APRA Deputy Chair Margaret Cole - Speech to the Conexus Retirement Conference

Good afternoon… and thank you David and the Conexus team for inviting us to join you today. 

Driving better financial outcomes for Australians in retirement is a priority focus for APRA and ASIC, as I’m sure it is for everyone here. Simone and I welcome the opportunity to share our perspectives, and what we expect from you, to ensure fund members have the support they need from their super funds, not just during their working lives but in their retirement years, as well.

The concept of setting aside savings for the future is hardly new; even the idea of a “nest egg”, which has traditionally featured prominently in superannuation marketing, was first used in connection with savings in Britain 500 years ago.

But it is the far more recent introduction of the superannuation guarantee in Australia that has ensured that even the most disengaged fund member can accrue super throughout their working lives.

As an industry you have generally done a good job in supporting your members in the accumulation phase. Government-introduced initiatives such as the default MySuper product and the annual performance test have provided further enhancements for members. 

Members in the accumulation phase share one simple, if obvious, need: to build assets to fund their retirement. How large their assets grow will depend on a range of factors, such as the size of contributions made by or on behalf of members, investment decisions - or lack thereof, costs incurred and fund performance. 

By sharp contrast, the needs of members in the retirement phase of superannuation are far more diverse, and understanding and supporting these needs will be complex. 

The challenge is magnified by the sheer volume of members heading towards retirement, with an estimated three million fund members to reach preservation age in the next decade. 

The surge of members moving towards retirement is resulting in strong growth in assets held in retirement products. As of March this year, just over $450 billion of superannuation benefits were held in retirement products, $53 billion more than a year ago. 

For an industry that has focused heavily on super accumulation for the past three decades, the need to pivot to a stronger and more nuanced approach to retirement could not be more pressing. 

You will have already felt the firm push from government, regulators and the community to focus, as a priority, on the retirement phase. The Financial Accountability Regime, which takes effect for superannuation next March, will further increase your accountability in this space. FAR requires you to appoint an accountable person who will take responsibility for member outcomes, including the delivery and execution of retirement income strategies.

Retirement income covenant thematic review and pulse check

The images we often see in superannuation advertising are of smiling, grey-haired couples enjoying their golden years. The implication being that fund members can expect a well-supported transition from the accumulation phase to retirement.

But last year’s APRA and ASIC retirement income covenant thematic review suggests things might not work out that way.

At this event last year, Jane Eccleston from ASIC and I were forthright in expressing our concerns about what the review revealed about the industry’s progress in implementing the covenant. The review identified a number of shortcomings, including gaps in trustees’ understanding of member needs, and a general lack of urgency to embrace the intent of the covenant.

We believe our concerns were heard or, at least, in part. The follow-up pulse check, published six weeks ago, showed that many of you have taken steps to better understand the varying needs of your member cohorts and have stepped up efforts to promote availability and access to retirement-focused information for members. This is promising progress although with just one in five planned improvements completed by mid-June, the pace of change could be a great deal quicker.

But it is the lack of progress in tracking the success of retirement income strategies, an area specifically called out in the thematic review report, that is most concerning. Three quarters of trustees told us that measuring retirement outcomes was a priority, and yet only limited number of success metrics were reported in the survey by trustees. 

It begs the question: Without specific and measurable success metrics, how can you measure the effectiveness of your retirement income strategies?

An effective retirement income strategy will not only set out what you are doing to support the varying needs of your members but how you intend to gauge whether your strategy is working. This will require clearly defined outcomes for each of your member cohorts and the ability to track and measure progress against those outcomes.

In our interactions with many of you, we have heard about the challenges you are facing in implementing the covenant, including uncertainty around the financial advice framework, insufficient member data and lack of member engagement and literacy. However, this shouldn’t hold you back from putting metrics in place now, to set a baseline from which to assess the success of your strategy and to address any weaknesses in a timely way.

Retirement income strategies and SPS 515

Another key call-out from the thematic review was the need to fully integrate retirement income strategies into your broader business planning and performance process.

APRA’s recently updated prudential standard for Strategic Planning and Member Outcomes (SPS 515) clarifies our expectations on this point. 

Under the new standard, you will be required to conduct a review of the appropriateness, effectiveness and adequacy of your retirement income strategy every three years, at least. 

You are also required to assess and demonstrate – every year – the outcomes achieved for members as a result of your retirement strategy, and to embed this practice in your business performance review process.

These new requirements clearly articulate sound business practices that I would hope many of you were already planning to do. 

Supporting diverse member needs

Under the covenant, you are required to support all members who are in or approaching retirement, regardless of the size of a member’s super balance, their level of engagement with super, or whether they have access to financial advice. 

All members, from high-net-worth individuals with independent financial advisers to low balance members who are fully disengaged with their super, need to be supported by your strategy. 

Even where members are receiving independent financial advice, the obligation to meet the retirement income covenant sits with you as the trustee, not with the adviser. To support these members, you need to have a firm understanding of the number of members using advisers and the types of retirement-related advice they are seeking. 

Many of your middle-income members may be actively engaged with their super but unaware of the range of retirement tools, products and assistance that you offer. Does your strategy reflect how you will support these members to take control of their own retirement outcomes?

But it is the cohort of disengaged members where the potential for the most impact lies. The default MySuper product serves to protect the financial interests of disengaged members in the accumulation phase. However, as these members head towards retirement, they will need to make critical decisions about what to do with their superannuation, including transitioning out of the accumulation phase. As of March this year, more than 750,000 accounts fully invested in MySuper products were held by members aged 65 or over.

Making it easier for your members to access information and to better understand their options – including the benefits of moving their super assets to the pension phase – should be fundamental to your strategy. Members who are disengaged should not also be disadvantaged.

We acknowledge that many of you are already making good progress to develop retirement strategies that address the diverse needs of your various member cohorts. In a few moments, Simone will touch on some examples of better practices that we are observing in the industry.

We encourage you to keep looking at ways to embrace the spirit of the retirement income covenant, and partnering, where it makes sense, with life insurers on longevity products, or with other innovative companies outside the super industry to meet the needs of your members.

Closing

Having touched on what we will expect from you, let me now say a few words about what you can expect from us.

APRA and ASIC work shoulder to shoulder on driving improvements across many aspects of superannuation. 

You can expect that we will continue to collaborate closely, whether acting jointly or through our own regulatory channels, to drive up outcomes to members in retirement. 

But ultimately, no one is in a better position to support your members than you. By acting with urgency, by deepening your understanding of members’ retirement needs, and by closing the gaps in your retirement strategies, you, collectively, can improve the retirement outcomes of the Australian community. 

With that, let me hand over to Simone Constant…