This edition of rules and regs comes as the industry digests the Productivity Commission’s recommendations for the superannuation system, and the final report from the financial services Royal Commission. These inquiries will shape the reform agenda over the medium term, although any short-term response will be delayed by the upcoming election. Since December’s rules and regs we have also seen APRA’s finalised member outcomes requirements and ASIC’s much-anticipated consultation package on fee and cost disclosure, plus a slew of other developments. All in all, 2019 is shaping up to be a landmark year for superannuation.
Efficiency and competitiveness of superannuation: Productivity Commission report
On 10 January the Government released the final report of the Productivity Commission from its three-year investigation into the efficiency and competitiveness of the superannuation system. The report outlines 31 recommendations to significantly ‘modernise’ the system to work better for members. This summary highlights the more significant recommendations.
In relation to default fund processes and outcomes tests, the Commission recommended:
- employees should only be defaulted into a superannuation account if they are new to the workforce or don’t have an existing account. Employees without an account should be presented with a ‘best in show’ shortlist of funds, selected by an independent panel. An employee who fails to choose a fund should be defaulted into a fund from the shortlist
- all APRA-regulated funds should undertake an annual outcomes test for their MySuper and choice offerings, against clear benchmarks. Investment options that fall short of the benchmarks should be subject to remediation and withdrawn if remediation is not possible.
On insurance, the Commission recommended:
- insurance through superannuation should be opt-in for those under age 25, or for accounts where no contributions have been made for 13 months
- trustees should articulate and quantify the insurance balance erosion trade-off determination they have made for their members
- a binding and enforceable superannuation insurance code of conduct should be implemented through APRA and ASIC
- there should be an independent inquiry into insurance through superannuation.
The Commission recommended several reforms to ensure products meet members’ needs:
- trailing advice commissions should be banned as soon as possible, and all fund fees should be levied on a cost-recovery basis
- accounts that have a balance less than $6,000 or have been inactive for 13 months or more should be consolidated by the ATO
- funds should produce simple dashboards for consumers
- the definition of ‘advice’ should be amended to clearly refer to ‘advice that takes into consideration personal circumstances’
- the Government should reassess the benefits, costs and design of its proposed retirement covenant.
On ensuring best practice fund governance, the Commission recommended:
- APRA’s prudential standards should be more prescriptive about how trustees are to be regulated
- the ‘best interests’ obligation on trustees should be clarified
- fund mergers should be disclosed as soon as there is an agreement to merge.
The Commission recommended several reforms to system governance:
- ASIC’s and APRA’s roles should be clarified. APRA should focus on licensing and authorisation, to ensure high standards of system and fund performance. ASIC should focus more on the conduct of trustees and advisers and the appropriateness of products.
- APRA should immediately undergo a capability review
- a working group should be established to improve the collection and publication of superannuation-based data
- the Government should establish an independent member advocacy body
- APRA and ASIC should produce a ‘state of superannuation’ report every two years
- there should be an independent inquiry into MySuper and choice evaluated outcomes every five years and into the superannuation industry every ten years
- compulsory superannuation’s role in the broader retirement income system should be reviewed before the superannuation guarantee (SG) contribution rate is increased.
Strengthening superannuation member outcomes
APRA has finalised a package of prudential requirements to strengthen the focus of registrable superannuation entity (RSE) licensees on the delivery of quality outcomes for their members.
The requirements include the introduction of an outcomes assessment that will require RSE licensees to annually benchmark and evaluate their performance for choice and MySuper products in delivering sound, value-for money outcomes for members. RSE licensees will also be required to meet strengthened requirements for strategic and business planning, including management and oversight of fund expenditure and reserves.
The package includes a new prudential standard SPS 515 Strategic Planning and Member Outcomes, amendments to existing standard SPS 220 Risk Management, and new prudential practice guides SPG 515 Strategic and Business Planning and SPG 516 Outcomes Assessment. The new measures will commence on 1 January 2020.
APRA acknowledges that the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Bill 2017 seeks to introduce a legislated outcomes assessment. APRA will review whether any amendments are needed to its prudential requirements if the Bill is passed by Parliament.
Fee and cost disclosure
ASIC has released Consultation Paper 308 Review of RG 97 Disclosing fees and costs in PDSs and periodic statements on proposed changes to the fee and cost disclosure regime for superannuation funds and managed investment schemes. The paper follows an independent expert’s review of the disclosure rules.
The consultation package also includes a draft updated Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements and proposed amendments to the Corporations Regulations 2001. During the consultation period, which runs until 2 April, ASIC will consumer test some of the proposed changes.
ASIC expects to release its response to submissions on the consultation package, conclusions from the consumer testing, a revised Class Order [CO 14/1252] and an updated RG 97 in the second half of 2019. Its current compliance approach to the disclosure requirements will apply until the consultation process is complete and any amended requirements are in force – ASIC will not take action where an entity is making reasonable endeavours to comply and not misleading consumers about fees and costs.
Early release of superannuation
The Government has launched further consultation on reform of the rules governing the early release of superannuation benefits on compassionate and severe financial hardship grounds.
An issues paper released by Treasury seeks views on proposed changes to relax aspects of the current regime and provide more scope for individuals to obtain early release of their superannuation – including in cases of family and domestic violence. Views are also sought on proposals to strengthen the integrity of the regime and ensure superannuation is accessed as a last resort in cases of hardship, and changes to the administration of the rules governing early release on compassionate and severe financial hardship grounds. Submissions close on 15 February.
Retirement income framework: disclosure metrics
Treasury has released a consultation package on proposed disclosure metrics for retirement income products – the next step toward development of a retirement income framework, which will include the offering of comprehensive income products for retirement. The Government announced its intention to require providers of superannuation income streams to adopt standardised disclosure metrics in its May 2018 Budget.
The consultation package includes papers proposing metrics to help consumers assess how a product aligns with their preferences in relation to potential income, flexibility and risk management, and outlining the retirement income risk measure. Submissions close on 28 March.
When Parliament resumes on 12 February, it will have a long list of superannuation-related bills to consider–including bills intended to implement some of the Government’s major superannuation reforms. Importantly, these include:
- Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 – this Bill has been passed by the House of Representatives and remains before the Senate. The Bill implements major reforms to insurance and fees within superannuation and consolidation of low-balance, inactive accounts. The ‘protecting your super’ package of reforms was announced by the Government in its May 2018 Budget.
- Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Bill 2017 – this Bill includes amendments to strengthen APRA’s powers in relation to RSE licensees and enable APRA to obtain information on expenses incurred by RSEs and RSE licensees. It also introduces an annual ‘member outcomes’ test for MySuper products, requires RSE licensees to hold annual members’ meetings, and amends the portfolio holdings disclosure rules. The Bill is yet to come before the House of Representatives.
- Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017 – this Bill amends the SG law to provide that employees under workplace determinations or enterprise agreements made on or after 1 July 2018 have the right to choose their superannuation fund. It also provides that salary sacrificed amounts will not reduce an employer’s mandated SG contributions. The Bill has been passed by the House of Representatives and remains before the Senate.
- Treasury Laws Amendment (2018 Measures No 4) Bill 2018 – this Bill makes amendments in relation to SG compliance and penalties, single touch payroll (extension to small employers from 1 July 2019), fund reporting, employee commencement, Superannuation Complaints Tribunal secrecy provisions, and the taxation treatment of deferred annuities and reversionary transition to retirement income streams. The Bill has been passed by the Senate with amendments unrelated to superannuation and awaits reconsideration by the House of Representatives.
- Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 – this Bill has been passed by the House of Representatives and remains before the Senate. It provides for a one-off 12-month amnesty for unpaid SG, allows a partial opt-out from SG for higher income earners with multiple employers, and makes integrity measures to support the 2016-17 Budget reforms.
- Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018 – this Bill remains before the House of Representatives but has been referred to the Senate Economics Legislation Committee for inquiry and report by 11 February. The Bill proposes to implement the Government’s May 2018 Budget commitments to introduce new means testing rules for lifetime retirement income stream products.
New and updated regulations
Contribution work test – the Treasury Laws Amendment (Work Test Exemption) Regulations 2018 have introduced a one-year exemption from the contributions work test for eligible recent retirees, as announced in the May 2018 Budget. Retirees aged 65-74 with a total superannuation balance under $300,000 will be exempt from the contributions work test for 12 months from the end of the financial year in which they last met the work test. The exemption will apply to voluntary contributions made in 2019-20 and later years. Significantly, the Government will not proceed with its proposal to restrict access to the ‘bring forward’ arrangements for individuals who utilise the exemption.
Fee and cost disclosure – prior to releasing its consultation package on reforms to fee and cost disclosure obligations, ASIC made ASIC Corporations (Amendment) Instrument 2018/1088. This extends, for a further 12 months, existing interim arrangements for the disclosure regime.
Section 29QC – ASIC Superannuation (Amendment) Instrument 2018/1080 has further deferred the commencement date for the ‘consistency of disclosure’ requirements in section 29QC of the Superannuation Industry (Supervision) Act 1993, until 1 January 2024. Section 29QC broadly requires that if an RSE licensee is required to give information to APRA under a reporting standard and gives the same or equivalent information to other persons, there is consistency in the way the information is calculated. The commencement of section 29QC has been deferred a number of times to ensure appropriate alignment with APRA’s reporting standards, the proposed choice product dashboard rules and the expanded fee and cost disclosure rules.
Family law superannuation splitting regime – the Civil Law and Justice Legislation Amendment Act 2018 has made technical amendments relevant to the superannuation splitting regime, by renumbering provisions in the Family Law Act 1975.
Income stream benefits – the Treasury Laws Amendment (Miscellaneous Amendments) Regulations 2018 have amended the Income Tax Assessment Regulations 1997 to confirm the meaning of ‘superannuation income stream benefit’.
APRA – the Australian Prudential Regulation Authority Regulations 2018 have remade the Australian Prudential Regulation Authority Regulations 1998. The latter regulations, which support the legislation establishing APRA, were due to sunset (expire) on 1 April.
Income tax – the Legislation (Deferral of Sunsetting – Income Tax Assessment Regulations) Certificate 2018 defers the sunset date of the Income Tax Assessment Regulations 1997 to 1 April 2021. The Certificate allows greater time for the Regulations—which were due to sunset on 1 April 2019—to be reviewed and replaced. The Regulations are relevant to the calculation of tax payable by individuals and entities, including superannuation funds.
ASIC levies – ASIC has issued the ASIC (Supervisory Cost Recovery Levy – Regulatory Costs) Instrument 2018/1062 and the ASIC (Supervisory Cost Recovery Levy – Annual Determination) Instrument 2018/1063. Together, these provide ASIC with the information necessary to calculate the levies payable by each regulated entity for 2017-18.
AUSTRAC superannuation guidance
AUSTRAC has released Industry specific guidance: superannuation sector. The guidance focuses on risks and potential scenarios relating to money laundering, terrorism financing and serious financial crime specific to superannuation organisations, and examples of methods to mitigate these risks and combat criminal threats.