This article was written by Nathan Hodge, Sarah Yu and Penny Sarantis.
Though there were no changes to the legislated increase in the rate of superannuation guarantee, the 2020-21 Federal Budget still packed a punch for the superannuation industry.
Taking onboard the Productivity Commission and the Royal Commission reports, the Budget introduces the Government's Your Future, Your Super reforms which have a significant focus on fund underperformance, transparency and with giving members the choice to "choose the best super fund for them".
Below we outline the key changes that will impact the superannuation industry.
1. APRA underperformance assessments
As of 1 July 2021, superannuation products will be subject to an annual performance assessment by APRA. MySuper products will be the first to be subject to assessment and will be required to inform their members of their underperformance by 1 October 2021. APRA will use the methodology it has adopted for its heatmaps.
From 1 July 2022, annual performance tests will also apply to 'trustee-directed products' (TDPs). TDPs are accumulation superannuation products "where the trustee has control over the design and implementation of the investment strategy" and the "investment strategy covers more than one asset class".
The annual performance test will focus on net (after fees) investment returns and is intended to become the primary method for measuring underperformance in the superannuation sector. There are a number of consequences of underperformance:
- underperforming funds will be listed as underperforming on the YourSuper comparison tool (see below); and
- upon two consecutive years of underperformance funds will not be permitted to accept new members (but can continue to receive monies for existing members) until it receives an assessment that the product is not underperforming.
What does this mean?
It is unclear precisely what investments are being targeted by TDPs; it appears to target all pre-mixed choice investment options but this ambit is very wide and given that "APRA will construct an individual benchmark for every MySuper product and TDPs based on an individual product's portfolio asset allocation" this will be a resource and time intensive exercise. It begs the question if such an exercise is warranted?
This is a particularly odd approach to underperformance given the recent amendments to trustee covenants on member outcomes and APRA's new prudential standards on member outcome assessments have not had time to impact member outcomes. This is without taking into account APRA's power to direct funds to merge and the new design and distribution obligations due to commence in 2021.
While these assessments focus on underperformance, it appears to be a further wedge to enable APRA to force fund mergers without APRA exercising its directions powers. The repercussions of:
- being listed on the YourSuper comparison tool and having to notify members of the fund underperformance for one instance of underperformance; and
- closing a product to new members for two consecutive instances of underperformance,
effectively means that a single instance of underperformance will have significant consequences that will be exacerbated by a further consecutive instance of underperformance. This may incentivise funds to adopt more similar investment strategies leading to less diversity (and less conviction) in superannuation funds' investment strategies.
It also reduces the growth of inflows into the fund and potentially increases outflows due to the negative information about the underperformance. Some funds could actually move into a net outflow position, which would create greater difficulties in addressing the underperformance.
2. Stapling of superannuation accounts
From 1 July 2021, an existing superannuation account will be 'stapled' to an employee to avoid the
creation of a new account when that person changes their employment. If an employee does not nominate an account at the time they start a new job, employers will be able to identify the employee's existing account via the ATO and pay their superannuation contributions to that fund. An employer identifying an employee's existing superannuation account will be a manual process for an employer until 1 July 2022 when employers will have the option of automating this process
If an employee does not have an existing superannuation account and does not make a decision regarding a fund, the employer will pay the employee's superannuation into its nominated default superannuation fund.
What does this mean?
Consistent with the Royal Commission and Productivity Commission recommendations, the reforms mean an employee will only be defaulted once into a superannuation account. If the employee does not engage further with their account, they will keep that account until such time as they choose to have their contributions paid, and their account balance transferred to another fund. In other words, the reforms tie default accounts to members, rather than employers.
This reform has significant implications for the corporate super segment of the superannuation sector as the reform shifts default superannuation from a workplace determination for each employment relationship to being focused on obtaining members when they first enter the workforce (as that superannuation account will be stapled to them for the remainder of their working life) or persuading a person to select a fund. This could place further pressure on the existing default superannuation system.
A consequence of this new measure may be that members will be "stickier" with a reduction in fund outflows; given a large proportion of the workforce is invested in MySuper products. This is because current members' accounts and current level of contributions will continue until the member chooses to move, rather than when the employer decides to go to tender to change default funds. With members "stapled" to their accounts the likelihood of employers tendering their default funds is likely to become a process of the past.
However, the biggest direct detrimental consequence of this measure is the impact to fees and insurance premiums. Corporate employer plans have for some time been able to negotiate better fees for their members and member insurance cover/premiums as a consequence of their scale. This is a concept and benefit that is engrained in current legislation (e.g. the large MySuper employer plan rules, and the MySuper administration fee discount). This may impact the offers that can be made given not all employees in a workforce will be covered by the offer.
There is also a potential problem with inadequate insurance cover, for example a worker commencing their first job in retail and who opts to enter into that employer's default fund may find that they are not validly insured when they move into a high risk job (such as police, mining, healthcare etc) as their default insurance cover to which they are stapled too doesn't provide cover for high risk occupations.
Trustees will also need to consider their existing arrangements when an employee ceases employment with a participating employer. If the employee is transferred to a personal-style product, they would remain in that product under this regime. This change could place greater pressure on trustees to ensure that those products remain appropriate, for example, that their fees and insurance are reasonable and appropriate for members. Otherwise, there could be consequences under the APRA underperformance assessments, member outcomes assessments and ASIC product intervention powers.
Member disengagement around super will make it difficult for new entrants to the superannuation industry as building scale will be dependent on the person becoming a member of the fund as a result of their first employment (perhaps benefiting those funds that obtain contributions for young casual employees) or attracting the individual member to select the fund rather than attracting the business of an employer and the scale of its entire workforce. In the longer term, this will benefit those funds that are the first superannuation fund for a member or can persuade a person to switch into their fund.
Stapling will also place greater pressure on marketing and advertising to attract members. In this regard, super funds may consider looking at how the "millennial" super funds have succeeded in attracting members.
3. Your Super comparison tool
The Federal Government announced that the ATO will develop systems so that new employees entering the workforce for the first time or wanting to review their superannuation will be able to select a superannuation product from a table of MySuper products through the "YourSuper portal." By 1 July 2021, the tool will:
- provide a table of simple super products (MySuper) ranked by fees and investment returns;
- link members to super fund websites where they can choose a MySuper product; and
- show members their current super accounts and prompt them to consider consolidating if they have more than one.
What does this mean?
The YourSuper comparison tool is aimed at making it easier for members to compare the fees and performance of super funds in the market, ultimately assisting members to make an informed decision about which super product best meets their needs and will make them better off in retirement. It should provide a more accessible tool for members than the APRA MySuper Heatmap. Considering the long term nature of superannuation, we hope that the YourSuper comparison tool will not unduly emphasise short term returns.
4. "Higher" best interests standards
Following recommendation 22 of the Productivity Commission the Government is seeking to clarify what it means for a trustee to act in members' best interests, by requiring that trustees must act in the best financial interests of members as of 1 July 2021.
The onus of demonstrating compliance with the new duty will be reversed so that trustees must establish that there was a reasonable basis to support their actions being consistent with members' best financial interests.
There will also be anti-avoidance measures to ensure payments from the superannuation fund to a third party (including an interposed or a related entity) do not undermine the intent of the change.
What does this mean?
Despite the multiple additions to the statutory covenants in the SIS Act to strengthen and clarify the duties that apply to superannuation trustee, lawmakers are yet again attempting to rework these statutory covenants by mandating that a trustee act in the best "financial" interests of members. This is despite the recently added obligation to promote beneficiaries' financial interests in particular their net returns (and existing long standing general law that already supports an understanding that trustees should act in a members, best financial interests).
It is curious to see how this amendment which now "limits" best interests to best financial interests only will affect the interpretation of the duty moving forward particularly given that Cowan v Scargill already demonstrates that "best interests" is a member's "best financial interests".
Perhaps more interesting is the need to demonstrate compliance with the duty of best interests. Some trustees have already had licence conditions imposed on them to this effect and so may well be in a better position than others to comply. Those that don't will need to consider what processes and documentation will need to be implemented for this new rule.
The proposed anti-avoidance rule is described so broadly, it is difficult to comment on its potential impacts and what it will look like. The industry will need to wait for further detail.
5. Changes to ERF rules
The Government has confirmed its intention to amend the Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020 (Cth) to make certain amendments to defer implementation dates of the closure of eligible rollover funds (ERFs) as follows:
- defer by 12 months the start date of the measure that prevents superannuation funds transferring new amounts to ERFs;
- defer the date by which ERFs are required to transfer accounts below $6,000 to the ATO to 30 June 2021;
- defer the date by which ERFs are required to transfer remaining accounts to the ATO to 31 January 2022; and
- allowing all superannuation funds to voluntarily transfer amounts to the ATO, rather than an ERF, in circumstances where the trustee believes it is in the best interests of that member.
What does this mean?
The deferral dates are welcomed providing trustees with additional time and flexibility to implement the measures. Particularly welcomed though is the amendment to allow trustees to transfer amounts to the ATO rather than to an ERF.
This could be a particularly handy option for trustees handling compensation from remediation due to exited members, the transferring out members who are no longer eligible for corporate plan membership or upon wind up as an alternative to a successor fund transfer.
6. Extension of COVID early access application period to 31 December 2020
In recognition of the adverse financial effects from the COVID-19 pandemic, the Federal Government announced that it would extend the application period for eligible persons to gain early access to a portion of their superannuation to 31 December 2020. Eligible Australian and New Zealand citizens and permanent residents were able to apply for early access up to a maximum of $10,000 of their superannuation before 1 July 2020. Now, they are also able to access an additional $10,000 until 31 December 2020 assuming that they are still eligible. The same eligibility conditions continue to apply.
What does this mean?
Though close to 3 million individuals so far have accessed their superannuation early under this measure, withdrawing over $35 billion from the superannuation system, ABS statistics show that although 57 per cent of those who had accessed their superannuation had used (or planned to use) it to pay household bills, mortgages, rent and other debts whereas a whopping 36 per cent planned to save it. Given these statistics, it leaves one wondering why this relief was extended and whether saving superannuation monies outside of superannuation is the best use of superannuation monies …
7. Expenditure transparency and increased disclosure ahead of annual member meetings
In addition to the "Higher" best interests standards, the Government has announced that it intends to legislate enhanced requirements for superannuation funds to disclose information about how they are spending members' money. The intention being to ensure not only that superannuation trustees' actions are consistent with members' best financial interests, but that superannuation funds are more transparent about their operations and expenditure as a means of achieving these outcomes.
What does this mean?
The Government will implement regulations that will require the notice of the Annual Members' Meetings to members to include key information about how members' money has been spent and managed. This disclosure is likely to include information regarding executive remuneration, marketing expenditure and related party transactions. Guidance will be provided to assist funds in presenting the required disclosure in a way that facilitates member understanding and ensure that there is consistency across the industry.
The push towards enhanced disclosure requirements is consistent with regulations over the last few years (RG 97, for example). However, given the volume of disclosure that is already required to be provided to members, it will be interesting to see what guidelines the Government has in mind to facilitate member understanding of the material. It also raises the important question of whether increasing the volume of information required to be provided to members (who are predominately already disengaged) is necessarily going to facilitate greater member understanding of trustee expenditure. It will, of course, allow commentators to apply public pressure to funds over matters such as related party transactions, remuneration, political donations, payments to industry bodies or trade associations and marketing and sponsorship
8. Deferral of Retirement Income Covenant
The Government has confirmed it will defer the commencement of the Retirement Income Covenant, announced in the 2018-19 Budget, from 1 July 2020 to 1 July 2022 to allow continued consultation and legislative drafting to take place during COVID-19, and for the measure to be informed by the Retirement Income Review (which has also been deferred despite the Panel releasing its final report to the Government in July 2020 which has not as yet been released to the public).
What does this mean?
As the deferral was announced in May in response to COVID-19, there will be additional time available to the industry to plan around the practical implications of the covenant. The Budget announcement provides certainty about when the deferral will end and the date of commencement of the covenant.
