AFCA proposes new rule changes to the Superannuation Complaints Tribunal prior to it ceasing operations on 31 December 2020. (4 November 2020)
The rules are to ensure that once the Superannuation Complaints Tribunal (SCT) ceases operations on 31 December, all unresolved complaints can be transferred to AFCA so that they may be continued. Trustees should take note that:
- since 1 November 2018, ASFA undertakes all new superannuation complaints as part of its main role as SCT prepares to cease operation on 31 December
- on 31 December, all ongoing SCT complaints that have not been resolved will be handed to AFCA
- the transfer of complaints will see each complaint enter the AFCA's dispute resolution process at the stage most comparable to where it was at the SCT
- all ongoing appeal matters from the Federal Court that came from the SCT will be taken by AFCA moving forward.
It is expected that these changes will be released by AFCA in January 2021.
ASIC's focus in Superannuation (10 November 2020)
Jane Eccleston, ASIC's Superannuation Senior Executive Leader, recently discussed ASIC's Superannuation priorities for the 2020-21 financial year, including:
- continuing to review the industry's progress on improving insurance outcomes for members, particularly in default insurance. ASIC's objective is to address inappropriate and poorly communicated insurance in superannuation that results in higher premiums and the improper erosion of members' retirement benefits. The regulator aims to encourage new behavioural norms among trustees in the communication, design and claims processes for insurance to improve the benefits of insurance in super for members
- encouraging trustees to engage with product design and distribution obligations (DDO) now and consider how they can implement both the DDO and member outcomes regimes simultaneously to make the most of the synergies between them. To comply with the DDOs, trustees need to have strong product governance processes that encompass planning around the needs of potential members, understand how products operate in practice for members, and review and action based on evidence
- aiming to improve standards of trustee governance is internal dispute resolution (IDR). Better IDR improves both consumer outcomes and risk management, and ultimately, the performance of super funds. It can also reduce the risk of future remediation costs, which can balloon when trustees fail to identify or proactively respond to consumer losses
- updating its instruments to allow trustees to provide retirement projections and calculations. ASIC is working to understand how consumers use and act on retirement projections and estimates, including by examining overseas models, actuarial and other advice. The regulator will issue a consultation paper in 2021 to consult the public on the proposed changes to legislative relief and guidance. Once complete, ASIC will update its regulatory guidance to remove ambiguity for trustees and update the tools to give members consistent, clear and reliable information.
APRA Outcomes assessment under section 52(9) of the Superannuation Industry (Supervision) Act 1993 - frequently asked questions (11 November 2020)
APRA has released a series of frequently asked questions in respect of the SIS outcomes assessment requirements that trustees must undertake by the end of February 2021. These FAQs (outlined below) address common areas of weakness identified from APRA's targeted review of trial outcomes assessments.1
1. Should RSE licensees place on hold work underway to comply with the outcomes assessment, given that there may be changes to section 52(9) of the SIS Act to reflect the proposed budget measures?
2. When should the outcomes assessment under section 52(9) of the SIS Act be completed by?
3. Do RSE licensees need to complete outcomes assessments for choice products?
4. How should RSE licensees approach the assessment of choice products, given such products are comprised of multiple investment options from which a member selects?
4.1. Should assessments of choice products be undertaken at the product or option level?
4.2. Can an RSE licensee use work undertaken to comply with Prudential Standard SPS 530 Investment Governance (SPS 530) in order to satisfy section 52(11)(b) of the SIS Act?
4.3. How should fees be benchmarked for choice products?
5. For the purposes of section 52(10) of the SIS Act, is an RSE licensee permitted to select the MySuper products against which to make the comparison?
6. How can an RSE licensee make the product determination under section 52(9) for a lifecycle MySuper product with multiple lifecycle stages?
7. Do all factors under section 52(11) need to be assessed for MySuper products and choice products?
8. What data should the RSE licensee use to complete the outcomes assessment?
Consultation on remuneration requirements for all APRA-regulated entities (12 November 2020)
APRA published an updated draft Prudential Standard CPS 511 Remuneration (CPS 511) for a second round of consultations. The new prudential requirements have been flagged by APRA as being a key focus for it in the period ahead. APRA plans to revise CPS 511 across all of its regulated industries to deliver:
- stronger incentives for individuals to proactively manage non-financial risks
- appropriate financial consequences where material risk incidents have occurred
- increased transparency to drive stronger board accountability for remuneration outcomes.
This consultation provides funds with the opportunity to make submissions on the revised CPS 511 standards which aim to also address recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) through principle-based minimum requirements. CPS 511's key requirements are:
- the board of an APRA-regulated entity is responsible for the remuneration framework and its effective application
- an entity must have a remuneration framework which captures all remuneration arrangements and is appropriate to the size, business mix and complexity of the entity
- remuneration outcomes must be commensurate with performance and risk outcomes
- higher standards must be met for key roles and certain large, complex entities.
Submissions are due by 21 February 2021.
ASIC Consultation Paper CP 332 Promoting access to affordable advice for consumers (17 November 2020)
The consultation paper seeks information from financial advice industry participants and other stakeholders on impediments to the delivery of good-quality affordable personal advice.
ASIC is seeking feedback in respect of the challenges and practical issues providers face when providing limited advice to consumers, including:
- what impediments to the advice industry providing good-quality limited advice exist
- how ASIC should address these impediments
- whether ASIC Regulatory Guide RG 244 Giving information, general advice and scaled advice could be improved
- what form future ASIC guidance on limited advice could take
- whether terms including "limited advice", "narrow-scope advice", "piece-by-piece advice", "transactional advice" and "episodic advice" could be better clarified
- whether better guidance in respect of statements of advice is required
- the issues that affect the affordability of personal advice in Australia
- experience in providing strategic advice
- experience in providing digital advice.
Submissions are due by 18 January 2021.
ASIC Report 673 Consumer engagement in insurance in super (20 November 2020)
ASIC released the findings of a report it commissioned to determine:
- what members who engage with their insurance in super want to achieve
- the reasons as to why they do and do not succeed
The report identified the following potential improvements to members' experiences:
- helping members understand:
- the differences between the insurance products on offer
- the differences between insurance inside and outside super
- whether it is possible to claim on more than one policy
- changes in insurance needs over the course of their lives
- the implications of pre-existing conditions on switching.
- calculators on all superannuation fund websites would help people work out how much cover they need and how much it would cost
- reminders to check insurance cover when starting a new fund or changing jobs, or when life stages change, by letter or email or with the statement
- case studies on websites, or very short and clearly accessible articles on individual topics on websites, perhaps in a more journalistic style than in PDS style, to demystify and clarify some often-asked questions
- customer support staff to guide members on the phone through the website process appears to be a productive use of the time spent with members by fund representatives
- help members understand the demarcation between general information and 'advice' and whether they need to speak to a financial adviser or not
- greater understanding and use of MoneySmart.
Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Bill 2020 (11 November 2020)
Amendments to the Bill, which was first introduced in 2019, were introduced and passed by the House and Representatives and have been moved by the Senate. The amendments to the Bill propose to:
- amend section 10L(2)(b)(i) of the Family Law Act 1975 (Cth) (FLA) to allow Western Australian de facto couples to participate in private arbitration in relation to their superannuation proceedings, in the same circumstances as their counterparts in other states and territories
- extend proposed Part VIIIC of the FLA to all Western Australian de facto relationships (including those with proceedings on foot) without the need for both parties to opt-in to the new superannuation splitting regime as originally proposed in the Bill
- expressly prevent de facto couples who have final property orders in place or who have a financial agreement under Part 5A of the Family Court Act 1997 (WA) upon commencement of the Bill, from applying for superannuation splitting orders under proposed Part VIIIC of the FLA.
Treasury Laws Amendment (2020 Measures No. 5) Bill 2020 (11 November 2020)
The Bill was introduced to the House of Representatives and proposes to amend the Superannuation (Unclaimed Money and Lost Members) Act 1999 (Cth) so that the Commissioner for Taxation (Commissioner) must transfer inactive low-balance account amounts it receives to a KiwiSaver scheme provider if a member directs it to do so.
There was some uncertainty as to whether trustees were to also transfer any KiwiSaver amounts to the Commissioner. The proposed amendments clearly imply that all amounts (Australian or internationally-sourced) amounts are to be transferred to the Commissioner, if and as required.
Banking Royal Commission the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (12 November)
The Bill outlines several amendments to SIS, arising from the Banking Royal Commission's recommendations.
The Bill's amendments include:
- amendments to the Corporations Act to strengthen the existing voluntary code of conduct framework to allow ASIC to designate enforceable code provisions in approved codes of conduct
- establishing a mandatory code of conduct framework for the financial services industry through regulations, with the ability to designate certain provisions as civil penalty provisions
- the requirement that superannuation fund trustees to only hold duties to the members and beneficiaries of the superannuation funds that they are licenced to act as a trustee of
- extending ASIC's role in covering consumer protection and market integrity regulation, meaning that it will share the general administration of, or co-regulate, the SIS consumer protection and member outcomes provisions
- amending the SIS breach reporting regime to align the 30-day timing requirement for reporting under that regime with the extension of ASIC's role
- extending the AFSL regime to cover the provision of a superannuation trustee service while also amending the existing SIS indemnification prohibitions to prevent trustees and directors from using trust assets to pay a criminal, civil or administrative penalty incurred in relation to a contravention of a Commonwealth law
- clarifying and strengthening the Corporations Act breach
reporting regime, including:
- expanding the types of situations that need to be reported to
ASIC to include:
- investigations into whether a significant breach has occurred or will occur if the investigation continues for more than 30 days, and the outcomes of those investigations
- conduct that constitutes gross negligence or serious fraud
- conduct that amounts to misleading or deceptive conduct under the financial services law
- serious compliance concerns about individual financial advisers operating under another licence.
- requiring lodgement of breach reports with ASIC within 30 days after the licensee first becomes aware, or is reckless with respect to whether there are reasonable grounds to believe, a reportable situation has arisen.
- expanding the types of situations that need to be reported to ASIC to include:
Your Future, Your Super package (26 November 2020)
The government released the following exposure draft legislation and explanatory material for public consultation. These contain the following draft legislation:
- Treasury Laws Amendment (Measures for a later sitting) Bill
2020: Best Financial Interests Duty which:
- amends the SIS best interests covenants so that trustees and directors must act in the best financial interests of members
- requires trustees to determine whether payments made to third parties (including superannuation associations) are made in the best financial interests of members
- requires trustees to determine whether payments made to third parties are used for a proper purpose
- places a reverse evidential burden on trustees and directors to prove that they performed their duties in the best financial interests of members when being sued.
- Treasury Laws Amendment (Measures for consultation) Bill 2020:
Single default account which:
- introduces the concept of a 'stapled fund' (of which regulations will require drafting to define the term)
- requires that if an employee has a stapled fund with no chosen fund, an employer can satisfy the choice of fund requirements by making contributions for the employee into the stapled fund
- prevents an employer from satisfying the choice of fund requirements for contributions made to a default fund or a fund specified under a workplace determination or an enterprise agreement made before 1 January 2021, if the employee has a stapled fund.
- Treasury Laws Amendment (Measures for a later sitting) Bill
2020: Addressing underperformance in superannuation which amends
SIS so that:
- APRA must conduct an annual performance test on MySuper products and other classes of beneficial interest in a regulated superannuation fund that is specified in yet-to-be-made regulations (such as trustee-directed products)
- APRA must notify trustees of the results of the annual performance test
- two new covenants apply, requiring trustees of superannuation
products that fail the annual performance test:
- to notify beneficiaries who hold the product, that their product has failed the annual performance test
- to cease accepting new beneficiaries into the superannuation product, if the product fails in two consecutive years, unless APRA lifts the prohibition.
- APRA may rank products.
Once, again, regulations require drafting to detail the tests' requirements and the formula that APRA will use to rank products.
Submissions are due to Treasury by 24 December 2020.
The intent of the package of exposure legislation is clear. However, one of the concerns facing trustees is that the exposure legislation is highly reliant upon the regulations to detail the relevant rules. Without draft legislation, it makes it very difficult for trustees to cover off on all matters required in submissions.
The following points are worth highlighting in respect to the best financial interests legislation:
- the evidential burden is placed squarely on trustees and their directors' shoulders. A careful eye needs to be cast on the parts of SIS that enable either of members and the regulators to launch civil proceedings against trustees because, even though the draft explanatory memorandum states that the reverse evidential burden only applies to actions brought by the regulator (and not members), the language in SIS that relates to this specific rule is quite technical
- the evidential burden will apply for six years from the date of an event occurring. However, parts of SIS allow members to take action within six years of a cause of action (i.e. loss) arising. Care needs to be taken by the drafters to ensure that there is no crossing over of the rules (see our previous point) so that trustees can be left assured that the evidential burden has a limited lifespan
- trustees who wish to make social impact investments will need to carefully consider how these rules apply. It is clear that trustees need to assess the costs and benefits of actions, including quantifiable metrics to demonstrate what the anticipated financial outcome is and the reasonable basis for that expectation. In this case, the draft legislation is set to take effect as of 1 July 2021, the issue that some trustees will need to carefully examine is whether any current investments that fall along the social impact spectrum would meet the proposed covenant and, if not, whether there needs to be a divestment before or after that date if trustees cannot provide evidence that such investments are made in the members' best financial interests (noting the rules will cover decisions to continue to hold investments and not merely decisions to make new investments)
- trustees will be required to conduct reasonable due diligence when assessing payments to a third party. If, after having conducted this reasonable due diligence, the trustee knows or ought reasonably to know that the payment to the third party is not in the best financial interests of beneficiaries, or there is a concern that they might not be, the trustee should not make the payment. Therefore, the first question to ask is "who or what is a third party?" - it is clear that some in Parliament take the view that money is being funnelled out of the superannuation industry to certain political wings, and it is clear that this draft legislation is designed to address that view. The explanatory memorandum uses some incredibly vivid language when describing this requirement:
- it is also clear that the draft legislation has aimed at one (if not more) of the various superannuation associations
- advertising and sponsorship will be caught by these rules. However, we don't know if the new rules make as great an impact on advertising and sponsorship as might have been expected - it may depend upon whether the regulations create further rules. When advising trustees on whether they can advertise and/or sponsor, we would imagine that all lawyers refer to the SIS covenants and the need to demonstrate the nexus between the activity and producing some form of financial benefit for members commensurate with the amount spent. Where trustees may become exposed is where they sponsor small events, such as a regional chamber of commerce function, where the amount paid to sponsor the event may be relatively small and the ability to gauge any form of outcome is low. It is also likely that trustees will need to ensure that they can justify continuing to advertise and/or sponsor so that the evidential burden is met - again, similar themes as likely included in most advice to trustees on the matter.
Cases and other recent developments
REST v McVeighsettlement(2 November 2020)
The parties in this matter agreed to settle.
REST released a public statement in which it announced that it will take further steps to ensure that investment managers take active steps to consider, measure and manage financial risks posed by climate change and other relevant ESG risks, as well as to report back to REST.
REST also agrees to continue to develop its management processes for dealing with the financial risks of climate change on behalf of its members.
REST's climate change initiatives include:
- implementing a long-term objective to achieve a net-zero carbon footprint for the fund by 2050
- measuring, monitoring and reporting outcomes on its climate-related progress and actions in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
- encouraging its investee companies to disclose in line with the TCFD recommendations
- publicly disclosing the fund's portfolio holdings
- enhancing its consideration of climate change risks when setting its investment strategy and asset allocation positions, including by undertaking scenario analysis in respect of at least two climate change scenarios
- actively considering all climate change-related shareholder resolutions of investee companies and otherwise continuing to engage with investee companies and industry associations to promote business plans and government policies to be effective and reflect the climate goals of the Paris Agreement
- conducting due diligence and monitoring of investment managers and their approach to climate risk
- continuing to develop its management processes and implementing changes to its climate change policy and internal risk framework, which apply to all of the fund's investments, to reflect the above
- seeking to require that its investment managers and advisers comply with the above.
This is an area that will become increasingly fraught. It is clear that trustees need to consider ESG-related matters as part of the ongoing assessment of their portfolios. However, this does not mean that trustees must consider or make ESG-related decisions for ESG's sake. One of the key challenges for trustees is how they enunciate this to members - superannuation's purpose is to provide quantifiable retirement benefits - while also ensuring that they provide adequate disclosure to detail the trustee's ESG practices.
Retirement Income Review (20 November 2020)
The July 2020 report was released publicly and key observations include:
- a clear objective for the system is needed to guide policy, improve understanding and provide a framework for assessing the performance of the system
- what constitutes an "adequate, equitable, sustainable and coherent" retirement income system needs to be clear and preferably legislated
- as the superannuation system matures, people will increasingly fund more of their own retirement. Nevertheless, the Age Pension (a means-tested Commonwealth government income support payment) will continue to supplement the retirement income of a large proportion of people, but to a lesser degree
- superannuation savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation. Yet most retirees leave the bulk of the wealth they had at retirement as a bequest
- the home is the most important component of voluntary savings and is an important factor influencing retirement outcomes. The system favours homeowners, such as through the exemption of the principal residence from the Age Pension assets test
- the appropriate adequacy objective for a system based on compulsory superannuation is to balance living standards across a person's working life and retirement.
- saving for retirement involves forgoing consumption in working years. When there is compulsory superannuation, the rate should be set at a level that balances pre- and post-retirement living standards for middle-income earners. It is challenging to set a single superannuation guarantee (SG) rate that suits all Australians given the variety of people's circumstances and experiences
- a rate of compulsory superannuation that would result in people having an increase in their living standards in retirement may involve an unacceptable reduction in living standards prior to retirement, particularly for lower income earners. This is based on the view, supported by the weight of evidence that increases in the SG rate result in lower wages growth, and would affect living standards in working life
- under the legislated increase in the SG to 12%, the projected replacement rate for future retirees with typical working lives exceeds the suggested 65-75% benchmark rate across most income levels. This assumes people draw down their savings in retirement. If they only draw down their superannuation at the legislated minimum rates, which many people currently do, those in the upper half of the income distribution will not achieve the 65-75% replacement rates
- more efficient use of savings in retirement can have a bigger impact on improving retirement income than increasing the SG. If the SG remained at 9.5%, and retirement savings were used more efficiently, most people would achieve 65-75% replacement rates. Most would also achieve higher replacement rates than with the SG at 12% and drawing down balances at the legislated minimum rate
- the focus of superannuation has often been on building larger superannuation balances through increased contributions. But lower fees and higher investment returns will increase superannuation balances. Crucially, there has been insufficient attention on assisting people to optimise their retirement income through the efficient use of their savings by drawing down
- using superannuation assets more efficiently and accessing equity in the home can significantly boost retirement incomes without the need for additional contributions
- the design of superannuation tax concessions increases inequality in the system. Tax concessions provide greater benefit to people on higher incomes
- government expenditure on the Age Pension as a proportion of GDP is projected to fall slightly over the next 40 years to around 2.3%. Higher superannuation balances reduce Age Pension costs. The cost of superannuation tax concessions is projected to grow as a proportion of GDP and exceed that of Age Pension expenditure by around 2050. This is due to earnings tax concessions. The increase in the SG rate to 12% will increase the fiscal cost of the system over the long term
- there are areas where superannuation tax concessions are not a cost-effective way to help people achieve adequate retirement incomes. In particular, the cost of the earnings tax exemption in retirement will grow faster than the growth in the economy as the system matures and provides the largest boost to retirement incomes of higher income earners.