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Retirement income streams

Retirement Income Covenant (RIC)

Section: 14.7

14.7 Retirement Income Covenant

What is the Retirement Income Covenant (RIC)?

The RIC is a legal obligation that requires Australian superannuation funds to have a strategy to assist members who are in, or approaching retirement, with their retirement income needs.

Why was it needed?

The Financial System Inquiry (2013-14) found that the decisions people faced at retirement were complex and that many did not seek any professional advice. At the same time the Inquiry noted that the market for retirement income products was underdeveloped.

While MySuper product options offer relatively simple default products for the accumulation phase of superannuation, when it comes to retirement, people are often left to manage multiple financial objectives and risks themselves.

The challenge facing retirees is to know how to maximise income from their savings while meeting planned and unplanned expenses-all while managing longevity risk. With many lacking the confidence to draw ongoing sustainable amounts to support their preferred retirement lifestyle, they instead draw only small amounts from their superannuation and so end up with a large amount of their savings unspent.

What is the outcome of the RIC?

The RIC is a policy aimed at getting more superannuation funds to find ways to help their members with their retirement income choices.

Superannuation funds must develop a retirement income strategy that outlines how they plan to assist their members who are retired or are approaching retirement to achieve and balance the following three objectives:

  • maximise their retirement income
  • manage risks to the sustainability and stability of their retirement
  • have some flexible access to savings during retirement

The strategy(ies) developed will likely reflect the broad membership of each particular superannuation fund, but they may also divide their membership into groups of members (or cohorts) and make different provisions for each group, rather than individual members. As such, strategies will consider factors such as average member superannuation balances, if members are partnered or not and age at retirement.

With this guidance from superannuation funds it is hoped that retirees will gain the confidence to spend more of their superannuation and other savings, in the earlier years of their retirement while enjoying better health.

Last modified: Wednesday, June 28, 2023