Fire Lit from the Banking Royal Commission – Looming Changes to the Superannuation Regime

As two Superannuation Bills progress through Parliament, registerable superannuation entity (RSE) licensees should prepare for significant changes to the superannuation system.

Background

On 14 February 2019, the Senate passed amendments to the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2019 (No 1 Bill). The No 1 Bill has been introduced into the House of Representatives but is yet to pass there.

On 18 February 2019, the House of Representatives agreed to Senate amendments to the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (No 2 Bill), which now awaits Royal Assent.

Following the recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Commission), these amended Bills serve as further signs of looming changes for the superannuation industry.

The No 1 Bill

In his Final Report, Commissioner Hayne recommended that:

1. the Superannuation Industry (Supervision) Act 1993 (SIS Act) be amended to prohibit trustees from 'treating' employers in return for 'having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund' (Recommendation 3.6); and

2. civil penalties be imposed for breach of trustee’s or director’s covenants and like obligations (Recommendation 3.7).

The No 1 Bill is intended to implement these recommendations by:

• enforcing civil penalties on trustees and associates of superannuation funds who 'treat employers' as a means of inducing employers to nominate the particular fund for their business. Accordingly, the amended No 1 Bill proposes to subject directors and trustees (and associates of trustees) to civil penalties for breaches of their best interest obligations; and
• amending section 68A of the SIS Act to enable ASIC to impose civil penalties on trustees for providing employer incentives or 'kickbacks' in relation to the selection of a default super fund.

The No 1 Bill also proposes further changes, including:

• imposing civil and criminal penalties on directors of RSE licensees who breach their best interests duties to members;
• replacing the current 'scale test' with an 'outcomes test'. This will require trustees to assess whether their MySuper product is optimising member outcomes by effectively promoting the financial interests of their beneficiaries. The outcomes test will also be extended to choice products;
• giving the Australian Prudential Regulation Authority (APRA) greater authority to:
  • refuse a RSE licensee a new authority to offer a MySuper product or to cancel an existing authority;
  • impose regulatory action when a change of ownership or control of an RSE licensee takes place;
  • issue a direction to an RSE licensee where APRA has prudential concerns; and
  • obtain information on expenses incurred by RSE and RSE licensees in managing or operating the RSE;
• refining the requirements for RSE licensees to make publically available their portfolio holdings; and
• requiring RSE licensees to hold annual members’ meetings (AMMs).

What do the changes mean for RSE licensees?

In preparation for the changes (and assuming the No 1 Bill is passed by the House of Representatives before Parliament is prorogued due to the Federal election):

• Directors of superannuation funds in particular need to be aware of these changes, to ensure compliance or risk facing possible civil and criminal penalties.
• Trustees of the superannuation funds (and associates of trustees) must be mindful that civil penalties provisions will apply for breaches of best interest duties owed to members.
• RSE licensees should carefully consider whether any current or potential MySuper products would raise prudential concerns from APRA to give grounds for refusal.
• RSE licensees should prepare for the new requirement to hold AMMs. AMMs are held to discuss the key aspects of the fund and provide members with a forum to ask questions about all areas of the fund’s performance and operations. Trustees would retain flexibility over how AMMs are conducted including holding virtual meetings.

The No 2 Bill

The No 2 Bill deals with issues faced by Australians with low balance, inactive and multiple superannuation accounts. It is intended to protect members' superannuation savings from fee erosion or inappropriate insurance arrangements.

In particular, the No 2 Bill includes measures to:

• prohibit trustees of superannuation funds from charging certain fees and costs exceeding 3% of the balance of a MySuper or choice product annually, where the balance of the account is less than $6,000;
• deal with trustees providing opt-out insurance to:
  • new members under 25 years of age;
  • members with balances below $6,000; and
  • members with inactive MySuper or choice account.

The Senate amendments agreed to by the House of Representatives removed the proposed opt-in rule for superannuation insurance relating to members under 25 years of age and for member accounts with balances of less than $6,000. The amended No 2 Bill will retain the opt-out rule for members under 25 with default superannuation, and those with account balances of less than $6,000; and

• transfer all superannuation savings with balances of less than $6,000 to the Commissioner if an account (related to a MySuper or choice product) has been inactive for a continuous period of 16 months (amended from 13 months). The Australian Tax Office is required to consolidate and transfer inactive low-balance accounts into relevant active accounts within 28 days.

Furthermore, 'inactive' accounts will not be affected by member changes to investment options, insurance cover or nominating a beneficiary.

What do the changes mean for RSE licensees?

In preparation for the commencement of the new legislation, trustees of superannuation funds should carefully review current account balances with less than $6,000, accounts where members are under 25 years of age and inactive accounts and consider whether changes must be made in order to comply with the above 3% fee cap and opt out rule.