Editorials

The cookie cutter can’t be applied

SMSFs retirement income covenant

The imposition of a retirement income covenant on SMSFs was an unnecessary burden given they are set-up and run for that exact outcome by the fund member's themselves.

The SMSF sector received some good news last week when the federal government released the explanatory materials for the exposure draft of the legislation that will introduce a retirement income covenant for superannuation fund trustees.

Contained in the materials was the stipulation the retirement income covenant “does not apply to trustees of self-managed superannuation funds”.

When you think about what this measure aims to achieve, it really made no sense for SMSF trustees to be bound by it.

Basically, more initiatives are being introduced to the superannuation industry to accelerate the development of better income solutions for Australians who are in their retirement years. For a long time it has been recognised the country is experiencing a generational shift, with the majority of the baby boomer generation moving into their retirement over the past decade without an accompanied shift in focus from super funds.

In many ways this situation has led to the growth in the number of SMSFs as retirees look to find and manufacture a retirement income solution they couldn’t get from their existing super fund.

And if we accept this is the motivation for many individuals to set up an SMSF to control how they fund their retirement, then the application of the retirement income covenant to these people makes absolutely no sense.

It would be tantamount to the government imposing the need for this cohort to formally document their strategy as to how they will meet the fund members’, effectively themselves, retirement income needs. If the motivation of SMSF establishment I’ve outlined above rings true, the fund’s investment strategy, if properly drafted, should take care of that and any additional compliance requirement would be an unnecessary double up.

This anomaly had already been pointed out to Canberra by bodies such as the SMSF Association, which also expressed its concerns about the measure leading to an increase in administration costs. This would have come about from the need to extend the scope of the annual fund audit to take into account whether adherence to the retirement income covenant had been satisfied.

Further, other sector stakeholders raised concerns as to the role financial advice would have to play in the process when a question mark still hangs over the extent to which accountants, still the advisers SMSF trustees trust the most, can actually provide this service.

This is not to say the retirement income covenant is not a good idea for public offer funds. The diversity of their membership bases, with so many individuals still in accumulation phase, means measures like this will go some way to ensuring their members in retirement are not largely ignored. You might call it an initiative to confirm these trustees have the ability to walk and chew gum at the same time.

However, the implementation of the retirement income covenant has illustrated very well why a cookie-cutter, or one-size-fits-all, approach to legislation simply cannot work in certain circumstances for the superannuation industry.

It is then very encouraging our politicians and government agencies seem to have got this message.

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