ASFA VICTORIAN LEGISLATION DISCUSSION GROUP 21 AUGUST 2017

Transcription

1 ASFA VICTORIAN LEGISLATION DISCUSSION GROUP 21 AUGUST 2017 RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS IN SUPERANNUATION 24 JULY AUGUST APRA AND ASIC UPDATES 1.1 Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017: consequential amendments to APRA s Prudential Framework (25 July 2017) The draft Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017 (Bill) sets out a number of legislative proposals that will require consequential amendments to APRA s prudential framework or otherwise provide APRA with additional regulatory powers. Accordingly, APRA has outlined its plans for consulting on potential amendments to its prudential framework consistent with the draft Bill. Expanding the scale test to an outcomes test The Bill proposes to expand the existing scale test in SIS, section 29VN to require trustees to determine in writing, on an annual basis, whether the financial interests of the fund s beneficiaries who hold a MySuper product are being promoted on a basis that goes beyond the number of beneficiaries or amount of assets of the fund. APRA will consider appropriate changes to the prudential framework, including issuing prudential guidance, to support trustees compliance with this obligation. Accountability and improved expense transparency The Bill proposes to permit APRA to collect additional data about trustee expenditure on a look-through basis. This power would permit APRA to require that trustees report to APRA the ultimate purpose and destination of payments from the fund. APRA will therefore consider mandating reporting of the chain of associated transactions to identify the final recipient and purpose of relevant payments. Powers to approve change in ownership The Bill proposes to require trustees to seek approval from APRA for a change of ownership or control of a trustee. This will bring the superannuation industry broadly in line with other APRA-regulated industries where, under the Financial Sector (Shareholdings) Act 1998 (Cth), an acquisition greater than 15% in a financial sector company requires approval. APRA will publish an approved form and accompanying guidance for this purpose once the legislation is finalised. Processes for opting-out of insurance The Government has requested that APRA identify means to make it easier for MySuper members to opt out of insurance. APRA will, therefore, consider appropriate changes to APRA Prudential Standard SPS 250 Insurance and Prudential Practice Guide SPG 250 Insurance in Superannuation in relation to 1

2 trustees processes for complying with their obligations under SIS, Section 68AA. These changes will be designed to support simple and straightforward processes for members to opt-out of insurance. 1.2 APRA s policy outlook for 2017 business and strategic planning (July 2017) APRA confirmed that it has conducted a review of a cross-section of trustees to assess their approaches to strategic and business planning and how they were undertaking the SIS, section 29VN scale test. In general, APRA found that trustees with poor business planning practices failed to consider the longer-term implications of key factors such as the net member benefit outflow ratio or declining membership. APRA also observed that a number of trustees failed to adequately identify and/or address challenges that would likely impact their ability to attract and retain members or drive strong member outcomes. Common features of weak business planning were: strategic objectives or goals that were broad, with no timeframes, allocated resources/budget and not linked to clearly stated business initiatives; limited or no measurable indicators or metrics, and associated tolerances or triggers, to enable performance to be tracked against objectives or the outcomes of initiatives to be appropriately assessed; indicators or metrics that were not consistent with the current position of the fund, for example a rapidly declining membership base; and failure to develop contingency plans or alternative future actions that would be taken in the event that adequate progress against key objectives or metrics was not achieved. APRA stated that trustees must also consider a broad range of indicators when undertaking their business planning. While trustees need to develop measures relevant to their own funds and/or strategy, some possible indicators include but are not limited to: financial performance indicators, for example: (iii) (iv) (v) (vi) target investment performance, over the medium and long term; target net asset growth; target cost or expense base, including average operating costs per member and average operating costs per active member; target fee levels; target liquidity measurements, including net outflow ratio; and target average insurance product premiums and claim payment ratios; membership indicators, for example: (iii) (iv) measures of member switching, and the reasons for switching; target levels of active and inactive members; target levels for default employers; understanding membership demographics; 2

3 (v) targets for member engagement through various communication channels; and business initiative indicators, for example: outcomes of initiatives such as new/enhanced services or changes in benefits/product design and associated member takeup or other targets; and outsourcing arrangement indicators, for example: (iii) (iv) target performance by service providers; target budget for outsourcing arrangements; analysis on the availability of alternative service providers in the event of a price increase or service disruption; and analysis on the ability or potential ability of the trustee to in-house functions currently undertaken by third parties. APRA expects processes to be in place that include triggers or tolerances linked to the strategic and business plan that would prompt review and action. These would be based on leading indicators that enable action to be taken to strategically address concerns about the fund s sustainability. It would also be prudent for trustees to consider undertaking scenario analysis for certain metrics, and their implications Over 2017, APRA will continue its supervisory focus on strategic and business planning, and how trustees are addressing the need to deliver quality, value for money member outcomes into the future. APRA states that trustees are unable to demonstrate sound practices, and an ability to deliver appropriate member outcomes on a sustainable basis, will be subject to heightened APRA supervisory attention, which is likely to include requirements to develop and implement plans to quickly address areas of underperformance, or a plan to merge or wind-up underperforming funds in order to ensure that members best interests are adequately protected. 1.3 APRA assessment of fund performance to member outcomes (July 2017) APRA states that the approach to assessing how trustees are performing must evolve. In particular, there must be an adequate focus on assessing the delivery of quality outcomes to fund members (and other beneficiaries), as that is fundamental to a trustee meeting its ongoing duty to act in the best interests of beneficiaries. The delivery of quality outcomes is driven, to varying degrees, by better governance practices, improved competition and efficiency, greater transparency and a continued focus on the delivery of quality, value for money products and services. Rethinking fund-level performance APRA states that fund level rate of return is not reflective of the outcomes achieved for members as it does not accurately reflect the variation in cash flows and asset values that occurs within the fund on the basis that assets generating earnings at the fund level are the combination of assets held for MySuper, choice investment and pension products, and also for fund reserves. These different segments typically have very different investment strategies and asset allocations, reflecting their different risk/return targets. They are also likely to have different fees and costs. This significantly diminishes the utility of the rated return calculation for 3

4 assessing the quality of outcomes for members, and hence whether or not a trustee is meeting its ongoing duty to act in the best interests of beneficiaries. Assessing quality outcomes APRA states that the assessment of whether a product is delivering quality outcomes for members needs to look at both qualitative and quantitative aspects, including the nature and quality of the benefits and services being provided and the adequacy of the trustee s governance and risk management frameworks and practices. APRA also expects all trustees to assess the sustainability of their products over the medium to long term. This is particularly important for MySuper products given the potential adverse impact on remaining default members of, for example, declining membership or ongoing negative cash flows with consequent potential impacts on investment strategy and costs. APRA expects trustees, when assessing the outcomes for members of their products, to consider outcomes primarily based on performance against preestablished targets or objectives, including like-for-like comparisons against peer offerings, where possible. On this point, APRA states that when considering MySuper products, peer comparison is more straightforward than was the case previously for default products as there is now (at least) three years of MySuper product data available to support like-for-like assessment of outcomes for these products. APRA expects that when assessing the extent to which products deliver quality member outcomes, trustees will consider a range of metrics, drawn from both data reported to APRA and information that is available more broadly, including: net returns, on an absolute basis and relative to risk/return targets; fees and costs; and the level and cost of insurance. APRA s published data also provides valuable input for a forward-looking assessment across all products offered by trustees. APRA s attention is not limited to MySuper products; similar analysis is being undertaken for choice products in the accumulation and pension phases. APRA expects, where it is clear that a product cannot continue to operate in the best interest of its members, trustees will act to ensure a timely and well-managed transfer of the members to another suitable product which may ultimately lead to the trustee s exit from the industry. As part of its ongoing supervision activities, APRA will also be discussing the approach to assessing member outcomes and future sustainability with all trustees. 1.4 Strengthening Operational Governance of RSE Licensees Upcoming Consultation (11 August 2017) APRA confirmed that it has identified areas where the APRA prudential framework could be enhanced to lift operational governance practices. Operational governance relates to how a trustee determines its strategic objectives, undertakes business planning and runs its business operations on a day-to-day basis. APRA identified weaknesses in the practices of some trustees, including: strategic and business planning processes that are based on unrealistic assumptions and lack adequate rigour, including use of poorly constructed 4

5 indicators or key performance metrics; business initiatives where the link to the delivery of quality, value for money outcomes for beneficiaries appears limited or is not adequately demonstrated; and insufficient rigour around trustee decision-making and monitoring in relation to expenditure, fees and costs and the use of reserves. Accordingly, APRA intends to consult on proposed changes to the prudential framework including the following key changes: strategic and business planning: APRA intends to consult on a proposal that trustees have policies and procedures to establish, implement, monitor and review their business plan, and the achievement of strategic objectives; fund expenditure and reserving: APRA intends to consult on a proposed requirement for trustees to meet minimum expectations when making decisions which require the use of fund assets, whether these decisions relate to expenditure incurred in running the fund, setting aside money in reserves or the setting of fees and costs policies to fund these decisions. These minimum expectations will include implementing appropriate policies and procedures to ensure there is adequate rigour in decision-making, monitoring and transparency related to the use of members money; and APRA also proposes to amend the reporting to allow It to collect more expense data on a look-through basis. MySuper outcomes assessment: APRA is considering changes to the prudential framework and issuing prudential guidance in order to support trustees compliance with the obligations to be introduced by the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017; and assessing outcomes for all beneficiaries: APRA intends to consult on a proposal to require all trustees to regularly assess whether they have provided, and are likely to continue to provide, quality, value for money outcomes for beneficiaries. The proposed assessment would include consideration of net investment returns, expenses and costs, insurance, and other benefits and services provided; and where a trustee identifies factors that are inhibiting it delivering appropriate quality and value for money outcomes, the trustee would be required to put in place specific actions to address these factors. APRA is seeking feedback from interested parties by 11 September

6 2. LEGISLATION 2.1 Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017 (26 July 2017) Treasury released the draft Bill which proposes to amend SIS, the Corporations Act, and the Financial Sector (Collection of Data) Act 2001 (Cth) to modernise the superannuation system. The amendments propose to improve accountability and member outcomes by: (e) (f) (g) replacing the current scale test with an outcomes test that requires trustees to undertake an annual determination considering a number of features to ensure the outcomes being delivered are in the financial interests of their members; providing APRA with enhanced capacity to refuse or cancel a MySuper authorisation, where it believes that the trustee may not comply with its obligations; providing APRA with improved directions powers to enable it to intervene at an early stage to address prudential concerns; aligning the superannuation director penalty regime with the penalty regime that applies to directors of managed investment schemes; requiring people to seek approval from APRA prior to a change in ownership or control of an trustee occurring; requiring trustees to hold annual members meetings to enable members to ask questions about all areas of their fund s performance and operation; and enabling APRA to gather more information on the operational and managerial expenses of superannuation funds. Submissions in respect of the draft Bill closed on 11 August Treasury Legislation Amendment (Improving Accountability and Member Outcomes) Bill 2017: superannuation guarantee (salary sacrifice integrity measures) (26 July 2017) Treasury released draft legislation that proposes to amend the Superannuation Guarantee (Administration) Act 1992 (Cth) so that: amounts that an employee salary sacrifices to superannuation do not reduce an employer s superannuation guarantee charge (SG Charge); and an employer include salary sacrificed amounts in an employee s ordinary time earnings (OTE) base, because OTE also includes any contributions made in the quarter that are sacrificed OTE contributions. Submissions closed on 11 August Treasury Laws Amendment (2017 Measures No. 4) Bill 2017 (16 August 2017) The Bill has passed through Parliament and now awaits Royal Assent. Once enacted, the legislation will provide asset roll-over relief for mandatory transfers of accrued default amounts within a superannuation fund. 6

7 2.4 Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017 (17 August 2017) The Bill was introduced into the House of Representatives and proposes to amend the Medicare Levy Act 1986 (Cth) in order to increase the Medicare levy rate to 2.5% of taxable income from the 2020 Financial Year. 2.5 Superannuation (Excess Non-concessional Contributions Tax) Amendment (National Disability Insurance Scheme Funding) Bill 2017 (17 August 2017) The Bill was introduced into the House of Representatives and proposes to amend the Superannuation (Excess Non-concessional Contributions Tax) Act 2007 (Cth) in order to increase the superannuation excess non-concessional contributions tax rate that applies to an individual s excess non-concessional contributions for a Financial Year from 47% to 47.5% from the 2020 Financial Year. 2.6 Superannuation (Excess Untaxed Roll-over Amounts Tax) Amendment (National Disability Insurance Scheme Funding) Bill 2017 (17 August 2017) 3. CASES The Bill was introduced into the House of Representatives and proposes to amend the Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007 (Cth) in order to increase the Medicare levy component of the superannuation excess untaxed roll-over amounts tax rate from 2% to 2.5% from the 2020 Financial Year. There were no cases of significance, this month. 4. OTHER RECENT DEVELOPMENTS 4.1 ATO draft instrument SPR 2017/D2 Reporting of event based transfer balance account information in accordance with the Taxation Administration Act 1953 (16 August 2017) The ATO released the draft Instrument for consultation. The Instrument is intended to set out the way in which superannuation providers are required to report transactions to enable the ATO to determine if an individual has exceeded his or her transfer balance cap and take appropriate action. The Instrument s principal purpose is to set out the timeframe under which the Transfer Balance Account Report (TBAR) is to be provided to report transaction data relating to superannuation fund members. TBAR reporting will commence from 1 October 2017 and will be required on a monthly basis, within 10 working days of the end of each month, or such later date as the Commissioner of Taxation (Commissioner) may allow, in which the relevant reporting event occurred. Superannuation providers are required to report: superannuation income streams in existence just before 1 July 2017; (e) (f) superannuation income streams that commence or begin to be in the retirement phase on or after 1 July 2017; limited recourse borrowing arrangement payments; commutations; compliance with a commutation authority issued by the Commissioner; personal injury (structured settlement) contributions; 7

8 (g) (h) superannuation income streams that stop being in the retirement phase; and any other relevant transactions, that result in a credit or debit in an individual's transfer balance account. Interested parties are invited to make submissions to the ATO by 22 August ATO draft instrument OPS 2017/D5 Withholding Variation: Certain superannuation beneficiaries who have not quoted a tax file number (16 August 2017) The ATO released the draft Instrument for consultation. The Instrument is intended to repeal and replace the legislative instrument Variation to the rate of withholding for certain superannuation beneficiaries who have not quoted a tax file number, which was registered on 28 June 2007 (Current Instrument). The Current Instrument varied the rate of withholding to zero for the non-assessable non-exempt component of superannuation payments, when the payee has not quoted a TFN, but is due for repeal under sunsetting provisions. Upon commencement, the new Instrument will continue to provide the same treatment as the Current Instrument and, therefore, will apply to payments covered by section or subsection of Schedule 1 to the Taxation Administration Act 1953 (Cth) where the payee has not provided the payer with a TFN declaration that has effect under Division 3 of Part VA of the Income Tax Assessment Act 1936 (Cth). Interested parties are invited to make submissions to the ATO by 1 September Contact: 8