MySuper adviser questions and answers

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1 MySuper adviser questions and answers IMPORTANT: These frequently asked questions are designed to provide financial advisers and licensees with a better understanding of the MySuper reforms and clarify how the changes will affect your business and your clients. The information is based on the MySuper legislation and associated regulations and is current as at the date 29 October 2013 of preparation. It is provided for your use only as a recipient of this and is not intended for wider distribution or use by other third parties. It contains general information about MySuper and provides an insight into how the IOOF group s superannuation products will be affected and the initiatives we are taking to comply with the reforms. We encourage you to ask us questions specific to your needs as a financial adviser, so please speak to your IOOF relationship manager if you require any further assistance. The Government commissioned the Super System Review in 2009 to make recommendations to ensure the superannuation system was still operating for the best interests of members. This resulted in a number of key reforms to the Australian superannuation system. In particular, is the introduction of the MySuper reforms, which essentially require superannuation trustees to offer a new, simple and cost-effective superannuation product that will replace existing default products. The MySuper legislation also introduces a number of particular requirements relating to conflicted remuneration and superannuation, which operate alongside the FoFA reforms. Similarly to FoFA, these reforms have been released via a series of tranches of legislation (and additional amendments), making it difficult for advisers and product providers alike to keep track of where the next wave of change is coming from. The MySuper legislation has now passed and super funds are applying to APRA to authorise their MySuper products. IOOF has applied to APRA for approval of the IOOF MySuper product. Following approval, the IOOF MySuper is set to commence 1 January MySuper in a nutshell MySuper is a default investment option with additional features prescribed by legislation. These features include: low fees default death/tpd insurance no conflicted remuneration members must have access to the same benefits, and only one MySuper product per super fund. Under the legislation, super contributions must be paid to a MySuper product from 1 January 2014 if a member has not made an investment choice for those contributions. By 2017, unless an investment choice is made, the accumulation held in the default investment option (the accrued default amount) must be transferred to MySuper. If a super fund does not have a MySuper product, they cannot accept default contributions and must transfer existing default accumulations to another super fund s MySuper product. We have received authorisation from the Australian Prudential Regulation Authority (APRA) to launch IOOF MySuper from 1 January IOOF MySuper will become the default investment product for all corporate and employer super plans within the IOOF Portfolio Services Superannuation Fund (IPSSF) including LifeTrack, IOOF Portfolio Services and Spectrum Super. What adviser remuneration can be paid on default corporate/employer super business from 1 July 2013? Between 1 July 2013 and 1 January 2014 (when MySuper commences), most existing commissions in corporate/ employer super (including risk commission) can continue to be paid because they are grandfathered under FoFA. However from 1 January 2014 all new default contributions must be paid to a super fund s MySuper product and therefore conflicted remuneration (commissions, volume bonuses, rebates ) will cease where attributable to MySuper. For that part of a current default member s super account that is NOT invested in MySuper (the accrued default amount), commissions, volume bonuses and rebates may continue until it is transitioned to MySuper (sometime before 2017). 1

2 Advisers have the option of charging an agreed fee for service for personal advice to members as this is not conflicted remuneration. Advisers may also receive payment from the trustee out of the administration fees to service the plan members and provide intra-fund advice. What adviser remuneration can be paid in respect of new members joining existing corporate/employer super plans from 1 July 2013? Under the new grandfathering regulations for FoFA, commissions may be payable in respect of new members who join an existing (pre 1 July 2013) corporate/employer super plan up until 1 July However no commissions would be payable for new members joining after this date. Further, under super law, no entry fees can be charged from 1 July 2013, and this will affect upfront commissions (on contributions) for new members starting 1 July Regardless of FoFA grandfathering, it is likely that commissions will cease for all new members to corporate/ employer plans from 1 January This is because most new members to corporate/employer super plans commence as default fund members and therefore from 1 January 2014 will be MySuper members (at least initially). As trustees have obligations to treat members fairly and equitably, it is likely that trustees will choose to remove commission for all new members from this date (whether MySuper or choice members). Although commissions are likely to cease for new members commencing after 1 January 2014, advisers will be able to charge a fee for service for advice as agreed with the member (member advice fees). For the reasons set out above, IOOF is removing commission from administration fees and insurance premiums for all new members of IOOF corporate/employer plans from 1 January Advisers will however be able to negotiate member advice fees (including a separate advice fee for insurance) with individual members. What adviser remuneration can be paid in respect of existing members of corporate/employer super plans? For corporate/employer super, existing accumulation balances held in the current default investment options ( the accrued default amount or ADA) must be transferred to the MySuper product before 1 July Therefore any existing commission arrangements in respect of these accumulations can continue until the amounts are transferred to the MySuper product. If the existing member confirms in writing that they wish to remain invested in the current (default) investment option or they make another investment choice, the investment will not transition to MySuper and commission arrangements (including insurance commission) can continue indefinitely. If a member s super is transitioned to MySuper, adviser commissions on contributions, insurance and investments will cease. These payments do not recommence if the member makes a subsequent investment choice and ceases to be a MySuper member. This would be a new arrangement and any conflicted remuneration would be banned under FoFA. Advisers will be able to charge fees for service for advice as agreed with the member (member advice fees). IOOF is planning to continue to pay existing commissions from the current default investment option until such time as the ADA is transitioned to MySuper or the existing ADA becomes insufficient to pay fees and premiums. Advisers should note that in line with APRA s position on transitions, IOOF is likely to schedule ADA transfers to MySuper earlier than In the next few months, IOOF will be sending a letter to default members about MySuper. Included in this communication a notice for a member to confirm their current investment or make an investment choice (and therefore opt out of MySuper). Please note: Advisers and individual corporate/employer plan members can agree to a new member advice fee. If a member advice fee is agreed after 1 January 2014, all current commissions, adviser service fees and member service fees in relation to that member will cease as a consequence. What about risk commission provided through corporate/employer superannuation? If insurance premiums are being paid from a MySuper product, any commission that would otherwise be grandfathered under FoFA, will cease if attributable to the MySuper product. This was made clear in the Explanatory Memorandum to the legislation: "This... will prohibit an RSE licensee from paying premiums on insurance policies that have embedded commissions paid by a life insurance company to a financial adviser in relation to the insurance arrangements offered through the superannuation fund". Where risk commission that has been grandfathered under FoFA is not being paid from the MySuper product, these payments can continue until the ADA is transitioned to MySuper (if at all). Please note: Grandfathered risk commission only applies to existing employer plan insurance arrangements. It does not extend to the new default insurance arrangements that will commence as a consequence of the MySuper reforms. 2

3 IOOF will continue to pay risk commission where the insurance premiums are being deducted from the ADA (via the member s cash account, until such time as: the ADA is transitioned to MySuper there are insufficient funds in the ADA, and premiums are paid from MySuper, or the adviser negotiates a new member advice fee after 1 January No risk commission applies to the new default insurance arrangements that will commences for MySuper members from 1 January 2014, even if the premiums are not being deducted from MySuper and are deducted from an existing member s ADA or choice investments. What about plan service fees (adviser service fees)? Traditional plan service fees (called adviser service fees under IOOF corporate/employer super plans) are advice fees agreed between an adviser and employer sponsor to a corporate/employer plan, for which members of that plan pay. Existing arrangements are grandfathered under FoFA, however if they are construed as conflicted remuneration they cannot be paid from a MySuper product. Also under the new super fee rules commencing 1 July 2013, fees for personal advice to an employer sponsor of the plan can no longer be paid from member s accounts. Consequently traditional plan service fees will either cease from 1 July 2013 or be restructured to ensure that they are paid in respect of services other than advice to an employer for example member education and services to policy committees. Within IOOF corporate/employer super platforms, plan service fees are called adviser service Fees, have been agreed between the employer and the adviser and deducted from members accounts. Existing adviser service fees for current members will continue as they are grandfathered under FoFA. Where an adviser service fee is payable, arrangements with the adviser will be set to ensure that the fee is not paid in respect of personal advice to the employer. Adviser service fees will cease if and when the member s ADA is transferred to MySuper or if the member and adviser negotiate a new member advice fee after 1 January Adviser service fees will not apply to new members of corporate/employer plans from 1 January Is a fee disclosure statement required for plan service fees (adviser service fees)? No, not in respect of IOOF corporate/employer super plans. A fee disclosure statement does not need to be provided where adviser service fees are paid because adviser service fees s are collective fees that are not paid in respect of personal advice to the member. On the other hand, member advice fees are advice fees agreed with the member for personal advice and fee disclosure statements will be required if the member advice fees is ongoing. In the IOOF MySuper product, however, member advice fees are dollar -based and not on-going, so fee disclosure statements are not required. Advisers should seek clarification from their licensee, to ensure they meet dealer requirements for fee disclosure statements. What about existing members of corporate super who have chosen their investment strategy? Existing members of corporate/employer super plans, who have chosen their investment strategy for contributions (and that strategy is not 100 per cent in the current default investment option), are deemed to be choice members and not MySuper members. Commission arrangements will be able continue for these members as a grandfathered existing arrangement. For new choice members, advisers will be able to charge member advice fees as agreed with the member. In respect of risk commission, it is likely trustees will remove any commission from cover arrangements for new choice members to align them with MySuper members. If commission ceases because a member became a MySuper member, commission payments cannot be re-established if that member makes a subsequent investment choice and switches out of the MySuper. Once the right to commission has been extinguished after 1 July 2013, it cannot be reinstated as this would constitute a new arrangement. Most IOOF choice corporate/employer super members will not notice much difference with the advent of MySuper, as fees and their current insurance arrangements will remain the same. This includes choice members with little or no insurance cover, as the new opt-out insurance cover will only apply to MySuper members. For advisers, any current commission arrangements will continue in relation to existing corporate/employer super members. Where a choice member s account is transferred to personal super on leaving employment after 1 January 2014, any grandfathered commission will cease, as new unbundled fees apply to all new IOOF personal super from this date. 3

4 Can a corporate/employer super member choose the MySuper investment option? Recent changes to the MySuper legislation provided that members in MySuper should not be barred from making investment choices and choice members should also have the opportunity to choose MySuper. In line with this, all members in IOOF corporate/employer super, including choice members, will be able to switch their benefits to IOOF MySuper should they wish to. Corporate/ employer super members who switch all their benefits to MySuper voluntarily after 1 January 2014 will retain their current insurance arrangements. Does MySuper apply to members in personal superannuation? The MySuper rules will also apply to those personal super members who were formerly members of corporate/ employer super and who remain invested in the employer plan default investment option. The same rules will apply to these members as will apply to current members of corporate/employer super plans: New contributions will be allocated to MySuper from 1 January 2014 and the ADA must be transferred to MySuper before July Members will receive opt-out default insurance cover from 1 January This applies to all former corporate/ employer super members transferred to personal super who are invested in the default investment option and are therefore classified as MySuper members. Any adviser commissions will no longer be payable in respect of contributions from 1 January 2014, and investment commissions will cease when the amounts held in the default investment option are transitioned to MySuper. Risk commission will also cease if paid directly or indirectly from MySuper and no commission applies to the new default insurance cover. From 1 January 2014, IOOF MySuper members in corporate/ employer super may be transferred to MySuper in personal super on leaving the employer. No changes will apply to the account, other than any discounted administration fees attributable to the employer plan may return to the standard MySuper administration fee rate. How does MySuper impact current rebate agreements with dealer groups? Although current rebate/volume based agreements are grandfathered under FoFA, a trustee can not pay conflicted remuneration (including volume based payments) from or attributable to a MySuper product. Therefore investments within MySuper will be carved out from any current rebate/volume based agreements. For choice members, rebates are still payable under FoFA grandfathering, however under new regulations rebates will be limited to investments in respect of existing members on the platform as at 30 June What about intra-fund advice and fees for service in MySuper? Trustees can provide, either directly or through advisers, some advice (intra-fund advice) that is paid for collectively through the administration fee. Otherwise only agreed member advice fees can be charged to MySuper members accounts. To be able to be collectively charged the advice must be: 1 General advice (such as member education and policy committee services); or 2 Personal advice, with the following restrictions: Provided to current members only (not prospective members). Must relate to the member s benefits in the super fund. Can relate to consolidating interests within the fund but not consolidating interest from outside the fund. Can relate to moving to a pension or taking up insurance from the fund. Cannot relate to choosing investment options within the fund (except a cash management trust). Single transactional advice only (not for ongoing advice). Personal advice provided through intra-fund advice is still subject to the Corporations law requirement that it be both appropriate and in the best interests of members. Advisers can provide scaled personal advice to MySuper members on a fee for service basis and the advice fee can be deducted from the account. However, for the advice fee to be deducted from the MySuper member s account, the advice must be provided under an arrangement with the trustee so the trustees may set conditions on the advice provided or the fees charges. Trustees have enhanced duties for MySuper members so it is expected that advice fee conditions will be strict. It is unlikely members in MySuper will receive holistic advice as this would ordinarily include advice on the appropriate investment strategy for the client and therefore would necessarily be relevant for choice members. 4

5 Advisers will be able to provide personal advice to individual IOOF MySuper members on a fee for service basis. As no investment advice would be involved, the trustee has limited member advice fees in MySuper to fixed dollar fees for service on a one-off basis. As member advice fees in MySuper will not be charged on an ongoing basis, a Fee Disclosure Statement is not required. Advisers can charge a percentage based ongoing advice fees for service in the choice environment as agreed with the member. Member advice fee options for choice members include a dollar based or percentage, one-off or ongoing and includes separate member advice fee insurance. Where the adviser charges an ongoing member advice fee, this is an ongoing advice fee and a fee disclosure statement is required. Is active consent from the member required to opt out of MySuper? Yes. Current default super members must make an active investment choice for their contributions and their investment accumulation. This choice must to be in writing. This choice includes a confirmation that they are wish to remain with the current investment default for both contributions and accumulation. By confirming in writing they want to stay in their current investment, they are actively making an investment choice. Advisers who are currently preparing communications for corporate/employer super clients to an investment choice, should take care to ensure that the member makes an active selection of investment option, and doesn t just opt out of MySuper. A direction from a member to the trustee merely to opt out of MySuper would be ineffective where the MySuper product has not been authorised by APRA. How will the Federal Election impact MySuper and Choice members? In the final stages of the last Parliament a large amount of superannuation legislation was passed, including most of the outstanding MySuper legislation. Most issues to do with MySuper are therefore now law. The Coalition has however indicated it supports genuine transparency and competition in the default super fund market and they were critical of the previous ALP Government s anti-competitive, closed-shop approach 1. Consequently more competition amongst MySuper providers is to be expected, rather than substantial changes to the MySuper rules. Generally the incoming Coalition Government has said it will take an easier approach to super and will not to make any unexpected negative changes. They have committed to increasing the Super Guarantee from 9% to 12 %, however they intend to delay the gradual increase for 2 years to give the economy time to adjust to the post-mining boom. (See the The Coalition s Policy for Superannuation issued September ) Other changes they have announced are; Implementing a clearing house for small business super contributions using the ATO. Small business employers would be able to pay their super contributions to the ATO with their PAYG withholding payments. Review solutions for inadvertent breaches of the concessional and non-concessional contributions cap. Review incentives such as the Low Income Super Contribution and Government Co-contribution. To implement all 16 Coalition recommended reforms to FoFA including removing opt-in, simplifying fee disclosure; and refining the ban on risk commission in super. The Coalition has indicated it will review some of industrial relations aspects of default super, particularly the application of the Fair Work Act and Modern Awards to default super. Although some practical changes to the MySuper rules are inevitable regardless of who wins the election, there is unlikely to be an overhaul of the arrangements. The other issue for advisers to note is that whichever party forms Government after 7 September, the person who becomes Minister for financial services and superannuation is fundamental to the process of reform and is not always the person expected. The incoming Coalition Government is not likely to unwind components of MySuper now that it has won the Federal Election. Both major political parties consistently supported the MySuper concept and throughout the legislative process there has been little difference between the two parties in substance. 1 The Coalition s Policy for Superannuation issued September 2013 PLA