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Chapter 2
Overview of the proposed legislation
2.1
This chapter provides an overview of the MySuper Core Provisions Bill
(paragraphs 2.2–2.23) and the Trustee Obligations and Prudential Standards Bill
(paragraphs 2.24–2.35). It also canvasses concerns raised regarding the staggered
introduction of the legislation necessary to transfer Australia's
superannuation system to the choice architecture model (paragraphs 2.40–2.48).
Overview of the MySuper Core Provisions Bill
2.2
The MySuper Core Provisions Bill is intended to introduce the core
framework for the new superannuation regulatory paradigm. As outlined in the
Explanatory Memorandum (EM), the Bill would:
- define a MySuper product;
- set out the framework for trustees to obtain APRA approval to
provide a MySuper product;
- limit a regulated superannuation fund to offering only one
MySuper product except in certain circumstances;
- establish the standard set of available fees;
- determine the rules regarding contribution payments and account
transfers for MySuper products; and
- underpin the MySuper framework with strict liability offences.[1]
Definition of 'MySuper product'
2.3
The Bill would define a 'MySuper product' as a class of beneficial
interest in a regulated superannuation fund that a registrable superannuation
entity (RSE) licensee is authorised by APRA to offer as a MySuper product.[2]
APRA authorisation to classify a
product as a 'MySuper product'
2.4
This circuitous definition of 'MySuper product' would be clarified by
the procedures for trustees to obtain APRA approval to offer a product as a
MySuper product. The MySuper Core Provisions Bill would introduce a
section 29T of the Superannuation Guarantee (Administration) Act, which
would require APRA to provide authorisation if certain conditions are met. To
meet the definition of 'MySuper product', funds must be registered, have five
or more members and, unless certain exceptions are met, be the only MySuper
product in the fund. In addition, APRA must be satisfied that the RSE licensee:
- is likely to comply with the fee charging rules in relation to
MySuper products;
- is likely to comply with the enhanced trustee obligations;
- is not likely to represent a product as a MySuper product when
they are not authorised to do so; and
- is not likely to place contributions of a member that does not
have a chosen product into a product that is not a MySuper product.[3]
2.5
Accordingly, the definition of 'MySuper product' encompasses not only
the characteristics of the product but also the 'likely' actions of the product
provider. The Bill would provide APRA 60 days to assess an application from the
date of its receipt or from the date APRA receives any additional information
requested.[4]
This timeframe may be extended a further 60 days.[5]
2.6
In addition, where an RSE licensee is seeking to offer a MySuper product
before 1 July 2013, APRA will have 120 days to process applications made before
1 July 2013. The 120 day period may be extended by an additional 60
days. The EM states that:
[t]his period will commence on 1 July 2012 if the application
is made prior to that date...Any application received by APRA after 1 July 2013
will mean that APRA does not have the extended period to make a decision but
also means that the RSE licensee will not have the transitional arrangements to
continue to pay contributions to that product after 1 October 2013 until a
decision is made by APRA.[6]
2.7
Once granted, APRA may revoke an authorisation to offer a product as a
MySuper product if the regulator 'is no longer satisfied' that the fund or the
trustee will meet the conditions required under proposed section 29T.[7]
The MySuper Core Provisions Bill would recognise potential links between the
regulation of the financial services industry and the superannuation regulatory
framework. APRA would be required to consult the Australian Securities and
Investments Commission (ASIC) 'if it believes that the cancellation will affect
the RSE licensee's ability to offer one or more financial products'. However,
nothing in the Bill requires ASIC to approve the proposed cancellation prior to
APRA cancelling the authority. Furthermore, failure to consult ASIC does not
invalidate the cancellation of an authority to offer a product as a MySuper
product.[8]
2.8
Consistent with the recommendations of the Super System Review,[9]
the MySuper Core Provisions Bill would also create a second stream of
superannuation products. All superannuation products not meeting the definition
of 'MySuper product' would be classed as 'choice products',[10]
and therefore would not be subject to the MySuper requirements. The EM notes
that the MySuper Core Provisions Bill would not restrict trustees from charging
fees that differ from the fees disclosed in the product disclosure statement.[11]
Characteristics of a MySuper product,
including contributions and account transfers
2.9
The MySuper Core Provisions Bill would require MySuper products to have
the following elements:
- a single, diversified investment strategy;
- equal access to options, benefits and facilities for all members;
- processes for amounts to be attributed to members in a way that
does not stream gains or losses to only some members of the MySuper product,
with an exemption for lifecycle investment strategies;
- no differences in the extent of fee subsidisation of employees of
a certain employer if fee subsidisation is allowed by employers;
-
no limits on the source or kinds of contributions made by or on
behalf of members;
- no pension benefits paid from the assets of the MySuper product;
and
- a prohibition on replacing a member’s interest in that MySuper
product without the member’s consent, other than with an interest in another
MySuper product in the fund, an interest in a MySuper product in another fund
and the replacement is permitted by a law of the Commonwealth, or an interest
in another fund if that transfer is otherwise permitted or required by a law of
the Commonwealth.[12]
Limitations on the number of
MySuper products within a superannuation fund
2.10
The MySuper Core Provisions Bill would provide an exception to the
general rule that a fund may provide only one MySuper product.[13]
Two or more MySuper products may be offered where:
- the RSE licensee is already authorised to offer a generic MySuper
product in the fund, however the proposed MySuper product satisfies either the
goodwill or large employer requirements; or
- the RSE licensee is seeking to apply for authorisation of a generic
MySuper product and is already authorised to offer one or more MySuper products
in the fund but each of those authorised products would satisfy either of the
goodwill or large employer requirements.[14]
Tailored products for large
employers
2.11
Proposed section 29TB of the Bill would allow trustees to provide
tailored MySuper products for large employers. An employer with 500 or more
members of a superannuation fund would fall within the definition of 'large
employer'.[15]
The EM clarifies the parameters of the definition of 'large employer':
To qualify as a large employer, an employer or associate of
that employer must contribute or would, apart from a temporary cessation of
contributions, contribute to the fund for the benefit of at least 500 members
who are either employees of that employer or employees of associates of that
employer. For an employer that is not currently contributing to that fund, they
may qualify if APRA expects that the employer and its associates will
contribute for 500 members by the end of a time period specified by APRA. This
excludes any employee of the employer or associate in respect of whom the
employer or its associates does not make contributions on their behalf to the
fund as well as employees that have a chosen fund different to the fund
offering the tailored MySuper product.[16]
Permissible fees
2.12
Part 2C, Division 5 sets out the permissible fee structure for MySuper
products. Consistent with the government's response to the Super System Review,
proposed section 29V provides that trustees may charge administration fees,
investments fees, buy-sell spread fees, switching fees, exit fees and activity
fees.
2.13
As noted in the EM, the Core Provisions Bill would also require that,
for MySuper products which include a lifecycle investment strategy, all members
will be charged the same investment fee irrespective of their lifecycle stage.[17]
2.14
The Core Provisions Bill does not contain the complete framework for the
standard set of permissible fees. As noted in the EM, further legislative
tranches will introduce provisions to require exit fees, switching fees and buy-sell
spreads to be charged on a cost recovery basis. The EM further notes that
additional tranches will 'define those fees for financial advice that can be
deducted from member accounts',[18]
as well as the parameters for offering discounted administration fees.[19]
The EM does not clarify why these measures could not be included with related
measures in the Core Provisions Bill.
Commencement
2.15
The proposed amendments to the Superannuation Industry (Supervision) Act
would commence on 1 January 2013, or an earlier date fixed by Proclamation.
This would allow APRA to accept applications for authorisation to provide
MySuper products from this date. The amendments to the Superannuation Guarantee
(Administration) Act, which would require default payments to be made to
MySuper products, would commence on 1 October 2013.[20]
MySuper Core Provisions Bill -
Strict liability offences
2.16
Two offences would underpin the core provisions of the MySuper
framework. First, under proposed section 29W, it would be an offence for a
person to offer a product as a MySuper product when not authorised to do so.
Second, under proposed section 29WA, it would be an offence for a trustee to
direct a member's contributions to a MySuper product if the member has elected
to become a member of a choice product.
2.17
The offences would be strict liability offences. Section 6.1 of the Criminal
Code explains that the effect of strict liability is to remove all fault
elements for an offence. That is, it would be irrelevant whether the person
intended to commit the offence, or knew, or was reckless as to whether, he or
she was committing the offence.
2.18
Strict liability is purportedly required for the offence at proposed
section 29W as the conduct prohibited may 'inadvertently cause' an employer to
be in breach of requirements under the Superannuation Guarantee
(Administration) Act.[21]
The EM does not provide justification as to why strict liability for the
offence at section 29WA is required to secure the efficacy of the MySuper
scheme. It does, however, state that it 'is a reasonable expectation' that RSE
licensees have appropriate administrative procedures in place to ensure each
members' contributions are administered in accordance with the new superannuation
framework.[22]
2.19
It is apparent that the offence at 29WA is incomplete. As stated in the
EM, the scope and application of the offence will be clarified by subsequent
draft legislation.[23]
This approach appears to be contrary to Commonwealth criminal law best
practice, as outlined in the Commonwealth Attorney-General's Department's A
guide to framing Commonwealth criminal offences, infringement notices and
enforcement powers. The guide advises that '[t]he scope of an
offence should be clear on its face' and, further, that other provisions should
not ordinarily extend the scope of the offence.[24]
2.20
Further evidence was obtained regarding the strict liability offences at
the hearing on 2 March 2012. Treasury officials explained that strict liability:
...does not go to an element of intent by the person who is
causing the breach. If objectively on the face that provision, you breach the
elements of the provision, it does not matter whether you intended to or not...
With respect to this particular provision, I would suggest it is very unlikely
that you would accidently represent yourself as offering a MySuper product when
you are not authorised to. You have to apply to APRA to be authorised to offer
MySuper, so the element of intent of deliberately breaching this provision is,
I think, not as relevant.[25]
2.21
This explanation did not address the effect of proposed section 6.1 of
the Criminal Code, whereby it would also be irrelevant whether the person knew,
or was reckless as to whether, he or she was in breach of the MySuper licence
requirements.
2.22
However, the imposition of strict liability under the offences at sections
29W and 29WA was considered by the Senate Standing Committee for the Scrutiny
of Bills. The committee concluded that 'although the explanatory memorandum
does not raise the point, it would be reasonable to expect the licensee to be
in a position to guard against the possibility of a contravention.'[26]
Trustee Obligations and Prudential Standards Bill
2.23
The Trustee Obligations and Prudential Standards Bill contains measures
in response to the recommendations of the Super System Review to strengthen
trustee duties generally and to impose additional obligations on trustees of
MySuper products.[27]
The Bill would also allow for APRA to make prudential standards to govern
Australia's prudential system.[28]
Trustee obligations
2.24
Section 52 of the Superannuation Industry (Supervision) Act outlines the
obligations that apply to superannuation trustees. These obligations will be
strengthened by new and expanded obligations. These obligations include that
the superannuation trustee must:
- exercise the same degree of care, skill and diligence as a
prudent superannuation trustee;[29]
- act fairly in dealing with classes of members and members within
a class;
- give priority to the interest of members where a conflict exists;
- formulate, review and give effect to an insurance strategy for
the benefit of the fund's members;
- formulate, review and give effect to a risk management strategy
and manage financial resources to cover operational risk;
- in addition to the existing requirements regarding investment
strategies—which relate to the fund as a whole—trustees must formulate
investment strategies for each investment option and offer a range of options
to allow adequate diversification. Trustees will also be obliged to have regard
to valuation information, expected tax consequence and costs in their
investment strategies.
2.25
Additional obligations will be introduced in respect of trustees that
offer MySuper products. This reflects the unique nature of MySuper as a default
product; as noted by the Minister in his second reading speech, members of
MySuper products 'have effectively delegated all decisions for their
superannuation to the trustee'.[30]
Trustees of a registrable superannuation fund that includes a MySuper product
will be required to:
- promote the financial interests of MySuper members (in particular
returns after the deduction of fees, costs and taxes);
- assess on an annual basis whether the fund has sufficient assets
and members to enable it to continue to promote the financial interests of
MySuper members; and
- include in the investment strategy for the MySuper product, and
update on an annual basis, the target investment return and level of risk for
the product.
2.26
The duties that will apply to directors of corporate trustees of
superannuation funds in relation to a MySuper product and more generally are
separately outlined.[31]
These obligations are largely similar to those applying to superannuation
trustees but focus on the directors as individuals. The EM also notes that APRA
will provide specific guidance on some standards that are 'objective', noting
for example that 'new directors will not be expected to have the level of skill
and knowledge of an experienced director immediately'.[32]
2.27
The new trustee obligations will commence from 1 July 2013.[33]
With some minor exceptions, the new obligations will not apply to self‑managed
superannuation funds.
2.28
Issues relating to the proposed trustee obligations are explored further
in chapter 4.
Prudential standards
2.29
The operating standards in relation to superannuation are currently
outlined in Part 3 of the Superannuation Industry (Supervision) Act, with
additional standards prescribed in regulations.
2.30
The reliance on primary and subordinate legislation to form the system
of standards that governs the superannuation industry differs from the
frameworks which apply to other areas of the financial system. While APRA has
the power to issue standards in relation to authorised deposit-taking
institutions, life insurance companies and general insurance companies, it does
not have a similar power that covers superannuation funds. The Stronger Super
Review argued that APRA should be given a general standards‐making power in relation
to superannuation.[34]
The Review observed:
Standards can be made and varied more quickly than
regulations which means that, if required, the law can be quickly adjusted to
respond to developments in the industry. Further, complete topics could be
addressed under a single standard whereas, at present, a topic may be found in
several places in the SIS Regulations ... the Panel believes that it is
important that trustee duties not be sprinkled across several places but,
rather, be readily available to trustee‐directors in one place.
This also means that a standard has the capacity to leave less room for
uncertainty than the promulgation of regulations on the same topic.[35]
2.31
Schedule 2 to the Trustee Obligations and Prudential Standards Bill will
give APRA the power to issue prudential standards in relation superannuation
prudential matters. These standards must be complied with by RSE licensees and
'connected entities'—the RSE licensees' subsidiaries and other entities prescribed
in regulations.
2.32
APRA will be able to determine prudential standards on any matter that
includes:
-
protecting the interests of members;
- ensuring that the conduct of an RSE licensee or connected entity
meets the reasonable expectation of members;
- keeping an RSE licensee or connected entity in a sound financial
position;
- ensuring the conduct of an RSE licensee does not cause or promote
instability;
- the appointment of auditors and actuaries and the conduct of
audits and actuarial investigations.[36]
2.33
APRA will have the prudential‑making power from the date of Royal
Assent. The EM states that this will allow time for the standards to be
developed and for industry to transition to them, generally by 1 July
2013—although some standards that relate to MySuper may apply from 1 January
2013.[37]
Committee view
2.34
The committee did not receive evidence on the standards-making power
that the Trustee Obligations and Prudential Standards Bill proposes to give
APRA. The power for APRA to make prudential standards will give it greater
flexibility in performing its role as a prudential regulator and responding to
developments in the superannuation industry, and the industry will benefit from
the clearer and better‑targeted rules that will result. The committee
notes that the framework for the proposed powers appears similar to those that
apply to the other industries prudentially-regulated by APRA, and the standards
will still be subject to Parliamentary oversight through the disallowance
process. Accordingly, the committee supports the prudential standards
provisions and this report does not examine them further.
Commencement of the MySuper superannuation system
2.35
A number of submitters to the inquiry raised concerns with the
commencement date of the compulsory contributions to default MySuper products. It
was put to the committee that a date of 1 October 2013 for the
commencement of MySuper products as the default superannuation vehicle is not
feasible. Sunsuper noted that the changes may require 'lengthy computer system
change lead times' and accordingly recommended Parliament promptly address the
draft legislation.[38]
Similarly, Mercer submitted that the timeframe for the transition to the new
superannuation regime is 'extremely tight', positing that the legislation would
not pass parliament until the Spring 2012 sittings.[39]
Accordingly, Mercer recommended the 1 October 2013 start date be deferred
until July 2014.[40]
The Association of Superannuation Funds of Australia also proposed a
1 July 2014 commencement date, arguing that 'October 2013 does not
give the industry or employers enough time to adjust to the changes'.[41]
2.36
In contrast, the Australian Institute of Superannuation Trustees (AIST) supported
the proposed 1 October 2013 commencement date, submitting that the date allows
sufficient time for industry to transition to the new superannuation framework:
We support the timetable that is in place at the moment. We
think it is in the nature of the superannuation industry, which is a large and
sophisticated industry, to be able to cope with change. It is one of the
criticisms that are often levelled at the creators of the superannuation system
that change rolls about every year or two. As a consequence of that I think the
industry is actually quite used to implementing quite significant changes on
relatively short time lines, including in circumstances where the full details
of the change are coming from a number of different directions.[42]
2.37
However, the AIST further commented that a prompt introduction of all
legislative measures required to introduce the superannuation reforms is
required to ensure a smooth transition to the new superannuation regulatory
framework.[43]
Committee view
2.38
The committee acknowledges concerns with the timeframe to transition to
the MySuper system. However, the committee notes that the reforms were formally
announced in December 2010,[44]
and have been the subject of extensive industry consultation that included the
release of exposure draft legislation for public comment.[45]
The committee concurs with the views of the AIST that the industry is
well-placed to adapt to the new superannuation framework in time for a
1 October 2013 start date. However, the committee also notes the
views of the AIST and other submitters that it is imperative that the
legislation be confirmed and addressed by parliament as soon as possible. As
will be considered, the introduction of the legislative measures in tranches
undermines the timely consideration of the MySuper legislation.
Further tranches—additional legislation to introduce the MySuper system
2.39
As the Bill's title indicates, the MySuper Core Provisions Bill would
establish the framework for the MySuper system. As noted in the EM, further
legislative measures are required to establish the MySuper system.
2.40
With the introduction of the Trustee Obligations and Prudential
Standards Bill, the following 17 measures are yet to be provided for the
Parliament's consideration:
- further requirements in respect of insurance;
- allowing defined benefit funds and schemes to continue to be a
default superannuation product;
- rules for the charging of financial advice deducted from member
accounts and charging for intra fund advice;
- arrangements for the transition of member accounts from existing
default superannuation products to MySuper products;
- trustee duties for eligible rollover fund licensees that will be
similar to the specific trustee duties in relation to MySuper products;
- prohibition on deduction of commissions from MySuper member
accounts;
- rules for the payment of performance based fees by RSE licensees
to investment managers in relation to the assets of a MySuper product;
- limitation of certain fees to cost recovery;
- a rule for the fair and reasonable allocation of costs between
each MySuper product and each choice product within a fund;
- additional governance measures (relating to selection of service
providers, not preventing directors of trustees from voting other than in
certain limited circumstances, increasing the time limits for which members can
lodge complaints to the Superannuation Complaints Tribunal in relation to total
and permanent disability (TPD) insurance claims, requiring trustees to provide
members with reasons for decisions in respect to formal complaints and providing
APRA with the administrative power to impose fines);
- ensuring APRA has the ability to determine prudential standards
to facilitate the transition process;
- enhanced data collection and data publication powers for APRA;
- additional disclosure requirements in relation to MySuper and
choice products;
- consequential amendments to deal with the nomination of
superannuation funds in modern awards and enterprise agreements;
-
consequential amendments to the Corporations Act 2001 to
ensure the necessary obligations of that Act apply to MySuper products;
- consequential amendments to move requirements for fitness and
propriety, actuaries and auditors from the legislation to prudential standards;
and
- amendments to the Corporations Act so that RSE licensees that are
also responsible entities of managed investment schemes are no longer exempt
from the Corporations Act requirements to have available adequate financial
resources.[46]
Concerns with the staggered
approach
2.41
Evidence before the committee is highly critical of this staggered
approach to introducing the MySuper reforms.[47]
The views expressed by the Financial Services Council are representative of the
concerns raised:
The FSC wishes to highlight the difficulty in commenting on
and legislating significant reforms, such as MySuper, in multiple phases. Many
questions arise in relation to the Bill, which may be answered in later
tranches. Further, subsequent tranches may give rise to additional issues with
this Bill. It is therefore very difficult to properly assess the full impact of
the Bill without the benefit of the related tranches of legislation,
regulations and prudential standards.[48]
2.42
Reflecting these concerns, AIST submitted that additional elements
fundamental to the operation of the MySuper scheme could appropriately have
been included in the MySuper Core Provisions Bill:
AIST notes that the issues it identifies with the Bill may be
addressed in the subsequent tranches of legislation. Conversely, matters that
appear settled in the Bill may be disturbed in the subsequent tranches and
require additional and possibly modified comment on the Bill. This is not an
ideal way for either Parliament or bodies with an interest in the legislation
to consider a highly important reform package.
It would have been preferable for key elements of MySuper
(eg, trustee duties, protections for members transferred between funds when
they change jobs, and the prohibition on commissions) to have been included in
the first tranche.[49]
2.43
The Corporate Super Association questioned whether a tranche approach
will deliver the new superannuation framework effectively:
We do acknowledge that the scale of the legislative task that
has been undertaken is considerable, but we are not happy with piecemeal
introduction of legislation that is intended to work as a package. If the
operation of the part that has been introduced depends on the subsequent
introduction of a later tranche, it is undesirable. Later tranches may not be
passed if parliament does not sit as anticipated or the timetable is delayed;
hence, the legislation may remain incomplete and either ineffective or hard to
enforce. And piecemeal introduction does not give the public or parliament a
full and complete understanding of the legislation which is being considered.[50]
2.44
It was evident that the introduction of the MySuper scheme in tranches
has resulted in Bills that are not self-contained. It was put to the committee
that matters contained in one Bill cannot be evaluated on the basis of the
provisions in that Bill alone. Rather, understanding one concept requires
reference to all tranches of the MySuper legislation. This includes the regulation
of intra-fund advice.
Intra-fund advice
2.45
Several submitters brought the matter of intra-find advice to the
committee's attention.[51]
Strong views were expressed regarding the regulation of intra-fund advice, and
it was noted with concern that the form of the regulation is currently unclear
as later tranches of MySuper legislation will affect the parameters in which
intra-fund advice may be provided.[52]
Treasury confirmed that the approach to regulating intra-fund advice is a
matter that has yet to be settled. Treasury officers advised that '[w]e have
not got to the detailed drafting yet', with one adviser stating 'I do not have
any more detail than was outlined in the press release of 8 December.'[53]
Committee view
2.46
The committee acknowledges stakeholder concerns about a staggered
approach to introducing legislative measures to comprehensively modernise
Australia's superannuation system. The committee appreciates the details
provided in the Explanatory Memoranda to the Bills regarding the measures
required to wholly implement the MySuper system.
2.47
The committee agrees with stakeholders' views that introducing the
measures in various legislative tranches diminishes stakeholders', and the
Parliament's, capacity to comprehensively review the measures proposed. The
introduction of the MySuper legislation in numerous tranches in effect asks
Parliament to pass a segment of an overall policy scheme, in reliance on
statements by the Executive on the final form of the scheme. It is also of
concern to the committee that measures in tranches yet to be introduced, and
apparently still under development, will affect the measures in the two Bills that
are the subject of a parliamentary inquiry. However, given the extensive nature
of the policy changes announced, and the need for lengthy consultation with
industry (which they themselves have requested and been given), these
significant reforms require a practical response. While the approach taken may
not be best practice, it is the most practical.
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