Distributing super products through employers – what trustees need to know

Member acquisition and retention are obviously important areas of focus for trustees. The recent design and distribution obligations (DDO), the ‘stapling’ and ‘hawking’ reforms and the increased emphasis on members’ best financial interests are changing how trustees approach these matters.

The stapling and hawking reforms were created to improve outcomes for Australians. The stapling reforms aim to do this by protecting superannuation account balances from erosion due to fees paid for multiple superannuation accounts. The hawking reforms aim, in the context of superannuation products, to protect people from joining funds because of unsolicited offers and give them more control over their decision to join a fund. Before the commencement of these reforms, ASIC updated its guidance for employers when communicating with their employees about choice of super fund. ASIC also described how the stapling requirements apply, and what conduct constitutes an unsolicited offer or hawking.

ASIC recently reviewed how superannuation trustees dealt with employers to understand the impact of these reforms and industry changes on the arrangements between trustees and employers. This involved checking whether any misconduct causing significant consumer harm was occurring.

ASIC’s review

Our review examined the operations of a representative sample of ten superannuation funds across industry and retail sectors, together holding nearly 54 per cent of total superannuation assets. We focused on interactions between trustees and employers, or employee members, to check on the conduct of trustees in relation to attracting or retaining members. We looked at the acquisition and retention methods being used, including whether trustees offered unlawful inducements to employers. We also examined how trustees used their relationship with employers to engage with employees. Our review was limited to trustee practices and behaviour over a two-year period from March 2020 to March 2022, and predominantly considered documents used in trustee engagements with employers and employees.

We have outlined our observations on how trustees are responding to the recent reforms. While we did not identify any instances of misconduct warranting further formal regulatory action, we noted some areas where trustees need to be vigilant about their obligations.

Decreased focus on marketing of a fund to employers

From 1 November 2021, under the ‘stapling’ reforms, where an individual changes jobs and does not select a fund, employers are required to make Superannuation Guarantee (SG) contributions to a fund that is linked or ‘stapled’ to the employee as advised by the Australian Taxation Office (ATO). If there is no stapled fund, employers must make SG contributions to their default fund.

ASIC’s review into trustee conduct in relation to employers confirmed the move by some trustees to focus more on the member relationship. We observed that the level of employer engagement varied between trustees, with some of the trustees surveyed investing significant resources into building relationships with employers. Some trustees focused their efforts on retaining current employers rather than seeking new ones, particularly where the fund had suffered reputational damage (for example, failed the annual performance test). Some other trustees appear to see employers as a ‘gateway’ to members. For these trustees, there was more of a focus on their relationship with members than with employers, and what could be done to better service and retain existing members.

In addition, where trustees may have previously participated in tenders to acquire new members via the default fund mechanism, our review found that some trustees have made the decision to move away from this type of activity and focus more on growth through mergers over the next few years.

Use of third-party providers and choice of fund

The new anti-hawking reforms commenced on 5 October 2021 and aim to protect consumers from inappropriate products by prohibiting unsolicited, real-time offers of financial products. ASIC’s Information Sheet 89, Communicating with employees about superannuation fund choice: what you can and cannot do (INFO 89) provides examples of what constitutes hawking. INFO 89 reminds employers to avoid this type of conduct by ensuring they do not invite employees to join a particular fund or provide them with pre-filled standard choice forms during a meeting or other real-time interaction. Employers should also avoid making statements to employees that amount to financial product advice about superannuation. These prohibitions also apply to superannuation trustees and other providers of financial products as well as their agents and representatives. Providers of financial products cannot circumvent the hawking prohibition by using a third party to make offers on their behalf.

During our review, we did not see evidence of hawking being encouraged by trustees. We did, however, note that some trustees were using payroll providers and HR platform providers to distribute their product.

We recognise that payroll providers and HR platform providers may be attractive to employers as they may help remove some of the administrative involved in the stapling requirements. However, we are concerned that some of these providers offer curated presentations of super fund options that could steer employees away from other, potentially more appropriate options: to keep their existing fund, be stapled to a previous fund or join the default fund at their workplace. Selecting from a limited range of funds provided via these entities also increases the risk of the employee ending up in an inappropriate product, such as a non-MySuper product, with typically higher fees, a potentially unsuitable investment mix and limited or no insurance cover. Care needs to be taken that no non-compliant advice is provided through the presentation of these products.

New and ongoing obligations

Trustees should bear in mind other recent legislative changes that may also impact the way they distribute super products through employers as well as long-standing obligations.

Appropriate distribution of products

Trustees, as issuers of financial products under DDO, have an obligation to ensure that their choice superannuation product is targeted at customers for whom it is appropriate. Employers, on the other hand, are not subject to these obligations so long as they only engage in certain permitted distribution activities, including giving a PDS for the default fund, paying contributions to a super fund on behalf of an employee, and arranging for an employee to join the employer’s default fund. Employers need to be careful not to provide advice to a member (as opposed to factual information). If they do so they may be subject to DDO applying to distributors, for instance, the obligation to take reasonable steps to distribute the product in accordance with the target market determination (TMD).

We note it is inconsistent with a trustee’s duties as an issuer under DDO to influence employers towards engaging in non-permitted distribution of a choice superannuation product.

An issue that was not explored in detail in our review is whether trustees are taking reasonable steps that will, or are reasonably likely to, result in distribution being consistent with the TMD for the product. We anticipate focusing on industry compliance with this obligation further in future.

Not influencing employers’ and employees’ choice of fund

The prohibition on trustees or their associates influencing an employer’s choice of default fund is intended to promote good decision-making by employers so they can select a default fund without undue trustee influence.

Recent changes to requirements under s68A of the Superannuation Industry (Supervision) Act 1993 (prohibiting trustees from offering inducements to employers to influence their selection of a default fund) have seen an increase in the scope of the conduct that constitutes influencing an employer, and an increase in the penalty for breaches of these obligations. Further information about how s68A applies is set out in ASIC’s Information Sheet 241 Prohibition on influencing employers’ superannuation fund choice: section 68A of the SIS Act (INFO 241).

In our review, we found that trustees and related entities offered a range of benefits to employee members, such as educational seminars on non-superannuation topics. While these benefits might have helped make the fund seem an attractive choice to an employer these benefits were offered widely across the fund membership and accordingly did not raise concerns that this may constitute a harmful practice.

Not misleading employers and employees

We noted that some trustees have arrangements with commercial payroll providers or HR platform providers to advertise funds via a superannuation fund selection module within employee onboarding software. Trustees using these services should take care that employees are not misled by the presentation of the information into thinking that their employer has approved or vetted the promoted funds. Prominent and appropriate disclaimers are likely to be needed to achieve this outcome.

ASIC’s expectations

We remind trustees to keep in mind their obligations to avoid harmful behaviours, including hawking, misleading representations when promoting funds and unlawful inducements of employers. Trustees also need to make sure any messages about their products and services remain accurate and balanced and understand how any advertisements are delivered to employees if using third party providers.

For more information, refer:

Information Sheet 89, Communicating with employees about superannuation fund choice: what you can and cannot do (INFO 89)

Information Sheet, 241 Prohibition on influencing employers’ superannuation fund choice: section 68A of the SIS Act (INFO 241)