On 21 September 2011 the Assistant Treasurer and Minister for Financial Services and Superannuation released an Information Pack (IP) describing the key elements of the Stronger Super reforms. These are:
- My Super – a simple low cost default superannuation product (available from 1 July 2013, with employers to make Superannuation Guarantee contributions for new employees who have not exercised choice from 1 October 2013 and trustees to transfer existing balances of default members by 1 July 2017)
- Super Stream – using data and e-commerce standards to make processing of super transactions easier cheaper and faster (mandatory for super funds from 1 July 2013 and for large and medium sized employers from 1 July 2014); and
- Improved Oversight – by providing regulators with the tools they need, such as a prudential standards making power and an enhanced data collection power for APRA.
The IP provided further details about each of these elements. This article concentrates primarily on My Super.
My Super announcements
For My Super, it had been announced that funds choosing to offer a My Super product would need to offer a single investment strategy with a clearly articulated targeted return and level of risk and a standard set of features and fees. The IP now indicates that some flexibility will be allowed. For example:
- discounted administration fees will be permitted in some circumstances;
- employers with more than 500 employees can have a tailored My Super product;
- merged funds may be permitted to retain distinct My Super brandings; and
- lifecycle investment options will be permitted.
A further key announcement was that there will be no need to apply for a separate My Super licence from APRA. Instead a separate My Super RSE authorisation will be required.
The Government has also decided not to proceed with a statutory office of 'trustee-director'. Instead the Government will focus on the introduction of certain governance duties for all trustees and directors. These are:
- a statutory duty for trustees and directors to give priority to the interests of fund members when that duty conflicts with other duties;
- strengthening the requirements of individual directors to manage conflicts of interest;
- increasing the standard of care, skill and diligence required of trustees and directors to that of a 'prudent person of business';
- clarifying the duties of individual directors to act honestly and exercise independent judgment; and
- a statutory duty for trustees to devise and implement an insurance strategy and to manage insurance with the sole aim of benefiting members.
Death and Total and Permanent Disablement (TPD) cover must be offered on a basis that allows members to 'opt out' within 90 days of joining the fund or on each anniversary of joining the fund. If opt out cover cannot be obtained at a reasonable cost, compulsory insurance cover must be offered for My Super products, while Choice products can elect to offer compulsory insurance or no insurance at all. Trustees will have a discretion whether to offer income protection insurance and on what basis.
There will be a standard default level of death and TPD insurance cover for My Super products, but members will be able to increase or decrease their cover without becoming Choice members.
The Government will expand the investment strategy covenant to include cost, tax and the availability of valuation information as factors to be considered when developing an investment strategy. There will also be a due diligence obligation in selecting and monitoring fund investments. Trustees will need to comply with all of the covenants (not just the investment strategy covenant) before they can rely on the defence in section 55(5) of the Superannuation Industry (Supervision) Act 1993 (SIS Act).
There will be specific rules for how performance fees can be paid to investment managers in relation to My Super products.
My Super Core Provisions
The exposure draft of the Superannuation Legislation Amendment (My Super Core Provisions) Bill 2011 contains some aspects of the Stronger Super reforms, particularly in relation to the core framework for My Super products. Specifically the Bill:
- defines a My Super product as a 'class of beneficial interest' that the RSE Licensee is authorised to offer as a My Super product. A 'class of beneficial interest' that is not a My Super product will be a Choice product;
- generally limits a regulated superannuation fund to one My Super product only;
- prescribes the characteristics of a My Super product (to be set out in the fund's governing rules); and
- limits the kinds of fees that can be charged for a My Super product and the basis on which they can be charged.
The Explanatory Memorandum (EM) contains a more comprehensive explanation of the proposed framework and notes that a number of aspects will be dealt with by subsequent tranches of legislation. Most significantly, the enhanced My Super trustee duties (which arguably form the overarching principles for My Super) remain to be seen. The EM states that these will include:
- a duty to formulate and give effect to an investment strategy at an overall cost aimed at optimising the best financial interest of members, as reflected in the net investment returns over the longer term;
- a duty to set an investment return target (over a rolling 10 year period) and level of risk appropriate for members of the My Super product; and
- a duty to actively examine and conclude whether the My Super product has access to sufficient scale (with respect to both assets and number of members) to continue to provide net investment returns that are in the best financial interests of members.
We consider that these key duties should have been included in the Bill because they are fundamental to any My Super offering and until they are legislated in final form, it will be difficult for trustees to design a My Super product. Also absent are details of the required insurance offerings for My Super and the exemption to allow defined benefit funds to continue to be employer default funds for Superannuation Guarantee purposes. Intra fund advice has also been omitted.
Other important aspects missing from the Bill are APRA's powers to make prudential standards and issue directions to trustees. Many of the Stronger Super reforms are reliant on APRA having standards making power, so again it is curious that the 'core provisions' have omitted this key regulatory tool.
This piecemeal approach to legislation runs the risk that the reform package is either incompletely or defectively enacted (for example, if later tranches are not passed by Parliament or are passed only with changes that are inconsistent with an earlier tranche).
Under the Bill, the Superannuation Guarantee (Administration) Act 1992 (SG Act) will be amended so that, from 1 October 2013, a fund can only be an employer's default fund for the receipt of superannuation guarantee contributions if it has a My Super product. Trustees will have an obligation to correctly allocate employer contributions to the correct product and failure to comply will be a strict liability offence.
It will also be a strict liability offence to offer a My Super product unless the trustee has a My Super RSE authorisation.
The Bill defines the characteristics of a My Super product to apply from 1 January 2013, which must be reflected in the fund's governing rules. These are:
- There is a single diversified investment strategy, with clearly identified assets.
- All members of the My Super product have access to the same options, benefits and facilities (such as call centres, member education, death benefit nominations, online information and intra fund advice, if offered).
- The same processes are adopted in crediting or debiting member accounts, except where an employer subsidy applies (in which case the subsidy cannot favour one employee over another).
- Income can only be credited to My Super accounts from the same My Super assets (except in respect of products with a lifecycle investment strategy).
- The only limits on the source or kind of contributions are those required by law.
- Without the member's consent, the member's My Super interest cannot be transferred to or replaced with another product except to another My Super product within the fund or as permitted by law.
- Pensions cannot be paid from a My Super product. (The EM indicates that My Super members who wish to commence a pension will need to become Choice members.)
The EM states that a lifecycle investment strategy will be permitted as long as it permits investments to be altered only according to the member's age.
In addition the only fees that can be charged to a My Super product are an administration fee, an investment fee, a buy sell spread, a switching fee, an exit fee and an activity fee. The buy sell spread, switching fee, exit fee and activity fee are expressly limited to cost recovery. The administration fee must relate directly to the administration of the fund, which the EM describes as including the recovery of costs relating to processing contributions, providing member communications, administering the trustee office and providing intra-fund advice. The investment fee is described as including the recovery of costs relating to engaging investment managers, performance based fees to investment managers, directly managing investments, transaction costs in buying and selling assets and asset consulting. It is not entirely clear how other expense recoveries under a trustee's indemnity are to be charged or whether a profit component is permitted for the administration and investment fees.
There are also strict charging rules for the permitted fees, which require:
- the same flat fee for all My Super members;
- the same percentage fee for all My Super members; or
- a combination of the same flat fee and the same percentage fee for all My Super members.
My Super authorisation
APRA will be empowered to grant authorisations to offer a My Super product to regulated superannuation funds with five or more members (other than eligible rollover funds). RSE licensees will need to apply for an authorisation for each My Super product they wish to offer.
Generally each fund will only be permitted to offer one 'generic' My Super product. There is an exemption that allows large employer groups (with 500 or more employees) to have a 'tailored' My Super product. There is also an exemption that allows an RSE licensee to apply for a separately branded My Super product in the circumstances of a fund merger. This exemption is currently framed around APRA being satisfied that there is 'material goodwill' in the original fund and that it would be in the best interests of the members of the fund to maintain a distinctive My Super branding. This is likely to be a problematic exemption to administer in practice, since APRA is not set up to make commercial judgments on consideration of 'goodwill'.
Applications for a My Super authorisation must be in an approved form, state the trustee and fund ABNs and be accompanied by the fund's trust deed and governing rules. APRA has power to request additional information.
APRA has 60 days to decide an application after receiving the application (or if further information is requested, from the date it receives the further information). There is power for APRA to extend this period by a further 60 days, but if the application is not decided within the extended timeframe, it is deemed to be denied.
APRA must grant a My Super authorisation if it is satisfied that:
- the fund's governing rules reflect the required characteristics for a My Super product;
- the trustee is likely to comply with the enhanced trustee obligations;
- the trustee is likely to comply with the fee rules; and t
- he trustee is not likely to contravene the contribution allocation rule and the prohibition on offering a My Super product when not authorised to do so.
'Satisfaction' would seem to be a high threshold and there are no factors for APRA to take into account in reaching its state of satisfaction. In our view, it would be preferable for the authorisation obligation to be expressed in terms of APRA having 'no reason to believe' that the trustee would not comply with the enhanced trustee duties and My Super core provisions.
Similarly, APRA has power to cancel a My Super authorisation where it is not satisfied, or no longer satisfied, of certain matters. This power is also broadly framed. Given the commercial significance of holding a My Super authorisation, we query if such broad discretions are appropriate.
What are the next steps?
We understand that APRA is encouraging industry to apply early and to engage in advance consultation with APRA about its proposed My Super product offerings. This suggests that trustees should start to consider the design of their My Super offerings, even though the detail of the enhanced trustee duties remains outstanding. Questions might include:
- What investment strategy should be offered for the My Super product? Will it be the existing default strategy or, given the proposed enhanced trustee duties, should a different strategy be designed?
- If it is a different strategy, how will this impact on the ultimate transfer of existing 'default' members to the My Super product?
- If it is the same as the current default strategy, how will the assets attributable to the My Super product be separately identified?
- Can death and TPD cover be offered on an 'opt out' basis at a reasonable cost? Will income protection cover be offered and on what basis?
- What fee structure will apply?
- Given the proposed focus on cost effective returns, what other facilities will be offered to My Super members?
- What trust deed amendments might be required? Will a separate membership category be created?
While it is still early days, planning for the considerable task of transitioning to My Super will need to be on the 2012 business agenda, at least if the Bill is passed before Christmas.