CHAPTER 2
THE CHOICE OF FUND PROPOSAL
Background to the legislation
2.1 The Government first announced its choice of fund policy prior to
its election in 1996. The then Shadow Minister for Superannuation and
Retirement Incomes, David Connolly MP, presented a paper to LIFA in May
1995 that outlined the Coalition's intended approach:
The Coalition has long supported greater freedom of choice for superannuation
contributors and greater competition between funds as the best way to
reduce costs and increase returns ...
...
There is no justification for over-riding employees' right to choose
the fund into which their contributions should be paid. Most retirees
will become heavily dependent on the performance of their superannuation
fund, and their vulnerability will be significantly increased by their
inability to choose or change the fund into which their contributions
are paid. [1]
2.2 In an address to the Association of Superannuation Funds of Australia
in November 1995, the then Shadow Treasurer, Peter Costello MP, further
elaborated on the Coalition's position regarding choice of fund:
Under a Coalition government, no superannuation fund will enjoy the
privilege of a captive market dictated through industrial awards. Employees
will have a choice. They will be able to exit a poorly performing fund.
Superannuation funds will have to compete for business. [2]
2.3 The Government described its choice of fund proposal in detail as
part of the May 1997 Budget. The Government announced that it would introduce
choice of fund for new employees from 1 July 1998, and extend choice to
existing employees within two years of the date of effect of the legislation.
Under the Government's proposal, employers were required to offer employees
choice from among five or more complying superannuation funds or Retirement
Savings Accounts (RSAs) nominated by the employer.
2.4 The Government announced changes to this policy on 25 November 1997,
following extensive consultations with industry. Announcing the changes,
Senator the Hon. Rod Kemp, the Assistant Treasurer, said that the `enhancements'
would:
...improve the choice arrangements by significantly reducing the administrative
burden on employers while ensuring the key objective of providing choice
of fund to employees is achieved. [3]
2.5 The major changes to the original policy were as follows:
- limited choice of five funds reduced to four; and
- introduction of a new `unlimited employee choice' option.
The legislation
2.6 On 4 December 1997, the Government presented Taxation Laws Amendment
Bill (No. 7) 1997 in the House of Representatives. This bill includes
provisions (contained in schedule 5) that implement its announced policy.
2.7 The Government describes its objectives in introducing this proposal
as follows:
The choice of fund arrangements are designed to give employees greater
choice and control over their superannuation savings, which in turn
give them greater sense of ownership of these savings. The arrangements
will increase competition and efficiency in the superannuation industry,
leading to improved returns on superannuation savings. [4]
2.8 Schedule 5 of the Bill consists of a series of amendments to the
Superannuation Guarantee (Administration) Act 1992 (SGAA), the Retirement
Savings Account Act 1997 and the Superannuation Industry (Supervision)
Act 1993, that are intended to give effect to the Government's proposal.
2.9 In essence, the amendments require employers to make compulsory superannuation
contributions (SG contributions) to a complying superannuation fund or
RSA account in compliance with the choice of fund requirements. The legislation
imposes a higher rate of SG charge on employers who do not comply with
the choice requirements.
2.10 The choice of fund requirements apply only to SG contributions and
do not include discretionary or salary sacrifice contributions to funds.
Choice options
2.11 Employers may satisfy their choice obligations using one or a combination
of three options:
- a limited choice offer;
- an unlimited choice offer; or
- an Australian Workplace Agreement, certified agreement or specified
informal agreement.
2.12 If an employer opts for a limited choice offer, they must offer
the employee a choice of at least four complying superannuation funds
or schemes and RSAs, including:
- at least one "public offer superannuation fund";
- at least one RSA or "capital guaranteed fund";
- if there is one or more "standard employer-sponsored funds"
of which the employer is a "standard employer sponsor" and
of which the employee is eligible to be a member - at least one of those;
and
- if there is one or more "industry based superannuation funds"
of which the employee is eligible to be a member - at least one of those.
[5]
2.13 Employers can also meet their choice obligations by providing 'unlimited
employee choice'. Under this option, an employee may select any complying
superannuation fund or RSA as the employer's chosen fund. [6]
The employer would not have to provide the choice of four funds and the
employee would be responsible for the collection of information such as
key features statements. [7]
2.14 Employers can also use the AWA/certified/informal agreement option
to satisfy their choice of fund obligations. Such an agreement would specify
the agreed fund, as negotiated between the employer and employee.
2.15 Informal agreements would be accepted where an employee nominates
in writing the fund/RSA of the employee's choice and the employer agrees
to that nomination. [8]
2.16 There are several other circumstances under which the legislation
deems the choice of funds obligations to have been satisfied and the employers
do not have to make the offers described above.
- the contributions are to an unfunded public sector scheme (other than
the CSS or PSS); or
- the contributions are made in respect of employees employed under
a state industrial award.
Unfunded public sector schemes
2.17 Employers providing superannuation to employees under unfunded defined
benefit public sector schemes generally do not have to offer choice of
fund. The exception is in respect of CSS and PSS members employed by the
Commonwealth. In this case, the Government has committed itself, through
this legislation, to offering choice to Commonwealth employees in the
CSS and PSS from 1 July 2000.
State industrial award employees
2.18 Employers who make contributions for employees under state industrial
awards are also deemed to have satisfied the choice of fund obligations.
They may, however, have to satisfy obligations imposed under state legislation.
2.19 It is important to note that the situation in respect of federal
award provisions is different. This legislation over-rides federal award
provisions and employers who employ people under federal awards must offer
choice of fund to their employees.
Schedule for introduction
2.20 Choice of fund is to be introduced in two stages:
- from 1 July 1998, new employees must be offered choice of fund; and
- from 1 July 2000, continuing employees who were employed prior to
1 July 1998 must also be offered choice of fund.
Employee response to a choice of fund offer
2.21 Employees have 28 days in which to respond to an offer of choice
of fund. Choices made after the 28 day deadline are of no effect unless
the employer agrees to accept them.
2.22 If an employee fails to respond to an offer of choice of fund, the
employer may instead contribute to a default fund. This satisfies the
choice of fund obligations. The original offer of choice must specify
the default fund and also contain prescribed descriptive information about
the default fund.
2.23 In the case of existing employees, the default fund is the fund
to which the employer previously contributed on behalf of the employee.
2.24 For new employees, the employer determines the default fund.
Employer liability
2.25 This legislation includes a provision at Section 32V that is intended
to ensure that employers cannot be held legally liable for actions they
may take to satisfy the choice of fund requirements. This was a matter
that was identified as a significant area of concern by commentators and
the industry when the Government announced the choice of fund policy.
Defined benefit schemes
2.26 Choice of fund will apply to defined schemes. It is possible that
employees who choose to leave a defined benefit fund may receive reduced
contributions. For example, they may only receive SG minimum contributions
rather than contributions in accordance with the defined scheme they have
just left. The Government has said, 'in such circumstances employees will
need to be informed by their employers of the full consequences of their
choice'. [9]
Frequency of choice
2.27 The legislation includes provisions that effectively limit employees'
rights to choose a fund to one request per year. Employers will not be
required to act on an employee's changed nomination within twelve months
of acting on a previous nomination. The Government has included this provision
to limit the costs to employers associated with employees frequently nominating
a different fund or RSA.
2.28 Employers may, however, make more than one choice offer per year
if they wish. They may also accept more than one request per year from
an employee.
Education of affected groups
2.29 According to the Regulation Impact Statement contained in the explanatory
memorandum for the legislation, the ATO and ISC will provide assistance
to groups affected by the measure. In particular, the ATO will provide
assistance through:
- new pamphlets specifically directed at those affected;
- existing internet facilities; and
- existing help lines.
2.30 Funds and RSA providers will also be required to prepare key features
statements, in accordance with ISC guidelines. Employers must supply a
copy of a KFS for each fund offered to an employee.
2.31 The ISC guidelines, which are dependent on the passage of legislation,
cannot be approved by the Senate until late May at the earliest.
2.32 The explanatory memorandum also notes that the private sector `may
also contribute to the education of affected groups'. [10]
Footnotes
[1] Superannuation and the Budget: Policy Development
for the Next Century, a paper presented to LIFA by David Connolly MP,
Shadow Minister for Superannuation and Retirement Incomes and Member for
Bradfield, 25 May 1995.
[2] The Federal Coalition's approach to superannuation,
address to ASFA by Peter Costello MP, Shadow Treasurer, Melbourne, 2 November
1995.
[3] Press Release AT/23, 25 November 1997.
[4] Second Reading Speech on the Taxation Laws
Amendment Bill (No. 7) 1997, by the Parliamentary Secretary (Cabinet)
to the Prime Minister, the Hon Chris Miles MP.
[5] Taxation Laws Amendment Bill (No. 7) 1997,
Explanatory Memorandum, p. 65.
[6] Taxation Laws Amendment Bill (No. 7) 1997,
Explanatory Memorandum, p. 65.
[7] Press Release by Senator the Hon. Rod Kemp,
Assistant Treasurer, 25 November 1997, p. 2.
[8] Attachment to Press Release by Senator the
Hon. Rod Kemp, Assistant Treasurer, 25 November 1997, p. 2.
[9] Savings: choice and incentive, p.
26.
[10] Explanatory memorandum, p. 73.
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