The Retirement Income Covenant (RIC) is a legal obligation requiring Australian super funds to better assist retiring members to maximise retirement income and provide them with expertise and tools to manage the risks of adverse market events.
- The superannuation system can seem daunting and complex for retirees.
- The RIC aims to ensure superannuation fulfils its intended purpose.
- There is a greater onus on trustees to ensure retirement living standards are increased.
Why the RIC?
Historically, super has been seen as lacking in responsiveness to retirees' needs around products, services and tailoring specific solutions that could meet their situation.
One of the more significant challenges for our retirement income system is to give retirees the confidence to spend more of their superannuation, and other savings, in the earlier years of their retirement while they enjoy better health.
| CONSIDER
The Retirement Income Review that preceded the RIC found around 90% of super balances weren't exhausted at death. This was contrary to the intended role of superannuation to fund retirement needs, rather than as a bequest to charities, offspring etc.
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Objectives and benefits
Since 1992, superannuation had been primarily focused on accumulation of balances right up to the date of retirement.
The Retirement Income Covenant (RIC) commenced July 1, 2022, and was developed to address issues related to the drawdown stage of retirement.
It is intended to help give retirees the confidence to spend more of their savings, while enabling choice and competition in the retirement phase of superannuation.
To achieve this, superannuation trustees must have a retirement income strategy that outlines how they plan to help members who are retired or are approaching retirement to achieve and balance three objectives, namely to:
- maximise their expected retirement income over the life of the member
- manage expected risks to the sustainability and stability of their expected retirement income
- have flexible access to expected funds during retirement.
What does it mean to retire?
The RIC is beneficial to retirees because it helps them overcome complexities around the superannuation system, such as:
- when to retire
- how to invest
- how to meet income needs in retirement.
| DID YOU KNOW?
Only recently did Parliament enact a legislative definition of superannuation's purpose, which is:
to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.
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