RIC presents challenges in four areas

Understanding membership, design and distribution obligations (DDO), member education and advice, and compliance and governance are the for key areas trustees will need to focus on under the Retirement Income Covenant (RIC) regime, according to KPMG.

In a paper by Cecilia Storniolo, KPMG superannuation partner, and Katrina Bacon, KPMG superannuation director, they argued these four areas would be necessary as part of the legislative requirement to “formulate, review regularly and give effect to a retirement income strategy” as part of the RIC.

Expected to commence from 1 July, 2022, the RIC had three key objectives:

• Maximising the retirees’ expected income;
• Ensuring flexible access to capital; and
• Managing risks to the sustainability and stability of retirement income.

When it came to DDO, trustees would need to balance the different objectives of the RIC and this meant no single product would be able to effectively balance all three competing objectives of the RIC.

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“For example, a product that offers a guarantee may not provide flexible access to capital when needed,” they said.

“As a result of the inherent and competing nature of the objectives under the covenant, it is more likely that a successful retirement income strategy will need to include a combination of different retirement products as part of an integrated solution. This optionality is more likely to provide members with better solutions in retirement.”

For understanding membership, as funds merged and had broader membership bases they would be more likely to deliver better member outcomes if they segment their membership into cohorts to develop retirement solutions that better serve the needs of each cohort.

When it came to advice, trustees had to work around not being able to personalise to individual circumstances without complying with complex financial advice requirements.

“Funds which offer the full suite of financial advice services need to have appropriate oversight of their advice offering to ensure that all relevant regulatory requirements are met, including clear delineation and controls around different levels of advice, meeting best interests duties and permissible fee arrangements,” they said.

“Trustees will need to carefully design, implement and monitor their education, guidance and advice model, in line with their product offering, to maximise the value provided to members within this complex and highly regulated area.

“Law reform may need to be considered to facilitate this, and KPMG welcomes the Future of Advice Review scheduled for 2022 announced by the Government.”

When it came to compliance and regulation, the challenge for trustees was developing a retirement income strategy that integrated with its existing business plan.

“The monitoring and review of the strategy should also be integrated with their existing business plan in a way that minimises additional compliance burdens, which put more pressure on, instead of enhancing, the fund’s governance and the implementation of their strategy,” they said.