Views on the bill
2.1
The Treasury Laws Amendment (Improving Accountability and Member
Outcomes in Superannuation Measures No. 2) Bill 2017 (Measures No. 2 bill) amends
the Superannuation Guarantee (Administration) Act 1992 (SGAA) to extend
choice of fund provisions for employees (schedule 1); and remove the capacity
of employers to use salary sacrifice contributions to reduce minimum
superannuation guarantee contributions (schedule 2).
2.2
This chapter discusses the specific schedules and examines the related
issues raised by the inquiry.
Schedule 1¾Choice of fund for
workplace determinations and enterprise agreements
2.3
Schedule 1 amends the SGAA to ensure employees under workplace
determinations or enterprise agreements have an opportunity to choose the
superannuation fund for their compulsory employer contributions. This measure
applies to new workplace determinations and enterprise agreements made on or
after 1 July 2018.
2.4
The 2014 Financial Systems Inquiry (FSI) found that a 'significant
minority of employees cannot choose the superannuation fund that receives their
Superannuation Guarantee (SG) contributions'. The report noted that this is
particularly the case for those employees who have a superannuation fund
nominated in the enterprise agreement, workplace determination or state-based
award.[1]
2.5
Both the Productivity Commission (PC) and the Australian Superannuation
Funds of Australia (ASFA) have noted that approximately 20 per cent of
superannuation members have been unable to exercise genuine choice due to such
restrictions, supporting the FSI findings.[2]
2.6
Given the importance of compulsory superannuation contributions to
individuals' retirement incomes, the bill states that individuals should be
able to decide where their compulsory superannuation goes. Lack of choice of
fund for all workers has a potential to disadvantage some Australians and may
contribute to employees having multiple superannuation accounts and paying
multiple sets of fees and insurance premiums, which can reduce their retirement
income.
Support for the measure
2.7
Not surprisingly, many submitters support the general intent of the bill
and the amendments to the SGAA.
2.8
Mr John Maroney, CEO of Self Managed Super Fund Association (SMSFA), told
the committee that SMSFA was generally supportive of the bill's provisions noting
that it is particularly focused on the issue of choice and competition. Mr Maroney
stated that 'giving all employees the option to select their own superannuation
fund is an essential element in promoting an efficient and competitive
superannuation sector'.[3]
2.9
In specific regard to SMSFA trustees, he noted that:
...about 60 per cent are aged 55 or older...working in part-time
jobs under an enterprise agreement while transitioning to retirement.
The fact they can be employed under an enterprise agreement
can dictate where their superannuation guarantee contributions go. We believe
this is unfair and inefficient and that it needs to be changed. It's not just
the self-managed super funds that are affected by lack of choice. Arrangements
that fail to give employers or employees any choice as to where their super
guarantee contributions go may have widespread negative consequences, of which
the most significant is accounts proliferation, resulting in multiple sets of
fees and insurance premiums, both of which can erode superannuation balances
unnecessarily.[4]
Improving competition
2.10
CHOICE in its submission highlighted the issue of lack of competition as
a driver for change. CHOICE recounted an individual who had tried to
consolidate her contributions into one fund only to see it whittled away by
fees. The individual, CHOICE stated, would have preferred to place all her
contributions into a non-default scheme she has, as she prefers the customer
experience she receives even though the two funds 'perform comparatively well
against the market'.[5]
2.11
The recent PC draft report examining the superannuation industry, notes
that it:
...is a timely opportunity to look at potential ways to
introduce more competition into a system that benefits from a large flow of
mandated superannuation contributions, and much of that from disengaged
members.[6]
2.12
The Financial Planning Association of Australia[7]
supports both amendments to the SGAA as does the Association of Financial Advisors
(AFA). In its submission in support of the provision of choice to employees
working under workplace determinations and enterprise agreements, AFA noted
that the lack of choice has a detrimental impact in a number of scenarios,
including the following:
-
Employees with two or more part time jobs that are covered under
an enterprise agreement where they would be forced to contribute to separate
funds and pay fees to each fund.
-
Situations where an employee has moved from one employer to
another and is forced to commence contributing to a new fund. It may be in the
best interests of the employee to continue paying into the previous fund. One
example would be where they have insurance in the old fund that they do not
want to give up. This might include circumstances where they have implemented
tailored insurance arrangements that may have been put in place as a result of
financial advice and required medical underwriting. It may also be the case
that the previous fund provides better terms and more suitable investment
options than the new fund.
-
Another situation might arise where the employee was previously
self-employed and had set up their own SMSF, which they want to retain and don't
want their contributions to go into a new fund.[8]
Reducing duplication of processes
and fees
2.13
Likewise Dixon Advisory offered that allowing individuals to choose the
funds which they contribute into will reduce duplicity of accounts, especially
for individuals who change jobs on a regular basis. It would also reduce
duplication of insurance and administration fees from having multiple accounts,
and it would also provide sufficient flexibility for individuals to keep their
superannuation consolidated making it easier for them to track balances and ensure
compliance against rules, such as the total superannuation balance cap.[9]
2.14
In commenting about a suggested proliferation in the number of super
fund accounts as a result of choice, Mr John Maroney of SMSFA, stated:
I think the history would reflect that it was quite difficult
to aggregate accounts. So choice would have led people having more accounts,
with a quite involved manual process to combine accounts. But with improved
technology in recent years and issues such as [Australian Taxation Office (ATO)]
SuperStream, it's now much more efficient and convenient for people to
aggregate their accounts. So if one chooses to use a particular fund for future
contributions one can go to the MyGov site, tick a few boxes and essentially
have an account aggregation happen fairly efficiently and without a lot of
paperwork.[10]
2.15
A number of industry bodies noted the benefits of improvements to MyGov
and the ATO's SuperStream, for example the Australian Chamber of Commerce and
Industry (ACCI) in expressing its support for both provisions in the bill stated
that:
Reducing the incidence of multiple account holding and
account consolidation has been a major focus of superannuation policy and
reform actions over the last few years. Changes to the lost small accounts
rules, the use of the TFN as an identifier, SuperStream, and the structure and
functionality of MyGov, have all been directed at reducing the incidence of
multiple account holding and supporting account consolidation.[11]
2.16
While recommending passage of schedule 1 as introduced, ACCI made the
following suggested amendment:
The effect of item 6 of Schedule 1 appears to be that not
only new employees commencing on or after the day which a new agreement (made
after 30 June 2018) starts to apply should be given standard choice forms, but
so should those which have commenced with the employer within the previous 28
days. The Australian Chamber encourages the Committee to consider whether this
might be addressed by publicity or an amended transitional provision clearly
excluding employees in employment with the employer on the day that the new
agreement commences.[12]
Choice with consequence
2.17
The Australian Institute of Superannuation Trustees (AIST), a non-profit
organisation, supports both schedules in the bill. However, in providing its
support for choice of fund it noted that:
AIST supports the principle of choice in superannuation but
argues this has to be provided in a way that does not leave consumers worse
off, and operates in an environment of meaningful disclosure and consumer
protections.[13]
2.18
Likewise, a number of submissions noted cautious support for the bill, calling
for parallel consumer protection measures to be enacted to safe guard those
vulnerable members in the workforce. The Construction, Forestry, Mining and
Energy Union (CFMEU) stated that:
It should not be assumed that employees will be completely
free to choose the fund/s that best meets their interests if these measures are
approved. The reality of the workplace applies here. The opening up of access
to the full range of superannuation funds on an individual basis will expose
employees to considerable pressure from both employers and superannuation funds
to direct their superannuation contributions to a particular fund which favours
them.[14]
2.19
Thirteen of the 32 submissions received by the inquiry were from union
organisations that unanimously rejected the bill. Fundamental to their
reasoning was that the very nature and collective value derived from enterprise
bargaining agreements for their members, who in many cases will not have the
wherewithal to understand and make informed choices on such an important issue
is reason enough for the continuation of the status quo.
2.20
The Queensland Nurses and Midwives' Union explain the extension of the
role union representatives contribute in providing effective super funds to
their members:
Union trustee representatives on superannuation fund boards
undertake a critical extension of their everyday activism on behalf of members.
It is imperative unions continue to advocate for members across their lifespan
by promoting strategies that provide dignity in retirement. This includes the
optimisation of retirement savings through superannuation and campaigning for
the maintenance and enhancement of non-superannuation related factors that
contribute to secure retirement such as health care and housing.[15]
2.21
In pressing the point that many workers lack understanding regarding
super funds, ISA states that:
...the propensity of consumers to make complex financial
decisions is not likely to improve in the near future. It is therefore not
surprising that a considerable number, in the order of two thirds of fund
members, rely on default arrangements in enterprise agreements and modern
awards.[16]
2.22
The PC in its 2015 report, Superannuation Policy for Post-Retirement
remarked that financial literacy in Australia is generally well-developed and
improving, but certain groups namely the relatively poor, women and Aboriginal
and Torres Strait Islander peoples have been identified as being more likely to
have poor financial literacy. In regard to superannuation, the PC reported that:
Broadly speaking, Australians are less financially literate
in matters relating to superannuation and retirement planning than financial
matters in general. A shift from defined benefit to defined contribution plans
for some along with a demographic shift caused by the retirement of the 'baby
boomers', longer life expectancies and increased immigration of those who may
be unfamiliar with Australian financial systems, means that many require a
greater level of financial literacy when it comes to making plans for their
retirement.[17]
Removal of exemptions
2.23
A number of submitters raised the issue of the removal of exemptions
from the measure, for example they do not allow the continuance of the choice
of fund exemptions where additional superannuation benefits are provided (such
as, automatic group insurance).
2.24
ISA also argues that a clear benefit extends from the choice of fund
exemption to allow the inclusion of specific named funds within enterprise agreements
in certain industries. These, ISA stated, are often driven by the inclusion of
automatic group insurance to members of the fund, which for many employees,
particularly those in high-risk industries, will be the only insurance coverage
they will be able to obtain. Therefore, ISA stated, that they should remain an
allowable exemption.[18]
2.25
Furthermore AIST also argues the case for existing exemptions from
choice of fund to remain in some cases, noting that:
...in the event the Government decides to proceed with this legislation,
AIST proposes that the existing exemption remain for enterprise agreements
where superannuation benefits in excess of the community standard [similar to
ISA's insurance issue] are negotiated between the employer and their employees.[19]
Defined benefit schemes
2.26
Division 4 of Part 3A of the Measures No. 2 bill sets out a process to
be followed when an employee is choosing a fund. Proposed subsection 32F(3)
ensures that employees who are existing members of certain defined benefit
schemes cannot choose another fund. These are schemes where a member's
retirement, resignation or retrenchment benefit in the fund would remain
unchanged if the employer made contributions to another fund under the choice
of fund arrangements.
2.27
The purpose of this section is to address those employees who are by
default, at commencement of employment, members in a defined benefit
superannuation scheme and who cannot exercise choice of fund. With respect to
this section, the Law Council of Australia (LCA) have expressed a concern that
there may be potential that someone could by commencement become an automatic
member in a defined benefit scheme by default; but because of the potential
time delays in registration could see an individual register in an alternative
fund leaving the employer liable for final defined benefits. The LCA states
that:
[It] strongly recommends that this provision should also
contemplate employees who are eligible to be, and will become, a defined
benefit member because the employer is bound by an agreement to put its members
into a defined benefit fund. Otherwise, there is an issue if the employer is
bound by an industrial arrangement to put new employees in a defined benefit
fund, but there is (as is inevitable) a delay between commencing employment and
the employer sending the first contribution to the defined benefit scheme
(which is when the new employee actually becomes a member).[20]
2.28
The LCA further explained that:
New s 20(3A) proposed in the bill, together with existing s
32NA(9)(b), indicate an intention that in this situation the employer should
not be subject to 'double jeopardy' of the employee choosing another fund but
while also being entitled to defined benefits. However, the threshold for
s 32NA(9) is the wording in sub-section (1) that the employee is (in the
present tense) already a defined benefit fund member. This in turn leads to a
heightened risk of adverse selection against an 'open' defined benefit fund.[21]
Schedule 2¾Salary sacrifice
integrity
2.29
Schedule 2 amends the SGAA to improve the integrity of the
superannuation system by ensuring that an individual's salary sacrifice
contributions cannot be used to reduce an employer's minimum SG contributions.
2.30
The amendment would implement the Superannuation Guarantee
Cross-Agency Working Group's recommendations to prevent contributions made as
part of a salary sacrifice arrangement from satisfying an employer's SG
obligations (Recommendation 8); and specifically include salary or wages
sacrificed to superannuation in the base for calculating an employer's SG
obligations.
2.31
Under a salary sacrifice arrangement an employee agrees to forego part
of their future salary or wages in return for their employer providing benefits
of a similar value. Employees are also able to salary sacrifice amounts of
their future salary and wages to be paid by their employer to a superannuation
fund as superannuation contributions. These contributions are deductible for
the employer and are not included in the assessable income of the employee
(subject to concessional contributions caps). Instead, these contributions are
included in the assessable income of the superannuation fund and generally
taxed concessionally at a rate of 15 per cent.
2.32
Currently, salary sacrificed amounts count towards employer
contributions that reduce an employer's mandated SG contributions. In addition,
employers can calculate SG obligations on a (lower) post salary sacrifice
earnings base. While employees salary sacrificing may obtain other taxation
benefits, employees who salary sacrifice to boost their superannuation savings
may end up with lower superannuation contributions than they expect.
Support for the measure
2.33
The measure improves the integrity of the superannuation system by
ensuring that an individual's salary sacrifice contributions cannot be used to
reduce an employer's minimum SG contributions. Possibly because of the past
reviews and inquiries, this schedule was a non-controversial issue with
submitters unanimous in their strong support for the proposed salary sacrifice
measures.
2.34
While the AIST,[22]
CHOICE[23]
and ISA,[24]
all welcomed the proposed changes, they did suggest that the government could
further improve the proposed approach.
2.35
AIST argued that while the proposed measures will ensure that members
are not short-changed when entering into salary sacrifice arrangements with
their employers, the measures could be enhanced by two changes:
-
making the SG payable on gross remuneration, to avoid complex
formulae and ensure that employees' mandated retirement savings are calculated
the way intended; and
-
removing generic labelling of concessional contributions and ensuring
the source of all concessional contributions are cleanly labelled.[25]
2.36
Mr Alan Kirkland, CEO of CHOICE commented on the benefit of closing the
present salary sacrifice loophole:
Shutting down the salary sacrifice loophole, which has seen
an estimated $1 billion stripped from retirement savings by unscrupulous
employers, is also a great outcome for consumers. It's a common sense reform
which Choice fully supports.[26]
2.37
ISA argued that while the bill closes the salary sacrifice loophole,
this only addresses 16 per cent of the unpaid super problem.[27]
2.38
Treasury provided evidence to the committee noting further measures
already announced by the government to further improve the unpaid super problem:
The measure in this bill, I would say, was a downpayment on
other measures the government proposes to introduce. I think two of the most
important measures the government has announced are intended to provide much
greater visibility to the tax office and substantially strengthen its capacity
to undertake enforcement activities in relation to non-payment of SG. The first
one will be implementation and extension of single-touch payroll. That will
provide more information on SG entitlements and enhanced, more frequent fund
reporting. The ATO will have a much more accurate and real-time picture of what
funds are owed by employers and what money has been received by funds. There
are some other changes as well, but they are the most important changes in
terms of improving the ATO's capacity to detect and remedy non-payment of SG.[28]
2.39
While the LCA is supportive of the salary sacrifice measure, it is
concerned that the operation of the bill in relation to some types of 'Total
remuneration' or 'Total Package arrangements' is uncertain and may have
unintended consequence that requires further examination:
[T]he salary sacrifice integrity provisions in the Bill could
be interpreted as requiring that all superannuation contributions made under
such arrangements are considered to be made under a 'salary sacrifice
arrangement', because all superannuation contributions are agreed by the
employee and reduce the amount of their package that is received in cash. The
effect would be that for these employees their total package is 'ordinary time
earnings' and superannuation guarantee would then have to be calculated on the
total package and paid in addition.[29]
2.40
While opposing the choice of fund measures in the Measures No. 2 bill,
the Australian Council of Trade Unions offered its full support for the passage
of the salary sacrifice measures.[30]
Committee view
2.41
Superannuation is perhaps the most important investment that a person
makes in the course of their working life. Confidence in the investment and
those who manage it is paramount for the future welfare and security of
millions of Australians; not to mention the reduction in reliance on the public
purse.
2.42
The committee notes that the majority of submitters are in favour of the
bill and the impact that it may have on the choice and competition in the
market. Evidence presented to the committee established the current low engagement
rates when it comes to choosing a superannuation fund, and that most simply
take what is provided to them. The committee observes that the central premise
of the bill is to give more employees choice in deciding their super fund, to promote
greater engagement. In addition, the upshot of implementing 'choice of fund' is
the potential for greater competition on fees and services and the possibility
to make it easier for members to track balances and SG compliance.
2.43
The committee notes the potential for greater market power in regard to information
asymmetry among different players in the market¾buyers,
sellers and the intended beneficiaries of services¾all who have the potential to distort the availability and flow
of information about the quality and needs of products in the future
marketplace. The committee encourages industry leaders to be open and
forthright about their products and services to assist people make informed
choices.
2.44
The committee acknowledges that a number of submitters have called for
exemptions to be retained, noting that the legislation does not allow their
continuance under 'choice of fund'. The committee is not supportive of this
suggestion. The committee is cognisant that benefits accrued from the economies
of scale of super funds can go both ways¾benefits
have flowed in the past providing large automatic group insurance to members¾and quite possibly in the future equal
benefits might be forthcoming. However, the committee does consider that issues
pertaining to defined benefits deserve closer examination.
2.45
In regards to the salary sacrifice measure, the committee welcomes the
unanimous support of the amendment by submitters and notes the comments made by
Treasury officials about other related government measures to be pursued.
2.46
The committee notes that the Australian Government asked the
Productivity Commission (PC) to review the competitiveness and efficiency of
the Australia's superannuation system, which will be finalised in 2018. The
committee has considered the views put forward by submitters who argued that
any 'choice of fund' changes should be made after the PC report has been
finalised. The committee believe that this report and the PC final report will
help inform any evaluation of how the amendments proposed in the Measures No. 2
bill are performing into the future. The committee consider that the
effectiveness of the measures should be evaluated in two financial years from
implementation on 1 July 2018.
Recommendation 1
2.47
The committee recommends that the bill be passed.
Senator Jane
Hume
Chair
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