THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES

Transcription

1 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES TREASURY LAWS AMENDMENT (PROTECTING YOUR SUPERANNUATION PACKAGE) BILL 2018 EXPLANATORY MEMORANDUM (Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O Dwyer MP)

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3 Table of contents Glossary... 1 General outline and financial impact... 3 Chapter 1 Overview of the Protecting Your Super Package... 5 Chapter 2 Fees charged to superannuation members... 9 Chapter 3 Insurance for superannuation members Chapter 4 Inactive low-balance accounts and consolidation into active accounts Chapter 5 Regulation impact statement Chapter 6 Statement of Compatibility with Human Rights... 73

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5 Glossary The following abbreviations and acronyms are used throughout this explanatory memorandum. APRA ASIC ATO Bill Commissioner Abbreviation Definition Australian Prudential Regulation Authority Australian Securities and Investments Commission Australian Taxation Office Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 Commissioner of Taxation ITAA 1997 Income Tax Assessment Act 1997 SIS Act SMSF SUMLM Act Superannuation Industry (Supervision) Act 1993 Self managed superannuation fund Superannuation (Unclaimed Money and Lost Members) Act 1999 TAA 1953 Taxation Administration Act

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7 General outline and financial impact This Bill contains amendments to the SIS Act, SUMLM Act, ITAA 1997 and TAA 1953 to protect individuals retirement savings from erosion, ultimately increasing Australians superannuation balances. Date of effect: 1 July 2019 Proposal announced: This Bill implements the Protecting Your Super Package announced in the Budget. Financial impact: The measures, including final amendments following consultation on the draft Bill, are estimated to have a gain to the budget of around $850 million in fiscal balance terms and around $1,750 million in underlying cash balance terms over the forward estimates. Human rights implications: This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights Chapter 6, paragraphs 6.1 to Compliance cost impact: Medium to high Summary of regulation impact statement Regulation impact on business Impact: The amendments have an estimated annual compliance cost impact of $28.5 million averaged over 10 years. Main points: The current superannuation regulatory framework provides no special protection for the erosion of retirement savings of low balance accounts through fees and premiums for default insurance. The scope of the RIS is the impact of excessive fees, inappropriate insurance arrangements and duplication of accounts on individuals. Addressing the root causes of account proliferation is beyond the scope of this RIS. Three options were considered and detailed in the RIS. Overall, Option 2 was determined as the preferred approach as it provides the greatest benefit to members at the lowest regulatory burden. Legislative amendments are required to implement Option 2. 3

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9 Chapter 1 Overview of the Protecting Your Super Package Outline of chapter 1.1 This Bill contains amendments to the SIS Act, SUMLM Act ITAA 1997 and TAA 1953 to protect individuals retirement savings from erosion, ultimately increasing Australians superannuation balances. 1.2 This Chapter provides an overview of those amendments. Context of amendments 1.3 Superannuation is a major part of Australia s retirement income system. Together with the Age Pension and savings outside superannuation, it supports Australians in their retirement years. 1.4 Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). It is projected to grow rapidly in the coming decades, as the superannuation system matures. 1.5 Given the importance of superannuation to Australians, the Government is seeking to ensure that people s hard-earned savings are not unnecessarily eroded by fees or inappropriate insurance arrangements. 1.6 In , accounts with balances below $6,000 comprised over 40 per cent of all accounts in the system. These accounts face disproportionately high fees and insurance premiums. 1.7 For these accounts, the principal source of growth is through compulsory contributions; however, high passively incurred fees (such as administration and investment fees) can mute this growth. These fees are imposed under the equal fee structures built into default MySuper products and many choice products and are highly regressive in their impact on low balance accounts. 1.8 In addition, a significant number of people hold duplicate or inappropriate insurance policies, in large part due to the current default MySuper settings and the relative ease with which an individual can inadvertently hold multiple superannuation accounts across different funds. The current MySuper settings mandate the provision of death and total and permanent disability insurance, primarily on an opt out basis and 5

10 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 allow for income protection insurance to be provided on an opt out or opt in basis. 1.9 Insurance in superannuation plays an important role given the benefits it can provide to individuals. However, insurance premiums can be a key driver of account balance erosion, and can reduce a low income earner s retirement balance by 10 per cent or more (compared to no insurance) with the effect increasing for every set of policies held While there is a current regime for transferring lost superannuation savings to the Commissioner to protect them from erosion, this regime requires longer periods of inactivity before amounts are transferred, and savings can be eroded entirely by fees in the interim. In addition, numerous exceptions permit trustees to not transfer balances below $6,000 to the Commissioner, allowing these balances to continue to be subject to ongoing fee and insurance premium erosion Historically, there have been high levels of member disengagement with the superannuation sector. In addition, past and current restrictions on a member s ability to choose a fund have forced individuals to hold their superannuation savings in multiple accounts. The combination of these factors has led to outcomes that do not reflect the needs of the default and low balance cohorts of members The changes in the Bill will not replace existing account consolidation processes which will remain available to members. The changes supplement the current arrangements to streamline consolidation of balances for disengaged members, ensuring that superannuation savings are better protected from inappropriate or excessive erosion by fees and insurance premiums Reducing the number of low balance accounts will generate system-wide efficiencies by reducing administration costs for funds and better targeting default insurance cover The Bill protects members superannuation savings from erosion by: limiting fees so that low balance savings can grow and are protected from disproportionately high fees; banning exit fees to remove a barrier to account consolidation; ensuring that arrangements for insurance in superannuation are appropriate so that members are not paying for insurance cover that they do not know about or premiums that inappropriately erode their retirement savings; and strengthening the ATO s role in reuniting small, inactive balances to reduce the costs to members and consolidate the 6

11 Overview of the Protecting Your Superannuation Package accounts of members that have accrued multiple superannuation accounts Together, these changes will provide a comprehensive solution to many of the issues faced by Australians with low balance, inactive and multiple accounts Except in Chapter 4, in this explanatory memorandum, the term account is used as it is commonly understood in the superannuation sector, meaning a member s interest in either a MySuper product or a choice product held within their superannuation fund. Summary of new law Fees charged to superannuation members 1.17 Schedule 1 to this Bill prevents trustees of superannuation funds from charging certain fees and costs exceeding 3 per cent of the balance of a MySuper or choice product annually where the balance of the account is below $6, The fees that are capped are administration and investment fees. The costs that are capped are amounts as prescribed in regulations incurred by the trustee for administration of the fund and investment of the fund s assets and not otherwise charged as a fee The Schedule also prevents trustees from charging exit fees on all superannuation accounts, regardless of a member s account balance This will prevent inappropriate erosion of low balances by high passively-incurred fees, and will remove a disincentive to account consolidation or rollovers by members. Insurance for superannuation members 1.21 Schedule 2 to this Bill prevents trustees from providing opt out insurance to new members aged under 25 years, members with balances below $6,000 and members with inactive MySuper or choice accounts, unless a member has directed otherwise This will better target default insurance cover and prevent inappropriate erosion of retirement savings caused by insurance premiums Members will still be able to obtain insurance cover within their superannuation if they choose to do so. 7

12 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 Inactive low-balance accounts and consolidation into active accounts 1.24 Schedule 3 to this Bill requires the transfer of all superannuation savings with balances below $6,000 to the Commissioner if an account, related to a MySuper or choice product has been inactive for a continuous period of 13 months The account will not be transferred if the member has chosen to maintain insurance or if the existing insurance cover has not ceased The Schedule also enables the Commissioner to proactively pay amounts held by the ATO into a member s active superannuation account, where the reunited account balance would be greater than $6, This will increase the rate of account consolidation in the superannuation industry, decrease low-balance account erosion and reduce insurance premium and fee duplication for many members. 8

13 Chapter 2 Fees charged to superannuation members Outline of chapter 2.1 Schedule 1 to this Bill prevents trustees of superannuation funds from charging certain fees or costs exceeding 3 per cent of the balance of an account annually if the balance is less than $6, Schedule 1 also prevents trustees from charging exit fees on all superannuation accounts, regardless of a member s account balance. Context of amendments 2.3 Currently, the SIS Act does not limit the amount of administration fees or investment fees that can be charged for either choice or MySuper products. There are no limits on indirect costs that lower returns on a member s investments. 2.4 While MySuper charging rules require consistency amongst members in a given MySuper product, this does not always result in equitable outcomes as particular charging structures can result in low balance accounts paying disproportionately high fees. 2.5 A trustee of a superannuation fund can only charge certain fees in relation to a MySuper product if they meet the charging rules. These charging rules generally apply so that the trustee must charge the same flat fee, the same percentage of the account balance, or a combination of both, for all members of a MySuper product. 2.6 Because the charging rules do not impose a limit on the amount of fees that can be charged to a member, they can disproportionately erode the balances of low balance accounts. 2.7 Administration and investment fees represent the majority of fees charged by funds. These fees are incurred by members simply by virtue of holding a product and are a significant cause of account balance erosion, particularly for inactive accounts. 2.8 Exit fees are a disincentive for members to consolidate accounts or exercise a choice to roll their balance into another fund. Consolidation of accounts, in particular, reduces members exposure to duplication of fees across multiple low balance accounts and reduces undue erosion of their aggregate superannuation savings. 9

14 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 Summary of new law 2.9 This measure amends the general fee rules in Part 11A of the SIS Act to introduce a fee cap which restricts the total amount of administration fees, investment fees and associated costs as prescribed in regulations that can be charged where the balance of an account is less than $6, The general fee rules are also amended to prohibit exit fees charged as a result of the disposal of all or part of a member s interests in a superannuation entity, regardless of the balance The amendments in this schedule do not apply to SMSFs consistent with the current application of the other rules in Part 11A The amendments apply equally to choice and MySuper products. Comparison of key features of new law and current law New law The maximum amount of administration fees, investment fees and prescribed costs that can be charged annually is 3 per cent of the account balance, when the balance is less than $6,000. If a trustee has charged more than the amount allowed under the fee cap the trustee must refund the excess above the cap generally within 3 months of the end of the fund s income year. A trustee must not charge an exit fee, which is a fee related to the disposal of all or part of a member s interest in a fund. Current law There is no limit on the recovery of administration and investment costs. A member can be charged an exit fee, which is a fee to recover the cost of disposing of the member s interest (in full or in part) from a fund. Detailed explanation of new law Cap on fees and costs 2.13 From 1 July 2019, the total amount of administration fees, investment fees and prescribed costs that can be charged annually are 3 per cent of the balance of the account held by the member, if the balance 10

15 Fees charged to superannuation members is less than $6,000 at the end of the fund s income year or at the time of account closure. [Schedule 1, item 18, section 99G of the SIS Act] 2.14 For the purposes of the explanatory memorandum, the term prescribed costs refers to an amount prescribed in regulations (if any) incurred by the trustee for the administration of the fund or investment of the fund s assets which are not charged to the member as a fee. The SIS Act is amended to include this regulation making power. The fee cap applies to these costs. [Schedule 1, item 18, paragraph 99G(3)(c) of SIS Act ] 2.15 It is expected that the regulations will capture amounts which directly or indirectly reduce the return on a member s investment. It would include the situation where the charging of these amounts may be deducted from a member s return before the investment earnings are attributed to the member It is expected that the regulations will prescribe these amounts with reference to the amount of indirect cost disclosed by the trustee It is the balance of an account that determines whether administration fees, investment fees and prescribed costs are capped and, if so, the maximum amount of these fees and costs that is charged That is, a member who has more than one account in a fund may have total combined superannuation savings in that fund greater than $6,000. However, if the balance of a particular account is less than $6,000, the administration fees, investment fees and prescribed costs that can be charged for that account will be capped and will be calculated based on the amount in that account. Example 2.1 Cecilia holds two accounts with Glenbrook Super fund: a choice accumulation account with a balance of $150,000 and a MySuper account with a balance of $3,000. The total administration and investment fees, and prescribed costs that could be charged to the MySuper account would be capped and calculated with reference to the amount held in that account The amount of administration and investment fees, and prescribed costs that can be charged is worked out as: 2.20 The fee cap percentage can be no more than 3 per cent and will be set in regulations. The regulation power ensures the fee cap percentage remains appropriate and if necessary can be adapted to reflect changes in fee structures over time. [Schedule 1, item 16, subsections 99G(2) and 99G(4) of the SIS Act] 11

16 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill Operating standards can prescribe how the account balance is calculated. Operating standards will be used where necessary to provide guidance on the treatment of amounts that have not been credited or debited to account balances at the point of the calculation. [Schedule 1, item 14, paragraph 31(2)(dc) of the SIS Act] 2.22 If the trustee has charged more than the permitted administration fees, investment fees or prescribed costs, the trustee has up to 3 months after the end of the fund s income year to refund the excess to the member. [Schedule 1, item 18, subsection99g(6) of the SIS Act] Example 2.2 Felicity holds a MySuper account with Glenbrook Super. Glenbrook Super s income year ends on 30 September. At 30 September 2021, Felicity holds $1,300 in the account and has held the account for the whole year. The maximum administration fees, investment fees and prescribed costs that could be charged would be: Step 1 Calculate the fee cap for the whole year =Fee cap percentage x member s account balance for the account on the last day of the income year = 3% x $1,300 = $39 The fund would have until 31 December 2021 to refund any administration fees, investment fees or prescribed costs charged above this amount If the member begins to hold the account during an income year, the amount of administration fees, investment fees and prescribed costs that can be charged is calculated using the member s account balance at the end of the fund s income year apportioned based on the number of days the member held the account during the income year. [Schedule 1, item18, subsections 99G(2) and 99G(5) of the SIS Act] Example 2.3 Julian opens a MySuper account with Glenbrook Super on 11 January The fund s income year ends on 30 September 2021, meaning Julian held the account for a period of 264 days. The balance of his MySuper account is $3,000 at 30 September The maximum administration fees, investment fees and prescribed costs Glenbrook Super could charge the account over the income year would be: Step 1- Calculate the fee cap for the whole year = Fee cap percentage x member s account balance for the account on the last day of the income year 12

17 = 3% x $3,000 = $90 Fees charged to superannuation members Step 2 Apportion this for the time Julian held the account = Fee cap for the whole year x No. of days during the income year for which member held the account / 365 = Amount calculated at Step 1 x No. of days during the income year for which member held the account / 365 = $90 x 264/365 = $65.10 The fund would have until 31 December 2021 to refund any administration fees, investment fees or prescribed costs charged above this amount If the member ceases to hold the account during the income year the amount of administration fees, investment fees and prescribed costs that can be charged is calculated using the member s balance on the day the member ceases to hold the account and is apportioned based on the number of days the member held the account in the fund If the total administration fees, investment fees and prescribed costs charged exceed the amount worked out under the cap, the trustee has up to 3 months from the day the member ceased to hold the account to refund the excess to the member. Example 2.4 Rupert closes his choice accumulation account with Glenbrook Super on the 19 April It had a balance of $4,500 at this date. As per the examples above, Glenbrook Super s financial year runs from 1 October to 30 September. The maximum administration fees, investment fees and prescribed costs Glenbrook Super could charge the account over the income year would be: Step 1- Calculate the fee cap for the whole year = Fee cap percentage x member s account balance for the account on the last day of the income year = 3% x $4,500 = $135 Step 2 Apportion this for the time Rupert held the account Fee cap for the whole year x No. of days during the income year for which member held the account / 365 = $135 x 202/365 = $

18 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 The fund would have until 19 July 2022 to refund any administration fees, investment fees or prescribed costs charged above this amount An administration fee or investment fee that is charged at a reduced rate for a member of a MySuper account to align with the fee cap is not a contravention of a trustee s obligation to only charge fees in accordance with the charging rules or the requirement to follow the same process for a class of member of the same beneficial interest. [Schedule 1, items 2, 9 to 11 and 13, paragraph 29TC(i)(d), subsection 29VA(11), paragraph 29VB(1)(d), subsection 29VB(4) and paragraph 29VE(c) of the SIS Act] 2.27 Similarly, the Bill clarifies for the avoidance of doubt, that a trustee that is meeting the fee cap is meeting its obligations under section 99E of the SIS Act to attribute the costs of the fund fairly and reasonably between classes. [Schedule 1, item 18, subsection 99G(7) of the SIS Act] Application and transitional provisions - Cap on fees and costs 2.28 The amendments apply to administration fees, investment fees and prescribed costs charged on or after 1 July [Schedule 1, item 19] 2.29 A transitional provision is required to set out a methodology to manage the period after the commencement of the measure when a fund has an income year that does not run 1 July to 30 June A trustee will still need to apply the fee cap, apportioned for those days that fall between 1 July 2019 and the end of the fund s income year. This period is the transition period. [Schedule 1, items 20(2) and 20(3)] 2.31 The amount of administration fees, investment fees and prescribed costs that can be charged in this circumstance is worked out as: [Schedule 1, item 20(2)] 2.32 The fee cap percentage is set as per the fee cap percentage for the ongoing fee cap provisions and will be set in regulations at no more than 3 per cent If the trustee has charged more than the calculated fees and costs the trustee must refund the excess within 3 months of the end of the fund s income year. 14

19 Example 2.5 Fees charged to superannuation members Vhairi holds $2,400 in a MySuper account in Glenbrook Super on 30 September 2019 and has held the account for the whole year. As per the examples above, Glenbrook Super s income year runs from 1 October to 30 September. The transition period, the period 1 July 2019 to 30 September 2019, is 93 days. For the period between 1 July 2019 and 30 September 2019, the maximum administration fees, investment fees and prescribed costs Glenbrook Super could charge the account over the income year would be: Step 1- Calculate the fee cap for the whole year = Fee cap percentage x member s account balance for the account on the last day of the income year x number of days in the transition period / 365 = 3% x $2,400 x (93/365) = $72 x (93/365) =$18.35 The fund would have until 31 December 2019 to refund any administration fees, investment fees or indirect costs charged above this amount If the member holds the account for only part of the transition period, the fee cap is apportioned for that part of the transition period that the member holds the account. [Schedule 1, item 20(3)] 2.35 The methodology in this circumstance is: [Schedule 1, item 20(3)] 2.36 The fee cap for the whole year would be the fee cap worked out for the transition period where the member held the account for the whole transition period The fee cap does not need to be applied if the member does not hold the account on or after 1 July Prohibition on exit fees 2.38 From 1 July 2019, a trustee of a superannuation fund or an approved deposit fund cannot charge a member an exit fee (other than a 15

20 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 buy-sell spread) when the member withdraws all or part of their interest from the fund or when the member s interest is transferred out of the fund, such as a transfer to the ATO under the SUMLM Act. [Schedule 1, item 15, section 99BA of the SIS Act] 2.39 The Bill inserts a new definition of exit fee into the SIS Act. An exit fee is a fee, other than a buy-sell spread, that relates to the disposal of all or part of a member s interests in a superannuation entity. [Schedule 1, item 15, subsection 99BA(2) of the SIS Act] 2.40 This could include a deferred entry fee or a percentage based fee. It is not related to the cost of disposing the interest, rather it is a fee triggered by the disposal. Example 2.6 Maggie took out a superannuation policy with Thornton Superannuation fund in The policy was sold through a life insurance agent. Maggie sought to transfer her superannuation savings to another fund in 2017 but was informed by Thornton that, if she withdrew before 2024, she would face an early withdrawal fee to recover the outstanding costs incurred when the policy was purchased. From 1 July 2019, Maggie can transfer her savings to another fund without incurring any exit fee Regulations may prescribe circumstances when the ban on exit fees does not apply. [Schedule 1, item 15, subsection 99BA(1)] Application and transitional provisions Prohibition on exit fees 2.42 Exit fees cannot be applied to the balance or interest that is fully or partly withdrawn or transferred out of the fund on or after 1 July [Schedule 1, item 19] Consequential amendments 2.1 References in the SIS Act to exit fee are updated or removed. [Schedule 1, items 1, 3 to 8, 12, 16 and 17, subsection 10(1), paragraph 29V(1)(e), paragraph 29V(2)(b), subparagraph 29V(3)(b)(ii), subsection 29V(6), paragraphs 29V(7)(b), (8)(b), and (9)(c), paragraphs 29VA(5)(a), (6)(a),and (7)(a), paragraph 29VB(5)(b), section 99C(heading) and subsection 99C(1) and (2) of the SIS Act] 16

21 Chapter 3 Insurance for superannuation members Outline of chapter 3.1 Schedule 2 to this Bill will prevent trustees from providing insurance on an opt out basis to members who are under 25 years old and begin to hold a new superannuation account on or after 1 July 2019, to members with account balances below $6,000, and to members with inactive accounts. 3.2 In all circumstances the member may opt into insurance offered by the trustee by making a direction to the trustee. Context of amendments 3.3 Currently, many superannuation trustees automatically provide insurance cover to members upon joining the fund. This arrangement is commonly referred to as default insurance and requires a member to opt out of insurance if the member considers the insurance to be inappropriate for them. 3.4 Default insurance is part of the legislative framework for MySuper products. That is, the MySuper settings generally mandate the provision of death and total and permanent disability insurance on an opt out basis, and also allow income protection insurance to be provided on an opt out basis at the trustee s discretion. Some choice products also include default insurance. 3.5 Under the insurance covenant in the SIS Act, trustees must only offer insurance that does not inappropriately erode the retirement income of members. Despite the covenant, insurance premiums are a key driver to the erosion of superannuation savings for certain member cohorts. 3.6 Young members, members with multiple and/or inactive accounts or products, and members with low balances can face significant erosion due to insurance premiums. 3.7 In addition, as a result of the default nature of the insurance and of members being disengaged, many members may not be aware that insurance premiums are being deducted or that they have multiple insurance policies. This leaves the member s retirement savings at risk of being significantly eroded by those premiums. 17

22 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 Summary of new law 3.8 From 1 July 2019, if a person holds insurance within superannuation, and certain criteria is met, the trustee may only provide insurance on an opt in basis. 3.9 For existing members, trustees must notify the affected members on or before 1 May 2019 of the changes so as to give these members an opportunity to elect to continue with their insurance cover beyond 1 July 2019 through their fund The changes do not apply to existing members under the age of 25, where the person s account has a balance of $6,000 or more and the account has not been inactive for 13 months The changes do not replace the existing broader obligations that apply under the SIS Act, such as the insurance covenant, nor do they affect the MySuper insurance settings for those unaffected by the changes. Comparison of key features of new law and current law New law Trustees can only provide insurance to a member of a choice or MySuper product when directed by the member, if the member: is under 25 years old and begins to hold a superannuation account on or after 1 July 2019; has an account with a balance less than $6,000; or has an account that has been inactive for 13 months. Current law Trustees of choice products are not limited in how they can offer insurance beyond the restriction in the insurance covenant of the SIS Act. For MySuper products, trustees must generally provide death and total and permanent disability insurance on an opt out basis. Income protection insurance may also be offered on an opt out basis at the trustee s discretion. Detailed explanation of new law 3.12 Currently, under section 68AA of the SIS Act, trustees are required to provide MySuper members with death and total and permanent disability insurance cover on an opt out basis, unless a reasonable condition applies There are no similar requirements for members who hold a choice product but some trustees of choice products choose to provide insurance on an opt out basis. 18

23 Insurance for superannuation members 3.14 Schedule 2 of this Bill amends the SIS Act to prevent a trustee from offering or maintaining default insurance cover for certain members unless the member has elected to obtain or maintain the insurance provided The circumstances when a trustee cannot provide opt out insurance for a member of either a MySuper or choice superannuation account are when: the member is under the age of 25 and begins to hold the superannuation account on or after 1 July 2019; the balance of the account is less than $6,000 and has not been $6,000 or more on or after 1 April 2019; or the account has been inactive for a continuous period of 13 months or more. [Schedule 2, item 1, subsections 68AAA(1), 68AAB(1) and 68AAC(1) of the SIS Act] 3.16 Where a member meets one of the criteria set out at paragraph 3.15 the trustee may only provide insurance where the member has elected to obtain or maintain the insurance cover. [Schedule 2, item 1, subsections 68AAA(2), 68AAB(2) and 68AAC(2) of SIS Act ] 3.17 From 1 July 2019, the trustee must ensure that each member affected by these amendments can direct the trustee to take out or maintain their insurance cover. Directions by members in respect of their insurance must be made in writing. [Schedule 2, item 1, subsections 68AAA(2), 68AAB(2) and 68AAC(2) of the SIS Act] 3.18 A written direction by a member, who is either under 25 or who has a balance of less than $6,000, to opt into insurance will be valid indefinitely unless the superannuation account subsequently becomes inactive. An election to opt in to insurance cover by a member who is under 25 will be taken to satisfy the opt in requirement for low balance accounts, and vice versa. [Schedule 2, item 1, subsections 68AAB(3) and 68AAC(3) of the SIS Act] Example 3.1 George is 22 years old and holds superannuation with Deep Blue SuperFund, with a balance of $4,000. He has elected to opt into death, TPD and income protection insurance despite having a balance of less than $6,000. He does not need to make a separate election to opt in to insurance because he is also under 25 years of age. George gets a new job as a seafood chef, upon which he is defaulted into a new fund, and he stops contributing to Deep Blue SuperFund. Despite George s election to opt into insurance, his insurance cover with Deep Blue SuperFund will cease upon 13 months of inactivity unless he makes a new election to maintain his cover, even though the account is inactive. 19

24 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill The Electronic Transactions Act 2000 provides that if legislation requires a person to give information in writing, that requirement is taken to have been met if the person gives the information by means of an electronic communication Regardless, the amendments do not affect a member s right to be covered by insurance until: the end of the period for which premiums have been deducted; or the expiry date of the term of the member s existing insurance cover. [Schedule 2, item 1, subsections 68AAA(7), 68AAA(8), 68AAB(5) and 68AAB(6) of the SIS Act] 3.21 A breach of the new insurance rules is a breach of the RSE licensee law with which the trustee must comply Failure to comply with the RSE licensee law may result in consequences such as a direction from APRA to comply (see section 29EB of the SIS Act), cancellation of the trustee s authority to offer a MySuper product (where relevant see section 29U of the SIS Act) or cancellation of the RSE license (see section 29G of the SIS Act) The obligation in section 68AA for a trustee to provide death or permanent disability insurance under a MySuper product is turned off while the member meets one of the criteria listed at paragraph However, these obligations continue to apply to all other MySuper members who do not meet the criteria Once a MySuper member no longer meets any of the criteria listed at paragraph 3.15, the requirement under the MySuper rules for the trustee to provide opt out death and permanent disability insurance applies again. [Schedule 2, item 2, subsections 68AA(8A) and (8B) of the SIS Act] Example 3.2 In December 2019, Luke, aged 26, commences work. As Luke does not choose a superannuation fund he is defaulted into a MySuper product. Upon joining the fund, Luke is sent a Product Disclosure Statement which outlines that he will be covered by death and total and permanent disability insurance once his account balance reaches $6,000. His fund also offers him the opportunity to take up this insurance prior to his account reaching $6,000, but he chooses not to do so. Eighteen months later, Luke s superannuation account balance reaches $6,000. At this time, his fund provides him with insurance cover, in compliance with the MySuper insurance obligations.

25 Insurance for superannuation members 3.25 A definition of inactive is inserted into the SIS Act. A choice or MySuper product will be considered inactive if no contributions or rollovers have been received in the previous continuous period of 13 months. [Schedule 2, item 1, subsection 68AAA(3) of the SIS Act] 3.26 The period of inactivity is reset when a contribution or rollover is received. That is, the contribution or rollover resets the clock on inactivity for another 13 months. [Schedule 2, item 1, subsections 68AAA(4) and 68AAA(5) of the SIS Act] 3.27 To manage potential administrative and compliance burdens in relation to superannuation accounts with balances that fluctuate around the $6,000 threshold amount, the insurance rules apply to products where the balance has not reached $6,000 at any point in time on or after 1 April [Schedule 2, item 1, paragraph 68AAB(1)(b) of the SIS Act] 3.28 That is, once the balance of a superannuation account has reached $6,000 on or after 1 April 2019, the requirement to only offer insurance at the member s request ceases unless the account becomes inactive (or where the member began to hold the account on or after 1 July 2019 and is less than 25 years of age). Example 3.3 Cedric opens a MySuper account on 1 August He is 30 years old. He does not opt in to insurance and is not therefore defaulted into insurance until his account reaches $6,000, upon which time he is provided with death and TPD insurance in accordance with the MySuper insurance rules. Cedric s account subsequently falls below $6,000, due to Cedric making a partial rollover to his SMSF. Cedric continues to make contributions to his MySuper account. Cedric s insurance cover in his MySuper account will be maintained, despite his balance now being below $6, Members who elect to maintain insurance in inactive accounts with balances of less than $6,000 will not have their balances transferred to the Commissioner under the changes contained in Schedule The date of 1 April 2019 is when the trustee must identify certain members of the fund who may be impacted by the new insurance rules and notify these members of the impact (the stocktake date) Paragraphs 3.40 to 3.43 further explain how these amendments affect the existing insurance arrangements of members holding a choice or MySuper product in the lead up to 1 July Paragraphs 3.46 to 3.56 explain the notification obligations on trustees. Notification requirements 3.32 From 1 July 2019, the timing and frequency of assessing whether a member holds a product that meets one of the criteria listed 21

26 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 above is at the trustee s discretion. However, the requirements imposed on trustees to not offer opt out insurance to these members, as well as the notification requirements for inactive members, necessitate that trustees make these assessments at a reasonable frequency It is expected that the regulations will require a trustee to provide a written notification from 1 July 2019 to members who hold accounts that have been inactive for six or nine months. This is designed to communicate that if the account continues to be inactive for a total of 13 continuous months, insurance will only be maintained if the member directs the trustee to do so The notices are to cover how the member can maintain insurance cover and what will happen if no direction is made to the trustee It is also expected that regulations will require a trustee to provide a written notification to a member who has an inactive account but has elected to maintain insurance cover. The notice will explain that the particular account remains inactive but that the member has elected to maintain the insurance cover. The notice will also explain what the member needs to do to cancel the insurance cover at a later date. Carve-outs 3.36 The new insurance rules do not apply to SMSFs or small APRA funds. [Schedule 2, item 1, section 68AAD of the SIS Act] 3.37 The new insurance rules also do not apply where an employer makes contributions to a fund, in addition to its superannuation guarantee obligations, which cover the full cost of the member s insurance premiums, on behalf of the member. [Schedule 2, item 1, paragraphs 68AAA(6)(d), 68AAB(4)(d) and 68AAC(4)(d) of the SIS Act] 3.38 For this exception to apply, the employer must: notify the trustee that it is paying the employee s insurance premiums; the amount the employer is contributing exceeds the employer s superannuation guarantee obligations for the member; and the excess is equal to or greater than the insurance premiums, payable in relation to the insurance cover for the quarter. [Schedule 2, item 1, section 68AAE of the SIS Act] 3.39 The new insurance rules do not apply to a defined benefit member, an ADF Super member or a person who would be an ADF member if they had not chosen a fund. [Schedule 2, item 1, subsections 68AAA(6), 68AAB(4) and 68AAC(4) of the SIS Act] 22

27 Application and transitional provisions Insurance for superannuation members 3.40 The measure will impact insurance arrangements that are in place before 1 July Generally, the amendments apply to members who are under 25 years old and who start to hold a choice or MySuper product on or after 1 July [Schedule 2, item 5] 3.42 A person who is under 25 years old and who began to hold a MySuper or choice product before 1 July 2019 will not be impacted unless, on 1 July 2019, the person s superannuation account had either been inactive for 13 months or the balance of the account had not been more than $6,000 since 1 April The measure will apply to members who hold a superannuation account that, on 1 July 2019, has been inactive for a period of 13 months (including the time before 1 July 2019), or which has had a balance of not more than $6,000 since 1 April [Schedule 2, items 3(2) and 4(1)] 3.44 Schedule 2 places obligations on trustees to notify members who have insurance arrangements in place before 1 July 2019 and who might be affected by the new measures, to provide these members with an opportunity to elect for their insurance to continue. [Schedule 2, items 3(3), 4(2) and 4(6)] 3.45 To determine the relevant members and accounts, a trustee must undertake a stocktake on 1 April 2019, whereby the trustee reviews all members and determines which members have an account: with a balance less than $6,000; or which has been inactive for six months or more. [Schedule 2, paragraphs 3(3)(a) and 4(2)(a)] Notification obligations and elections for insurance under products with balances less than $6, Where a trustee identifies a member with an account balance below $6,000 on 1 April 2019, the trustee must give the member a written notice before 1 May 2019 which sets out: that from 1 July 2019, the fund will not provide the member with insurance cover if the balance of the account remains below $6,000; that cover can be maintained if the member elects to do so; and the method for election. [Schedule 2, items 4(2)(b) and 4(3)] 23

28 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill If a member with a superannuation account balance of less than $6,000 has made an election prior to the 1 April 2019 stocktake, then the election is deemed to be effective on or after 1 July 2019 and the member does not need to be provided with a written notice. An election made prior to the Budget night will also be effective after 1 July [Schedule 2, item 4(5)] 3.48 While the amendments do not require a member to have made the election in writing, if insurance is provided by the trustee on an opt out basis after 1 July 2019, and the member has not asked for it to be provided, the trustee may be in breach of the RSE licensee law. A trustee will need to be able to demonstrate that a member has elected to maintain cover, other than in writing by, for example, a record of a meeting or a note following a telephone conversation Where a member has simply contacted the fund to make a claim on their existing insurance, made an enquiry about the insurance offered by the fund or made a general enquiry about their superannuation account, this would not suffice to demonstrate that the member has elected to have insurance cover For the trustee to be able to demonstrate that the member has elected to have insurance cover, the election must be directly related to the insurance cover and must demonstrate that the member has decided to have insurance provided through superannuation. Example 3.4 Example 3.5 Lola has recently joined the workforce and has a superannuation balance of $2,000. She is worried her employer has not been making superannuation guarantee contributions so she calls her fund to find out if the right contributions have been made. The fund representative provides Lola with details on the contributions that have been made and her account balance and Lola is comforted that her employer is making the right contributions. The representative asks Lola if she had any other questions, or wanted to know about the insurance the fund offers but Lola declines as she is running late to her next university lecture. This conversation should not be taken to be Lola electing to have insurance provided by her fund. Emily is consolidating her multiple superannuation accounts and wants to improve her understanding of the types of insurance offered by each provider. She makes enquiries with each provider and after some thought decides to roll all her superannuation into one particular fund given its insurance offering. The combined balance of her consolidated superannuation savings is $4,

29 Example 3.6 Insurance for superannuation members She contacts her fund and explains to the fund representative that she would like total and permanent disability and income protection insurance provided through her choice product. The fund representative makes the necessary arrangements including by making a note of the conversation on Emily s file. The trustee would be able to use this to demonstrate that Emily has elected to have insurance. In 2017, Fletcher sought personal financial advice. As a result, Fletcher now has a single superannuation account, to which he is making ongoing contributions. His account has a balance of $4,000 and he holds individually underwritten insurance within his superannuation. Fletcher s fund has maintained a file for Fletcher with includes the statement of advice and underwriting paperwork. As a result, Fletcher s fund maintains his insurance cover after 1 July 2019 despite his account having a balance below $6,000. Notification obligations and elections for insurance through inactive products 3.51 Where a trustee identifies a member with a superannuation account, which on 1 April 2019 has been inactive for at least 6 months, the trustee must give the member a written notice before 1 May 2019 that says: from 1 July 2019, the fund will not provide the member with insurance cover if the account remains inactive; cover can be maintained if the member elects to do so; and sets out the method for election. [Schedule 2, items 3(3)(b) and 3(4)] 3.52 A member with an inactive account on 1 April 2019 does not need to be given a written notice if the member has made a written election between Budget night and the 1 April 2019 stocktake. [Schedule 2, item 3(6)] 3.53 An election made before Budget night is not deemed to be effective on or after 1 July This reflects that the account has been inactive and there is a higher risk that the insurance associated with the account may no longer be appropriate. Therefore, it is important to ensure that the member makes a conscious decision for cover to be maintained in an inactive account. 25

30 Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 Notification obligations for insurance products first held between 1 April 2019 and 1 July Each trustee must also ensure a member with a superannuation account that was acquired after 1 April 2019 but before 1 July 2019 is given a written notice that says: from 1 July 2019, the fund will not provide the member with insurance cover if the account balance is less than $6,000 and it has not been more than $6,000 since 1 April 2019; cover can be maintained if the member elects to do so; and sets out the method for election. [Schedule 2, item 4(6)] 3.56 If the member does not make an election before 1 July 2019 and the balance of the account is less than $6,000, insurance will not be provided from 1 July ASIC is the regulator responsible for the notification requirements in the transitional provisions. [Schedule 2, item 6] 26

31 Chapter 4 Inactive low-balance accounts and consolidation into active accounts Outline of chapter 4.1 Schedule 3 to this Bill amends the SUMLM Act to include an additional circumstance when superannuation providers and retirement savings account (RSA) providers must provide statements and pay amounts to the Commissioner. 4.2 Where a MySuper account or choice account has been inactive for 13 months and the balance of the account is less than $6,000, the balance of that account must be paid to the Commissioner, unless the member has chosen to opt in to have insurance through that superannuation account. 4.3 To complement this extension of the unclaimed money and lost member regime, the Schedule gives the Commissioner greater powers to consolidate amounts held for a person who has an active account with a superannuation provider or RSA provider, without needing to be directed to do so by the person. Context of amendments 4.4 Historically, there has been a high level of member disengagement with superannuation. In addition, past and current restrictions on a member s ability to choose a fund, have forced individuals to hold accounts across multiple funds. Consequently, current outcomes do not reflect the needs of the target cohort of members. 4.5 Currently, the SUMLM Act requires a superannuation provider or RSA provider to pay the balances of accounts to the Commissioner where: the person has reached preservation age and the fund has not received an amount in respect of the person within the last two years and the fund has been unable to contact the person after five years; the person is deceased and the fund has been unable to pay the benefit to the rightful owner; the amount from a super-split on divorce cannot be paid to a fund for the receiving spouse; 27