On 21 September 2011 the Federal Government released the Stronger Super Information Pack (the Pack) setting out the Federal Government's decisions on key design aspects of Stronger Super reforms. This update provides an overview of the decisions relating to MySuper products.
Much of the key design for MySuper has been discussed in detail through the Government's consultation process. However, there are some issues that are now clarified and some surprises not anticipated such as the proposal to remove "own occupation" total and permanent disablement (TPD) products which do not meet the TPD condition of release under the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
MySuper products will only cover pre-retirement initially. Further consultation will occur on whether post retirement offering should be part of a MySuper product in the future, and the framework that should apply.
Transition to MySuper
The following timeline is proposed for the industry to transition to MySuper products:
1 July 2013 - Super Funds can offer MySuper products.
1 October 2013 - Employers must contribute to a default fund that is a MySuper product to meet Superannuation Guarantee contribution obligations.
1 July 2017 - Super Funds must transfer existing default balances to a MySuper product.
Conversion of default funds to meet MySuper requirements
Additional transitional arrangements will be developed to deal with default superannuation funds (default funds) nominated in enterprise agreements.
To qualify as a default fund in a modern award a superannuation fund will have to offer a MySuper product. Fair Work Australia will review default funds named in modern awards to ensure they meet this requirement. Further consultation on this aspect will occur.
Trustees can offer MySuper products from 1 July 2013 but have until 1 July 2017 to transfer existing balances of default members to a MySuper product. Further consultation on allowing an extension of time to transition will occur in limited circumstances where existing obligations affect a trustee's ability to transfer balances.
Existing members of defined benefit funds or legacy products do not have to be transferred to a MySuper product.
Consultation continues on capital gains tax consequences of transitioning to MySuper, including whether capital gains tax relief is appropriate.
The Government recognises that in implementing this transition trustees could be exposed to issues concerning meeting their fiduciary duty to act in the best interest of members. The Government will consult on what protection will be required to ensure trustees are protected in actions they take to comply with these new arrangements.
Discounted Fees and Tailored MySuper products
The Government has changed its position on a single fee structure for all MySuper products. While a single investment strategy and a standard set of fees for all prospective members is still a requirement, employers will be able to negotiate with funds for discounted administration fees for their employees. The Government will set parameters within which trustees will be able to offer discounted administration fees.
Employers with more than 500 employees can also be offered a MySuper product tailored to the needs of their workplace allowing a different investment strategy, member services and fees to that offered in the fund's main My Super product.
The catch is that details of these tailored MySuper products and discounted administration fee arrangements must be reported to APRA and must also be "separately published" by trustees. What that involves will not be apparent until the legislation becomes available.
Fees that can be charged for MySuper Product
There is a limit on the type of fees a trustee can charge for a MySuper product, being:
- administration fee;
- investment fee (including performance based fees (see below));
- *buy and sell spreads;
- *exit fee;
*cost recovery only
All fees must come within the standard descriptions given above to ensure members can understand them and be able to compare them to other MySuper products.
Member specific costs:
In addition to the above fees member specific costs can be charged by trustees. This is where an action is initiated by the member or a court. The example given is Family Law splits.
Performance based fees
The Government has set the following parameters for performance based fees concerning assets of a MySuper product:
- a reduced base fee reflecting potential gains the investment manager receives from performance based fees, taking into account any fee cap;
- measurement of performance on an after tax basis (where possible) and after costs basis;
- an appropriate benchmark and hurdle for the asset class reflecting risks of actual investments;
- appropriate testing period; and
- provision for adjustment of the performance based fee to recoup any prior or subsequent under performance (e.g. high water marks, clawbacks, vesting arrangements and rolling testing periods).
If a performance based fee arrangement does not contain each of the above, the trustee must be able to justify that this different arrangement continues to be in the best financial interests of the MySuper members.
Exceptions for mergers
Funds are limited to one MySuper product but the Government will now allow a limited exception for a pre-existing and distinct MySuper or default product acquired as a result of a fund merger. To qualify for this exception an application must be made to APRA for approval to offer a MySuper product using more than one brand.
Trustees considering a successor fund transfer or merger will need to consider this and ensure an application to APRA is made in sufficient time for approval to be given prior to the transfer or merger date.
Rates of Return
Trustees of MySuper products will have to clearly articulate a targeted rate of return for that product over a rolling 10 year period, and the level of risk it has determined appropriate for its MySuper members.
APRA will consult on standards for reporting return and risk targets for MySuper products.
Life cycle investment options
A life cycle investment option may be used as the single investment strategy for a MySuper product. This type of option allows a trustee to automatically switch members to different investment options according to their age. This is not new and some funds have already adopted this approach. There are issues for and against this approach which a trustee would need to consider. The main argument for this approach in the context of MySuper is the lack of engagement of those who will be invested in this default fund. It allows more conservative investment of retirement savings as members approach retirement age.
APRA will provide guidance on how trustees develop and maintain a life cycle investment approach within a MySuper product.
The good news is that trustees will not be required to apply to APRA to hold a separate RSE Licence to offer a MySuper product. The not so good news is that trustees will have to apply to APRA to be "authorised" for each MySuper product they wish to offer. The industry had hoped that existing RSE licences would be sufficient. However, the Government has indicated that existing processes will be used, duplication will be avoided and APRA will have sufficient power to regulate MySuper.
MySuper Funds must offer a standard default level of life and TPD insurance which can be increased or decreased by members (if offered by the Trustee) without the need for them to leave the MySuper product.
This standard cover can be replaced by a default insurance strategy tailored to specific requirements of the employees of a particular employer.
The Government has previously announced all regulated superannuation funds must offer life and TPD cover on an "opt-out" basis where available depending on occupational and demographic factors, subject to further consultation.
The Government has decided that as a minimum a trustee must allow members to "opt-out" of life and TPD cover within 90 days of joining a fund, or on each anniversary of joining. This provides significantly less flexibility than members would currently enjoy. Presumably this restrictive approach reflects the view that only disengaged members will remain in a MySuper product.
Trustees that cannot acquire "opt-out" cover at a reasonable cost must offer compulsory insurance for MySuper members.
This requirement does not apply to defined benefit funds which have insurance as part of the benefit design.
The Government has decided to leave it up to Trustees whether to offer income protection insurance on an "opt-in" or "opt-out" basis, or "at all".
"Own occupation" definition for TPD insurance
Many funds now offer members the option of taking out TPD cover based on "own occupation". This type of cover applies if a member is totally and permanently disabled from performing their own occupation. The member may or may not also be unable to perform any other occupation for which they are reasonably qualified based on education training or experience (the "any occupation" test).
The "own occupation" definition of TPD does not meet the TPD condition of release under SIS. The SIS condition of release is based on the definition of "permanent incapacity" defined in SIS and adopts the "any occupation" test.
Consequently a trustee receiving an insurance payment based on an "own occupation" TPD claim must satisfy itself that the member also meets the "any occupation" test to satisfy the condition of release before it can pay the benefit to the member. If the member is only disabled to the extent of his or her "own occupation" the insured benefit paid under the Group Life Policy must remain in the fund until the member is able to satisfy a condition of release.
The Government has indicated that it will end this practice "as rapidly as possible" and states as follows:
"The Government believes it is in the best interests of members to align insurance definitions with the conditions of release so that insurance is consistent with the purpose of superannuation and that insurance monies are available to members at the time of their disability."
The Government will consult the industry on an appropriate timeline for the phase-out of existing policies that are not consistent with definitions of life, TPD and income protection insurance and this will be included in the legislation.
This does not appear to have come out of the report provided by Paul Costello following consultation with the industry. There seems to be a lack of understanding of how widely the "own occupation" TPD product is offered across the industry by all types of funds. This product is acquired by members at a higher premium as it is easier to satisfy than the "any occupation test" when making a claim. Such a proposal would require cancellation of existing insurance arrangements and removal of members from this type of cover for the lesser cover of an "any occupation "policy.
This will not be a good news story for members. It is a backward step and shows that the Government and its regulators are out of step with the direction the industry has taken in this area.
The information contained in the Pack released by Government only provides a broad outline of the MySuper product. The detail will not be available until the legislation is released. It is clear that further consultation will be required on some aspects of MySuper.
Submissions must be made by 21 October 2011 to email@example.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.