CHAPTER 12
OTHER ISSUES
Introduction
12.1 During the course of the inquiry, the Committee received evidence
on a number of other issues related to the choice of fund proposal. While
these issues are important, they were not central themes within the inquiry.
However, the Committee includes some discussion on each issue for the
information of the Senate.
12.2 The matters covered in the following chapter are:
- Defined benefit schemes;
- Excluded funds;
- Industry fund definition;
- Federal - State application of choice;
- Crediting rates/reserving policy; and
- Limits of S32U (federal award over-ride);
- Dispute resolution; and
- Casual employees.
Defined Benefit Schemes
12.3 Several witnesses highlighted particular difficulties for defined
benefit schemes in relation to the application of the choice of fund legislation.
Areas addressed include:
- re-entry rights;
- notice of exit; and
- contributions holidays.
Re-entry rights
12.4 Several witnesses, including IFSA and Coopers & Lybrand, informed
the Committee that members transferring in and out of defined benefits
schemes, as will be their right under the legislation, created difficulties
for these schemes and left them open for exploitation by transferring
members.
12.5 Mrs Louise Matthews of Coopers & Lybrand believes this practice
has the potential to create funding difficulties for employer sponsors:
...the employer sponsor will never know where it stands in regard to
its membership base. It can leave a fund open to employees playing arbitrage
against the fund. In a defined benefit fund, it is the employer sponsor
who is taking the investment risk. So you can imagine that an employee
is quite able, during perhaps periods where there is a risk of a negative
or low return, to move into the defined benefit fund and hence benefit
from benefits that are promised under that fund, and then, during fantastic
investment \DB\PGN\278periods, move out of the fund and enjoy actual
earnings in an accumulation style fund. [1]
12.6 Both Coopers & Lybrand and IFSA recommended that if a member
chooses to leave a defined benefit fund, the employer should have the
right to reject that employee's application to rejoin that fund at some
later time. [2]
Notice of exit
12.7 Coopers & Lybrand advised the Committee that mass exodus of
members from a defined benefit fund could have serious consequences for
funding calculations and solvency of that fund. This would adversely affect
the remaining members of the fund.
12.8 Ms Matthews told the Committee that defined benefits generally only
maintained sufficient liquidity to pay benefits as people terminate employment.
She said that funds would not hold sufficient liquid assets to accommodate
a greater number of people leaving the fund than those allowed for when
fund managers estimate probable levels of member terminations for that
year. [3] However, greater numbers might be
expected to leave after the Government introduces choice of fund.
12.9 Ms Matthews emphasised that superannuation is a long-term investment.
Accordingly, she argued that trustees should have the right to invest
in long-term investments in order to meet the benefits that have been
promised under the fund and not have to keep excessive funds in the money
markets.
12.10 Coopers & Lybrand therefore recommended that members be required
to give the trustee and employer sponsor twelve months notice of their
intention to leave the fund, to allow the employer and trustee time to
#46reorganise the fund's investments and cash flow problems appropriately.
[4]
Contributions holidays
12.11 Mr John Tweedie, representing the Australian Bankers' Association,
advised the Committee that introducing choice of fund may increase costs
for employers operating defined benefits funds that are on a contribution
holiday as a result of accrued surpluses.
12.12 Mr Tweedie explained the situation for employers in the following
terms:
Many defined benefit schemes will be structured on the basis of a multiplier
times final average salary - say eight times final average salary. When
a person reaches the eight times final average salary level, if choice
is then offered - on my understanding of the way the legislation is
proposed - that choice would then have to be offered to the member and,
if the member employee chose another fund at that stage, the employer
would have to recommence contributions. [5]
12.13 The ABA recommended that the Government amend the legislation so
that if the person already has the maximum benefit and there is a benefit
certificate from the actuary saying that this person has all the benefits
that are needed to satisfy the superannuation guarantee, the employer
should not be obliged to offer choice to that person.
12.14 The implications of choice of fund for defined benefit funds on
contributions holidays is a difficult issue. The Committee considers that
the ISC should further consider this matter prior to the commencement
date.
Excluded funds
12.15 Excluded, or do-it-yourself funds, are superannuation funds with
fewer than five members.
12.16 Mr David Connolly, representing Phillips Fox, was one of several
witnesses who questioned whether excluded funds should be permitted under
an unlimited choice offer. Mr Connolly considered there may be major
compliance issues if employers are compelled to accept choices of DIY
funds from employees. In particular, employers may have to satisfy themselves
that the DIY fund was, in fact, a complying superannuation fund.
12.17 Mr Connolly considered that checking that the fund nominated is
a complying fund would impose an unwanted administrative burden on employers:
What employers do not want to have to do is go through a compliance
regime to check that the fund is a complying fund. [6]
12.18 Mr Connolly recommended that excluded funds not be permitted under
the unlimited choice option.
12.19 Other witnesses offered different opinions about excluded funds.
The ASCPA took a strongly supportive view of the role of excluded funds
within the choice regime. The Society advised:
Excluded funds offer the ultimate expression of choice. Not only does
the member control where the contributions are made, but they have a
direct say in how contributions are invested, within the parameters
set down by SIS. [7]
12.20 The ASCPA acknowledged that there may be difficulties associated
with offering an excluded fund under the `limited choice option' because
of the requirement to produce a key features statement. However, they
considered that excluded funds are, and should remain, a legitimate selection
under an unlimited choice option. The ASCPA advised the Committee that
the major area where excluded funds can realistically be expected to be
a major player in choice is in the informal agreement option. [8]
12.21 Mr Murray Wyatt commented on what response employers should make
if an employee selected an excluded fund as part of an unlimited choice
offer. He stated:
You get an advice from the ISC that your fund is regulated. For payments
between funds, the payer fund usually requires a copy of that certificate
before making the payment. That certificate could be provided to the
employer to substantiate that his payments are going to a regulated
fund - as a compliance certificate. [9]
12.22 Other witnesses confirmed Mr Wyatt's view. For example, Mr John
Tweedie, a solicitor from the Commonwealth Bank who gave evidence on behalf
of the Australian Bankers Association (ABA) advised that because of the
considerable penalties associated with contributing to a non-complying
fund, a prudent employer should make reasonable inquiries to ensure that
the fund is a regulated fund.
As I say, that would be a prudent course for the employer. If the employee
wants a particular fund, the employer wants to know that by using that
fund he will satisfy his obligations. [10]
12.23 The Committee sought information from representatives of the ISC
and Australian Taxation Office concerning the status of excluded funds
under the legislation. Mr Olesen confirmed that excluded funds may be
offered as part of the limited choice of four funds option.
12.24 Mr John Larkin of the ISC advised that the disclosure rules for
excluded funds were still `broadly under consideration'. He said:
Under present rules, excluded funds are not required to provide a key
feature statement - because in most cases the trustee and the employee
are one and the same person. [11]
12.25 The Committee sought information from the ATO/ISC concerning an
employer's obligations where an employee nominated an excluded fund. Mr Chapman
advised the Committee that:
We would expect the employer to check whether the excluded fund was
regulated and whether it was complying. We are currently working to
try and get a full list of regulated funds up on our Internet home page
so that people can do that electronically. We hope to have that done
in the next month. [12]
12.26 Where excluded funds offer choice, the jurisdiction should rest
with the ISC, not the ATO.
Industry fund definition
12.27 Employers who choose the limited choice option must offer their
employees at least four choices. One of these choices must be an industry
based superannuation fund of which the employee is eligible to be a member.
12.28 Subsection 6(1) of Schedule 5, Taxation Laws Amendment Bill (No.
7) 1997 defines industry based superannuation fund as a complying superannuation
fund or complying superannuation scheme that has two or more employer
sponsors and that:
(a) complies with subsection 89(1) of the Superannuation Industry (Supervision)
Act 1993 (basic equal representation rules); or (b) is nominated in a Commonwealth award, a State award, or a Territory
award immediately before the commencement of Schedule 5 to the Taxation
Laws Amendment Bill (No. 7) 1997; or (c) is approved in writing by the Commissioner as an industry-based
superannuation fund.
12.29 Several submissions and witnesses to the inquiry disagreed with
the definition of industry based fund used in the legislation. Ms Ann
Byrne, Convenor, Industry Funds Forum, told the Committee that the definition
used in the legislation means almost every master trust and life office
fund can now be an industry fund. [13]
12.30 Based on what she believed `the general community understands an
industry fund to be', Ms Byrne recommended a considerably narrower definition
of industry based fund.
12.31 Ms Byrne stated that an industry fund should:
- have equal representation of employers and employees;
- have two or more employer sponsors; and
- operates on a not-for-profit basis.
12.32 Representatives of the Industry Funds Forum told the Committee
that master trusts more properly should be defined as fitting within the
public offer fund category. [14]
12.33 Mr Ian Silk of the Industry Funds Forum explained why the definition
in the legislation is too broad:
The difficulty with the definition now is principally the part that
states that a fund is an industry fund if it is nominated in an award.
There are any number of Federal and State awards - hundreds - and many
of those reflect private arrangements between an employer and a union
and their employees. They have transported into an award a particular
fund, a commercial fund, a non-industry fund. Because of the fact that
it is in one award in, say, the Northern Territory, in terms of this
definition that fund is regarded and defined as an industry fund for
the entire nation, for every industry. [15]
12.34 The Association of Superannuation Funds of Australia (ASFA) made
similar comments about the definition of an industry fund. ASFA advised
the Committee they believed the definition of an industry fund to be too
wide and included types of superannuation funds not previously regarded
as industry funds.
12.35 ASFA recommended the definition of `industry based superannuation
fund' be amended to require that the fund have two or more non-associated
employer sponsors and comply with the basic representation rules or be
approved by the Commissioner as an industry based superannuation fund.
12.36 Mr Kevin Casey, the Manager, Technical Advisory Services, AMP,
put an alternative view to the Committee about the definition of an industry
based fund. Mr Casey, who was appearing on behalf of IFSA, told the Committee
that over a period of time the classification of superannuation funds
had become blurred.
12.37 Mr Casey noted that the industry style funds had grown out of award
type superannuation. However, many were now also public offer funds. Mr
Casey concluded:
We believe that there is now less distinction between a public offer
and an industry fund and therefore the definition which would require
the equal representation at trustee level would actually not, in fact,
fit the market as it is emerging. [16]
12.38 Mr Casey said that there would be competitive advantages to existing
industry funds if a more limited definition applied. This would exclude
other funds from being classified as industry funds and offered as industry
funds under one of the four types of funds. [17]
Federal - State application of choice
12.39 For constitutional reasons, the choice of fund legislation does
not apply to people employed under state awards. Several witnesses contended
that there was a need for a national uniformity of approach.
12.40 Some States have introduced their own choice of fund legislation.
However, there are differences in approach, and not all have legislation
in place. The Western Australian Government, for example, introduced choice
of fund legislation as part of its 1995 industrial relations reforms.
Where the employer agrees, employees can also exercise choice in New South
Wales and Queensland.
12.41 ASFA advised the Committee that a lack of uniformity between the
states and commonwealth would make education campaigns difficult:
We think it is going to be difficult to have a national education campaign
when there are different workers doing different things or have rights
to do different things. That is where we would like the clarification
between Commonwealth and States. [18]
12.42 ASFA recommended that the Government meet with relevant state ministers
to achieve consistent and workable approaches, leading to national uniformity
before the legislation is implemented. [19]
12.43 Representatives of AMP also expressed concern about the lack of
coverage by the legislation of people on state awards:
There are concerns about the coverage of the choice of fund legislation.
Employees under state industrial awards will not be covered by the legislation.
Further, some states have introduced their own versions of choice of
fund that are not compatible with the federal government's measures.
This adds to the cost and complexity. AMP believes that harmonisa_tion
is necessary but acknowledges that it is a long-term policy objective.
[20]
12.44 Mr John Maroney of IFSA also expressed concern about this matter.
He recognised however that it was difficult to achieve a uniformity of
views. He suggested the Commonwealth could make use of its corporations
power in order to exercise a federal jurisdiction in respect of choice
of fund. [21]
Crediting rates/ reserving policy
12.45 William M. Mercer Pty Ltd advised the Committee that choice of
fund will present particular problems for funds with high levels of reserves.
Mercers considered that there is a danger that members will switch out
when reserves are low and in when reserves are high.
12.46 Mercers considered that trustees may have to review their policy
in respect of crediting rates and reserves. Trustees may wish to avoid
building up reserves further and perhaps reduce them when setting crediting
rates. They may also have to set future crediting rates at a rate more
closely related to the earning rate in each period. [22]
Limits of S32U
12.47 Section 32U of the legislation over-rides federal awards in respect
of choice of fund, `to the extent that the employer instead makes the
contributions on behalf of the employee...to another superannuation fund
that is a chosen fund or a default fund'. [23]
12.48 The Committee considers there is reason to believe confusion exists
about whether S32U has wider effects. For example, could the section affect
the frequency with which contributions are remitted? Would the SG provisions
or the award provisions prevail? This confusion may arise out of the Government's
proposal to remove superannuation as an allowable matter from the Workplace
Relations Act.
12.49The Government has introduced separate legislation to remove superannuation
as an allowable matter. This change will, if implemented, have far reaching
implications for how superannuation contributions are paid and to whom.
The Committee, however, is of the view that its current terms of reference
do not extend to this matter and that it would therefore be inappropriate
to discuss it at length in this report.
12.50 The Committee believes it would assist if the Minister were to
clarify whether the effects of S32U extend beyond nominating a particular
fund for the purposes of an award, prior to consideration of Taxation
Laws Amendment Bill (No. 7) in the Senate.
Casual employees
12.51 Witnesses drew the Committee's attention to the application of
the choice of fund legislation to casual employees. If casual employees
are treated as new employees, larger numbers of employees than originally
anticipated may have to be offered choice of fund on 1 July 1998.
12.52 The Committee sought advice from officers of the Australian Taxation
Office as to whether such employees would have to be offered choice of
fund. Mr Neil Olesen, Assistant Commissioner, confirmed that casual employees
are new employees each time they commence a new employment relationship:
It would be the case, where they may start and stop employment with
the same employer frequently in a short time because of the nature of
their casual employment relationship. Yes, strictly speaking, they are
new employees each time they start a new employment relationship. [24]
Footnotes
[1] Evidence, p. 277-278.
[2] See Evidence, p. 277-8, also Evidence,
p. 386-7.
[3] Evidence, p. 277.
[4] Evidence, p. 277.
[5] Evidence, p. 19-20.
[6] Evidence, p. 257.
[7] Supplementary Submission, 27 February,
1998, p. 1.
[8] Ibid.
[9] Evidence, p. 170.
[10] Evidence, p. 17.
[11] Evidence, p. 422.
[12] Evidence, p. 423.
[13] Evidence, p. 32.
[14] Evidence, p. 33.
[15] Evidence, p. 33.
[16] Evidence, p. 385.
[17] Evidence, p. 385.
[18] Evidence, p. 245.
[19] Submission, p. 5.
[20] Evidence, Ms Louise Sylva, p. 352.
[21] Evidence, p. 386.
[22] Submission, Attachment 1, p. 10.
[23] Taxation Laws Amendment Bill (No. 7) 1997
[24] Evidence, p. 444.
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