Purpose of the Bill

The purpose of the Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019 (the Bill) is to amend the Superannuation Guarantee (Administration) Act 1992 (SGAA) to ensure employees under new workplace determinations or enterprise agreements have an opportunity to choose the superannuation fund for their compulsory employer contributions.

Structure of the Bill

The Bill is comprised of one Schedule, which makes amendments to the SGAA.

Background

Under the SGAA, employers are required to make contributions to their employee’s superannuation fund (with limited exemptions). Employers are required to contribute a minimum percentage (currently 9.5 per cent, increasing to 12 per cent from 1 July 2025) of each eligible employee’s earnings to a complying superannuation fund.[1] Most employees have the opportunity to choose which fund these contributions are paid into.[2] However, individuals might encounter difficulty making retirement savings decisions that are in their own best interests for a number of reasons, including:

• lack of financial literacy, which limits people’s ability to make informed financial choices
• complexity of investment decisions and difficulty matching risk preferences with the right products
• high search costs in terms of time taken to research and understand what is often a large number of products
• the ‘endowment effect’ where people value money that is lost more highly than money gained, causing them to be unduly conservative in their investment decisions
• lack of price awareness, as compulsory contributions, fees and other costs do not come directly out of members’ pockets
• information asymmetries between superannuation providers and individuals
• a long lag between the initial investment of contributions and the time when the benefits can be accessed
• an associated tendency toward procrastination and inertia in making retirement savings decisions
• mental rules or short cuts (heuristics) that people use when they have no clear preference, or where the cost of acquiring information is too high, which can lead to persistent biases in decision making
• framing effects, where people choose based on how the available options relate to one another, how they are explained and what other information is provided at the same time, rather than which option is in their best interests.[3]

For those employees that do not make an active choice, employers are required to nominate a fund—which is called the default fund.[4] Existing default arrangements evolved in the context of the workplace relations system. Specific superannuation funds were named in awards when superannuation became an industrial matter in national wage bargaining in the 1980s. Several industry-based funds were established as not-for-profit entities to cater for employees in specific industries.[5]

From 1 July 2005, most employees have been able to choose their superannuation fund and the product to which they want their contributions directed. Where employees have not made a choice, funds named in awards have become the default option in many cases. Default arrangements provide a safety net for employees that failed to make a decision, in view of the compulsory nature of superannuation.[6]

Once a default fund has been selected, fund trustees are required to place default contributions into that fund’s default product, which in most cases must be a MySuper product.[7] MySuper accounts were introduced by the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 as simple and cost-effective superannuation products that are able to be more easily compared between funds and do not include features that members do not need or use.[8]

Types of superannuation fund

Accumulation funds

Most Australians have their super in an accumulation fund. The value of a person’s super depends on:

• how much money their employer contributes
• how much extra they contribute
• how much they receive in bonus contributions
• how much the fund earns from investing superannuation contributions
• the amount of fees charged and
• the investment option that the person chooses.

Importantly, investment profits are added to a person’s account, just as investment losses are taken out.

Defined benefit funds

Defined benefit funds are less common than accumulation funds. Most defined benefit funds are corporate or public sector funds, and many are now closed to new members.

The value of a person’s retirement benefit is defined by the fund rules and depends on:

• how much money their employer contributes
• how much extra the person contributes
• how long the person has worked for their employer
• the person’s salary when they retire.[9]

Financial system review

The final report of the Financial System Inquiry (known as the Murray Review after the chair of the inquiry, former CEO of the Commonwealth Bank David Murray) was published in November 2014. The final report noted that there was scope to improve the efficiency of the superannuation system in a number of areas. Of concern was:

A significant minority of employees cannot choose the superannuation fund that receives their [Superannuation Guarantee] contributions. In particular, this affects employees with a superannuation fund nominated in an enterprise agreement, a workplace determination or a state-based award. A 2010 [Association of Superannuation Funds of Australia] paper found that around 20 per cent of employees cannot choose their fund. These exemptions contribute to employees having multiple superannuation accounts and paying multiple sets of fees and insurance premiums, which reduces retirement income. For some individuals, lack of choice contributes to disengagement with superannuation.[10] [emphasis added]

Essentially the Murray Review took the view that the absence of choice is a barrier to members engaging with their superannuation, and that this barrier should be removed—thereby providing flexibility for members and lowering fees through greater competition.[11]

Accordingly, the Murray Review recommended the Government should remove provisions in the SGAA that deny some employees the ability to choose the fund that receives their Superannuation Guarantee (SG) contributions due to the exclusions given to enterprise agreements, workplace determinations and some awards.[12]

The amendments in this Bill respond to this recommendation. These amendments were originally introduced as Schedule 1 of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017 (2017 Bill). The 2017 Bill contained a second schedule that sought to ensure that salary sacrificed contributions did not reduce an employer’s minimum superannuation guarantee contributions. That second schedule was reintroduced and enacted as Schedule 7 to the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019. The 2017 Bill lapsed at the end of the 45th Parliament.

Committee Consideration

Senate Economics Legislation Committee

The Bill was referred to the Senate Economics Legislation Committee for inquiry and report by 20 March 2020. Details of the inquiry are at the inquiry homepage.

In its report, the Committee majority recommended that the Bill be passed, but also made two additional recommendations.[13] Firstly, the Committee recommended that a review be conducted into the effect of this legislation on Defined Benefit Schemes two years after its implementation. Secondly, the Committee recommended the Government considers broader changes as suggested by submitters to further improve the superannuation system. The Committee made particular note that the Treasury's ongoing Retirement Income Review could provide significant opportunity for improvements. Other suggestions by submitters are available at the inquiry submissions webpage.

In a dissenting report, Labor Senators on the Economics Committee recommended that the Bill be amended such that:

• Open Defined Benefit schemes can continue operation, to address concerns raised by Unisuper that their existing products would be detrimentally affected by the Bill
• the Bill includes a provision that allows for workers to bargain for a single fund or set of funds, where it is determined by the Fair Work Commission it is in their best interests.^[14]

Additionally, Senator Rex Patrick of the Centre Alliance recommended the Bill be amended to:

• require a formal ‘dashboard’ and ‘heatmap’ regime to inform workers of their super choices
• include a legislative review after two years by APRA, involving industry consultation, into the effect and any unintended consequences of the passage of the Bill on Defined Benefit Schemes.^[15]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills and had no comment in relation to the Bill.[16]

Policy position of non-government parties/independents

Whilst being debated in the House of Representatives, a number of Labor MPs commented on the Bill.[17] Uniformly, these MPs withheld a final opinion on the Bill pending the outcome of the Senate Economics Legislation Committee inquiry into the Bill. However, they did raise concerns of the Bill’s potentially negative impact on specific Defined Benefit funds[18] – such as UniSuper – as well as concerns about collective bargaining rights being eroded by the Bill.[19]

Adam Bandt MP of the Australian Greens expressed opposition to the Bill.[20] In particular, he noted that employees often lacked individual negotiating power with their employers, and that collective bargaining arrangements were a means for workers to ‘negotiate things that you couldn’t necessarily negotiate individually’. Additionally, he suggested that the Bill might be a first step in further eroding workplace protections – for example, on the right to overtime when working after 6pm – in future legislation, based on the same rhetoric of individual choice.[21]

Rebekha Sharkie MP of Centre Alliance spoke in support of the Bill.[22] She noted that Centre Alliance broadly supported individual choice, and noted that a number of constituents had raised the issue of being in multiple funds due to having multiple employers with mandatory funds (and were therefore paying multiple sets of fees). Additionally, Ms Sharkie noted that she would have preferred the changes in the Bill applied retrospectively to existing workplace determinations and enterprise agreements, but acknowledged the practical concerns with this and accepted the Bill’s drafting as a reasonable compromise.

Position of major interest groups

Unions

When originally introduced in 2017, there was a strong response to the proposed amendments from unions suggesting that the Bill could increase the incidence and magnitude of unpaid super. In particular, the Australian Council of Trade Unions (ACTU) raised concern that regulatory measures that removed workplace agreement funds could have a detrimental effect on the superannuation gender gap:

A number of enterprise agreements exist in female dominated industries (the service sector, nursing, health, hospitality and the like) which include superannuation provisions which are better for women workers than alternative arrangements which would exist in an uncontrolled choice environment. Moving away from these provisions may damage investment earnings potential for women workers, default insurance arrangements and support mechanisms such as those which pursue unpaid superannuation.[23]

Similarly, in its submission regarding this Bill the ACTU suggested that the proposed amendments ran contrary to workers’ interests. In addition to again highlighting risks of unpaid superannuation,[24] the ACTU submitted that the amendments could allow banks more opportunity to cross-promote their superannuation products to banking customers, which would run counter to suggestions in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that bank superannuation funds underperformed in comparison to industry funds.[25]

The Electrical Trades Union (ETU) expressed similar concern in its submission, and cited a 2012 Productivity Commission inquiry report that found that even without direct inducement from banks (prohibited by the Superannuation Industry (Supervision) Act 1993), employers may elect to consolidate all their business with one particular institution by setting it as their default fund, which would benefit the employer without directly considering any cost or benefit to the employees.[26] Additionally, the ETU raised concerns about the ability for insurance arrangements, particularly for high risk industries, to be negotiated without the scale of membership of industry specific funds.[27]

Business

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, indicated support for the Bill.[28] However, she noted that individual employee choice should not be at the expense of small businesses and family enterprises ‘suffering under an additional administrative burden to comply with the “Choice of fund” obligations’ for compulsory contributions.[29] She suggested the Bill be accompanied by government education and publicity measures as well as assistance programs from the ATO and Fair Work Commission, to ensure small businesses understood the changes made by the amendments.[30]

The Australian Chamber of Commerce and Industry echoed this position in its submission, in particular calling for broader awareness campaigns to provide businesses and individuals appropriate information where enterprise agreements are due for renewal.[31]

Trustee organisations

A number of trustee organisations made submissions to the Senate Economics Committee on the Bill.

The Australian Institute of Superannuation Trustees (AIST) supported the principle of choice in superannuation, but proposed that ‘the existing exemption remain for enterprise agreements where superannuation benefits in excess of the community standard are negotiated between the employer and their employees’.[32] AIST suggested that removing the potential for these default arrangements could lead to affected members having materially lower retirement incomes.[33] 

Conversely, Equity Trustees submitted that the Bill was a good first step but that subsequent legislation should be introduced to further extend freedom of choice:

Given the Superannuation Guarantee has now moved beyond its origin as an employee benefit to a legislated requirement, the employer’s role in selecting default funds for its employees is now redundant. Likewise, having any other agent select default funds exposes the employee to the interest of those bodies without any legislative protection requiring those bodies to act in the members’ best interest. [34]

Financial implications

The Explanatory Memorandum states that the Bill will not have a financial cost for the Commonwealth.[35] However, the Explanatory Memorandum also notes that the Bill will have average annual regulatory cost of $5.646 million, which is comprised of $2.245 million for business and superannuation funds and $3.401 million for individuals. These figures are derived from a regulation impact statement made in 2017.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[36]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[37]

Key issues and provisions

Choice of fund and industrial agreements

Currently section 32C of the SGAA sets out the circumstances in which a contribution to a fund by an employer for the benefit of an employee is made in compliance with the choice of fund requirements. In particular, subsection 32C(2) provides that if an employee has not chosen a specific fund, a contribution to a fund complies with the choice of fund requirements if it is made to a default fund.

Subsection 32C(6) of the SGAA provides that a contribution to a fund will comply with the choice of fund requirements if the contribution, or a part of the contribution, is made under, or in accordance with, certain listed agreements and workplace determinations.

Item 5 of Schedule 1 to the Bill amends paragraph 32C(6)(g) so that the choice of fund requirements will only be met in relation to a contribution that is made under, or in accordance with, a workplace determination that was made before 1 July 2020. Similarly item 6 of Schedule 1 to the Bill amends paragraph 32C(6)(h) so that the choice of fund requirements will only be met in relation to a contribution that is made under, or in accordance with, an enterprise agreement that was made before 1 July 2020.

This means that employees who are subject to a workplace determination or an enterprise agreement that is made on or after that date must be given a standard choice form.[38]

Item 7 of Schedule 1 to the Bill inserts proposed subsection 32C(6AA) into the SGAA so that contributions to a fund will comply with the choice of fund requirements if there is no chosen fund for the employee and the fund is a fund to which the employer has previously made contributions for that employee, in compliance with the choice of fund requirements under paragraph 32C(6)(g) or (h).

A failure by an employer to make contributions that comply with the choice of fund requirements will create a superannuation guarantee shortfall.[39] In that case, a superannuation guarantee charge is payable. The amount of the charge is an amount equal to the amount of the shortfall.[40]

Members of defined benefit schemes

Section 32F of the SGAA provides that a member of a defined benefit fund cannot choose another fund. In addition, an employer is not required to give an employee who is an existing member of a defined benefit fund a standard choice form in certain specified circumstances.[41]

Items 1–4 of Schedule 1 to the Bill amend the SGAA in relation to members of a defined benefit fund. Item 1 amends paragraph 19(2B)(c) so that there is no increase in the superannuation guarantee shortfall for an employer who makes contributions in respect of an employee who is a member of a defined benefit scheme and therefore, cannot choose a fund. Item 4 makes a consequential amendment by inserting proposed subsection 20(3A) into the SGAA. Together these amendments operate so that employers who do not technically comply with the choice of fund requirements because their employees are members of a defined benefit fund are not penalised.