Proposed Retirement Income Covenant may change the way we use our superannuation


Nearly 30 years ago compulsory superannuation was introduced. This led to many people reaching retirement age with a substantial nest egg. In 2019 the median superannuation held at retirement was about $180,000 for men and $137,000 for women.

Superannuation has proved an effective way to create wealth, but this has not translated into retirement income. Most people die with 90 per cent of their superannuation unspent – superannuation benefits our descendants, not ourselves.

That was never the government’s intention.

As Groucho Marx famously said: “Why should I care about posterity? What’s posterity ever done for me?”

Retirees tend to be conservative about money. As a result, most of us take only the minimum income from our super, especially during a travel ban.

The government plans to change this. The treasury is currently framing a Retirement Income Covenant. This is expected to come into operation on 1 July 2022. It will set out the obligations of superannuation trustees (including trustees of self-managed funds) to assist their members to increase their retirement incomes.

In a submission to Treasury, COTA’s CEO, Ian Yates said the purpose of superannuation is to generate optimum retirement income, rather than ending up as bequests. Yet the popular understanding of superannuation remains that of a nest egg for old age. 

One COTA member commented: “It’s a nest egg for old age, but when we get to our old age, we don’t use it because we might need it at a yet older age. Then we die and can’t use it anyway.”

Most superannuation funds at present do not support retirees to effectively manage their superannuation when they retire. Retirement involves multiple decisions and difficult trade-offs, such as: when to retire; whether to keep their money in superannuation and how to invest their savings, both in and outside of superannuation. When and how to draw down savings and plan for their future expenditure and capital needs. 

The long-term implications of these decisions, and their interactions with other systems like tax, social security, aged care and housing, make it very challenging for retirees to determine an optimal retirement income strategy on their own. 

The Covenant focuses on how superannuation funds might balance the need for income, manage risk (specifically investment and longevity risk), and allow flexible access to member’s funds for out-of-the-ordinary purchases such as new vehicles, age-friendly housing, residential aged care or overseas trips. 

It requires super funds to refer retirees to a retirement solution or recommend a retirement solution for the them to consider. Other retirees might want to be referred to a financial planner or to choose their own retirement solution themselves.

COTA says that the proposal that trustees should have the option to provide their members with income projections is unacceptable. 

“Reporting on estimated retirement incomes is fundamental to cultural change and should be a prescribed component of all Trustees strategies.

“We strongly believe that the provision of high-quality financial advice is critical to the objective of this legislation,” said Mr Yates.

Retirees have only ever been encouraged to save as large a lump sum as possible. Therefore, people often do not use the savings accrued by members through the superannuation system to provide retirement income.

Superannuants need help to balance uncertainties such as how long they will live and what financial storms lie ahead, especially the potential cost of residential care, with their need for present consumption.

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Frank Smith was trained as an agricultural scientist in the UK, moving to WA in 1974 and shortly afterwards began lecturing at WAIT (now Curtin University) in soils and agronomy. In 1979 he joined the Agriculture Protection Board in charge of publications and media relations, studying part time for a degree in Journalism. In 1992 he spent a year as a visiting professor at the University of Missouri-Columbia. Later he ran a small publication company with his wife Mary-Helen. He then began freelance writing, editing and book indexing. He has written articles for more than 40 magazines in four continents and indexed more than 20 books. In 2007 he started writing for Have a Go News and gradually reduced his writing for other publications. He later took over the subediting, ensuring Have a Go News is consistent in style and highly readable. He and Mary-Helen live in a passive solar home in the Perth Hills with a varying collection of quendas and native birds.