Issue 831, 2 November 2021
In this issue:
- APRA Super Data Transformation project: Focus Groups
- 2021-22 Budget measures: Bill introduced
- Financial Accountability Regime: Bills introduced
- Compensation scheme of last resort: Bills introduced
- Choice superannuation products: APRA analysis
- Trustee directed products: APRA FAQs
- Governance and strategic planning in superannuation: APRA concerns
- Investment switching by super fund executives: ASIC concerns
APRA Super Data Transformation project: Focus Groups
As part of its Super Data Transformation Project APRA is forming two industry focus groups:
- Asset Allocation - to clarify and align asset classifications ahead of the June 2022 financial year
- Expenses - to clarify and refine expense classifications and look through requirements for connected entities, and review and determine the appropriate materiality thresholds for expense reporting.
The focus groups will:
- comprise a group of around 12 representatives of super funds
- meet every three weeks from November 2021 to March 2022, or more frequently as required
- provide an industry view of these topics.
If your organisation would be interested in participating in one or both of these focus groups, please email Hans van Daatselaar by close of business Thursday 4 November. When emailing, please indicate who you are nominating for which focus group and provide their contact details, including their job title.
2021-22 Budget measures: Bill introduced
The Government has introduced into Parliament the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021. This Bill will implement several superannuation-related commitments from the May 2021 Budget (see ASFA Action issue 803).
Of relevance to superannuation, the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 proposes amendments to:
- remove the current $450 per month earnings threshold that applies before an employer is required to make Superannuation Guarantee (SG) contributions for an employee.Removal of the threshold will expand SG coverage to eligible employees earning salary or wages less than $450 in a calendar month from a single employer. The amendment is intended to apply from 1 July 2022, or the beginning of the next quarter following Royal Assent, whichever is sooner.
- remove the work test for voluntary (non-concessional) and salary sacrificed contributionsThe current work test that impacts the ability of an individual aged 67 – 75 years (inclusive) to make voluntary, non-concessional (non-deductible) or salary sacrificed contributions will be removed. As a result, the work test will only apply to individuals aged between 67 and 75 years who claim a deduction for their personal contributions. Under the changes, individuals under age 75 (rather than age 67) will also be able to ‘bring-forward’ non-concessional contributions in a particular financial year. The amendments are intended to apply to contributions made on or after 1 July 2022.Amendments will be required to the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) to implement the removal of the work test for non-concessional and salary sacrificed contributions.
- increase the maximum releasable amount for the First Home Super Saver Scheme (FHSSS).The limit on the maximum amount of voluntary contributions made over multiple financial years that are eligible to be released under the FHSSS will be increased from $30,000 to $50,000. This is intended to ensure that the FHSSS will continue to help first home buyers save more quickly for the purpose of purchasing or constructing their first home. The amendment is intended to apply to requests made on or after 1 July 2022 for the Commissioner of Taxation to make a determination in relation to the release of a FHSSS amount.
- reduce the eligibility age for downsizer contributions.Eligibility to make ‘downsizer contributions’ from the proceeds of sale of a principal residence will be reduced to apply to individuals aged 60 and above (rather than age 65 and above) with effect from 1 July 2022. In addition to amending the income tax legislation to give effect to this change, separate amendments will be required to the contributions acceptance rules in the SIS Regulations to ensure that the expanded downsizer contributions can be accepted by the receiving fund.
- reform the ‘segregated current pension assets’ rules.Amendments will be made to allow superannuation trustees to choose their preferred method of calculating exempt current pension income (ECPI) when they have member interests in both accumulation and retirement phases for part, but not all, of the income year. The amendments are intended to provide trustees with greater choice in how they calculate ECPI and minimise complexity and cost in relation to a fund’s reporting requirementsThe amendments are intended to apply to the 2021-22 and later income years.
The Government is yet to introduce legislation to implement the remaining superannuation-related measures from the Budget, including additional technical amendments to the FHSSS and relaxation of residency requirements for self-managed superannuation funds and small APRA-regulated funds, and a capacity for individuals to exit a specified range of legacy retirement products, including market-linked, life expectancy and lifetime products.
Financial Accountability Regime: Bills introduced
The Government has introduced into Parliament two Bills to implement the Financial Accountability Regime (FAR).
The Financial Accountability Regime Bill 2021 will implement several recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which recommended the extension of the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities.
The FAR imposes four core sets of obligations:
- accountability obligations, which require entities in the banking, insurance and superannuation industries and their directors and most senior and influential executives to conduct their business with honesty and integrity and with due care, skill and diligence
- key personnel obligations, which require entities in the banking, insurance and superannuation industries to nominate senior and influential executives to be responsible for all areas of their business operations
- deferred remuneration obligations—which require entities in the banking, insurance and superannuation industries to defer at least 40 per cent of the variable remuneration (for example, bonuses and incentive payments) of their directors and most senior and influential executives for a minimum of 4 years, and to reduce their variable remuneration for non-compliance with their accountability obligations
- notification obligations, which require:
- entities in the banking, insurance and superannuation industries to meet the core notification obligations by providing the Regulator with certain information about their business and their directors and most senior and influential executives
- for entities above a certain threshold (to be determined in rules made by the Minister), to meet the enhanced notification obligations, by preparing and submitting accountability statements and accountability maps.
The FAR will apply to the banking industry from the later of 1 July 2022 or six months after the commencement of the Bill. The Banking Executive Accountability Regime will be repealed as the obligations under the Financial Accountability Regime apply to the banking industry.
The FAR will apply to the superannuation and insurance industries on 1 July 2023 or 18 months after the Bill receives Royal Assent, whichever is later.
The Government has also introduced the Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021, which includes consequential amendments and transitional matters arising from the FAR regime.
The Government has previously undertaken consultation on a proposals paper in relation to FAR as well as two exposure draft Bills (see ASFA Action issues 823, 814, 734 and 697 for background).
Compensation scheme of last resort: Bills introduced
The Government has introduced into Parliament three Bills to implement a compensation scheme of last resort (CSLR). The CSLR forms part of the Government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and follows earlier recommendations by the ‘Ramsay Review’ into the external dispute resolution framework.
Together, the Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021, the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021, and the Financial Services Compensation Scheme of Last Resort Levy Bill 2021 establish the CSLR and the levy framework to fund it.
Some key elements of the CSLR include:
- the CSLR is intended to provide compensation to eligible consumers where they have a determination from the Australian Financial Complaints Authority (AFCA) in their favour and where the relevant financial firm has not paid the consumer in accordance with the determination
- where AFCA has made a determination under which a complainant is owed an amount from a financial firm and the financial firm has failed to pay the complainant, the complainant may apply to the operator of the CSLR for payment. If the eligibility criteria are met, the operator of the CSLR must compensate the complainant, up to a maximum of $150,000. The CSLR operator cannot consider the merits or facts of a dispute between a consumer and an AFCA member underlying an AFCA determination
- broadly, a consumer is eligible for compensation under the CSLR if:
- a ‘relevant AFCA determination’ requires an amount to be paid to the consumer
- the consumer notifies AFCA that the amount has not been paid within 12 months after the day the determination was made, or any such longer period as AFCA agrees
- AFCA has taken appropriate steps to require the amount to be paid and, after these steps are taken, the consumer remains unpaid
- the consumer is not eligible to receive payment under another statutory scheme
- the CSLR operator reasonably believes that the AFCA member is, having regard to the AFCA member’s financial position, unlikely to fully pay the amount
- to be a ‘relevant AFCA determination’, the determination must relate to one or more of the following products or services: engaging in credit activity, providing financial product advice that is personal advice provided to a person as a retail client about one or more products that include at least one relevant financial product, or dealing in securities for a person as a retail client, other than issuing securities
- the board of the company that operates the CSLR (the CSLR operator) must include the Chair of the Board of AFCA and a person who is a fellow of the Institute of Actuaries of Australia with at least five years’ experience in actuarial analysis. The CSLR operator will be regulated by ASIC
- the CSLR operator must meet specified operational and compliance requirements, including ensuring it has the appropriate expertise to carry out its central functions of assessing claims for compensation and estimating costs, and managing its money in a manner that is efficient, effective and economical
- where the CSLR operator has paid an amount to a consumer in accordance with an AFCA determination (in place of the person, body corporate, partnership, or trustee against which the determination was made), the operator is required to report the fact of the payment to ASIC. Where this occurs, an Australian financial services licence held by the relevant person, body corporate, partnership or trustee must be cancelled by ASIC
- the CSLR will be funded by an industry levy framework. Generally, this involves an annual levy which is subject to a cap on the amount that may be levied against a particular sub-sector. If required, a further levy may be imposed which, again, is subject to the sub-sector levy cap. However, where the CSLR operator determines that the value of claims in a financial year is set to exceed one or more of the sub-sector levy caps, the Minister will have the power to specify one or more actions to address the estimated shortfall: determine that particular compensation payments are paid over a number of periods (rather than in a lump sum); impose a special levy in excess of the sub-sector cap; or levy amounts against a sub-sector that was not liable for the initial annual levy. The Minister is not required to exercise any of these options.
The Government has indicated it will fund the establishment of the CSLR and contribute to scheme costs in the first year, to allow it to start paying claims from 1 July 2022. In addition, Australia’s ten largest banking and insurance groups (excluding superannuation groups and health insurers) will pay a one-off levy to fund a backlog of accumulated unpaid claims (and associated AFCA unpaid fees) relating to complaints given to AFCA between 1 November 2018 up to 28 October 2021 (the day the Bills to establish the CSLR were introduced into Parliament). Going forward, the scheme will be fully industry funded through a levy on relevant financial service and credit licensees.
Choice superannuation products: APRA analysis
APRA has published analysis of the performance of choice superannuation products, ahead of releasing its first Choice Product Heatmap in late 2021. Generally, ‘choice’ products are those that members have actively chosen to join and are typically more complex and varied than default MySuper products.
As with APRA’s MySuper Product Heatmap, the Choice Product Heatmap will provide clear and comparable insights on the performance of choice products in the areas of investment returns, fees and costs, and sustainability.
APRA’s analysis of the sector identified 568 choice products within APRA-regulated superannuation funds, offering around 9,000 distinct investment options and about 43,000 investment options in total. The analysis highlights underperformance in the choice sector. In particular:
- the median administration fees of choice products analysed by APRA are approximately 40 per cent higher than the median MySuper product (based on a $50,000 representative member)
- investment performance displayed considerable variation for options with similar allocations to growth assets; and
- a materially higher percentage of choice options underperformed a risk-adjusted, peer-derived benchmark by more than 75 basis point than MySuper options.
APRA Executive Board Member Margaret Cole said the findings demonstrate the importance of exposing and addressing underperformance among choice products.
The first Choice Product Heatmap will focus on multi-sector investment options in open, accumulation products (excluding platform products), representing 40 per cent of total member benefits in the APRA-regulated choice sector. Future versions of the Heatmap will be expanded as APRA capitalises on the enhanced data set delivered through the Superannuation Data Transformation and APRA Connect programs.
Trustee directed products: APRA FAQs
APRA has published a new set of frequently asked questions (FAQs) to provide clarity to registrable superannuation entity (RSE) licensees on the introduction of trustee directed products (TDPs) into the Government’s Your Future, Your Super performance test.
The FAQs provide guidance on:
- the investment options captured as TDPs
- the data sources that will be used in the 2022 performance test
- when RSE licensees will be contacted about their 2022 performance test results.
Governance and strategic planning in superannuation: APRA concerns
APRA has published an information paper Findings from APRA’s superannuation thematic reviews. This details the findings from three reviews undertaken over the past 12 months, covering strategic and business planning, fund expenditure and unlisted asset valuation practices. Collectively, the reviews outline risks and vulnerabilities that trustees must have front of mind to drive better practices and improve outcomes for members.
The SPS 515 implementation benchmarking review examined how selected trustees were meeting the requirements of SPS 515 Strategic Planning and Member Outcomes, which took effect on 1 January 2020. The review focused particularly on business plans and business performance reviews (BPRs) and found areas of potential improvement including the need for trustees to develop:
- greater connection between BPR findings and updates to business plans
- greater clarity on how strategic objectives support desired member outcomes
- more robust analysis of the drivers of business performance and stress testing of financial projections.
The expenditure thematic review examined expenditure on advertising, sponsorships and promotions by selected trustees. In particular, it considered whether expenditure was in the best interests of members, and whether trustees had applied appropriate governance and oversight to their decisions. APRA observed:
- many trustees failed to rigorously measure and assess anticipated and achieved benefits to beneficiaries of expenditure on marketing campaigns and related activities
- instances of trustees being unable to demonstrate how additional benefits associated with sponsorships, that were provided to directors, executives and staff of the fund, resulted in any improved outcomes for members.
The unlisted asset valuation thematic review was undertaken in response to heightened market vulnerability prompted by COVID-19, as well as increased member switching and the Government’s expansion of the early release of superannuation program. It examined unlisted asset valuation practices among selected trustees, with key findings including:
- most trustees demonstrated a proactive approach to revaluing unlisted assets in response to heightened market volatility
- revaluation frameworks needed improvement, board engagement was often limited, and some trustees relied overly on external parties
- trustees with pre-existing valuation committees typically had more robust valuation frameworks
APRA Member Margaret Cole said: “Overwhelmingly these reviews illustrate that robust frameworks, clear accountability and holistic approaches to business planning are essential ingredients in running what are, in most cases, multi-billion-dollar businesses with enormous fiduciary responsibilities. We expect all trustees to review their operations in light of these findings with a view to identifying any sub-standard practices and improving processes and procedures.”
Investment switching by super fund executives: ASIC concerns
ASIC has identified concerns with superannuation trustees’ management of conflicts of interest, following surveillance of personal investment switching by trustee directors and senior executives of during the time of increased market volatility arising from the COVID-19 pandemic.
ASIC notes that directors and senior executives of superannuation funds are potentially privy to price-sensitive valuation information. It undertook surveillance to examine concerns about whether fund executives were using this information for personal gain by switching investment options based on their knowledge of the timing of the revaluation of unlisted assets.
ASIC Commissioner Danielle Press indicated that the surveillance, on a sample of trustees, revealed conduct that fell below ASIC’s expectations:
“We expected superannuation trustees to have robust conflict of interest policies that dealt adequately with investment switching, including by their directors and executives. What we found instead was often a clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter this risk.
This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members”.
ASIC’s key concerns with trustees’ management of conflicts of interest included failure to identify investment switching as a risk, disparity in board-level engagement, lack of restrictive measures, inadequate oversight of investment switching and lack of oversight of related parties.
Commissioner Press said ASIC will continue to follow up with trustees about areas for improvement in their conflict management frameworks. ASIC is continuing to gather additional information and consider its next steps, and will consider appropriate regulatory action where it identifies misconduct causing consumer harm.
ASFA REGULATORY WATCHLIST
ASFA’s Regulatory Watchlist (ARW) tracks developments in Legislation, inquiries, consultations
and other regulatory announcements relevant to superannuation.
