There is something not quite right with the Protecting Your Superannuation (PYS) legislation. Although it is not my place to criticise government policy regarding well-intentioned reforms, it is a different matter where the law is not clear or leads to perverse outcomes.
The new measures for protecting superannuation members seem positive, simple and sensible as a first impression: removing exit fees, placing a 3 per cent fee cap on accounts under $6,000, ceasing insurance on inactive accounts and transferring inactive low-balance accounts to the ATO to be consolidated with active accounts. However, the legislation which enacts these measures has proven so far to be somewhat difficult for the superannuation industry to implement.
In my view, some of the difficulties concern the breadth of legislative drafting and the use of uncertain terminology. The regulators have provided some guidance, but it does not solve the problems.
Some of the difficulties arise from various conceptual notions inherent in the Superannuation Industry (Supervision) Act 1993:
- there are different types of members;
- there are references to different types of products, each of which is ‘a class of beneficial interest’;
- there are references to members having an account; and
- there are references to investment options.
After the MySuper provisions were introduced in 2012, the references to ‘MySuper product’ were essentially interpreted to mean the default investment option. It seems that this arose having regard to the fundamental reason for a fund to have a MySuper product, being for members who do not make an investment choice (see section 29WA).
Trustees therefore applied to be authorised by APRA to offer MySuper ‘products’. In many funds, the default investment strategy/option was re-badged as the single diversified investment strategy adopted for MySuper purposes.
Against this background, it’s interesting to consider the fee cap section in the PYS amendments as a particular example of the difficulties. The relevant section provides that the fee cap applies if the trustee ‘offer[s] a choice product or MySuper product … and on the last day of a year of income of the fund a member of the fund has an account balance with the fund that relates to the product that is less than $6,000’.
A problem arises for a choice member who has one account with a small part of their account balance invested in the MySuper option. In its recent FAQ 1.2, APRA says that such a member holds two products. I do not think this should be the position.
The terms ‘choice product’ and ‘MySuper product’ are defined by reference to the notion of a ‘class of beneficial interest’. That is, a ‘product’ is a ‘class of beneficial interest’, so it makes some sense that APRA gives authority to trustees to offer a ‘class of beneficial interest’ as a ‘MySuper product’. But ‘class of beneficial interest’ is not defined in any way. ‘MySuper product’ is defined as follows: ‘A class of beneficial interest in a regulated superannuation fund is a MySuper product if an RSE licensee is authorised under section 29T to offer that class of beneficial interest in the fund as a MySuper product’; and a ‘choice product’ is essentially defined as anything other than a defined benefit interest or a MySuper product.
Despite the lack of clarity in the key terms, implementation of the PYS reforms requires the wording of the legislation regarding products and accounts to be correlated somehow with the actual design of a fund’s MySuper arrangements.
My proposed solution is that each member should be assessed as to the type of member they are: MySuper member or choice member (disengaged or engaged making investment choices). Put another way, I do not think that one account for one member should necessarily be conceptualised as incorporating multiple products just because one of the investment options the account is invested in is labelled ‘MySuper’.
If it is the case that the MySuper balanced investment strategy cannot be selected by choice members as a mere investment option for part of their account balance (because it should be considered as a separate product), then that should have been made clear in the legislation and regulatory guidance before now.
Ideally, there should be a re-thinking of the legislation – but it may be too late for that and trustees must press on with implementation in the best way they can.
After this article was written, APRA announced that the Government has indicated it will pursue amendments to the SIS Act ‘to ensure the Government’s policy intent, which underpinned the PYSP legislative reforms, is achieved in two areas that have been raised by industry’ including to provide that ‘the legislative requirements allow for the aggregation of a members’ interests in one or more products held within a superannuation account’. This amendment may address some of the issues raised in this article.