Most participants in the Australian superannuation sector will be aware the Fair Work Commission (FWC) is undertaking a review (Review) of default superannuation funds under the Fair Work Act 2009 (Cth) (FW Act) which will result in the FWC selecting default funds in modern awards. Superannuation funds must be authorised by APRA to offer a MySuper product to be eligible to apply for selection as a default fund in a modern award. Superannuation funds wanting to retain their existing status, or become a default fund should be considering their position concerning the Review. Although the Federal Government is considering changes to this new process as indicated in the Discussion Paper, Better regulation and governance, enhanced transparency and improved competition in superannuation, at this stage funds cannot afford to assume the process will not proceed at least in part. A timetable has as yet not been released by the FWC.
The selection of standard default funds is a two stage process:
- Stage1 - applications must be made to the FWC addressing all of the first stage criteria set out below and supported with evidence. Based on these applications and submissions from other interested parties, the FWC, which at this stage will be constituted as a panel of FWC members and superannuation experts (the Panel), will determine which applicant funds should be included on the Default Superannuation List (the List) as suitable for inclusion as default funds in a modern award.
- Stage 2 - a Full Bench of the FWC will determine which of the funds named in the List will be named as a default fund in a particular modern award. No more than 15 funds can be named, except in limited circumstances
A superannuation fund offering a standard MySuper product will be invited to submit an application to the FWC for the product to be included on the List. Each application will need to contain relevant information addressing the first stage criteria (listed below). The FWC will include MySuper products on the List if, after having regard to the first stage criteria it is satisfied the inclusion of the product on the List is in the best interests of all default fund employees covered by all of the 122 modern awards. A product will also be included on the List if the FWC is satisfied inclusion would be in the best interests of employees in a particular class.
In this context, a 'class' means a group of employees for whom particular MySuper products are better than others. The Panel can consider whether it would be in the best interests of that group of employees for a Fund offering a particular MySuper product to be a default fund in a modern award which covers the employment of the class of employees. For example, a MySuper product may have net returns with a risk profile, insurance scheme and fees appropriate for a particular cohort of employees.
The first stage of the Review process involves two parts. Firstly, applicant funds will submit the application for inclusion of their product on the List containing relevant information. The FWC will publish all applications on its website. A person may then make submissions either opposing or supporting those applications. Although it is not stated in the legislation, it is anticipated applicant funds will have an opportunity to lodge submissions in response to submission opposing their inclusion on the List.
Any person or body who or which makes submissions in support of a fund must declare any interest they have in the subject fund.
Given the nature of the first stage criteria, it is likely that funds will need to produce supporting information and documents containing confidential or commercially sensitive material. Funds applying for inclusion on the List must identify any confidential and commercially sensitive information and bring it to the FWC's attention to avoid it being published or to ensure it is published in a summary form. If the FWC is satisfied that the information is confidential or commercially sensitive it may decide not to publish or if it does to instead publish a summary of the information which contains sufficient detail to allow a reasonable understanding of the substance of the information, without disclosing anything that is confidential or commercially sensitive.
The second stage of the Review kicks off as soon as practicable after the List is made. The FWC must review the default fund term of each modern award. After calling for and considering submissions, the FWC will make a determination varying the term. It must specify at least 2, but no more than 10 (subject to an exception), superannuation funds in relation to MySuper products satisfying the second stage test.
A default fund term may specify more than 15 superannuation funds in relation to MySuper products that satisfy the second stage test if, taking into account the range of occupations of employees covered by the modern award, the FWC is satisfied it is warranted.
In order for a MySuper product to pass the second stage test, the product must be on the List. The FWC must be satisfied that specifying the product in the default fund term of a particular modern award would be in the best interests of the employees, to whom the modern award applies, taking into account any submissions that were made in relation to the default fund term of the award and any other matter the FWC considers relevant.
The FWC must ensure the following have a reasonable opportunity to make written submissions about the specification of a particular product in the default fund term of a particular modern award:
- an employee and employer covered by the modern award; and
- an organisation representing the industrial interests of one or more employees or employers covered by the modern award.
The FW Act provisions dealing with the Review process do not refer to the prospect of superannuation funds making submissions during the second stage. However, the FWC has a general power to inform itself in relation to any matter before it as it considers appropriate, including by inviting submissions from any person. The FWC is required to consider any submissions made as part of the second stage of the Review.
Again, a person making a submission about the inclusion of a particular superannuation fund must declare any interest they have in that fund.
Approved Employer MySuper Products
An Approved Employer MySuper Product is a:
- Tailored MySuper product for a large employer under section 29TB of the Superannuation Industry (Supervision) Act 1993; or
- Corporate MySuper product which is a standard employer sponsored fund that is a non-public offer fund.
A similar process applies to the selection of an Approved Employer MySuper Product under the FW Act as for standard MySuper products. The differences are:
- Instead of the List the funds are included in a Schedule; and
- Either the employer or the superannuation fund can apply.
Best interests of employees covered by the award
The threshold matter on which the Panel must be satisfied to include a MySuper product on the List, Schedule or in a particular modern award clause is whether its inclusion would be in the best interests of award-based employees who do not choose a fund for Super Guarantee contributions. There is no reliable information available as to the 'best interests' standard other than the first stage criteria. It is highly unlikely the FWC will issue any directions on this matter.
Funds already listed as a default fund in the modern award may well seek to argue it would not be in the best interests of employees covered by the award, who do not choose a fund for Super Guarantee contributions, for the fund to be 'de-listed' from the award. This would result in employees being left with their accrued retirement savings in the de-listed fund, resulting in potential duplication of fees and impacting on existing insurance arrangements.
De-listing an incumbent fund would also result in an adverse impact on employers who may be perfectly happy with the fund they currently use. If they are required to direct Super Guarantee contributions to a different fund, this will result in administrative costs and inconvenience associated with having to select another fund and redirect contributions to that fund, as well as informing employees. An applicant fund may well enlist the support of employers, which do not necessarily want to be placed in this situation and may therefore be willing to support the application of an incumbent default fund.
However, it would be highly risky for an applicant fund to rely on incumbency alone. It is clear the Panel is looking for cogent evidence of an incumbent fund performing at an appropriate standard for those award-based employees not exercising choice of fund (see checklist below for more information).
As stated above, the FWC may inform itself in relation to the Review in such a manner as it considers appropriate. In addition to seeking submissions, this can include requiring a person to attend before it (whether or not to give evidence and/or provide documents or records), conducting inquiries, undertaking or commissioning reports or research, conducting a conference or holding a hearing.
Awards not specifying default funds
There are a number of modern awards which do not currently have any default superannuation funds listed. Examples include the Miscellaneous Award 2010 and Labour Market Assistance Industry Award 2010.
There are also a number of modern awards which do not currently have any terms dealing with superannuation at all. The FWC will make determinations in respect of those modern awards to insert such terms and the first and second stage processes will apply equally to those modern awards. Examples of modern awards without superannuation terms include the Seagoing Industry Award 2010 and Rail Industry Award 2010.
Preparing for the Review: a checklist for Funds
- Identify modern awards specifying your fund as a default fund. While this may be obvious to some trustees, it is sometimes surprising what a search will show up and what may have been overlooked.
- As far as possible, identify those fund members who are covered by awards and are members of your fund by default. These are the employees in respect of whom the 'best interest standard will be adjudged, so you need to get to know them if you don't already! Try and ascertain their age, gender, types of employment, major employers, industry and occupational profile, insurance coverage, use of member-directed services, job mobility, how long the have been members, the amount of annual contributions, and any information supporting member and employer satisfaction.
- Consider each of the tailored MySuper products you provide for major employers and whether there is a need to ensure these funds are specified in modern award default fund clauses. In most cases they will not currently be specified in awards. You will need to consult with the relevant employer about making an application to include the product on the Schedule.
- Consider each element of the first stage criteria (extracted below) and how the fund will inform the Panel about these matters. You will have addressed these matters previously in your fund's application for MySuper authorisation. You will need to ensure key assertions made in the application can be objectively established. You will need to refer to the basis for an assertion in the application and, if practicable, attach appropriate supporting material. You may need to consider expert witness evidence to support claims. For example, an asset allocation manager may need to attest to the appropriateness of your product's long term investment return target, your group insurer may need to explain how insurance is tailored to the needs of your award-based members who do not exercise choice, and your administrator may need to reinforce information about your efforts to reduce transaction costs for members and employer interacting with the fund. You will also need to identify any confidential or commercially sensitive information which you will want the FWC to protect from publication or to publish a summary of it instead.
- You need to commence dialogue with major employer sponsors, unions and even employee members to request support for your application by making a submission. This will be particularly important to reinforce the assertions you make in the application regarding the quality of advice given to fund members and administrative efficiency. This support will be critical to your success and may well be what differentiates your fund from other applicants. Incumbents should be in a stronger position than their competitors in this respect for the reasons outlined above.
- Consider whether, as part of the second stage, you want to seek the inclusion of your fund in an award in which the fund is not currently specified as a default fund. You might consider this appropriate if the profile of default fund members covered by the award is similar to the profile of your members.
- A draft application form has been released by the FWC and submissions taken on its format which is as yet not finalised. However, it does give some guidance on the information funds will need to gather in preparation for when the final form is available and timetable released.
First stage criteria
The first stage criteria are as follows:
- the appropriateness of the MySuper product's long term investment return target and risk profile;
- the superannuation fund's expected ability to deliver on the MySuper product's long term investment return target, given its risk profile;
- the appropriateness of the fees and costs associated with the MySuper product, given:
- its stated long term investment return target and risk profile; and
- the quality and timeliness of services provided;
- the net returns on contributions invested in the MySuper product;
- whether the superannuation fund's governance practices are consistent with meeting the best interests of members of the fund, including whether there are mechanisms in place to deal with conflict of interest;
- the appropriateness of any insurance offered in relation to the MySuper product;
- the quality of advice given to a member of the superannuation fund relating to the member's existing interest in the fund and products offered by the fund;
- the administrative efficiency of the superannuation fund;
- any other matters the FWC considers relevant.
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.