Issue 696, 10 January 2019
In this issue:
- Productivity Commission: final report on efficiency and competitiveness of superannuation system
- Fee and cost disclosure: ASIC consultation
- May 2016 Budget reforms: ATO draft ruling
- Proposed SG amnesty: ATO clarification of position
- ASIC default fund: request for proposals
- Income tax regulations: deferral of sunsetting
- SuperMatch: review of use of service
- Updated sex discrimination guidelines
Productivity Commission: final report on efficiency and competitiveness of superannuation system
The Government has released the final report of the Productivity Commission from its review of the efficiency and competitiveness of the superannuation system.
The report makes 31 recommendations for significant reform of the system, focused on ‘modernising’ the system to work better for members. These include:
Default fund processes and outcomes tests:
- ‘best in show’ default model – 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 to choose from within 60 days. An employee who does not make a choice within that time should be defaulted into one of the shortlist. The first ‘best in show’ shortlist should be in place by the end of June 2021. The ‘best in show’ shortlist should be judged by an independent expert panel [recommendations 1, 2, 3]
- elevated outcomes tests – all APRA-regulated funds should undertake an annual outcomes test for their MySuper and choice offerings, to be measured against clear benchmarks. Investment options that fall short of these benchmarks over eight years, should be subject to remediation and if remediation is not possible, they should be withdrawn and the members transferred to a better performing option (with APRA oversight). The first elevated outcomes tests should be completed by no later than 31 December 2020 for MySuper products and 30 June 2021 for choice products [recommendation 4]
Insurance:
- opt-in insurance for young and inactive members – insurance through superannuation should be made opt-in for those under age 25, or for accounts where no contributions have been made for 13 months [recommendation 15]
- insurance balance erosion trade-offs – APRA should require all fund trustees to articulate and quantify the insurance balance erosion trade-off determination they have made for their members [recommendation 16]
- insurance code – the Government should implement a binding and enforceable superannuation insurance code of conduct through APRA and ASIC [recommendation 17]
- independent inquiry – commission an independent public inquiry into insurance through superannuation [recommendation 18]
Products that meet members’ needs:
- fees – the Government should ban all trailing financial adviser commissions as soon as possible, and require funds to levy all fees on a cost-recovery basis [recommendation 14]
- multiple accounts – accounts that have a balance less than $6,000 or have been inactive for 13 months or more should be consolidated into one account by the ATO [recommendation 5]
- member-friendly dashboards – the Government should require funds to publish simple and digestible dashboards for consumers to compare metrics. The dashboards should be published by ASIC, with links provided by the ATO through its online service [recommendations 6, 7]
- ‘advice’ and approved product lists – the Corporations Act 2001 should be amended to ensure the term ‘advice’ clearly refers to ‘advice that takes into consideration personal circumstances’ and Australian Financial Services licensees should be required to disclose to ASIC information about their approved product lists [recommendation 8]
- financial literacy – the Government should evaluate its financial literacy programs so as to better target funding to these programs and maximise their effectiveness [recommendation 9]
- retirement income covenant – the Government should reassess the benefits, costs and design of the proposed covenant (which will require funds to develop a retirement income strategy for members) and only introduce it “if design imperfections (including equity impacts) can be sufficiently remediated [recommendation 10]
- information for pre-retirees – ASIC and the Department of Human Services should display on their financial literacy websites useful information for ‘pre-retirees’ (those over age 55) [recommendation 11]
- safeguards for SMSF advice – the Government should introduce stronger safeguards for consumers in self-managed super funds, such as the requirement for specialist training for those providing advice [recommendation 11]
- application of Consumer Data Right (CDR) to superannuation – the CDR—the guiding principle behind the Open Banking initiative—should be extended to the superannuation sector [recommendation 13]
Best practice fund governance:
- regulation of trustee directors – APRA should amend its prudential standards to provide greater prescription to how fund trustees are to be regulated [recommendation 19]
- ‘best interests’ duty – the obligation on a superannuation trustee to act in a member’s best interest should be amended to be clearer [recommendation 22]
- reducing impediments to mergers – all fund mergers should be disclosed as soon as the parties have entered into an agreement to merge. Fund mergers should receive capital gains tax relief [recommendations 20, 21]
System governance:
- clarify regulator roles and powers – the Government should clarify both ASIC’s and APRA’s roles, suitabilities, and strengths when regulating the super sector [recommendation 25]
- APRA – APRA should focus more on matters relating to licensing and authorisation, to ensure high standards of system and fund performance. The Government should immediately initiate an independent capability review of APRA to audit the authority’s efficiency and effectiveness [recommendations 23, 26]
- ASIC – ASIC should focus more on the conduct of trustees and financial advisers as well as the appropriateness of products [recommendation 24]
- data working group – the Government should establish a superannuation data working group comprised of APRA, ASIC, the ATO, the Bureau of Statistics, and the Commonwealth Treasury to identify ways to improve the collection and publication of superannuation-based data [recommendation 27]
- member advocacy – an independent member advocacy body should be established and funded by the Government [recommendation 28]
- ongoing review: the Government should:
- require APRA and ASIC to produce a ‘State of Superannuation’ report every two years
- commission an independent inquiry into MySuper and choice evaluated outcomes every five years
- commission an independent public inquiry into the superannuation industry every ten years [recommendation 29]
- inquiry into retirement incomes system – commission an independent public inquiry into the role of compulsory super in the broader retirement income system. This should be completed in advance of any increase in the superannuation guarantee contribution rate [recommendation 30]
Implementation of recommendations: the Government should establish a steering group of departmental and agency heads to oversee the implementation of the report’s recommendations. [recommendation 31]
The Assistant Treasurer has indicated the Government will carefully consider the recommendations and will await the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, before finalising its response.
Fee and cost disclosure: ASIC consultation
ASIC has released a consultation package on proposed changes to the fee and cost disclosure regime for superannuation funds and managed investment schemes.
The package includes Consultation Paper 308 Review of RG 97 Disclosing fees and costs in PDSs and periodic statements, which follows the release of Report 581 Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements in July 2018. Report 581 was prepared by an external expert Mr Darren McShane, which sets out recommendations and observations in relation to the fees and costs regime (see ASFA Action issue 652 for background).
Consultation Paper 308 seeks feedback on:
- ASIC’s proposals to make changes to the fees and costs disclosure regime
- a draft updated Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements
- proposed amendments to Schedule 10 to the Corporations Regulations 2001.
Comments on the CP 308, draft updated RG 97 and draft amendments to Schedule 10 are due by 2 April 2019.
ASIC will undertake consumer testing of some of the proposed changes during the consultation period, so the fees and costs disclosure requirements can be finalised as soon as possible. Should the results of the consumer testing indicate substantial changes to any of the proposals may be required, ASIC will seek further feedback from industry before finalising the requirements.
ASIC’s response to submissions on the consultation paper and conclusions from consumer testing released, a revised Class Order [CO 14/1252] and updated RG 97 are expected to be released in the second half of 2019.
In the meantime, ASIC will extend its current compliance approach to the fees and costs disclosure requirements until the consultation process is complete and any changes to the requirements are finalised and in force. This means ASIC will not look to take action against a trustee or responsible entity if they are making reasonable endeavours to comply with the requirements in Class Order [CO 14/1252], RG 97, the Corporations Act 2001 and the Corporations Regulations and are not misleading consumers about fees and costs.
If you have any feedback that you would like to provide to ASFA please forward it to Fiona Galbraith by close of business, Friday 22 February 2019.
May 2016 Budget reforms: draft ATO ruling
The ATO has issued a draft ruling on the calculation of an individual’s total superannuation balance (TSB).
Draft Law companion ruling LCR 2016/12DC Superannuation reform: total superannuation balance provides guidance on how an individual’s TSB is calculated from 30 June 2017. The TSB concept was introduced as part of the major superannuation reforms announced in the May 2016 Budget.
LCR 2016/12DC is relevant for determining an individual’s:
- eligibility for unused concessional contributions cap carry forward
- non-concessional contributions cap and for the bring forward of their non-concessional contributions cap
- eligibility for the Government co-contribution
- eligibility for the tax offset for spouse contributions.
Comments on the draft ruling can be made directly to the ATO by 22 February.
Proposed SG amnesty: ATO clarification of position
As noted in ASFA Action issue 639, the Bill to implement the Government’s proposed amnesty for unpaid superannuation guarantee (SG) remained before Parliament at the end of the 2018 sitting year. The ATO has recently clarified its approach in relation to the amnesty.
The Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 provides for a one-off 12-month amnesty for unpaid SG, with effect from 24 May 2018 – the date the Bill was introduced into Parliament (see ASFA Action issue 672 for more details). The Bill has been passed by the House of Representatives but remains before the Senate. This has led to some questions about the status of the amnesty and the implications for employers who had voluntarily disclosed a SG shortfall in reliance on the amnesty.
The ATO has published some information on its website to clarify its position in relation to the amnesty. In particular, the ATO notes that:
Subject to the passage of legislation the proposed amnesty is intended to be available for 12 months from 24 May 2018 to 23 May 2019.
If enacted, we will apply the new law retrospectively to voluntary disclosures made during this period. You will be entitled to the benefits of the amnesty for any SG shortfalls you’ve voluntarily disclosed to us – subject to the eligibility criteria.
ASIC default fund: request for proposals
ASIC is seeking proposals to select its next default superannuation fund for new choice-of-fund employees who have not nominated a fund.
The Public Sector Superannuation accumulation plan (PSSap) is ASIC’s current default superannuation fund for new choice-of-fund employees. This arrangement expires on 30 June, when ASIC moves outside coverage of the Public Service Act 1999.
ASIC has published background information, selection criteria and details on how it will evaluate proposals. Proposals must be received by 5pm (AEDT) on Friday 8 February.
Income tax regulations: deferral of sunsetting
The Government has made an instrument deferring the sunsetting (expiry) of important tax regulations, to allow greater time for them to be reviewed and replaced with updated regulations.
The Legislation (Deferral of Sunsetting – Income Tax Assessment Regulations) Certificate 2018 defers the sunset date of the Income Tax Assessment Regulations 1997 (the Regulations) to 1 April 2021.
The Regulations are made under the Income Tax Assessment Act 1997, which provides the main body of rules for the calculation of tax payable by individuals and entities—including superannuation funds—in relation to a financial year.
The Regulations were due to sunset on 1 April 2019. The explanatory material to the deferral instrument indicates that the Regulations will be reviewed to ensure that they remain fit for purpose, are operating efficiently and effectively, and are drafted consistently with modern drafting practices.
The explanatory material notes that a 24 month deferral of the sunsetting day will allow sufficient time for this review to occur. It will also avoid the need to remake the Regulations in their current form for a short period of time before they are expected to be repealed and replaced by new regulations arising from the review.
SuperMatch: review of use of service
The ATO has updated terms and conditions for its SuperMatch service, following a recent review of funds’ use of the service.
Version 7.0 of the Terms and Conditions and User Guide for SuperMatch was released in mid-December, and the ATO has reportedly written to fund trustees to notify them of the changes.
The ATO has stated that, during its review, it became apparent there have been misinterpretations of the SuperMatch terms and conditions and the addendum, which has led to trustee solutions not fully complying with the self-certification requirements.
In particular, the ATO has concerns about the multifactor requirements for member authentication, consent and disclosure of results from SuperMatch searches.
The ATO has also engaged with ASIC in ongoing collaborative work and information sharing looking at the use of SuperMatch and the associated disclosure. ASIC concerns include the lack of appropriate disclosure when seeking permission from members to use SuperMatch, and the failure to provide all of the response data provided by the ATO in the display of the results of the search.
The ATO and ASIC will continue to investigate potential cases of misleading and deceptive conduct where trustees fail to obtain explicit consent from a member to perform a search and where trustees do not provide balanced information about the risks and benefits of consolidation.
The ATO has reminded trustees of several key points for use of SuperMatch, including that:
- multifactor authentication is required before results of searches can be displayed electronically
- there must be explicit consent from the member before a search can be completed
- all emails, SMS and mobile app notifications notifying the member of the results of the search must be general in nature and cannot contain any specific SuperMatch response data
- where the member has insurance with another fund identified through SuperMatch (as per the Insurance Indicator), warnings should be displayed regarding the possible impact of consolidation of accounts on insurance held.
The ATO has asked trustees who have not contacted the ATO already, or are not currently working with the ATO, to undertake an assessment of their SuperMatch solution against the updated User Guide and Terms and Conditions. Where a trustee is unsure of its compliance, or identifies any misalignment, it should contact the ATO by the end of February.
Updated sex discrimination guidelines
The Human Rights Commission has published updated guidelines Guidelines: Special measures under the Sex Discrimination Act 1984 (Cth) in relation to ‘positive discrimination’ under sex discrimination legislation, with potential relevance to superannuation.
Recognising that some deeply embedded barriers to equality remain pervasive in certain areas of public life, a ‘positive discrimination’ mechanism—known as ‘special measures’—was included in the Sex Discrimination Act 1984 (SDA) to enable individuals and organisations to take positive actions for the purpose of achieving substantive equality for disadvantaged groups.
The SDA recognises that some groups, including women and lesbian, gay, bisexual, transgender and intersex persons have suffered historical disadvantage and may not enjoy their human rights equally with others. The gender pay gap, the under-employment of women, barriers to leadership roles, reduced retirement savings and high rates of sexual harassment at work as examples of this continuing inequality.
The updated guidelines are intended to assist organisations and individuals, seeking to address this inequality by taking proactive measures, to understand and use the special measures provisions in the SDA.
Chapter 5 of the Guidelines sets out practical examples of special measures. Example 1 is addressing the retirement savings gap between men and women. The example outlines a case study whereby an organisation introduced a policy to implement the following special measures to address the retirement savings gap between men and women:
1. Paid parental leave for up to 20 weeks
2. An additional 2 per cent superannuation for women, including periods of maternity leave
3. Additional support for parental leave, including:
- regular ‘keep-in-touch’ days during the paid parental leave
- long service leave accrual throughout paid parental leave
- superannuation payments to employees on paid parental leave for up to one year
4. Flexible working conditions, including:
- job-sharing and part-time opportunities for all roles
- access to working-from-home options for all roles
- flexible working hours for all roles.
5. Investigation of other strategies to address the gender pay gap in the organisation, and particularly as a result of an employee’s period of parental leave.
The Commission has indicated that it does not have the power to certify special measures under the SDA and there are no certifying procedures available elsewhere. Using the considerations outlined in the Guidelines, each individual and/or organisation must satisfy themselves that the special measures are being taken for the purpose of achieving substantive equality, that the special measures proposed will reasonably further this purpose, and that they are appropriately targeted.
If measures taken by an individual or organisation constitute ‘special measures’ under the SDA they are lawful and there is no need to apply to the Commission for an exemption – exemptions are concerned only with potentially unlawful conduct.
ASFA REGULATORY WATCHLIST
ASFA’s Regulatory Watchlist (ARW) tracks developments in Legislation, inquiries, consultations
and other regulatory announcements relevant to superannuation.
