With the election just past and implementation still pending on the Royal Commission’s final report, the Government has flagged another review of the retirement income system, as recently recommended by the Productivity Commission. Meanwhile, ASIC has modified the rules for Corporations Act relief for providers of superannuation calculators, and APRA has released observations on the governance, culture and accountability arrangements of regulated entities including superannuation funds.
Retirement income system review and other superannuation reforms
The newly re-appointed Treasurer, Josh Frydenberg MP, has indicated he will commission a review of the retirement income system, and will revisit a number of other reform proposals that the Government had not implemented prior to the recent election.
The Treasurer has indicated he will consult with cabinet colleagues and Treasury to act on the recommendation from the Productivity Commission’s inquiry into the efficiency and competitiveness of the superannuation industry regarding a review of the retirement income system. This is likely to include the interaction of superannuation, government pensions and, potentially, taxation.
The Treasurer has also foreshadowed the Government’s intention to:
- implement the recommendation from the Royal Commission into misconduct in the banking, superannuation and financial services industry to ‘staple’ a single default superannuation account to new employees entering the workforce
- move quickly on making life insurance inside superannuation opt-in, rather than default
- revisit plans to mandate a minimum one-third independent directors on superannuation trustee boards.
The Treasurer has not indicated a timeframe for the review.
Superannuation and retirement calculators
ASIC has modified its existing relief for providers of superannuation and retirement calculators, to change the way inflation is reflected.
ASIC issued ASIC Corporations (Generic Calculators) Instrument 2016/207 in April 2016. This instrument updated and continued relief from a range of legislative obligations for providers of generic financial calculators. A generic financial calculator is a facility, device, table or similar facility that is used to make a numerical calculation or find out the result of a numerical calculation about a financial product and does not advertise or promote a specific financial product. A generic financial calculator involves financial product advice if it produces recommendations or statements of opinion that are (or could reasonably be regarded as being) intended to influence the user in deciding about a financial product or class of financial product.
Generic financial calculators would, without relief, be subject to a range of Corporations Act licensing, conduct and disclosure obligations. Instrument 2016/207 gave providers of generic financial calculators relief from these obligations where the provider takes reasonable steps to meet certain requirements. One of these requirements was that if a calculator provided an estimate of an amount payable or receivable at a future time of two years or more, it must display a clear and prominent statement setting out the present value of the estimate that is calculated using an assumed rate of inflation of 2.5 per cent. This requirement was initially intended to apply from 1 April 2017 but was ultimately deferred, for superannuation and retirement calculators, until 1 July 2019.
In June, ASIC made ASIC Corporations (Amendment) Instrument 2019/514 to amend the relief conditions. Instrument 2019/514 effectively gives providers of superannuation and retirement calculator the option of using an assumed inflation rate of 3.2 per cent or an alternative assumed inflation rate, as long as certain disclosure requirements are satisfied. This is achieved by replacing the definition of ‘present value’ in Instrument 2016/207 with a new definition.
The explanatory material accompanying Instrument 2019/514 indicates that 3.2 per cent is equivalent to the assumed inflation rate used by ASIC’s MoneySmart superannuation and retirement calculators. It reflects CPI of 2 per cent and real wage growth of 1.2 per cent, the latter of which reflects the cost of meeting increases in community living standards. ASIC intends to periodically update Instrument 2016/207 to reflect any changes in the default inflation rate used by ASIC’s MoneySmart superannuation and retirement calculators.
If a superannuation and retirement calculator uses an alternative assumed inflation rate to calculate the present value of estimates and that an alternative rate does not include a component that reflects the cost of meeting increases in community living standards, the calculator must display a clear and prominent statement:
- specifying that the present value of the estimate does not take into account the costs of meeting increases in community living standards; and
- explaining the implications of the present value not taking into account such costs.
The amendments made by Instrument 2019/514 apply from 5 December 2019. Until then, superannuation and retirement calculators must disclose whether or not estimates take into account changes in the cost of living.
Governance, culture and accountability
APRA has released a paper analysing recent self-assessments on governance, culture and accountability carried out by a number of Australia’s largest banks, insurers and superannuation licensees.
In 2017, APRA commissioned a ‘prudential inquiry’ to examine the frameworks and practices in relation to the governance, culture and accountability within the Commonwealth Bank of Australia and its group entities. In May 2018, APRA published the extensive final report from that inquiry, identifying a number of prominent cultural themes that APRA considered raised matters of prudential concern.
In June 2018, APRA wrote to the boards of 36 banks, insurers and superannuation licensees, asking them to gauge whether the prudential issues identified in the CBA prudential inquiry also existed in their own organisations. After receiving the self-assessments last December, APRA’s frontline supervision teams carried out detailed analysis and benchmarking of their quality and the key issues that institutions identified.
APRA has now reported noting a wide variation in the quality of the self-assessments. In particular, according to APRA, while most institutions recognised the opportunity provided by the findings in the CBA prudential inquiry final report to critically examine their own organisation, a small number took a lighter touch approach and viewed it as an exercise for APRA rather than an opportunity to drive improvement.
APRA has now published an information paper, highlighting consistent findings from the self-assessments. These include the following:
- non-financial risk management requires improvement;
- accountabilities are not always clear, cascaded and effectively enforced;
- acknowledged weaknesses are well-known and some have been long-standing; and
- risk culture is not well understood, and therefore may not be reinforcing the desired behaviours.
APRA Deputy Chair John Lonsdale said that while the self-assessments “raised no concerns about financial soundness, they confirmed our observation that industry is grappling to manage non-financial risks, such as culture and accountability”. Mr Lonsdale said the findings would be used to help APRA better target its efforts to lift standards of non-financial risk management, as outlined in its 2019 policy priorities.
Family law superannuation interest rate determination
The Australian Government Actuary has made the Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2019. The Determination sets the interest rate for adjusting the superannuation entitlements of separated and divorced spouses under splitting orders and agreements made under the Family Law Act 1975.
The interest rate for the adjustment period that comprises the financial year beginning on 1 July 2019 is 4.8 per cent. The Determination also provides the method by which the interest rate is calculated for an adjustment period that includes a period within that financial year.