SMSFs hit with extra SIS Act obligation under new proposals

ASAP Advice founder Jim Hennington said these principles are part of an increasing government focus to better align the retirement phase of superannuation with the purpose of superannuation, which is to provide income for life in retirement.

Mr Hennington said while the bulk of the proposals apply solely to APRA-regulated super funds, the covenant requiring trustees to develop a retirement income strategy for members and regularly review it, will also apply to SMSFs.

The paper explained that the covenant will be introduced into the SIS Act, and operate alongside existing covenants in the SIS Act such as investment and insurance covenants.

“Requiring all superannuation trustees to develop a retirement income strategy will help to ensure appropriate, high-quality products are developed and offered to retirees. This should expand individuals’ choice of retirement income products and improve their standard of living in retirement,” the paper said.

As part of developing a retirement income strategy, Mr Hennington explained that the covenant requires trustees to consider factors such as maximising income for life for members, the potential life spans of members and the costs and benefits of managing longevity risk for members as a whole, and managing risks that affect the stability of income, including inflation.

It also asks trustees to consider how members will be provided access to capital and the expected member eligibility for the age pension.

“The factors specifically require trustees to focus on considering and optimising the competing objectives in retirement of delivering high income, risk management and flexibility, taking into account collective member preferences,” the paper said.

“Trustees should also consider how the potential cognitive decline of members may influence the member’s ability to make optimal decisions regarding the drawdown of income during retirement.”

Mr Hennington said the government wants individuals to be offered more choice and assistance to use products that may provide higher incomes and that more efficiently manage longevity risk.  

“This is not restricted to lifetime annuities, however, a number of other rule changes have occurred that allow and incentivise new retirement income products to emerge. For example, some products insure longevity risk but still allow for investment choice,” he said.

The paper also notes that while the government proposes to legislate the covenant by 1 July 2019, it plans to delay commencement until 1 July 2020.