Australia: Super no-guarantee: The risks of the new default fund regime


The superannuation industry has seen major regulatory change with the introduction of the Stronger Super reforms, which include MySuper and SuperStream. The next big change is the commencement of the new regime under the Fair Work Act 2009 that relates to default funds in modern awards.

What are modern awards?

Modern awards are handed down by the Fair Work Commission (FWC) and set out minimum terms and conditions for employees across Australia who work in certain industries or occupations.

Super and modern awards

One of the terms contained in modern awards relates to superannuation.

Under that term, if an employee covered by a modern award has not exercised choice of fund, then their employer must contribute to one or more of the default funds listed in the award.

Default funds differ between awards. However, modern awards currently include a grandfathering clause that allows employers to continue contributing to a fund to which the employer was contributing before 12 September 2008 or its successor.

If an employee exercises choice of fund, then their employer must contribute to their chosen fund until such time as that choice is no longer valid.

New regime

During the last 12 months or so, certain amendments were made to the Fair Work Act 2009 to introduce a new default fund regime. This new regime involves a four yearly review of the default fund term of modern awards by the FWC. The first full review under the new regime is set to commence on 1 January 2014.

This four yearly review involves two stages:

  1. First stage: the Expert Panel of the FWC will make a list of superannuation funds that offer a standard MySuper product that may be included in modern awards, called the Default Superannuation List; and
  2. Second stage: the Full Bench of the FWC will vary the default fund term of each modern award to remove every superannuation fund that is currently specified in the default fund term and will specify between 2 – 15 superannuation funds (from the Default Superannuation List) that satisfy the second stage test.

During the four yearly review, the Expert Panel will also make a list of employer MySuper products, called the Schedule of Approved Employer MySuper Products. An 'employer MySuper product' can be either:

  • a tailored MySuper product offered by a public offer fund to a large employer; or
  • a corporate MySuper product, which is a stand-alone non-public offer fund for the employees of an employer and its associated entities.

The new regime does not affect defined benefit members or exempt public sector superannuation schemes.

There is a 12 month transition period in which employers will be able to continue making superannuation guarantee contributions to their existing default funds until 1 January 2015.

What is at stake?

The ultimate outcome of the review process will be that an employer's choice of default fund (for employees who have not made an individual or collective choice) will be reduced to only the funds named in the modern award.

The limited employer choice of default funds will mean that many superannuation funds may lose out on the opportunity to receive new contributions for award-covered members.

In addition, trustees of superannuation funds not listed on modern awards will need to carefully consider whether they are in a position to retain the existing account balances of their members who are covered by modern awards.

The reason is that the election in section 29SAA of the Superannuation Industry (Supervision) Act 1993, together with APRA Prudential Standard SPS 410 MySuper Transition, requires the trustee of a superannuation fund that offers a MySuper product to identify a "suitable" MySuper product to which accrued default amounts of affected members must be attributed before 1 July 2017.

A MySuper product of a fund which is not listed in the relevant award for one of its members will be suitable if:

  • the member is eligible under the governing rules of the fund to make contributions to that product;
  • the trustee is legally able to attribute the member's existing account balance to the product; and
  • most importantly, the trustee has formed the view that the attribution of the member's existing account balance to that MySuper product promotes the financial interests of the member.

There will be a number of factors that the trustee of a superannuation fund not listed in a modern award will need to consider when determining whether the attribution of the existing account balances of its members who are covered by awards is in the financial interests of those members.

It is not a lay down misere conclusion as to whether trustees of funds that are not listed will be required to transfer accrued default amounts of its members to another fund to which contributions in respect of those members are paid. Trustees in those circumstances will need to give real and genuine consideration to this suitability question.

What has happened so far?

The review of default superannuation fund terms in modern awards is now underway.

The FWC has reviewed the list of authorised MySuper products published by APRA, and all superannuation funds that did not offer a MySuper product were deleted from the default fund term of modern awards on 30 December 2013.

The FWC has also inserted provisions in the default fund term of modern awards to the effect that defined benefit members who are default fund employees will not be affected by the new regime.

In addition, the grandfathering provisions have been amended to allow an employer to continue making contributions for the benefit of an employee to a superannuation fund (that is an eligible choice fund) where it was doing so before 12 September 2008, but only if the superannuation fund offers a MySuper product or is an exempt public sector superannuation scheme. Grandfathering provisions will continue only until 31 December 2014.

What's next?

Keep a close eye on the FWC's website as it will soon publish a timetable for the review process and any relevant application forms.

In the meantime, the FWC has indicated that the applications to be on the Default Superannuation List or Schedule of Approved Employer MySuper Products will need to include information about the superannuation fund and its MySuper product's performance, such as:

  • the appropriateness of the product's investment return target and risk profile;
  • its expected ability to deliver on the product's return target;
  • fees and costs;
  • net returns;
  • governance practices; and
  • administrative efficiency and quality of advice.

In deciding the application, the FWC is required to consider the best interests of default fund employees and take into account the information contained in the application, a set of performance criteria (in line with the information the applicant needs to include in their application) and any submissions made in relation to the application.

The determination varying the default fund modern award terms following this review process will take effect from 1 January 2015 at the earliest.

Your strategy?

In this changing landscape, there are a range of strategies that super funds may wish to use to secure contributions going forward and to retain existing account balances.

In developing a strategy, super funds may wish to consider:

  • whether any of their members are covered by modern awards;
  • if so, what modern awards;
  • for those modern awards, who are their competitors;
  • whether and how to garner employer and union support during the review process; and
  • whether a choice strategy can be adopted.

More changes in store?

The new Federal Government has released for public consultation a discussion paper "Better regulation and governance, enhanced transparency and improved competition in superannuation".

In this discussion paper, the Federal Government has sought comment from industry as to its views and suggestions on changes that can be made to improve transparency and competition in superannuation.

In particular, the discussion paper asks stakeholders to comment on certain aspects of the new default fund review process for modern awards.

This will be an opportunity for super funds to consider and put forward their views and any suggestions on how they think the new regime can be improved. The closing date for submissions is 12 February 2014.

Watch this space as further changes may flow from this discussion paper.

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.

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