points highlighted in our recent submission to this Position Paper.

Achieving sustainable scale

While retirement income strategies will vary across funds according to the membership base, most strategies will likely lead to the development of solutions that reliably and sustainably deliver income to members throughout their retirement. A critical success factor for reliability and sustainability in retirement income solutions is scale.

TAL believes that solutions that include pooling of longevity risk typically benefit from both scale (to smooth statistical volatility in mortality experience) and insurance expertise (to ensure appropriate management and distribution of mortality credits).

Reducing barriers to integrating innovative income streams

Following recent work completed with some of our superannuation fund partners on retirement solutions that balance flexibility, certainty and longevity, we recognise the value of integrated and easy to understand products which support members as they move through retirement and their expenditure needs change.

Currently, innovative income streams are treated as a separate product category to traditional superannuation account-based pensions and TAL sees significant benefit to more integrated product designs. These would allow for integration of longevity protection as a core feature of the product.

Managing retiree risk - effectiviness of retirement income strategies

The Position Paper helpfully refers to the need for trustees to “consider” risks to the stability and sustainability of their members’ retirement income, specifically longevity and investment risk, but leaves to the trustee’s discretion as to how these risks are managed.

TAL’s view is that any accompanying regulatory guidance should therefore be designed to remove any remaining barriers to trustees innovating, evolving, or expanding their available retirement income strategies and solutions beyond the existing account-based pension. This would empower trustees to innovate quickly with confidence, and reduce the likelihood that new solutions are not effective in achieving the policy or member outcomes of the Covenant.

Non-financial risks: cognitive decline

TAL notes that the previous Retirement Income Covenant position paper issued in May 2018 referred to the potential importance of trustees considering “whether and how cognitive decline may affect outcomes” when formulating a retirement income strategy. Whereas the current version of the Position Paper now focuses solely on financial risks.

Given the rising prevalence of dementia and cognitive impairment, and that an Australian retiring today at 67 is expected to live until they’re 87, spending 20 years in retirement¹, we suggest the Covenant specifically take into account the possibility of cognitive impairment as members age. While its onset and effects vary, cognitive decline is a normal physiological effect of ageing. This implies that trustees should consider this in their retirement income strategy and guidance, as well as supporting members to take early steps to account for the financial impacts should the risk eventuate.

Creating a legal environment where trustees can confidently provide their members with retirement guidance in their lead-up to retirement is of utmost importance to the success of the Covenant. Given the importance placed on this in the Position Paper, TAL supports affordable and scalable access to financial advice including the expansion of the intra-fund advice regime alongside the commencement of the Retirement Income Covenant.

TAL notes that the Position Paper views retirement guidance as being a continuum, ranging from factual information through to personal financial advice. Parts of this continuum are currently subject to policy uncertainty and challenges in the context of recent case law. Given the nuanced line between factual information and advice (general and personal) and legal risk arising from the possibility of crossing the line between what constitutes 'personal', as opposed to 'general' financial product advice, trustees are likely to approach the provision of guidance with considerable trepidation.

Get in touch to learn more

If you’d like more information about TAL’s retirement income solutions or wish to discuss this briefing note, please get in touch with your TAL Client Manager.

Please click here to read our submission to the Retirement Income Covenant Position Paper in full.

1: Australian Life Table 2015-2017