On Thursday 3 November 2011 the government tabled the Superannuation Legislation Amendment (MYSUPER CORE PROVISIONS) Bill 2011 containing the first stage of the new mysuper requirements
The Bill introduces the key characteristics for the MySuper product and the criteria for charging fees.
MYSUPER PRODUCT AUTHORISATION
Application to APRA is required for authority to offer a MySuper product. The MySuper product is a class of beneficial interest in the fund meeting the statutory criteria.
Only one class may be offered, unless one of the exceptions is met.
There is an exception where:
- there has been a transfer of members from another fund;
- the interests after transfer are similar to those in the original fund;
- there is material goodwill in that class of interest in the original fund;
- that goodwill would not be maintained in the fund unless offered by a separate product; and
- it is in the interests of the members to maintain this.
APRA will need to be satisfied of these criteria, but it is not clear at this stage how it will go about determining whether or not it is satisfied. In particular, it may be difficult for APRA to assess whether the best interests of existing and transferring members would be served by maintaining the transferring members within a separate product, which is an issue that seems one for the trustee to address.
There is also a "large employer" exception whereby if the specified rules are met, a separate MySuper product can be offered. A large employer is an employer (with its associates) of 500 or more members. APRA will have power to cancel the MySuper authority if the number of members falls below 500 on the last day of the income year. This suggests that a substantial "buffer" may be needed if large employer authorisations are to be sought with any confidence.
CHARACTERISTICS OF A MYSUPER PRODUCT
A MySuper product is defined as a class of beneficial interest. The key characteristics which the class of beneficial interest must have are as follows:
- Single diversified investment strategy in relation to assets that are attributed to the MySuper product.
- All members of the MySuper product are entitled to the same options, benefits and facilities.
- Amounts are attributed to members in relation to their interest in a way that does not stream gains or losses, subject to a lifecycle exception (see below).
- The same process is adopted in attributing amounts to members in relation to their beneficial interest in the fund. There is an exception for fee subsidisation by employers.
- For employer fee subsidisation to apply, the subsidisation does not favour one employee "MySuper member" over another employee "MySuper member".
- The only restrictions on contributions able to be accepted are those that arise under superannuation law or as prescribed under regulations (the Explanatory Memorandum suggests that the regulations might, for example, allow in-specie and foreign currency contributions to be declined).
- Any replacement of the interest must be with another MySuper interest or with the written consent of the member.
- A pension cannot be paid (other than an insured pension on disablement).
- The lifecycle exception has its own rules, which requires streaming on the basis of age plus possibly other factors prescribed by regulation.
Trustees will need to structure their deeds to ensure that the relevant rights are created and the relevant restrictions are imposed.
There will be significant issues in relation to insurance as many funds have employer-based minimum insured amounts for members. Where the employer fully subsidises the premiums, then it may be that a separate interest is required. There may be difficulties in accommodating partial subsidies.
There are detailed fee rules in Division 5. Division 5 does not deal with charges for items that do not involve the provision of a trustee service.
Recouping the cost of taxation and insurance from members is not covered by the fee rules. The legislation assumes that such recoupments are not fees.
Clause 29V sets out the fees that may be charged as follows:
- an administration fee;
- an investment fee;
- a buy-sell spread;
- a switching fee;
- an exit fee; and
- an activity fee.
An "administration fee" is defined as a fee that relates to the administration or operation of the fund and includes the costs incurred by the trustee that are not otherwise charged as an investment fee, buy-sell spread, switching fee, exit fee or an activity fee.
"Investment fee" is defined as a fee that relates to investment of the fund assets and includes fees in payment for the care and expertise in the investment of those assets (including performance fees), as well as costs incurred by the trustee that are not otherwise charged as an administration fee, buy-sell spread, switching fee, exit fee or activity fee.
"Buy-sell spread" is defined as a fee to cover transaction costs incurred in relation to the sale and purchase of assets.
"Switching fee" is defined as a fee to cover the costs of switching in and out of MySuper and, somewhat curiously, from one choice product to another choice product. "Exit fee" is defined as a fee to cover the cost of disposing of all or part of the member's interest in the fund. "Activity fee" is a fee that relates to costs incurred by the trustee that are directly related to an activity of the trustee that is engaged in at the request or with the consent of the member or relates to a member and is required by law.
Clause 29VA contains detailed charging rules that must also be followed.
There is a concept of a flat fee, which must be same amount charged to all MySuper members. There is also a concept of a percentage fee, which again must be charged to all MySuper members and must be the same percentage.
There can be a combination of fixed and percentage fees, but again it must be the same flat fee and the same percentage fee and must be charged to all MySuper members.
In the case of the buy-sell spread, switching fee, exit fee and activity fee, it must be the same amount for the relevant action for each member to whom it is charged. Where there are different costs for different activities there will have to be a different fee; for example, if switching costs for different types of switching differ, there will need to be a different switching fee for each category.
Exit costs can differ depending on the method of payment. There is an issue as to whether a fund can charge more than one exit fee. Otherwise, funds may have to split these costs into an exit fee and a separate type of payment activity fee.
The approach reflected in the Bill has the potential to generate lengthy fee lists to cover each type of transaction.
Trustees will need to analyse the characteristics and components of each of their activities to determine whether they meet the required characteristics to be able to make up a permitted fee. If not, the fee cannot be charged, and there is a real risk of accidental breach. What are currently classed as single activities may need to be broken up into more than one activity to enable proper cost recovery.
DETERMINING WHERE THERE IS A PRODUCT CHOICE
A member is automatically deemed to be a "MySuper member" unless they have given the trustee an election in writing for a specified choice product. Failure to pay a contribution into a MySuper product where there has not been a written election otherwise by the member will be a strict liability offence. This may create challenges for trustees, and their administrators, which are constantly doing battle with late, incomplete and unclear communications from members and employers.
STILL TO COME
There remain many issues still to be dealt with in further tranches of legislation. In particular, the Bill refers to "enhanced trustee obligations for MySuper products", and the Explanatory Memorandum gives only a brief indication of what these may be. At this stage, they seem likely to include duties:
- to manage the MySuper costs in a manner aimed at optimising the best financial interest of members as reflected in net returns over the longer term;
- to articulate an investment return target over a rolling 10 year period and level of risk appropriate to the members of the MySuper product; and
- to actively examine and conclude whether the MySuper product has access to sufficient scale to continue to provide net returns that are in the best financial interest of members.
Other subjects for further tranches include:
- the APRA prudential-standard making power;
- the carve-out allowing defined benefit funds to continue to offer default superannuation products for choice purposes;
- rules for charging for financial advice deducted from member accounts, intra-fund advice and the prohibition on deduction of commissions from members' MySuper accounts;
- rules dealing with performance- based investment management fees;
- obligations regarding insurance;
- disclosure; and
Trustees will be required to perform detailed work in restructuring existing default arrangements to ensure they meet the new rules. Detailed analysis of activities is required to determine the fee that is to apply. Much of the preparation will, however, need to await the release of the further tranches of legislation, and it will be difficult for trustees to know exactly where they stand until that legislation is released.
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