Thinking | 23 January 2013

MySuper and last minute changes to Tranche 3

The end of 2012 saw a number of further developments on the MySuper front.  Some of the last minute changes made to Tranche 3 of the Government’s Stronger Super reforms may seem minor on an initial reading but this article discusses how those quick changes can affect a superannuation fund’s MySuper offering.

Background

The Superannuation Amendment (Further MySuper and Transparency Measures) Act 2012 (Tranche 3 of the legislation implementing Stronger Super reforms) received Royal Assent on 3 December 2012.

Tranche 3 contains detail around fee charging rules, dashboard and portfolio holding disclosure as well as moving accrued default amounts and the need for superannuation funds to provide MySuper members with permanent incapacity and death benefit insurance cover on an opt-out basis. Some of the changes that seem quite minor at first may have important practical ramifications.

Before Tranche 3 was passed by both houses of Parliament, a number of last minute changes were made on 28 November 2012.  Importantly, some of the changes that seem quite minor at first may have important practical ramifications for superannuation fund trustees.

 

The last minute changes made to Tranche 3 before being passed by Parliament are as follows:
  • The definition of ‘accrued default amount’ (ADA) was amended.
  • The provision of risk insurance is excluded from the general MySuper requirement that members with a MySuper interest are provided with equal access to options, benefits and facilities.
  • Superannuation funds are permitted to require members to opt-out of permanent incapacity insurance cover if they opt-out of death benefit insurance cover.
  • It was clarified that intra-fund advice can only be provided in relation to cash management facilities within the fund (ie not cash management facilities outside of the fund).
The practical ramifications of the first three of these changes are explored below.
The last change is not discussed as it is merely a clarification.

Changes to the definition of ‘accrued default amount’

A regulated superannuation fund is required to identify the amount of each ADA it holds by no later than 30 September 2013 and quarterly after that.  All accrued default amounts (ADAs) that are held by a superannuation fund are required to be attributed to a MySuper offering by 1 July 2017.  Also, draft regulations include a requirement for trustees to give members notification when they are attributing the member’s ADA to a MySuper offering.  Further, the MySuper Transition Standard outlines requirements around attributing ADAs to a MySuper offering and also deals with the need for a Transition Plan.

Given the number of specific regulatory requirements concerning ADAs, it is important for superannuation fund trustees to be aware of what is and what is not contained within the definition of an ADA.

Changes to the general definition of ADA and addressing potential trustee liability issues

The definition of ADA was changed so that it relates to the whole of the member’s interest (ie not only part) where either:

(i) the member has not given the trustee a direction on investment of the amount; or

(ii) the amount of the member’s interest is invested in the fund’s current default investment option.

Therefore, where part of a member’s interest is invested in the fund’s current default option and part in a non-default investment option as a result of an investment direction given to the trustee, no part of the member’s interest would count as an ADA.

If all of the member’s interest is invested in an option under an investment direction given to the trustee and that was the historical default investment option of the fund at the time the amount was first invested in that option but is no longer the current default investment option, it would not be an ADA. (It would, however, be an ADA if no investment direction was ever given.)

This change to the definition of ADA could have potentially been a problem for superannuation funds who have chosen to structure their MySuper offering to replace their existing default investment strategy, instead of structuring it as a separate financial product.  This is because it removed the requirement to attribute every dollar that was invested in the default investment strategy of the fund as an ADA to a MySuper offering.

However, an amendment was made to facilitate those funds who had chosen to structure their MySuper offering to replace the existing default investment strategy by providing them with a discretion to attribute amounts in a default investment option to a MySuper offering even if the amount is not an ADA.  This was done by making any governing rules of a superannuation fund void that would prevent the trustee from attributing those amounts to a MySuper offering and excluding trustees from any liability to members for doing so.

Exclusion of investments in cash from being an ADA

The definition of ADA was also amended to exclude any amount of a member’s interest that is invested in an option under which the investment is held as cash.  Therefore, where cash is the default investment option the amount would not need to be attributed to a MySuper offering.

Successor fund transfers and ADAs

For the purposes of applying the general definition of ADA, where a member gave an investment direction to the trustee of a fund from which they were transferred and the members’ benefits were invested in an equivalent investment option in the receiving fund, the member is taken to have given the current trustee an investment direction to be invested in the equivalent investment option.

A practical question is whether the requirement for a member to have given the trustee of a prior fund an investment direction means that trustees need a physical copy of an investment direction given to the trustee of the previous fund?  Helpfully, the Explanatory Memorandum clarifies that a trustee does not need a physical investment direction to be satisfied that the member gave the previous fund an investment direction.  Rather, it could be satisfied that an investment direction was given to the trustee of the previous fund if it can show that the member could only have been invested in their current investment option if they had given an investment direction to the trustee of the previous fund.

It is worth noting that this amendment does not affect the second limb of the definition of ADA.  Therefore, where the whole amount of the member’s interest is invested in the current default investment option (even as a result of a successor fund transfer) then under the second limb that amount would be treated as an ADA.

Excluding risk insurance from the requirement that members with a MySuper interest are provided with equal access to options, benefits and facilities

Another last minute amendment is a clarification that risk insurance is excluded from the general requirement for members with a MySuper interest to be provided equal access to options, benefits and facilities.

This was necessary as the requirement for funds to provide all MySuper members, on an opt-out basis, with death and permanent incapacity benefits by taking out insurance is broad enough to allow a trustee to determine reasonable conditions of cover that could result in different classes of members being provided different levels of cover.  This flexibility was potentially in conflict with the MySuper characteristic requiring MySuper offerings to provide all MySuper members with access to the same options, benefits and facilities.

Superannuation funds are permitted to require members to opt-out of permanent incapacity insurance cover if they opt-out of death benefit insurance cover

Another amendment allows trustees of a superannuation fund to require a member who wishes to opt out of death benefit cover to also opt-out of permanent incapacity cover.  As a result, a trustee can prevent a member from holding permanent incapacity cover only.
As the Explanatory Memorandum explains, this change reflects the existing practice of many funds where it is not possible to offer permanent incapacity cover at the same premium rate if the member opts-out of death benefit cover due to anti selection risks.

Superannuation funds are permitted to require members to opt-out of permanent incapacity insurance cover if they opt-out of death benefit insurance cover

Another amendment allows trustees of a superannuation fund to require a member who wishes to opt out of death benefit cover to also opt-out of permanent incapacity cover.  As a result, a trustee can prevent a member from holding permanent incapacity cover only.

As the Explanatory Memorandum explains, this change reflects the existing practice of many funds where it is not possible to offer permanent incapacity cover at the same premium rate if the member opts-out of death benefit cover due to anti selection risks.

Contact

Adrian Verdnik

Adrian’s financial services law practice covers superannuation, managed funds, insurance, and financial advice.

Related practices

You might be also interested in...

Financial Services | 9 Jan 2013

National Consumer Credit Protection Phase 2 Reforms for Small Business Lending and Investment Lending

As a part of the Federal Government’s Phase 2 Consumer Credit Reforms, Treasury has released exposure draft legislation amending the National Consumer Credit Protection Act 2009 (NCCP Act) which covers:

Financial Services | 25 Feb 2013

Small Business Lending Reform Package postponed indefinitely

Following strong opposition by industry groups in relation to the small business lending reforms proposed as a part of the Credit Reforms Phase 2 package, the Minister for Financial Services and Superannuation, Bill Shorten has indicated that the proposed legislation in relation to small business lending will be postponed indefinitely.