COVID-19 and early access to super: what it means for superannuation funds and their members

The coronavirus (COVID-19) pandemic has caused significant disruption across business and society. In response to the economic pressures of the pandemic, the Federal Government has announced a range of stimulus measures to support individuals, households and businesses, including changes to rules regarding access to superannuation. What exactly will change under these new measures and what should superannuation funds and their members consider as they prepare for these changes?

The Federal Government recently announced measures to address the impacts of COVID-19. The measures were contained in its Coronavirus Economic Response Package Omnibus Bill 2020 (Omnibus Bill) and associated Bills (Associated Bills) which were introduced and passed by the Federal Parliament on 23 March 2020. The Omnibus Bill and Associated Bills received Royal Assent swiftly on 24 March 2020.

The response included two specific changes to rules regarding access to superannuation, which we explore in detail in this article, namely:

1. Temporary early release of superannuation benefits.
   
   
2. Temporary reduction of superannuation minimum drawdown rates.

1. Temporary early release of superannuation

Under the proposed new early release rules, eligible individuals affected by COVID-19 will be able to access up to $20,000 of their superannuation; up to $10,000 in the 2019-20 financial year and up to another $10,000 in the 2020-21 financial year.

The amounts accessed will be treated as non-assessable non-exempt income and therefore are tax free. These payments will not impact any Centrelink or Veterans’ Affairs payments or any other income or means testing. This stands in contrast to existing rules regarding the early release of superannuation.

To be eligible, a person must demonstrate at the time they apply for early release, that they are:

a) unemployed; or

b) eligible to receive any of the following under the Social Security Act 1991:

i) jobseeker payment;

ii) parenting payment;

iii) special benefit; or

c) eligible to receive youth allowance under the Social Security Act 1991 (other than on the basis that the person is undertaking full‑time study or is a new apprentice); or

d) eligible to receive farm household allowance under the Farm Household Support Act 2014; or

e) on or after 1 January 2020 they were made redundant, or their working hours were reduced by 20% or more (including to zero); or

f) for a person who is a sole trader—on or after 1 January 2020 their business was suspended or suffered a reduction in turnover of 20% or more.

How can individuals apply for early access to their super?

Individuals will be able to apply from mid-April and must apply through the Australian Taxation Office (ATO), as superannuation funds are not able to accept applications directly. All applications must be made within six months of the amendments commencing. The provisions are designed to commence the day after the Omnibus Bill received Royal Assent – which means the provisions will be operative from 25 March 2020 and applications must be made by no later than 25 September 2020.

It is proposed that the ATO will make a determination on the application and provide the determination to the individual’s superannuation fund, advising the fund of the amount to be released. Changes made to the operating standards under superannuation legislation then require the fund to release the amount to the member as soon as practicable.

Individuals will be required to apply online to the ATO using the MyGov website (which is already under considerable strain).  We understand that the processes for the ATO to receive applications and issue the necessary determinations approving the early release are still being developed and that the online application for the early release benefit will not be available until mid-April 2020.

It is important to note that if a person requests less than $10,000 for either financial year, they cannot then make another request for a release in that financial year.

How should superannuation funds prepare?

The new early release rules will impact superannuation funds from an economic and operational standpoint over the 2019-2020 and 2020-2021 financial years.

Liquidity Risk

The new rules will obviously have the potential to increase the amount of money superannuation funds must release to members. In turn, this will increase liquidity pressure for some funds which are already feeling the effects of the share market downturn owing to COVID-19.

These liquidity pressures will continue into the 2020-21 financial year, as eligible individuals may make a second application to the ATO for release of an additional $10,000 in the 2020-21 financial year.

Treasury estimates suggest that this reform measure will cost about $27 billion which equates to approximately 1% of the total superannuation asset pool at present.   According to analysis of APRA data by Rainmaker, in the five years to 2019, a total of 361,000 members took out an average of $8,000, totalling $2.9 billion in early release due to severe financial hardship.  

The draw down and pressure on liquidity for superannuation funds owing to these emergency reforms will be far greater than the industry has ever experienced. However, it may be a better option than other reforms that were flagged such as placing a temporary freeze on superannuation guarantee payments.

Trust deed operation

The new rules create a new compassionate ground for early release within the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations).  Superannuation funds need to ensure that their trust deeds allow for this new ground for early release of funds as directed by the ATO without requiring any additional application or information from the member.

The new operating standard does not apply to amounts that would otherwise be required to be released from defined benefit interests. However, superannuation funds that are able to release amounts from defined benefit interests continue to have the discretion to do so.

Operational challenges

Although applications for early release will be made through the ATO, superannuation funds should expect increased communication from their members as they seek to understand the new grounds for release, confirm or change personal details and check on the progress of their early release payouts. Superannuation funds should ensure they have adequate FAQs and other resources available for their call centre and customer facing staff and appropriate processes to be able to handle these claims quickly.

Severe Financial Hardship claims through existing grounds

It can be expected that individuals who do not meet the COVID-19 early release eligibility may still seek early release of their superannuation benefits through a severe financial hardship claim in accordance with items 105 and 205 in Schedule 1 to the SIS Regulations. Superannuation funds should consider whether their existing processes should be adjusted in preparation to manage an increase in the volume of these claims.

Retirement income strategy thwarted

Finally, it is worth remembering that approximately 55% of all superannuation accounts in Australia have a balance of less than $25,000. If these account holders successfully withdraw $20,000 over two financial years under the proposed early release measures, they will almost effectively wipe out their entire superannuation account balance. Some may view this as flying in the face of Australia’s retirement income strategy. Against the backdrop of the COVID-19 pandemic, others would argue it’s an economic necessity at present to allow this early access to superannuation measure to take place at any cost.

2. Temporary Reduction of Superannuation Minimum Drawdown Rates

The Government is also temporarily reducing superannuation minimum drawdown rates by 50 per cent for account-based pensions and similar products. The reduction in rates will apply for the 2019-20 and 2020-21 financial years. 

This stimulus measure will allow greater flexibility for retirees who are already accessing their superannuation benefits and enable them to draw down less and ride out the COVID-19 storm.

Next steps

As outlined, there are a number of considerations for superannuation funds as they prepare for members taking up the early access reforms. Our financial services team and superannuation specialists are closely monitoring these reforms and the COVID-19 stimulus package in general and can assist during this preparation phase and answer any questions regarding the impact on your business.

This article is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for COVID-19 updates.