Superannuation reforms contained in the 2020-21 Federal Budget look to create greater efficiency and transparency in super. However, without greater clarity as to how these reforms will be of practical effect it remains to be seen if they will provide the lasting benefits for members or just more red tape for trustees.
The superannuation package within the 2020-21 Federal Budget, Your Future, Your Super, focuses on making systematic improvements to the superannuation landscape in Australia, with a forecast benefit to Australians of $17.9 billion over the next 10 years. In line with its pre-election promises, the Government has not sought to make any change to the already legislated superannuation guarantee increases.
Australia’s compulsory superannuation system is central to the retirement incomes of its 16 million members, managing $3 trillion of retirement savings. The reforms in the 2020-21 Federal Budget are a direct response to the findings of the Productivity Commission’s 2018 Superannuation: Assessing Efficiency and Competitiveness – Inquiry report, which found that Australians pay over $30 billion a year in fees on their super (excluding insurance premiums) – a figure that is substantially higher than in many other OECD countries.
The recommendations of the Productivity Commission in its report broadly focus on modernising the superannuation system, making the choice of super fund easier, improving transparency in the industry, and removing glaring inefficiencies. Your Future, Your Super seeks to address these recommendations in the following four ways:
- Eliminating super fund duplication;
- Releasing a ‘YourSuper’ comparison tool;
- Imposing strict measures on funds that ‘underperform’; and
- Increasing disclosure and compliance requirements for super trustees, creating a new duty for them to act in the best financial interests of their members.
This snapshot also briefly considers announcements of:
- The Government’s continuing intention to amend the Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020; and
- A deferral of the release of the Retirement Income Covenant to 1 July 2022.
Outside of the reforms covered in this article, it is also notable that the Government is continuing its commitment to permitting individuals suffering financial distress under the ongoing COVID-19 pandemic to temporarily access their super.
Budget super reforms: at a glance
- Your superannuation follows you – employers must pay super guarantee (SG) contributions into an employee’s existing super account if they have one
- Seeks to prevent the unintended creation of multiple super accounts
- Employers will access existing account information via ATO online services
- In our view, this measure will increase member inertia, making it more likely that members will stay in underperforming funds
- Interactive comparison tool designed to assist consumers in choosing a super fund
- Aims to foster greater transparency and competition in the industry
- Ranks funds by fees and investment returns
- Prompts users to consider consolidating accounts
Holding funds to account for
- APRA to benchmark super funds by reference to net investment performance
- Underperforming funds must notify members
- Funds that fail two consecutive annual performance tests will be barred from accepting new members
- In our view, the assessment will not appropriately account for the unique economic circumstances of COVID-19 and place an undue emphasis of investment performance as the sole criteria for measuring the success of super funds
- ‘Best interests’ duty restated as a duty to act in the ‘best financial interests’ of members
Best financial interests
- Trustees must demonstrate that there was a reasonable basis to support their investment and spending choices
- Members must be provided with key information regarding fund management in advance of Annual Members’ Meetings
Annual Members’ Meeting requirements
- Regulations will set out information to be given to members prior to the Annual Members’ Meeting
- Guidance will be provided on presentation of information to enable consistency and clarity for members
- Government remains committed to closing Eligible Rollover Funds (ERFs)
Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020
- Amendments to be made to this Bill to set timeframes
- Will allow funds to voluntarily transfer amounts to the ATO if it is in the best interests of that member
Retirement Income Covenant
- Will impose an additional requirement on trustees to have a retirement income strategy
- Anticipates release of the Retirement Income Review
Reducing multiple accounts: your superannuation follows you
This first measure ensures that a new account will not be set up simply because a person has changed employers. This seeks to prevent the unintended creation of multiple super fund accounts for one individual and the resulting erosion of their super.
Employers will need to pay into their employee’s existing superannuation fund if they have one, unless the employees elects another fund. Employers will comply with this new system by logging onto ATO online services, entering the employee’s details, selecting an account, and paying the superannuation contributions into the employee’s nominated default superannuation fund.
This measure will help to deal with the long discussed issue of multiple accounts, with Treasury estimating that this reform will result in 2.1 million fewer unintended multiple accounts over 10 years, saving workers about $2.8 billion by avoiding duplicate fees, insurance and lost earnings across that time. Of course what remains to be seen is whether this will have the unintended consequence of ‘stapling’ inert members to poorly performing funds.
YourSuper comparison tool
The Government has proposed to introduce an interactive comparison tool designed to assist Australians in choosing the super fund that will best suit their needs. It has been indicated that this tool will:
- Tabulate super products, ranked by fees and investment returns;
- Provide links to super fund websites; and
- Display an individual’s current super account(s) and prompt users to consider consolidating accounts where they have more than one.
The introduction of this tool responds to the recommendation from the Productivity Commission that the Government foster greater transparency and competition in the industry.
Fees and financial performance are undoubtedly important factors in a person’s decision as to which fund is right for them. However, to present these metrics divorced from other fund information, such as governance and sustainability measures, risks undermining the importance of these other factors.
Managing underperformance: strict measures for underperforming funds
In a more drastic measure, underperforming funds will be prevented from taking in new members. APRA will assess fund performance annually and will implement APRA’s ‘heat map’ methodology to assess if the fund is underperforming. If a fund is deemed to be underperforming, it will need to inform its members of its underperformance and in that notification also provide them with information about the YourSuper comparison tool. All underperforming funds will be listed as underperforming on the YourSuper comparison tool until their performance improves.
Funds that fail two consecutive annual performance tests will be barred from accepting new members. These funds will only be able to re-open to new members if their performance improves. It is not clear whether this improvement is something that may be assessed upon request, or with any greater frequency than the planned yearly assessments. If this is the case, super funds that underperform two years in a row will not be able to accept new members for at least a year.
The first assessment is scheduled to be completed by APRA in September 2021. By 1 July 2022, these annual performance tests will be extended to superannuation products outside of ‘MySuper’ products.
There are no details as yet as to what will happen if large numbers of funds underperform against their benchmarks, as is possible at present with market fluctuations as a result of COVID-19. The result may be that funds become overly cautious in their investment strategies, denying younger members the opportunity for higher returns in their early years of investment and reducing the effectiveness of compounding on their balances over their working life.
Best financial interests
A restatement of the ‘best interests’ duty is proposed, so that trustees will need to:
- Comply with a duty to act in the best financial interests of members;
- Demonstrate that there was a reasonable basis to support their actions and that is consistent with members’ best financial interests; and
- Provide members with key information regarding how they manage and spend their money in advance of Annual Members’ Meetings.
The change to refer to the best ‘financial’ interest of members will be of little practical effect, as there is already ample case law to support that the existing ‘best interests’ test relates to the best financial interests of members. There is no current indication that there will be a materiality measure applied and whether, for example, an administrative error could result in a trustee being in breach of this covenant. The recent groundswell of funds towards impact investment may also be endangered as funds are forced to forego otherwise sound sustainable investment opportunities to shoot for the top of the league tables.
Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020
The Government remains committed to closing ERFs and enacting the Superannuation — facilitating closure of eligible rollover funds measures as first announced in the Mid-Year Economic and Fiscal Outlook. This will include:
- Deferring the start date of the measure that prevents superannuation funds transferring new amounts to ERFs by 12 months;
- Deferring the date by which ERFs are required to transfer accounts below $6,000 to the ATO to 30 June 2021;
- Deferring the date by which ERFs are required to transfer remaining accounts to the ATO to 31 January 2022; and
- Allowing all superannuation funds to voluntarily transfer amounts to the ATO in circumstances where the trustee believes it is in the best interests of that member, such as amounts that would otherwise have been transferred to an ERF.
Deferral of the Retirement Income Covenant
An announcement had already been made that the commencement of the Retirement Income Covenant would be deferred to 1 July 2022. This deferral is said to allow for further consultation, more considered legislative drafting and to ensure that the measure is informed by the Retirement Income Review once released. Given the Government’s reluctance to date to release the findings of the Retirement Income Review, this announcement clarifies at least that this remains on the Government’s agenda.
Once implemented, this covenant will impose a requirement on trustees to have a retirement income strategy.
The Federal Budget brings with it a litany of proposed reforms to the superannuation sector. Some of these reforms are long overdue and will be welcomed by the industry. Others however, such as the restatement of the best interests duty and the stapling of members to a single default super fund, are likely to send shockwaves throughout an industry that is still coming to grips with the early release measures announced as part of the Government’s COVID-19 economic recovery plan (under which approximately $33 billion has been withdrawn from the total superannuation asset pool), not to mention the fallout from the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (many of which are finding their way into legislation).
The legislative package that will be required to give effect to the superannuation proposals remains to be seen. However, it is certain that it won’t be light touch and the superannuation industry is already bracing itself for more regulation than you can poke a stick at. Keeping up with the pace of regulatory reform in the superannuation sector is a challenge at the best of times and these Budget reforms simply exacerbate that challenge.
Does it make sense for the legislature and policy-makers to take this approach to such a critical part of Australia’s retirement income strategy? Will the focus on net investment performance to weed out underperforming funds achieve its objectives by simply closing underperforming funds to new members? Is there merit in mandating funds to disclose how they spend their sponsorship and marketing dollars, or will this simply stifle competition and product innovation?
These are just some of the many questions raised by the Government’s ambitious reform agenda for superannuation in Australia. The banner for the reforms refers to ‘Your Future, Your Super’ – yet taking into account the underlying motivation for much of the reform measures, perhaps a more appropriate label for trustees and their members would be: ‘Your Super, Take Notice’.
If you’d like to discuss any of the proposed superannuation measures announced in the Federal Budget, please contact a member of our team.
 Cowan v Scargill  Ch 270; Australian Prudential Regulation Authority v Kelaher  FCA 1521, . See also, Asea Brown Boveri Superannuation Fund No. 1 Pty Ltd v Asea Brown Boveri Pty Ltd and Others  1 VR 144, .
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.