Professional Updates: Superannuation Law
Move it or choose it
By John Randall, Partner, and Yvonne Lee, Analyst,
Deloitte Touche Tohmatsu
Choice of fund and portability
Pros and cons
Impacts
M
ove it or choose it — that is the
message currently being spread to
employers, employees and the
superannuation industry in relation to the
handling of superannuation contributions and
benefits. And if the current Government has its
way, employees will soon be able to do both.
It has been five years since the Howard
Government first put forward its proposals to
introduce choice into the superannuation
system. After three bills (the last finally defeated
in the Senate in August 2001) and an election
win, the Government has yet to realise its
proposal. But it has not been discouraged. If
anything, the Government has become more
determined than ever that choice will become a
part of the superannuation system.
Less than a year after defeat of the last
choice Bill, the Government has wasted no time
in putting a fresh Bill before Parliament in the
form of Superannuation Legislation
Amendment (Choice of Superannuation Funds)
Bill 2002 (the ‘Choice Bill’).
However, even before the Choice Bill has
shown any promise of moving through both
Houses, the Government has already unveiled
the ‘next step’ to choice — portability.
Clearly the Government is keen on giving
employees greater control and flexibility in
dealing with their superannuation assets. But is
this really as great as it sounds?
To say that superannuation is a complicated
area is an understatement. Is it therefore wise to
leave in the hands of the individual this
mandatory investment that is designed to
provide the major source of income in
retirement? And how do choice and portability
tie in with other Government policies such as
the safeguarding and protection of
superannuation?
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NOVEMBER 2002
KEEPING GOOD COMPANIES
Policy rationale
The Government believes the public (via
each individual) needs choice and portability
for a number of reasons:
• choice will increase competition in the
superannuation industry
• choice will increase the efficiency of the
superannuation system, leading to increased
returns
• increased competition will force fund
administration charges to go down
• employers and government should not
dictate investment decisions for employees
and this extends to investment in
superannuation — such decisions should be
left to the individual
• portability will allow fund members to
consolidate their superannuation accounts;
this in turn will help to overcome the
inefficiencies that are associated with
holding multiple accounts with small
balances (such as higher administration costs
and consequently, lower returns)
• in a system where employees are able to play
an active role in managing their
superannuation, the system will need to
respond with improved reporting and
disclosure; as this happens, the safety of the
system will continuously improve.
Choice can be seen as a ‘going forward’
measure that will allow employees to decide
where future contributions will be deposited.
Portability complements choice by allowing
existing super entitlements to be moved to an
employee’s fund of choice.
Although each measure operates
independently of the other, choice and
portability can be treated as a package and, in
fact, has been promoted by the Government in
this way. So how will it work?
The Models
Choice
The Choice Bill introduces choice into the
superannuation system by way of amendment
of the existing superannuation
guarantee legislation. The Choice Bill
is divided into a number of sections
explaining which contributions will
satisfy the choice of fund
requirements, how an employer can
satisfy their obligations under choice,
and the consequences to the
employer of failing to do so.
One notable difference between
the current Choice Bill and previous
Bills is its size. The current Bill is less
than 30 pages long, compared with
the first Bill on choice which ran
well over 100 pages. Whereas
previous models provided for limited
and unlimited choice, the current
model is designed purely to provide
unlimited choice for employees.
Under the proposal, employers
will satisfy their obligations to offer
unlimited choice if they have
satisfied a formal choice process or
agree to a fund proposed by the
employee under an individual
written agreement.
The formal choice process is
satisfied if an employer offers a
‘standard choice form’ to an
employee before 29 July 2004 or
within 28 days of commencement of
an employee’s employment. A
standard choice form must also be
given to an employee if an employee
makes a written request for one
(unless the employer has made an
individual written agreement with
the employee or has given the
employee a standard choice form in
the previous 12 months) or if the
employer becomes aware that an
employee’s fund is no longer an
eligible choice fund (ie, a complying
fund).
The standard choice form must
contain certain prescribed
information. It must state that the
employee may choose any eligible
choice fund and it must specify the
details of a ‘default fund’ which the
employer will use if the employee
does not respond within 28 days of
being given the standard choice form.
A default fund is a fund provided
for in a Commonwealth or Territory
industrial award relevant to an
employee. If a fund is not provided
for under the award, then the default
fund will be the fund into which the
employer has been contributing for
the previous 12 months. If the
employer has been contributing to
more than one fund over that
period, the default fund will be the
fund into which the employer was
making contributions for the
majority of its employees.
If the employee is not covered by
an industrial award, then the
employer must select an ‘eligible
default fund’. This must be a
complying fund that satisfies
minimum levels of insurance in
respect of death. Alternatively, an
employee may give written notice to
their employer proposing a fund,
employees will not need to offer
choice.
Employers failing to satisfy the
choice requirements in respect of any
employee will be guilty of an offence
and subject to fines on a strict
liability offence basis (being up to 60
penalty units1).
Portability
The details on portability are not
clear, so far. At this stage, the
Government has been taking
comments in response to a
consultation paper. The Government
has at least indicated that the
portability model should consist of
the following key features:
• the transfer of member benefits
between complying funds,
approved deposit funds (ADFs),
Employers failing to satisfy the choice
requirements in respect of any employee
will be guilty of an offence and subject to
fines on a strict liability offence basis
(being up to 60 penalty units1).
and the employer can then give
written notice to accept that fund,
thereby creating an individual
written agreement between the
parties.
Contributions made for
employees who are members of
unfunded public sector schemes,
contributions made to the
Commonwealth Superannuation
Scheme, the Public Sector
Superannuation Scheme,
contributions made under the
Superannuation (Productivity
Benefit) Act (until such time as
regulations are made to include such
contributions), and contributions
made in accordance with an AWA or
certified agreement, will be treated as
in compliance with the choice
requirements and employers of these
NOVEMBER 2002
•
•
•
•
and Retirement Savings Accounts
(RSAs) at the request of that
member and the consent of the
receiving fund
a member would only be allowed
to transfer the full extent of their
withdrawal benefits (ie, the
amount which would be payable
if they voluntarily exited the
fund) to another fund — partial
transfers would not be allowed
members of defined benefit
schemes would not be allowed to
transfer their benefits while still
eligible to contribute to the
scheme
unfunded scheme members would
not qualify for portability
funds would be required to
transfer benefits within 90 days of
receipt of a member’s request.
KEEPING GOOD COMPANIES
621
Superannuation Law cont.
Choice and Portability
Arguments against
Arguments for
■ increases competition in the industry
■ increases the efficiency of the superannuation
system, leading to increased returns
■ greater competition will drive fund fees down
■ will reduce the number of small accounts
earning little or no returns
■ will reduce the number of accounts on the lost
members register
■ encourages ownership over superannuation
assets, gives employees more control over their
retirement assets, allowing them to make their
own choices and pursue their retirement and
investment goals
■ demand for disclosure of information from funds
will lead to improved disclosure and safety of
superannuation.
■ increases compliance costs to employers and
funds
■ superannuation is too complicated and will not
be understood and will not be handled properly
by individuals regardless of the amount of public
education provided. Employees risk losing their
savings if they make an uninformed decision or
fall victim to an unscrupulous adviser.
■ there is no evidence that choice and portability
will lead to lower fees and charges, particularly
as overseas experiences have shown the opposite
effect
■ choice and portability may actually lead to an
increase in the number of superannuation
accounts as employees move from fund to fund,
possibly chasing higher returns
■ the existing system already offers choice within
funds
■ entry and exit fees are a barrier to choice and
portability but there are no proposals to regulate
or limit the level of entry and exit fees
■ the disclosure regime, even following from
Financial Services reform, will not be adequate or
understood by employees.
The proposed start date for each
of choice and portability is 1 July
2004.
Will it work?
This is the all important question.
After five years and almost as many
Bills, has the Government finally got
it right? On this matter, the critics
are still out. The Choice and
Portability table provides a summary
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NOVEMBER 2002
of the arguments, some of which
deserve further consideration.
One of the key messages being
pushed in the debate is the fact that
Australians have a basic right to
make their own decisions with
respect to superannuation as they
would with any other investment.
Implicit in this argument is that
superannuation is like any other
investment — bank accounts, share
investments, even the purchase of
KEEPING GOOD COMPANIES
the family home. This is a rather
obscure (and, some would say,
absurd) assumption. Superannuation
must be distinguished from other
asset types simply because it is
different.
To begin with, superannuation is
a compulsory investment for
Australians. It is taxed differently
from other assets and is subject to
preservation rules. The same cannot
be said of other asset types. It is
Superannuation Law cont.
arguable that special treatment needs
to continue to be afforded to
superannuation.
Increased efficiency and higher
returns are two of the expected
positives to come out of the
proposals. It is reasonable to expect
that rationalisation of the industry
and enhanced efficiencies will be a
direct result of increased
competition. However, it is arguable
as to whether higher returns will also
result. Ultimately, fund returns are
driven by the performance of the
assets in which the trustees have
invested. While choice and
portability might boost returns
through its downward effects (if any)
on fund administration costs, one
needs to be cautious as to how long
this might be sustained. Indeed, the
ability of investment managers to
invest on a long-term basis is likely
to be hampered by the ability of
individual members to withdraw all
of their benefits within a short
period.
Australians have only started to
come to grips with share investments
over the last decade as a result of a
series of asset sales by the
Government. By comparison,
superannuation is a far more
complicated product. The time and
effort required to gain just a little
understanding is extremely
disproportionate.
One must ask, should employees
even be entrusted with the role of
managing an investment that is, at
the very least, complicated in
nature? Advisers in this area need to
be qualified and more importantly,
licensed in order to give advice as to
how and where money should be
invested. The latter, a more recent
requirement under Financial Services
reform, recognises that investment
management requires a certain level
of technical knowledge of products
and that investing money in
financial products contains elements
of risk that need to be understood
and addressed.
Unfortunately for many
individuals, there may well be the
temptation to chase higher returns
from year to year by frequently
switching between funds. After all,
the best indicator of future
performance is past performance —
isn’t this what every backyard
investment guru says? Changing
funds on a regular basis is costly and
soon erodes the value of benefits.
Overall returns for a member may
actually decline and as the number
of accounts held increases, it will be
more difficult for individuals to keep
track of their superannuation and,
inevitably, accounts may end up in
the lost members register.
Employers are probably
the biggest losers
under the proposed
system. Careful not to
burden the
superannuation
industry with more
administration, the
administrative burden
has instead been
shifted to employers.
Other costs that shouldn’t be
forgotten are the costs incurred by
employees in gathering information
and advice to choose their fund. Not
even Treasury has been able to
estimate these costs. While the Labor
Party has been arguing for a cap on
administration fees charged by
funds, nothing is being done about
limiting fees charged by planners
and advisers, who will no doubt be
the real winners in the choice
regime.
It is one thing to build flexibility
into the system — but protecting
retirement benefits is also part of the
Government’s broader policies on
superannuation. To this extent it
NOVEMBER 2002
should be noted that the Australian
Securities and Investments
Commission (ASIC) has recently
released draft guidelines in relation
to the way in which certain financial
products, including superannuation,
are advertised. Essentially the
guidelines discourage the use of
historical returns and require
qualification of promotional material
that uses historical data. This is a
step in the right direction and may
help to address the above problem.
Impact on employers
Employers are probably the
biggest losers under the proposed
system. Careful not to burden the
superannuation industry with more
administration, the administrative
burden has instead been shifted to
employers.
The task ahead for employers is
huge. Treasury estimates the
compliance cost to employers of
choice in the first year will be $27
million, with recurring costs of $18
million. Interestingly, Treasury has
calculated this on the basis that it
will initially take the 500,000
affected employers three hours in
total to comply with the new rules,
at a cost of $18 per hour after tax.
Bearing in mind that Treasury has
budgeted for a total of $28 million to
be spent over four years to
implement, administer and conduct
its public education campaign, it
might appear that estimates have
been a little optimistic.
Once an employee makes their
choice, it becomes the employer’s
role to give effect to that choice. For
employers, compliance with choice
will almost exclusively depend on a
complete and up to date record
keeping system. Employers will need
to keep track of to whom they have
issued standard choice forms or with
whom they have made individual
agreements and when and to which
fund. Employers will also need to
ensure they remain up to date as to
whether a particular fund is still
accepting contributions and
KEEPING GOOD COMPANIES
623
Superannuation Law cont.
continues to have complying status.
Selecting a default fund will be no
small task either. Poor returns in
recent times may mean that
defaulting to the existing fund may
not be the easy way to fulfil this
obligation. No doubt many
employers would be under pressure
to find a better performing fund,
especially as there is the possibility
that many employees who are
overwhelmed by choice will simply
fall back on the default fund.
Furthermore, while the Choice Bill
has provisions which protect
employers from any liability to
compensate employees for any loss
or damage for, say poor returns on a
default fund, until such provisions
are tested, employers best proceed
with caution.
Under the choice system,
employers should also expect to find
themselves taking on a ‘help desk’
role for employees. Although the
Choice Bill makes no mention of
such a requirement for employers,
employees inevitably will refer
queries to their employer (as the
employer will have provided them
with the standard choice form).
It is critical that employers be
aware of and ensure they only
provide factual information to
employees in relation to the way the
choice system operates. Under no
circumstances should employers start
giving opinions and advice as to
which fund an employee should
choose, unless they hold an
Australian Financial Services Licence
as required under Financial Services
reform. Where an employer is
licensed to provide financial product
advice, the employer will also need
to ensure that disclosure
requirements are adhered to — in
particular, if the employer receives a
commission or some other incentive
for recommending a particular fund
to an employee.
Impact on fund trustees
The key issue confronting trustees
in the choice and portability
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NOVEMBER 2002
environment is disclosure. Choice
and portability has been heavily
promoted as the driver for improved
and enhanced disclosure in the
superannuation system. As the
importance of accountability and
good corporate governance
continues to be highlighted with the
failure of major organisations and
superannuation funds, trustees will
be under pressure to deliver in this
area.
In accordance with the product
disclosure statements (PDS)
requirements following from
Financial Service reform, trustees will
need to ensure that all potential new
members understand what they are
investing in. ‘Clear, concise and
effective’ are the golden rules for
PDS.
Financial Services regulations
regarding the disclosure of
investment fees for superannuation
funds (the so-called ‘ongoing
management charge’) were recently
rejected in the Senate as they were
not considered comprehensive or
comprehendible to the ordinary
investor. Since then, ASIC has
released a report2 which discusses
various options for improving the
way in which investment fees and
charges should be disclosed in the
post-Financial Services reform era.
Trustees should take note of the
options and recommendations put
forward in the report, which include:
• disclosing the purpose of any fees
imposed
• presenting a standardised fees
table that identifies significant
fees (eg, entry, exit, switching and
management fees)
• separating the disclosure of
administration and investment
fees
• standardising the terminology
used across all financial products
(which would allow super to be
compared with other
investments)
• disclosing the capacity to increase
fees and maximum fees in the
fees section of PDS
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• disclosing the impact of fees on
returns over various periods on
both a percentage and dollar basis
• disclosing the amount of fees paid
to advisers in the fees section of
PDS
• disclosure of actual fees relating to
a person’s investment.
While employers have a role to
play in assisting employees, trustees
should note that education needs to
come from all angles — government,
employers and fund trustees. After
all, who knows more about
superannuation than those in the
industry?
Conclusion
If choice is to become entrenched
in the superannuation system, then
its introduction must be done
carefully. Up to $30 billion per
annum in contributions will be at
stake.
And what of portability? Proposed
legislation has not been drafted on
portability, but if anything, moving
existing benefits between funds
requires even more care.
Superannuation assets are currently
valued at around $530 billion and
this figure will continue to grow.
There can be such a thing as too
much flexibility and too much
choice. But will the opposing parties
be persuaded this time? The
Government is keeping its fingers
crossed.
Notes
1
One penalty unit equals $110 dollars.
If a body corporate is convicted of the
offence, the court may impose a fine
of an amount not greater than five
times the maximum fine that could be
imposed by the court on an individual
convicted of the same offence.
2
‘Disclosure of Fees and Charges in
Managed Investments: Review of
Current Australian Requirements and
Options for Reform — Report to the
Australian Securities and Investments
Commission.’