Up for Discussion - the retirement phase of superannuation

The Federal Government has turned its attention to the retirement phase of superannuation in an attempt to improve the retirement outcomes the system can generate for ordinary Australians. In a discussion paper released by Treasurer, Jim Chalmers, the Government is seeking community and industry views on how super can best provide security and income to Australians entering retirement (Discussion Paper).

The Discussion Paper picks up on the threads laid out in the Retirement Income Review of 2020 which found that there existed a ‘major misunderstanding’ that retirement income came from returns from investing super balances, ‘rather than drawing down those balances to fund living standards in retirement’. The review found that retirees are not maximising the benefit of their super, with the pervasiveness of the ‘nest egg’ view of super balances making retirees reluctant to draw down on their savings. The Discussion Paper looks to how these outcomes can be improved by focussing on: supporting members to navigate the retirement income system; supporting funds to deliver better retirement income products; and making lifetime products more accessible.

Sam McKenzie, Maddocks Lawyers

The Australian Superannuation system comprises both saving for retirement (accumulation phase) and delivering an income for members once retired (retirement phase). Since coming to power the Government has focussed on policy improvements designed to improve the accumulation phase, including increases to the superannuation guarantee (SG) and robust prudential standards and performance testing. Attention is now shifting towards optimising the retirement phase of super.

Shortcomings of the retirement phase

For many retirees navigating the retirement income system remains particularly challenging. The threat of outliving savings often causes retirees to unnecessarily self-insure by withdrawing the minimum amount from their superannuation, as opposed to implementing alternative strategies or products to suitably manage their retirement costs.

To address the numerous shortcomings of the retirement phase, on 1 July 2022 the retirement income covenant was introduced. This places the onus on trustees of super funds to regularly review and give effect to a retirement income strategy. The covenant obliges trustees to implement a comprehensive income strategy, which should assist members achieve and balance the following:

  • maximising retirement income;
  • managing risks to the sustainability and stability of that income; and
  • maintaining flexible access to savings.

Notwithstanding these obligations on trustees, a recent review of trustee’s retirement income strategies conducted by the Australian Prudential Regulation Authority (APRA) and the Australian Securities Investment Commission (ASIC) found that most trustees had not conducted an in-depth analysis of their members’ income needs in retirement and that trustees did not possess sufficient metrics to assess the retirement outcomes provided to members. 

While the Retirement Income Review of 2020 found that the Australian super income system is effective and sustainable, it also noted that the system can be improved by focusing more on the retirement phase. With that in mind, the Discussion Paper sets out a number of strategies to compliment the pre-existing government policies in place with a specific focus on the retirement phase.

Policy Proposals

The Discussion Paper, which was based on consultation with stakeholders across the superannuation industry and community, articulates several high-level policy proposals. These policy proposals are founded on three fundamental concepts articulated by the Treasury.

1.    Supporting members to navigate retirement income

The Discussion Paper discusses the challenges confronting retirees in making the mindset shift to view their savings as an amount to be drawn down to provide income for retirement, as opposed to a ‘nest egg’ to be held as capital, once the accumulation phase has concluded. The reasons for the retirees’ conservative mindset are numerous, however, the Discussion Paper emphasises the hinderance caused by the ‘choice overload’ that retirees face when entering the retirement phase, such as making complex cost management decisions and navigating intricate retirement income products and annuities available to retirees.

To provide support to members in navigating their retirement income, the Discussion Paper recommends:

  • further guidance, education and communication with retirees;
  • requiring funds and trustees to assist members by utilising their analysis of their members to ‘nudge’ members towards retirement income settings well suited to their circumstances; and
  • further efforts to simplify the retirement income system and provide information on the three pillars of the retirement income system (age pension, superannuation and savings and investments outside of superannuation) and how these three pillars may change and interact across the time of their retirement.

2.Supporting funds to deliver better retirement income strategies 

There is longstanding evidence that products and services in the retirement phase could be more accessible and more tailored to retirees’ needs. Despite this long held view, there have been minimal successful policy reforms that addressed the retirement phase. Since the Murray Inquiry into the financial system in 2014, only the innovative income stream and retirement income covenant reforms have been implemented. The Discussion Paper whilst acknowledging that advice and guidance may assist, points out that the advice is limited without suitable retirement income products in place to suit the retirees’ needs. Specifically, the Discussion Paper proposes the following:

  • standardised product disclosure framework for retirement phase products;
  • tools for comparison and performance; and
  • further guidance, education and communication with retirees; and
  • without identifying any specific areas of concern, reforms to existing regulation of retirement income products to ensure regulatory settings are fit for purpose.

3.Making lifetime income products more accessible

The final concept flagged is the need to improve the accessibility of lifetime income products in Australia. The Discussion Paper emphasises the small market for lifetime income products in Australia and then goes on to explain the cause for the relatively small market, noting numerous barriers for retirees that deter uptake of lifetime income products. These barriers include retirees concern of ‘wasting’ savings in the event of an early death, challenges in comparing retirement income products, limited flexibility once the product is purchased and counterparty risk regarding the fund or insurer. The Discussion Paper proposes the following policy responses enable funds to account for Australia’s ageing population:

  • support the reinsurance of longevity risk (being, outliving your savings) to ensure insurance is available to Australians at a reasonable price; and
  • trustees to develop at least one standardised retirement product which meets certain framework attributes and is provided to members as a ‘first offer’ to members.

What happens now?

The potential policy responses are in their initial stages, as such the Discussion Paper invites feedback from superannuation stakeholders on the challenges of the superannuation system and the proposed strategies put forth in the paper, with a focus on improving members’ experience in the retirement phase.

The closing date for submissions on the Discussion Paper is 9 February 2024. 

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial Practice Group.

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Daniel Hui
Daniel Hui
Senior Associate
+61 3 9258 3563

Qualifications: BCom, LLB (Hons), Monash University

Daniel is a member of Maddocks Tax and Structuring team. He has expertise advising on both direct and indirect taxes. He has represented private and publicly-listed companies, high net worth family groups and not-for-profit organisations in a broad range of tax and duty matters.

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