Superannuation Regulation and Government Policy Q3 2015 Louise Campbell Director, Russell Actuarial Russell Actuarial provides a synopsis of regulatory and government policy changes impacting the superannuation industry. Governance Reforms The Government has released draft legislation to repeal the current equal representation regime for trustees and require boards of all APRA-regulated superannuation funds (including stand-alone corporate funds) to have an independent chair and at least one-third independent directors. The requirement is limited to trustee boards and individual trustees. It does not change the equal representation rules for policy committees. To give existing funds sufficient time to comply with the new requirements, a three-year transition period will apply from the date of Royal Assent to the legislation. However, the requirements will apply immediately to any new fund established after 1 July 2016. Further, and consistent with rules that apply to ASX listed companies, trustees of APRA-regulated super funds will be required to report on whether they have a majority of independent directors, on an if not, why not basis, in their annual report, commencing 1 July 2019. An individual will not be independent if they are a director or employee of an organisation that owns the trustee or an organisation that has a material relationship with the trustee. Organisations with material relationships are likely to include employer sponsors of a fund, organisations with a right to nominate directors (typically unions or employer bodies), professional advisers and other suppliers. Submissions on the draft legislation closed on 23 July 2015. APRA has written to RSE licensees setting out, for comment, proposed changes to Prudential Standards SPS 510 and SPS 512 to supplement the new legislation. Productivity Commission Review The Productivity Commission has released a research paper Superannuation Policy for Post-Retirement. This is a policy research sequel to the Productivity Commission s 2013 research project, An Ageing Australia: Preparing for the Future. The research paper addressed two key questions: What might happen if the preservation age is raised? and Whether the use of lump sums as a primary means by which most individuals draw down their superannuation is problematic. The Commission undertook research in a number of areas, including financial literacy and retirement behaviour (including workforce participation by older Australians and involuntary retirement). The Commission also prepared a retirement simulation model to examine the response of individuals to a gradual increase in the preservation age to 65. The Commission modelling suggests that: There will be a modest increase in the participation rate of older workers (of around 2% in 2055) mainly among those with higher wealth at or near retirement. August 2015
Changing the preservation age will have little, impact on the workforce participation of individuals who retire involuntarily. Households that delay their retirement are likely to do so by two years and will have superannuation balances approximately 10% larger in real terms when they retire. There will be an indicative annual fiscal improvement of around $7 billion (in 2015 prices) in 2055 mainly due to tax revenue increases from wealthier households. Changing the preservation age will have little, if any, impact on the workforce participation of individuals who retire involuntarily almost one half of men and over one third of women who retire between the ages of 60 and 64 do so involuntarily. The paper suggests that use of lump sums is not problematic. The Commission s view was that lump sums are more prevalent among those with lower superannuation balances, but people are generally prudent in their drawdown behaviour. Those with higher superannuation balances more often use income streams, particularly account based pensions which provide more flexibility (albeit less certainty) than annuities. The Commission attributed low demand for annuities to the preference for flexibility, the difficulty that retirees face in understanding longevity risk, and the role of the age pension in managing longevity risk. The Commission identified a range of areas that it believes require further work, including: Developing a better understanding of involuntary retirement; Targeting of tax concession and the family home exemption from the age pension means test; Exploring how the retirement income system can better cater for the diverse circumstances and needs of different groups of retirees; and Determining how best to manage longevity risk. The Commission calls for the development of better data on drawdown patterns to provide an evidence base to support future policy. We note that the Government s commitments not to make adverse changes to super specifically includes changes to access to superannuation. On that basis it appears unlikely that the Commission s recommendations will become Government policy in the short term. Modern Awards The Fair Work Commission (FWC) is required by legislation to conduct a review of the default fund terms in modern awards on a four yearly basis. The current review commenced in 2014 and there was an expectation it would lead to new default fund provisions in awards in early 2015. The review process was halted in June 2014 as a result of a Federal Court decision which indicated that the Expert Panel, established to undertake the first part of the review, was not properly constituted. Currently there is no clear indication as to when a new panel will be appointed. In the meantime, current default arrangements will remain in place, including the grandfathering of past default fund arrangements which were in place prior to 12 September 2008. The Abbott Government has indicated that it is opposed to the current requirements and will seek to modify them. The Assistant Treasurer, Josh Frydenberg, commented in June that he felt uncomfortable with the Fair Work commission as an industrial umpire making choices around which super funds can be default funds. Mr Frydenberg said that the Government is looking at options to increase competition as a means of reducing fees. He also foreshadowed a crackdown on financial institutions offering incentives to employers to win their superannuation business. The Government has also closely associated changes to modern awards with changes to improve the governance of superannuation funds. The Royal Commission into Trade Union Governance and Corruption released a discussion paper in May which, amongst other things, seeks comments on extending choice of fund to employees employed under collective agreements, enterprise agreements, State award or State Agreements for whom choice of fund is not currently available. The report also seeks comments on whether unions should be able to negotiate terms in an enterprise agreement which specify a default super fund. 2 Russell Investments // August 2015
The Government maintains that there will be no adverse changes to superannuation in this current term and there are no plans for such changes beyond the next election. Tax system discussion paper In March 2015 the Treasurer released a discussion paper as part of the Tax White Paper process. The discussion paper contains 66 questions for community consultation. Following consultation, the Government plans to issue a Green Paper covering tax options due to be released in the second half of 2015. The Government will seek further feedback on those options before putting forward policy proposals in a White Paper in 2016. Submissions on the discussion paper were due by 1 June 2015, but the Treasurer announced an extension to 24 July 2015 for submissions which focus on the treatment of retirement income. Mr Hockey said the Tax White Paper will consider submissions on how policy settings can better encourage more productive use of savings to optimise retirement incomes, in simpler and more effective ways, not simply restricted to superannuation. This will include issues such as equity release and comprehensive retirement income stream products. Consideration will also be given to previous reviews and inquiries, including the Financial System Inquiry (FSI) and any recommendations of the FSI as they relate to superannuation. In addition, Mr Hockey said the Treasury review of income stream products will be included in the Tax White Paper process. The Government maintains that there will be no adverse changes to superannuation in this current term and there are no plans for such changes beyond the next election. Specifically, Mr Hockey has stated that the Government will not increase taxes on superannuation or remove any current flexibility in accessing superannuation on retirement. SuperStream The SuperStream initiatives are designed to enhance the back office processes of superannuation administration systems, through the introduction of standardised electronic commerce processes. The initiatives should also lead to improvement in the quality of data received. Medium to large employers (defined as 20 or more employees) had until 30 June 2015 to meet the SuperStream requirements for sending superannuation contributions to funds in a prescribed electronic format. APRA and the Australian Tax Office (ATO) have written to RSEs to update them on key expectations and developments concerning SuperStream implementation. All RSEs were expected to have completed induction and certification of their SuperStream contribution by 30 June 2015, although the ATO announced that it will extend its compliance flexibility to employers who are not yet SuperStream-ready by four months to 31 October 2015. Default funds that provide a My Super product must offer employers a pass through of all contribution data from 1 July 2015. The rules on the pass through of contribution data do not extend to the pass through of actual contributions. So the requirements are separate to, and fall short of, clearing house services. For small employers (fewer than 20 employees) the SuperStream requirements commenced from 1 July 2015 and the employers have until 30 June 2016 to meet the requirements. 3 Russell Investments // August 2015
Discount rates for the end of May, June, and July are now available. AASB 119: Using corporate bond yields to discount liabilities AASB 119, the financial reporting standard for employee benefits including superannuation and long service leave (LSL), requires the use of a discount rate based on market yields on high quality corporate bonds. However if there is no deep market in corporate bonds, the requirement is to use the yield on government bonds. The Group of 100 and the Actuaries Institute engaged Milliman Australia to undertake research in relation to the corporate bond market in Australia and the research concluded that there is a sufficiently observable, deep and liquid market in high quality Australian corporate bonds which satisfy the accounting requirements. Further to our last update it has now been agreed that Milliman will produce discount rate curves on a monthly (rather than quarterly) basis. Rates will be available on both the G100 website and Milliman Australia s website and are expected to be available in the first few working days of the month. Discount rates for the end of May, June, and July are now available. Depending on circumstances, the use of corporate bond yields rather than government bond yields could result in a material reduction in the value of liabilities and expense for defined benefit superannuation and LSL. We note that AASB 119 still requires notfor-profit public sector entities to discount superannuation and LSL obligations using market yields on government bonds. IAS 19 Exposure Draft On 18 June 2015 the International Accounting Standards Board (IASB) published proposed narrow-scope amendments to its pension accounting requirements. The proposed changes are designed to improve information to investors and address some diversity in practice. When a defined benefit plan is amended, curtailed or settled during a reporting period, the entity needs to update the assumptions about its obligation and fair value of its plan assets to calculate costs related to these changes. The proposed amendments to IAS19 Employee Benefits specify that the entity is required to use the updated information to determine current service cost and net interest for the period followed by these changes. The proposed amendments to IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements address how the powers of other parties, such as the Trustees of the plan, affect an entity s right to a refund of a surplus from the plan. The Exposure Draft Remeasurement on a Plan Amendment, Curtailment or Settlement/ Availability of a Refund from a Defined Benefit Plan (Proposed amendments to IAS 19 and IFRIC 14) is open for public comment until 19th October 2015. 2015-16 Federal Budget The following measures which were announced in the 2015-16 Budget have now passed all necessary legislative steps, although two measures do not take effect until future dates. Superannuation fund members suffering terminal illnesses will be able to gain access to their superannuation if they are likely to die within two years, rather than the current requirement of one year. This change took effect from 1 July 2015. A 10% cap will be imposed on the proportion of defined benefit pension income which can be excluded from the income test for Age Pension eligibility. This will affect some retirees receiving defined benefit income streams from public sector or corporate defined benefit funds. This will take effect from 1 July 2016. Changes in relation to the means testing for the Age Pension that will collectively result in more people qualifying for a full Age Pension, but fewer people who will qualify for a part Age Pension. This will take effect from 1 January 2017. 4 Russell Investments // August 2015
Australian Treasury is currently engaging with HMRC in an attempt to develop a practical outcome, which could include allowing funds to ring fence UK transfers and opt into the UK requirements for the transfers. Qualifying Recognised Overseas Pension Scheme (QROPS) In order for an Australian fund to accept a transfer in from the United Kingdom, on a taxfavourable basis for the member, the Australian fund must be a Qualifying Recognised Overseas Pension Scheme (QROPS). The United Kingdom Government s Her Majesty s Revenue & Customs (HMRC) department recently wrote to all QROPS providers in Australia asking them to ensure their schemes remain compliant with new rules, which were brought in from 6 April 2015. Specifically, the new rules do not allow members to access their benefits before age 55, unless they are retiring due to ill health, in line with UK pension rules. HMRC has taken the view that Australian rules on early access to superannuation (including terminal illness and compassionate grounds) mean that Australian superannuation funds cannot meet the new requirements. On that basis, HMRC removed all Australian funds from its published list of Recognised Overseas Pension Schemes (ROPS) (In order to be a QROPS, a superannuation fund must first be a ROPS), except for one Australian Government scheme. Australian Treasury is currently engaging with HMRC in an attempt to develop a practical outcome, which could include allowing funds to ring-fence UK transfers and opt into the UK requirements for the transfers. Financial System Inquiry The final report of the Financial System Inquiry (FSI), lead by David Murray, was released on 7 December 2014. The report made 44 recommendations to serve as a blueprint for the financial system over the next decade. The recommendations for the improvement of the superannuation system and retirement products could have far reaching implications for funds and members. Details of the recommendations on superannuation can be found in our article on the final report (www.russell.com.au/insights). At the time of writing the Government is yet to respond to the recommendations in the report. Stronger Super Accrued Default Amounts An Accrued Default Amount (ADA) for a member of a regulated superannuation fund is the amount of a member s superannuation interests: where the member has not given the trustee of the fund any direction about the investment option to be applied, or that is invested in the default investment option under the current governing rules of the fund. An ADA excludes any amount in a MySuper product or any amount invested in cash or certain life policies. Also excluded are interests in respect of defined benefit members, pensioners and amounts in Eligible Rollover Funds. If a member has an ADA the trustee of the fund must transfer the ADA to a MySuper product before 1 July 2017, unless the member provides an investment choice prior to the transfer. All RSE licensees should have in place a transition plan which sets out a process for identifying ADAs and for identifying a suitable MySuper product to which ADAs are to be attributed. Where an RSE licensee is not authorised to offer a MySuper product in an affected RSE, the RSE licensee must identify, by no later than 30 June 2016, one or more suitable MySuper products offered by another RSE into which it will move each accrued default amount. 5 Russell Investments // August 2015
A number of these changes involve significant cost and work for superannuation funds. Stronger Super Disclosure The Australian Securities and Investment Commission (ASIC) has recently announced some deferrals to start dates and extensions of relief in relation to various disclosure requirements. In particular ASIC has: Extended the maximum period of relief under Class Order CO 10/630 until 31 December 2015. This Class Order provides relief in relation to long-term performance reporting with periodic statements. Deferred the start date until 1 July 2016 for certain disclosures required pursuant to s29qb(1) of the SIS Act for standard employer-sponsored sub-plans, such as product disclosure statements, trust deeds and governing rules, actuarial reports of defined benefit funds, annual reports and summaries of significant event notices. Deferred the requirement to make a product dashboard publicly available for a choice product until 1 July 2016. Extended the interim relief in relation to including a superannuation product dashboard as part of a periodic statement until 1 July 2016, subject to the product dashboard being accessible on a website. Deferred the start date for the portfolio holdings disclosure requirements from 1 July 2015 to 1 July 2016. The first reporting date will be 31 December 2016. Deferred the implementation date for Section 29QC of the SIS Act until 1 January 2016. Section 29QC is intended to ensure that there is a level of consistency when a superannuation entity provides information to APRA under a reporting standard and also provides the same or equivalent information to other parties. A number of these changes involve significant cost and work for superannuation funds. In addition, the changes to disclosure of details of all sub-plan information in master trusts will involve the publication of a significant volume of material that will be very difficult for members to navigate and properly understand as well as information that was previously confidential. Other legislative items The Superannuation Guarantee (Administration) Amendment Bill 2015 has been passed by the Senate and received Royal Assent. This Bill removes, from 1 July 2015, the obligation for employers to offer a choice of superannuation fund to temporary resident employees or to employees affected when their superannuation funds merges with another fund. The Tax and Superannuation Laws Amendment (Release Conditions for Nonconcessional Contributions) Regulation 2015 was registered on 1 June 2015. It amended the conditions of release in the SIS Regulations and RSA Regulations to enable superannuation funds to release amounts to individuals who make an election to release non-concessional contributions. These amendments complement the Tax and Superannuation Laws Amendment (2014 Measures No 7) Act 2015 which allows individuals the option of withdrawing from their superannuation fund any excess non-concessional contributions (plus 85% of the associated earnings) from 1 July 2013. The full amount (ie. 100%) of the associated earnings are then included in the individual s assessable income (and subject to a 15% tax offset). 6 Russell Investments // August 2015
Timeline of future events Timeframe Event 1 July 2015 SuperStream commences for small employers and is compulsory for large employers 24 July 2015 Responses on tax review discussion paper due 2014 & 2015 Four yearly review of Modern Awards Late 2015/Early 2016 Final paper on tax review 31 October 2015 SuperStream compliance flexibility period ends for large employers 31 December 2015 Relief in respect of long term performance reporting ends No later than 30 June 2016 Identify one or more suitable MySuper products to which members ADAs could be attributed. 1 July 2016 Disclosure of RSE documents for employer-sponsored sub-plans 1 July 2016 Product dashboards to be publicly available for choice products 1 July 2016 Include product dashboard with periodic statement 1 July 2016 SuperStream is compulsory for small employers 31 December 2016 First reporting date for the portfolio holdings disclosure requirements No later than 1 July 2017 Financial years beginning on or after 1 July 2016 ADAs transferred to MySuper product AASB 1056 (financial reporting for superannuation funds) takes effect 1 July 2017 Removal of the Low Income Superannuation Contribution (LISC) 1 July 2021 SG increases resume (9.5% to 10%) For more information, please contact your Russell representative: Sydney 02 9229 5111 Melbourne 03 9270 8111 Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (RIM). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Copyright 2015 Russell Investments. All rights reserved. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Russell Investments. R_MKT_QA_SuperPolicy_V1F_1508 August 2015