Released earlier this month, the Productivity Commission’s report into the superannuation industry recommended that the Australian government should reassess the benefits, costs and design of the Retirement Income Covenant, a code that states super funds must continue to work in a member's interest after they retire.
The federal government released its Retirement Income Covenant Position Paper in May 2018, which contained six proposals for ensuring that super funds consider the retirement income needs and preferences of their members.
The government argued that the retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension.
While groups like Challenger and Colonial First State largely supported the government’s initiative, Morningstar fears that the Productivity Commission and upcoming royal commission final report could halt progress on the Retirement Income Covenant.
In a research note, Morningstar analyst Chanaka Gunasekera said that listed annuities provider Challenger, which last warned of a significant profit downgrade, faces risks as a result of the Productivity Commission’s recommendation that the retirement income covenant be reassessed.
The government’s covenant would require superannuation trustees to consider the retirement income strategies of its members.
“This included offering a flagship comprehensive income product for retirement, or CIPR. The CIPR is expected to comprise an account-based pension and a pool annuity-type product,” Mr Gunasekera said.
“However, there is now some uncertainty as to the progress of the CIPR due to the Productivity Commission report on superannuation published on 10 January. This report recommended a delay in introducing the retirement income covenant. It expressed concerns that the covenant may nudge members into products ill-suited to their longer-term needs.”
This included the requirement that all superfunds must offer a flagship risk-pool product.
“The commission is concerned that this requirement would force superfunds without capacity to create such a product to acquire it from a third party, such as Challenger,” Mr Gunasekera said.
“The commission is concerned there is currently few choices in the market for these products.”
The government and the opposition have both indicated that they do not intend to formally respond to the Productivity Commission report until after the publication of the royal commission final report on 4 February.