The Government has released the draft legislation and explanatory memorandum for the third tranche of its Stronger Super reforms. Click to view our earlier Corrs In Brief publications for the first and second tranches of the Stronger Super reforms.
NEED TO KNOW
The third tranche of the reforms is contained in the Superannuation Legislation Amendment (Further MySuper and Transparency) Bill 2012 (draft Bill). The draft Bill makes substantial amendments to federal legislation including the Superannuation Industry (Supervision) Act 1993, the Superannuation Guarantee (Administration) Act 1992 and the Corporations Act 2001. The proposed amendments include the following:
- a ban on entry fees and the introduction of a criteria for the charging of other fees in superannuation, including rules for the charging of financial advice;
- a requirement that all superannuation funds provide life and TPD insurance to members (excluding defined benefit members) on an opt-out basis;
- a new power for APRA to collect information on a lookthrough basis;
- new disclosure and publication requirements for trustees of superannuation funds regarding a “product dashboard” (for each of the fund’s MySuper and choice products), portfolio holdings and custody arrangements;
- only MySuper funds will be permitted to be eligible as default funds in modern awards and enterprise agreements;
- certain exceptions to the MySuper regime will exist for members of defined benefit funds;
- a requirement for trustees to transfer “accrued default amounts” (defined as the amount of a member’s interest in the fund where they have not exercised investment choice) to a MySuper product by 1 July 2017; and
- new rules in relation to ERFs with additional obligations for trustees and directors of ERFs to provide a single diversified investment strategy.
Further reforms are expected to be contained in a subsequent tranche of legislation, including:
- a legislative override of governing rules that require a trustee to use a related service provider;
- additional governance measures;
- consequential amendments to deal with the nomination of superannuation funds in modern awards and enterprise agreements;
- consequential amendments to the Corporations Act to ensure the necessary obligations of that Act apply to MySuper products;
- consequential amendments to move requirements for fitness and propriety for actuaries and auditors from the existing legislation to the prudential standards to be prepared by APRA; and
- amendments to the Corporations Act so that RSE licensees that are also responsible entities of managed investment schemes are no longer exempt from the Corporations Act requirements to have available adequate financial resources.
OVERVIEW OF KEY PROPOSALS
Fees, costs and intra-fund advice
Ban on conflicted remuneration
The draft Bill requires an RSE licensee applying for a MySuper product to elect that they will not charge a fee on an amount in a MySuper product that relates to the payment of conflicted remuneration to a financial services licensee. If APRA is satisfied that the RSE licensee has failed to give effect to this election then they will have the ability to cancel an authorisation to offer a MySuper product.
The draft Bill establishes new criteria that will apply to any performance-based fee payable to an investment manager under a contract or arrangement to invest assets of a fund that are attributable to a MySuper product.
Performance-based fees must comply with new criteria regarding how the fee is determined. The criteria will apply to an arrangement entered into on or after 1 July 2013 if all or any part of the assets invested under that mandate is attributable to a MySuper product that the superannuation fund offers.
If there is a fee that is determined (whether in whole or in part) by reference to the performance of an investment made by an investment manager on behalf of the trustee of a fund then the terms of that arrangement must satisfy the following 5 criteria:
- if the investment manager is entitled to a fee in addition to the performance-based fee then this fee must be lower than it would be if there was no performance-based fee;
- the period over which the performance-based fee is determined must be appropriate to the kinds of investment to which it relates;
- the performance of the investment must be measured by comparison with the performance of investments of a similar kind;
- a performance-based fee must be determined on an aftercosts and, where possible, an after-tax basis;
- the performance-based fee must be calculated in a way that includes disincentives for poor performance.
A trustee may still have an arrangement under which assets attributable to the MySuper product are invested subject to a performance-based fee which does not meet the criteria if they can demonstrate the arrangement promotes the financial interests of the members of the fund that hold the MySuper product.
The draft Bill prohibits superannuation trustees from charging across the membership of the fund for providing personal financial product advice on specific topics and personal financial product advice on an ongoing basis. Additional types of personal advice that must be charged directly to a member are to be prescribed by regulations.
A trustee will be able to meet the cost of general advice and limited intra-fund advice (such as insurance or investment options) from the assets of the fund.
APRA may cancel an RSE licensee’s authorisation to offer a MySuper product, if on the advice of ASIC, it is concluded that the RSE licensee has not complied with these obligations.
General fee rules will apply to certain fees charged by regulated superannuation funds and approved deposit funds. However, these rules will not apply to SMSFs and pooled superannuation trusts.
Below is a summary of the proposed general fee rules under the draft legislation:
- Exit fees, switching fees and buy-sell spreads will be limited to cost recovery. Entry fees will be prohibited.
- The cost of financial advice that is provided to an employer of one or more members of the fund will be prohibited from being recovered through a fee charged to any member of the fund.
An administration fee charged to employees of a particular employer in a MySuper product that is different to the administration fee charged to other members must, in addition to being the same for all employees, be at least equal to the costs that reasonably relate to the administration and operation of the fund for those employees.
Regulations, if any, may prescribe in further detail ways in which these fees may be calculated on a cost-recovery basis.
The general fee rules will commence immediately after the provisions of the MySuper Core Provisions Bill that relate to authorisation. However, the general fee rules will only apply to funds from 1 July 2013.
Minimum level of life insurance for Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act)
Under the draft Bill, each member of a fund must be offered benefits that are supported by life and TPD insurance, subject to “reasonable conditions”. Unless they are a MySuper member, members must be given the ability to opt-out of these benefits.
The amount of life insurance given must be at least the minimum set out in the Superannuation Guarantee (Administration) Regulations 1993 (Cth) (SG Regulations). Trustees will not have to comply with the opt-out requirements should they meet the conditions prescribed in the regulations in relation to the taking out of insurance. It is intended that the regulations will provide an exception where a trustee is unable to obtain opt-out insurance at a reasonable cost.
Collection and disclosure of information
APRA’s data collection powers
Under the draft Bill, APRA will have the ability to collect additional data from RSE licensees. In particular, an obligation to provide relevant data will apply to related body corporates, custodians of an RSE licensee and other parties under a contract or arrangement with one of these entities or the RSE licensee itself.
The draft legislation enhances APRA’s power relating to the treatment of information. APRA will have the power to make a non confidentiality determination in relation to a specified part of a reporting document (or reporting document of a specified kind), as well as the whole of the reporting document (or reporting document of a specified kind).
Publication of MySuper data
The draft legislation introduces a new requirement under which APRA will be required to publish information on the returns, fees and costs of all MySuper products quarterly.
Publication of a product dashboard and other information
RSE licensees will also be required to publish a product dashboard for each of the fund's MySuper and choice products on a part of their website that is accessible to the public at all times.
The product dashboard will contain information on investment return target, the number of times the target has been achieved, level of investment risk, a statement about the liquidity of the product and a measure of the average amount of fees charged in relation to the product on a per member basis.
Funds will also have to disclose the remuneration of directors and executive officers. Regulations are expected to specify other documents to be published on a fund’s website to promote transparency.
Publication of portfolio holdings
The amendments will require RSE licensees to publish information regarding their portfolio holdings on their website. The RSE licensee must publish portfolio holdings as at the reporting day, which will occur once every six months on 30 June and 31 December, within 60 days after each reporting day.
Parties who invest assets of an RSE, or assets derived from assets of an RSE, will be required to notify the provider of the financial product that they must provide information to the RSE licensee that will allow the RSE licensee to comply with the requirement to publish portfolio holdings.
Modern awards and enterprise agreements
Modern awards will generally only be permitted to nominate a default fund.
The draft legislation introduces a new requirement that, subject to limited exceptions (eg the public sector superannuation schemes), default funds listed in modern awards must offer a MySuper product. This requirement is intended to ensure that employers are not obligated to make compulsory superannuation contributions twice. From 1 October 2013, employers will generally only be able to avoid penalties under the choice of fund provisions in the SG Act by making superannuation contributions, on behalf of those employees who have not chosen their fund, to a superannuation fund that is authorised to offer a MySuper product.
The Fair Work Act 2009 (Cth) (FW Act) will also be amended to provide that an enterprise agreement will only be able to nominate a fund (or scheme) that is either:
- a fund that offers a MySuper product;
- a fund that only receives contributions in respect of employees who have not chosen a fund if such employees are defined benefit members; or
- an exempt public sector superannuation scheme.
Defined benefit members
Generally, the MySuper regime is not designed to apply to defined benefit arrangements.
Under the draft legislation, defined benefit funds will be able to continue to be used by employers for the contributions of employees that do not have a chosen fund, subject to some limited exemptions.
Defined benefit members will not be able to be counted in working out whether an employer contributes to the fund for 500 or more employees with respect to an application for a MySuper authorisation.
Transition to MySuper
The draft legislation introduces a new concept to the SIS Act namely, an “accrued default amount”. This refers to those parts of a member’s interest in a fund in respect of which they have not exercised member investment choice. Trustees will be required to transfer accrued default amounts to a MySuper product by 1 July 2017. The MySuper product can be within the existing fund, or an alternative fund. These new provisions will override the governing rules of the fund (similar to the existing ERF provisions) and no liability will attach to a trustee who is acting in accordance with the transfer provisions.
Eligible rollover funds
The draft Bill requires trustees to obtain an authorisation from APRA to operate an eligible rollover fund (ERF). Only an RSE that is a regulated superannuation fund can operate as an ERF. Approved deposit funds (ADFs) cannot operate as an ERF.
If an application for authorisation has not been made, or if APRA has refused authorisation by 1 January 2014, then all balances in an existing ERF are required to be transferred into an authorised ERF or a fund that offers a MySuper product.
The draft legislation introduces new enhanced trustee obligations that will apply to a trustee of an RSE that has been authorised by APRA to offer an ERF. For example, the governing rules of the ERF must provide that the only purpose of the fund is to be a “temporary repository” for amounts transferred to the fund and the ERF must provide a single diversified investment strategy.
The enhanced obligations will also require a director of a corporate trustee of an ERF to exercise a reasonable degree of care and diligence for the purpose of ensuring that the corporate trustee carries out the obligation to promote the financial interests of the beneficiaries of the ERF.
The draft Bill represents the third tranche of the Stronger Super reforms. Comments in respect of the draft Bill are due by 16 May 2012. It seems some of the devil will be in the detail as many of the provisions in the draft Bill will rely on supporting regulations which have yet to be released.