Bills Digest No. 2  1998-99 Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998

Date Introduced: 28 May 1998

House: House of Representatives

Portfolio: Treasury

Commencement: Except for the provisions relating to the provision of information, which commence on 1 July 1999, the choice of fund rules will commence on Royal Assent. The choice of fund rules will apply to new employees from 1 July 1999 and for existing employees from 1 July 2000.

Purpose

To provide employees with a greater choice in the selection of employer sponsored superannuation provider.

Background

The choice of fund rules were originally introduced in Taxation Laws Amendment Bill (No. 7) 1997 which also contained a number of unrelated taxation measures. The general background to the issue is discussed in the Digest for that Bill (extracts from which are reprinted below).

As noted in the background contained in the Digest for Taxation Laws Amendment Bill (No. 7) 1997, concerns had been expressed early on that there would be insufficient time for the passage of the legislation and its implementation before the starting date for new employees proposed in that legislation, ie. 1 July 1998. A specific concern was that there would be insufficient time for an education campaign to explain the choice rules to employees and employers to enable them to make informed decisions. In addition, the regulations had not been finalised.

On 8 April 1998, before the Bill was introduced into the Senate on 13 May 1998 as the Taxation Laws Amendment Bill (No. 3) 1998, the Assistant Treasurer announced that the starting date for the choice of fund rules would be deferred although no new starting date was given at that time. The Assistant Treasurer announced on 13 May 1998 that the new starting date would be 1 July 1999 for new employees and that the starting date for existing employees would remain the same, ie. 1 July 2000. The choice of fund measures were removed from the Bill in the Senate and this Bill introduced with the new starting date. The other difference between the measures contained in the two Bills is the provisions relating to the provision of information by superannuation entities to prospective beneficiaries contained in this Bill. The following is the background taken from the Bills Digest for the Taxation Laws Amendment Bill (No. 7) 1997:

Currently, an employee rarely has a choice as to which superannuation fund their employer's compulsory superannuation contributions are distributed to. Compulsory employer superannuation can exist under either a Federal industrial award or under the superannuation guarantee charge (SGC) scheme. The distributions of the contributions vary under the two schemes and, generally, award superannuation must be contributed to an industry fund (with equal employer and union representation in the board of trustees) while the employer will have the choice of fund to which contributions are made under the SGC scheme (where the employer makes the contribution voluntarily rather than paying the SGC, as is the normal case). There are, of course, variations on these general principals such as where the employer and employee discuss to which fund contributions are to be made to and where SGC contributions are made to an industry fund. However, there are pressures on employers to seek the least administratively costly way of paying superannuation contributions which generally means that the employer will chose one fund for all employees so that they do not have to deal with more than one fund. The problem with dealing with more than one fund increases as the number of employees rises and the employer wishes to minimise the number of funds dealt with (this matter will be discussed below).

Under award superannuation, the fund to which contributions are to be made is specified in the award. Under SGC, superannuation contributions must be made to a complying fund, which is one which is certified by the Insurance and Superannuation Commission (ISC) under the Superannuation Industry (Supervision) Act 1993.

The proposal to enable employee choice of fund was announced in the 1997-98 Budget and detailed in the Treasurer's Press Release titled Savings, Choice and Incentive, dated 13 May 1997. The original proposals, which have subsequently been altered, had the following features:

  • employers would be required to offer a choice of a minimum of 5 complying funds or Retirement Savings Accounts (RSA) to chose from, including an industry fund (where one exists), a public offer fund, a RSA, a RSA provided by the institution receiving the employee's pay (if the institution offers RSAs) and, if it exists, an in-house superannuation fund
  • if the employee did not make a choice of fund within 28 days the employer could nominate the fund
  • the choice of fund was to apply to new employees from 1 July 1998 and to existing employees two years later
  • Federal awards relating to superannuation would be overridden by the legislation but this would not apply to superannuation payable under State awards due to Constitutional restrictions
  • agreements under the Workplace Relations Act 1996 could overrule the legislation, and
  • the legislation would not apply to unfunded government schemes.

Following the release of the policy there was considerable employer concern regarding their potential liability if they failed to provide sufficient, or accurate, information regarding the various funds that their employees had to choose from. Employers feared that they may be held liable for any loss suffered by an employee if they provided insufficient, false or misleading information. Lobbying from various organisations, particularly employer groups, resulted in the proposals being changed and the changes were announced by the Assistant Treasurer in a Press Release dated 25 November 1997. Major changes related to:

  • employers would not be liable where they have complied with the Bill
  • removing the requirement that employers had to offer a RSA from the institution that received the employee's pay, where such a RSA existed, so reducing the number of alternatives that had to be offered to 4
  • allowing employers to offer the employee unlimited choice of fund (where the onus will be on the employee to collect the relevant information and select the fund of their choice), and
  • allowing the selection of the funds to be offered to be facilitated through one institution or service provider.

The choice of fund rules will be enforced by providing for a maximum increase of 25% in the SGC that would have been payable if no superannuation contributions had been made.

The reasons given for the introduction of the choice of fund rules is given in the second reading speech to the Bill as:

The choice of fund arrangements are designed to give employees greater choice and control over their superannuation savings, which in turn will give them greater sense of ownership of these savings. The arrangements will increase competition and efficiency in the superannuation industry, leading to improved returns on superannuation savings.

While the proposal has received support from a range of areas, including acceptance from the Association of Superannuation Funds of Australia, the leading industry group, a number of concerns have been raised about the proposed scheme. One problem that has been anticipated is an increase in advertising for the various competing products, which could have the effect of increasing costs to funds and so reducing the return to members. Another potential problem is whether people will be able to understand the information provided or will spend the time understanding the information provided. The Insurance and Superannuation Commission (ISC) has issued proposed rules relating to the amount of information provided and a commentator has noted that the rules for public offer funds will be virtually the same as currently exist and that the information provided by a major public offer fund at present comprises 6 pages, 2 pages of attached figures and 16 further pages of additional information.(1) While the requirements for RSAs will be less, even the amount of information that will be provided if four options are presented will be substantial.

If the unlimited choice option is followed, the onus will be on the employee to research the available options. Another potential problem is the method in which funds are presented to employees and the likely emphasis on short term growth rather than longer term growth and stability. While previous returns may be used to advertise the performance of a fund, a trustee of the Australia Post superannuation scheme has noted: 'making investment decisions based on past performance data has been particularly unreliable as an investment strategy'.(2)

There is therefore the fear that employees may be offered advertising for a fund that promises a large return based on short term performance rather than the long term viability of the scheme and this 'headline' performance could be used to attract people to a fund where the potential member does not fully understand the risks associated with the investment strategy of the fund. The example often used is recent events in the UK where people were given a choice of pension fund. It has been reported that an inquiry into the new scheme found 570 000 cases of mis-selling worth approximately $10 billion.(3) There is also the possibility that employers, who will not be subject to any legal action if they fail to act prudently, will take little care in selecting the funds and RSA offered, instead accepting those that offer the employer the easiest administration when making the contributions.

Other concerns are that the regime could see a proliferation of accounts if, for example, people in itinerant industries accept the employers default fund. This may lead to a person having a number of small accounts rather than an account in an industry fund. There have also been concerns expressed that prior to making a choice of fund an employee could be without death or disability insurance.(4)

The final concern is not with the scheme itself, but with the proposed starting date of 1 July 1998 for new employees. It is reported that a recent GIO survey found that 78% of employees and 42% of employers were not aware of the choice of fund scheme.(5) Not only will the legislation have to be passed by Parliament by this date but there will also need to be a considerable education campaign to address people's lack of knowledge of the scheme.

Main Provisions

Differences between this and the previous Bill are shown in bold text.

Amendments to the Superannuation Guarantee (Administration) Act 1992

Item 28 of Schedule 5 of the Bill will insert the requirements that must be complied with to satisfy the choice of fund rules. Proposed section 32C provides that the requirements will be satisfied in a number of circumstances:

  • where the employer contribution is made to a chosen fund (see below), a default fund (see below) or for a member of either of the Commonwealth schemes (CSS and PSS) - the contribution is made to an unfunded public sector scheme
  • the contribution is made under an Australian Workplace Agreement or a certified agreement
  • for people employed under State awards, the requirements will be taken to have been satisfied (in the Press Release announcing the measures it was argued that this was for Constitutional reasons and that the States would be asked to pass complimentary legislation. It may be noted that the SGC scheme as a whole applies to State employees as well as those employed under State awards and is based on the taxation power of the Commonwealth which also applies to State award employees)
  • where contributions are made under relevant Victorian or prescribed Commonwealth, State or Territory legislation, and
  • contributions made before 1 July 1999 will satisfy the requirements, as will contributions to any fund made in respect of a person employed by the employer before 1 July 1999 if the contribution is made before 1 July 2000 and contributions to the PSS or CSS before 1 July 2000 (this is the phasing in provision for new and existing employees).

Proposed section 32D lists the superannuation providers that will be eligible choice funds. They are:

  • a complying superannuation fund or scheme
  • a RSA, and
  • where the fund is presumed to be a complying fund while further information is sought or a decision on complying status is pending.

'Employee chosen fund' is defined in proposed sections 32F to 32H. A fund will be an employer offer chosen fund if the requirements of proposed Division 6 are satisfied. An employer must offer an employee a chose of funds within 28 days of the employee commencing or within 28 days of the employee requesting a choice, although there may only be one such request every 12 months. The employer must also offer a choice within 28 days of becoming aware that they cannot contribute to the chosen or default fund. As well, the employer may offer a choice at any time the employer choses (proposed section 32M). The limited choice option for the employer will be satisfied if the following choices are provided:

  • at least one public offer fund
  • at least one RSA or other capital guaranteed fund
  • at least one employer sponsored fund if such a fund or funds exist, or, if relevant an exempt public sector fund, and
  • at least one industry fund, if one exists (proposed section 32Q).

If a fund falls into more than one of the above categories, it may only be taken to satisfy one and the employer may chose which category it satisfies. Also, the employee must be eligible to be a member of the fund for it to satisfy the criteria.

To satisfy the limited choice option, the employer must also provide certain information, including the names of the funds, the day by which a choice must be made (28 days although the employer may except a choice after this time), the name of the default fund or funds, information on the funds required under the regulations and, if the regulations require additional information to be made available, where that information may be accessed.

To be an unlimited choice offer, the following information must be provided to the employee:

  • a statement that the employee may chose any complying fund or RSA
  • the day by which the offer must be accepted (generally 28 days)
  • the name of the default fund, and
  • information required to be provided under the regulations as described above.

As well as the employer offering limited or unlimited choice, the choice of fund rules will be satisfied if the employee has nominated a fund to the employer and the employer has accepted the fund (Note: there is no obligation on the employer to accept the employees choice of fund if it is not part of the limited choice funds proposed by the employer) (proposed section 32G).

A fund will cease to be a chosen fund if the employee choses another fund and has given the employer notice of the change; the employee has given the employer notice that they desire to make another choice and the employer has not responded within the required time (28 days); or if 'it is impossible for the employer to contribute ... to the chosen fund' (while the example given in the Bill is of a closed fund, it may take litigation to establish exactly the meaning of the employer not being possible to contribute to the fund. For example, would this include the employer not being able to finance the contributions?) (proposed section 32H).

Where an employer has given an employee unlimited choice, the employer may request that the employee provide a statement that the fund is a complying fund and if such a notice is not received within the allowed time, the fund will cease to be the fund chosen by the employee (proposed section 32U).

Default Funds

A default fund will arise if, for an employee, there is not a chosen fund and the person has been employed for less than 28 days; the employee has been offered a choice of funds and has not replied within the allowed time or the time for the chosen fund becoming the fund of the employee (2 months) has not expired; or the employer has offered a choice of fund and the employee has not responded within the required time (28 days). Basically, the provisions cover the time between when the employee has been appointed and the time they make a choice of fund, the time for the selection of fund has expired or during the 2 months in which the employer has to connect the employee to the chosen fund. These measures largely address the problems of a lack of death or disability cover as outlined above) (proposed section 32J).

A fund will be a default fund where the employer has previously contributed to the fund for the employee under the choice of fund rules and the employer has not contributed to another fund while the choice was in force. If such a fund does not exist (as for example in the case of new employees) the employer will be able to choose a complying fund or RSA as the default fund. A fund or RSA will cease to be a default fund if the employer ceases to be able to contribute to the fund on behalf of the employee (proposed section 32K).

Proposed section 32X overrules Commonwealth and Territory industrial awards that deal with superannuation by providing that a contribution under the choice of fund rules will be taken to have been a contribution that satisfies the award. The main effect of this provision will be that where an award requires contributions to be made to an industry fund, a fairly common part of award superannuation, contributions to a chosen or default fund will be taken to have satisfied this requirement.

Employer's potential liability for damages will be addressed by proposed section 32Y which provides that an employer will not be liable for anything done in complying with the choice of fund rules.

The penalty for failure to comply with the choice of funds requirements is contained in item 24 which will amend section 19 of the Act. The penalty will be 25% of the SGC that would have been payable had no contributions been made and will apply where a contribution is made to a fund in breach of the choice rules.

Amendments to the Superannuation Industry (Supervision) Act 1993 (SIS)

Proposed Division 2 of Part 14 of the SIS Act, which will be inserted by item 42, deals with the provision of information to prospective beneficiaries. Proposed section 114A will make it an offence, with a maximum penalty of 100 penalty units (currently a penalty unit is $110) for a superannuation provider to intentionally or recklessly issue a superannuation interest to a person unless satisfied on reasonable grounds that the prospective beneficiary has received the required information specified under the regulations and determinations. Such information need not be provided in circumstances specified in the regulations. Similarly, a superannuation provider is not to allow a person to become an employer-sponsor unless satisfied on reasonable grounds that the person has received the required information (proposed section 114C). Proposed section 114D provides for regulations and determinations to be made specifying the information to be provided, while proposed section 114E provides that if a document is provided that refers to the information being available in another document that will be provided free of charge on request, the first document will be taken to contain the required information.

Part 3 of Schedule 1, contains a number of provisions relating to the supply of information relating to superannuation products. Proposed section 148A provides that a trustee of a fund is not to intentionally or recklessly make a statement in a regulated document that the trustee knows to be false or misleading or in which there is a material omission of information. The maximum penalty for a breach of this requirement is imprisonment for 5 years. If a trustee has issued, or authorised the issue of, such a document they will also be liable for civil action from people who have suffered loss as a result of their action (proposed section 148B). A trustee of a fund is not to intentionally or recklessly issue or authorise to be issued a regulated document that contains a statement made by an 'expert' unless there is written authorisation to use the statement. The maximum penalty for a breach of this provision will be 6 months imprisonment. (Expert is defined in the SIS Act to be a person whose profession or reputation gives authority to the statement.) It will also be an offence not to keep a copy of the authorisation without reasonable excuse (maximum penalty is 10 penalty units - currently a penalty unit is $110) (proposed section 148C).

Proposed Division 3 provides for the issue of stop orders by the Insurance and Superannuation Commissioner where it appears to the Commissioner that there is a material statement in a regulated document that is false or misleading or that there is a material omission from the document. The stop order will direct that the entity to which it is issued is not to issue a superannuation interest while the order is in force and it will be an offence, with a maximum penalty of 2 years imprisonment, to breach such an order (proposed sections 148D to 148G).

Application: As noted above, the choice of fund rules will apply to new employees from 1 July 1999 and to existing employees from 1 July 2000.

Endnotes

  1. The Australian Financial Review, 31 December 1997.
  2. The Australian Financial Review, 15 January 1998.
  3. The Australian Financial Review, 11 December 1997.
  4. The Sydney Morning Herald, 8 December 1997.
  5. The Australian Financial Review, 22 December 1997.

 

Contact Officer and Copyright Details

Chris Field
6 July 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.

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