Powerful new legislation targets under-performing super funds and a whole lot more
The new Members Outcomes legislation really packs a punch and it’s surprising there hasn’t been more media about its likely impact. Big new powers for APRA, a new test funds must pass to stay in the industry, restrictions on fund inducements to employers and new investment disclosure laws will separately and jointly have a major impact on the industry. Each element will require careful analysis and planning by funds.
In a frenetic and sometime confusing penultimate week of Federal Parliament before the election, the Government finally passed its Improving Accountability and Member Outcomes in Superannuation legislation – passage of the legislation was in doubt until it actually passed. The legislation was signed into law on Friday by the Governor General.
The legislation has been before parliament for almost two years but it still got addressed faster than some other legislation, like the Objective of Superannuation Bill that is still languishing after three years.
APRA gets new super powers…
APRA has welcomed its broader directions powers to take action against under-performing super funds, and to take civil penalty action against funds not meeting their best interests of members obligations. This means that APRA doesn’t have to wait for the law to be broken but can now intervene at an earlier stage – before members suffer significant harm.
What this means in practice is that APRA will be pursuing under-performing funds to merge or exit the industry. Many funds with less than $1 billion of assets are likely to be in this basket, and a small number of larger funds. APRA will be under scrutiny to show that it can quickly and effectively manage this task and do so in a way that doesn’t further disadvantage the members of these funds.
…but APRA didn’t get everything it wanted
The legislation also requires funds to undertake annual outcomes assessment against prescribed benchmarks, including all of their MySuper and choice product options. This is where APRA didn’t quite get what it wanted and APRA is working out how the prudential standard it issued last December will need to be amended to accommodate the new legislation.
In the final version of the legislation criteria to be considered in the outcomes assessment was reduced. Under the amended bill, the focus of both MySuper and choice assessments has to be on fees and costs, returns, and investment risk. This means that the APRA requirement to benchmark member services (for example) as part of the test no longer applies. This is a victory for those who have called for the outcomes assessment to be focused on long-term net returns, with other matters to be secondary considerations.
The legislation also gives the Government powers to make regulations relating to the outcomes assessment requirements suggesting that APRA’s outcomes assessment prudential standard may also be displaced by the regulations.
Super funds will have to hit the ground running now that we finally have more clarity about outcomes assessment requirements. Funds have until January 2020 to get their draft outcomes assessment plan in place so the preparation of these plans is going to jump to the top of fund priority issues.
Prohibition on employer inducements
The legislation was also amended to implement the Financial Services Royal Commission recommendation that funds be prohibited from inducing employers to have them nominate the fund as a default fund. Funds and their associates breaching these new laws will be liable to civil penalties.
While the industry is still waiting on details of the scope of this prohibition (eg, does a sponsorship arrangement contravene this law?) directors of funds need to review existing practices, ensure compliance or risk facing possible civil penalties.
Portfolio Holdings Disclosure
Twice a year, funds now must disclose details of their investments, to level of the underlying asset held directly or through associated bodies. Funds will be required to publish the details of their portfolio holdings on their websites within 90 days after each June 30 and December 31 reporting date.
Annual Member Meetings
Finally, the legislation also requires APRA-regulated funds to hold annual members’ meetings.
In a welcome respite from years of major changes, there wasn’t much in last night’s Federal Budget about superannuation. The few changes were relatively minor and non-controversial, including:
Permanent Capital Gains Tax relief for merging super funds
Relaxed contribution rules for older Australians
Increased funding for regulators
Adjustments to reflect the final Protecting Your Super Act
Establishment of a Superannuation Consumer Advocate
The changes announced in the Budget require legislation. Parliament will sit for the next few days, but an election on 11 May is likely to be called on this coming Sunday or Monday.
We have detailed the superannuation changes in the Budget below:
The Government has announced permanent Capital Gains Tax relief for merging funds. Previously, this relief has been granted on a temporary basis. There are likely to be significant fund mergers in the near future and this will ensure some members receive an increased benefit.
From 1 July 2020, 65 and 66 year-olds will be able to make voluntary contributions (both concessional and non-concessional) to their superannuation without having to meet a work test. Currently, people aged 65 and over have to work for a minimum 40 hours over a 30 day period in the relevant financial year.
People aged 65 and 66 will also be able to make up to three years of non-concessional contributions under the bring-forward rule. People up to and including age 74 will be able to receive spouse contributions, with those 65 and 66 no longer needing to meet a work test. Currently, people aged 65 to 74 can only make voluntary contributions if they work a minimum of 40 hours over a 30 day period in a financial year. People aged 65 and over cannot access bring-forward arrangements and those aged 70 and over cannot receive spouse contributions.
The Government says that aligning the work test with the eligibility age for the Age Pension (scheduled to reach 67 from 1 July 2023) and increasing the age limit for spouse contributions to 74 will give older Australians greater flexibility to save for retirement.
The Government will provide $42 million over the next few years for the ATO to recover unpaid tax and superannuation liabilities including from large corporate entities and high wealth individuals.
They will ramp up regulator spending by more than $640 million, including:
over $400 million to ASIC to support its new enforcement and supervisory strategies
over $150 million to APRA to strengthen supervision and enforcement
over $35 million for a new criminal jurisdiction of the Federal Court.
As a result of the Government agreeing to amendments to the Protecting Your Super Package the Budget was amended to take account of:
extending to 16 months the period after which an account that has not received any contribution is considered inactive;
expanding the definition of when an account is considered active for the ATO-led consolidation regime; and
requiring the ATO to consolidate to an active account, where possible, within 28 days of receipt.
The Government has also announced its intention to establish a Superannuation Consumer Advocate and called for expressions of interest.
We would love to hear what you think of the changes announced in the Federal Budget. Leave us your thoughts and comments below. If you would like to find out more about how these changes will impact you, you can contact us at firstname.lastname@example.org.
While the turmoil in Federal Parliament and the Financial Services Royal Commission were getting all the headlines, other low-key but very important changes had the biggest impact on super funds in 2018 and will again in 2019.
Productivity Commission Report Not the Main Game
Opinion polls have been pointing to the ALP as the favourite to win the next election. Either way, the priority of the Government after the election is going to be on implementing the recommendations made by the Financial Services Royal Commission. The recommendations made by last week’s Productivity Commission’s report on superannuation are going to have a lower priority, although they will continue to influence the policy debate.
Many of the Productivity Commission’s recommendations echo the draft recommendations they made last year, many of which have already been picked up by the Government or incorporated into the Insurance in Super Code. Their signature recommendation of allocating new entrants to the workforce one of ten “best in show” funds (unless they choose an alternative) is a political hot potato that probably won’t be implemented.
Royal Commission Report Set to Dominate the Policy Debate
The Financial Services Royal Commission will issue its final report right on time on Friday, 1st of February 2019, and the Government will make it public immediately. Whatever recommendations are made by the Royal Commission, it is highly likely that both the Government and Opposition will commit to implement all of them after the election.
My prediction is that the Royal Commission will recommend:
a ban on “grandfathered” trailing commissions;
more litigation and less negotiation with companies that break the law;
a new superannuation regulator;
a new or increased focus on conduct regulation;
a large number of prosecutions arising out of their case studies.
All of this is going to take a while to put in place. Legislation is not likely until the end of 2019 and implementation will take place from 2020.
In the meantime, the larger industry funds are experiencing higher than forecast member and contribution flows as they are perceived to have fared much better than their retail competitors at the Royal Commission.
While the superannuation world waits for changes arising from these high-profile commissions of inquiry, the APRA Outcomes Assessment Test, the Insurance in Super Code and re-engineered super fund reporting to the ATO are requiring major investments from funds and are already driving major changes.
New APRA Test, ATO Reporting and Insurance Code the Real Drivers of Change
APRA Outcomes Assessment:
APRA released a package of new requirements for APRA-regulated super funds in December 2018 intended to strengthen the delivery of quality outcomes for fund members. The key change is an annual outcomes assessment, requiring funds to annually benchmark and evaluate their performance in delivering these outcomes as part of their business planning cycles. Not only will this lift standards in super, it will also facilitate the merger of poor performing funds into better performing funds.
New ATO reporting:
New systems for super fund reporting (known as the MATS and MAAS projects) to the ATO will require funds to report on a near real-time basis, thus helping to identify employers not meeting their obligations. This will massively increase the volume of information being sent to the ATO and will mean that myGov and new online commencement forms will have much more comprehensive and up to date information.
Insurance in Super Code of Practice:
Most super funds are in the process of implementing higher standards and quicker claims processing for their members as part of implementing the Insurance Code. Many of the changes in the PYS legislation and recommendations made by the Productivity Commission were already incorporated in similar requirements of the Insurance Code. This includes the cessation of insurance cover for low account balance members and opt-in insurance for many younger members.
IQ Group is Here to Help
The IQ Group is keeping abreast of all these changes and is both mapping their impacts for many of our clients and designing and implementing solutions that improve the member experiences.