Final details of the Government's Stronger Super reforms by TurksLegal

NEWSFLASH 21 September 2011

Final details of the Governmentâ&#x20AC;&#x2122;s Stronger Super reforms Paul Cleary | September 2011 | Insurance & Financial Services

The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, has today (21 September 2011) released the final details of the governmentâ&#x20AC;&#x2122;s Stronger Super reforms in the Stronger Super Information Pack available at strongersuper.treasury.gov.au. In this article we examine the key reforms as they relate to APRA-regulated superannuation funds. The key reforms are:

MySuper From 1 October 2013, MySuper, designed to be a simple, low cost default superannuation product which covers the pre-retirement phase of superannuation will be introduced. Trustees are required to apply to APRA to be authorised for each MySuper product they wish to offer. Key details follow.

Investment strategy MySuper products will have a single, diversified investment strategy. MySuper trustees are to clearly articulate the targeted rate of return (over a rolling ten year period) and level of risk that the trustee has determined is appropriate for its MySuper members.

Fees A standard set of fees will apply to all MySuper members. However, funds will be able to offer discounted administration fees to employees of a particular employer where there are administrative efficiencies for the fund in dealing with the employer, with the discounted fee reported to APRA and published by the fund. Members will be able to compare fees of MySuper public offer funds. For employers with more than 500 employees, funds can offer a MySuper product designed to meet the needs of the particular workplace including a tailored investment strategy, member services and fees, the details of all such separately tailored MySuper products to be reported to APRA. The government will determine the parameters under which a trustee will be able to offer a discounted administration fee within the MySuper framework.

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Awards To be named in a modern award, a superannuation fund will have to offer a MySuper product. Fair Work Australia will review the default superannuation funds named in modern awards to ensure that they offer a MySuper product.

Defined benefits and legacy products Funds will not have to transfer member balances that relate to defined benefit entitlements or to certain legacy products.

Separate MySuper products Where there is a pre-existing and distinct MySuper or default product acquired by a fund as a result of a merger or takeover, a fund can offer separate brands of MySuper products within the fund. Funds will need to apply to APRA for approval to offer more than one brand of MySuper product.

Insurance If a MySuper trustee is unable to obtain opt out cover at a reasonable cost, the trustee must offer compulsory insurance (trustees of choice products can either offer compulsory insurance or no insurance). It is up to the trustee of an APRA-regulated fund whether to offer income protection insurance, on an optâ&#x20AC;?in or optâ&#x20AC;?out basis or at all. MySuper products will be required to provide a standard default level of life and TPD insurance. If offered by the trustee, members can increase or decrease their insurance cover without having to leave the MySuper product. Standard insurance cover may be replaced by a default insurance strategy tailored to meet the specific requirements of the employees of a particular employer.

Implementation From 1 October 2013, for an employee who has not chosen a fund, the employer must make contributions on behalf of that employee to a MySuper product. By 1 July 2017, funds will need to transfer the existing default balances of members to a MySuper product.

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SuperStream SuperStream is designed to improve the administration and management of super accounts by introducing the following measures.

New data and payment standards Under SuperStream, the government will legislate to mandate the use of the new data and payment standards for superannuation transactions and reporting to government.

Consolidation Measures will be introduced to help superannuation funds and their members locate and consolidate multiple member accounts. Lost and inactive accounts with balances under $1,000 and in eligible rollover funds are to be consolidated into the memberâ&#x20AC;&#x2122;s current active account unless the member opts out.

Contributions and rollovers In relation to contributions, from 1 July 2013 employers will be required to disclose on payslips when contributions are due to be paid. Also from from 1 July 2013, funds will be required to either issue six-monthly statements which show contributions made or report electronically to members on whether they have received or not received any superannuation contributions for that quarter. Contributions will be more quickly allocated to member accounts through the use of data and e-commerce standards. The likelihood of member accounts being lost due to incomplete or incorrect information being provided to funds will also be reduced under these standards. The SuperStream working group is continuing to work on the data and e-commerce standards with a view to having the proposed contributions and rollovers data standards available in early 2012. These standards will be mandated for superannuation funds from 1 July 2013 and will apply to large and medium sized employers from 1 July 2014, and for smaller employers from 1 July 2015 (as currently anticipated).

Noâ&#x20AC;?TFN contributions From 1 July 2013, where a contribution is not accompanied by a TFN (noâ&#x20AC;?TFN contribution), the employer will be required to forward the contribution to a fund. If the fund is unable to obtain a TFN and other identifying details within a specified time frame, it would then send the money to the ATO as part of the unclaimed money process.

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Implementation The implementation timeline for the data and e-commerce standards is as follows: >>

Early 2012: Data standards published and available for use by funds (voluntary uptake).

July 2013: Data standards and use of e-commerce becomes mandatory for APRA‐ regulated funds and SMSFs for processing rollovers and accepting contributions (provided by employers in the new format).

July 2014: Data standards and use of e-commerce becomes mandatory for large and medium employers making contributions.

July 2015: Proposed application of data standards and use of e-commerce to small employers subject to further consultation on impacts.

The implementation timeline for account consolidation is as follows: >>

July 2011: Funds can use TFNs as primary locator to find accounts within a fund.

January 2012: Funds can use TFNs to search the ATO’s current service for searching for lost accounts with member consent.

July 2012: Where a member has multiple accounts within a fund, funds would be required to consolidate these accounts, where possible.

July 2012: The ATO will provide a new online facility for members to view their active (but not their inactive) superannuation accounts that are currently reported to the ATO, in addition to their lost accounts and other superannuation monies held by the ATO (for example, unclaimed money). Funds will also be able to search the account information, with member consent.

October 2013: Funds will report all inactive accounts, lost accounts as well as active accounts to the ATO.

January 2014: Commencement of auto‐consolidation of lost and inactive accounts (two years without contributions or rollover) with a balance of less than $1,000 and accounts in eligible rollover funds.

July–December 2014: The enrolment process for new employees will be modified so that employees can actively consider account consolidation at this time. If the new employee does not exercise choice the default option would be to create a new account. Any lost and inactive accounts with a balance of less than $1,000 will be transferred into the new account through the auto‐consolidation process. The threshold for auto‐consolidation of lost and inactive accounts would be increased to at least $10,000 subject to a review of the threshold by the Treasury, ATO and APRA.

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Governance and regulatory matters Regulatory The government will make regulatory improvements for APRA, ASIC and the ATO to facilitate their oversight of superannuation.

Trustees’ and directors’ duties The government will not legislate to introduce the statutory office of ‘trustee‐director’ recommended under the Super System Review. Instead the government will legislate to: >>

introduce a duty for trustees and directors to give priority to the interests of fund members when that duty conflicts with other duties

strengthen the requirements for individual directors in relation to managing conflicts of interest

increase the standard of care, skill and diligence required of trustees and directors of corporate trustees to that of a prudent person of business

clarify the duties applying to individual directors of corporate trustees to act honestly and to exercise independent judgment

introduce a requirement for trustees to devise and implement an insurance strategy and impose a statutory duty on trustees to manage insurance with the sole aim of benefiting members.

Investment strategies The covenants to which APRA-regulated fund trustees must have regard when developing an investment strategy, at either the fund or investment option level, will be expanded to include its expected costs, expected taxation consequences, and the availability of valuation information.

Operational risk An operational risk financial requirement will replace the existing trustee capital requirements after a transitional period.

TPD claims The government will increase the time limit for members to lodge a TPD claim with the SCT from two years to six years, unless they have lodged a claim with their trustee within two years of ceasing employment (in which case the time limit will be increased to four years).

Voluntary code of governance There is to be a voluntary code of governance developed by industry in consultation with APRA, rather than a code coordinated by APRA.

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Diversification of investment options The government will ensure that choice trustees are required to offer a range of investment options sufficient to allow members to obtain a diversified asset mix if they choose.

SIS covenants The government will require trustees to exercise due diligence in the selection and monitoring of investment options. In relation to investments, trustees will be required to operate in accordance with all of the s 52(2) covenants, rather than just the s 52(2)(f) covenant before they can rely upon subsection 55(5) as a defence to liability.

Reasons for decisions Trustees will be required, on request, to provide reasons for their decisions to members and eligible third parties in relation to a formal complaint.

Further consultation The government will further consult with industry on a number of issues including: >>

a mechanism to allow the period for transferring existing default balances to a MySuper product to be extended in certain, limited circumstances eg where existing fiduciary obligations affect a trustee’s ability to transfer balances

the arrangements for offering a MySuper product, so as to be named in a modern award

the legacy products that will be exempt from MySuper transfers

an approach to ensure that insurance policy terms are disclosed in a standardised way

whether MySuper products should be required to include a post‐retirement offering at some time in the future and the framework that should apply

CGT consequences of transitioning to MySuper and whether CGT rollover relief is appropriate (submissions on this aspect may be made to cgt_super_roll‐over@treasury.gov.au by 21 October 2011)

the introduction of the data and e-commerce standards for small employers under SuperStream

implementation issues for the data and e-commerce standards under SuperStream

the administration of the account consolidation process.

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APRA’s and ASIC’s activities APRA and ASIC will continue to be involved in a number of facets of the implementation of the reforms including the following: >>

APRA will consult with industry to determine appropriate metrics for the standard reporting of the return and risk targets for MySuper products.

APRA will develop guidance for trustees on developing and maintaining a lifecycle investment approach for a MySuper product.

APRA will also consider whether directors of corporate trustees should be required to include in their deliberations the impact of their decisions on the environment, the community and the fund’s reputation through relevant guidance material.

APRA will develop a prudential standard which will set out the approach for determining the operational risk financial requirement for individual funds. APRA will consult at length with industry on this standard.

APRA and ASIC will address the issue of the disclosure of trustee’s proxy voting policies and procedures and their voting behaviour to members.

Other >>

At this stage, there will be no changes to the existing requirements in relation to binding death benefit nominations.

ASIC has set up a centralised superannuation website: http://www.moneysmart.gov.au

Next steps The Stronger Super legislation will be introduced in several parts over the coming months and in the first half of 2012. The government will consult with industry on each part. The draft legislation on the core elements of MySuper is expected to be released in the next few weeks. Before the end of 2011, APRA will commence consultation on the relevant superannuation prudential standards and the government will release the draft legislation giving APRA the power to make those prudential standards. The SuperStream working group is expected to publish the proposed contributions and rollovers data standards in early 2012. Also early in 2012, the government will establish a SuperStream Advisory Council to provide ongoing advice to government on the governance and oversight of the data and e-commerce standards. The government is also considering setting up an independent advocacy body for superannuation consumers and will consult with industry and consumer groups on the implementation.

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For more information, please contact: Paul Cleary Partner T: 02 8257 5760 paul.cleary@turkslegal.com.au