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
Contact Officer and Copyright Details
Superannuation Legislation Amendment
(Choice of Superannuation Funds) Bill 1998
Date Introduced: 12 November 1998
House: House of Representatives
Commencement: Date of Royal Assent
The Bill amends
the Superannuation Guarantee (Administration) Act 1992
(the SGAA) to:
- require employers to make superannuation contributions on
behalf of an employee to a complying superannuation fund or scheme
or retirement savings account (RSA) in accordance with the 'choice
of fund requirements', and
- where these contributions do not comply with the choice of fund
requirements, increase the amount of Superannuation Guarantee
Charge (SGC) payable by the employer (if any).
This section of this Bills Digest will outline
briefly the history of this proposal and the changes made to it by
Government to meet the concerns of various groups affected by this
The policy objectives
The Government's choice of fund proposal was
included in the policy platform for the 1996 federal election. The
policy objectives of this proposal are to:
- provide greater freedom of choice for superannuation
contributors and greater competition between funds as a means to
reduce costs and increase returns,(1) and
- to ensure that no superannuation fund will enjoy the privilege
of a captive market dictated through industrial awards and all
superannuation funds will have to compete for business,(2) and
- employees will be able to exit a poorly performing
This policy was also recommended by the Wallis
Committee(4) and was the subject of inquiry by the Senate Select
Committee on Superannuation.(5)
The recommendations in the Wallis Report
on choice of funds
The Wallis Committee was set up to stocktake the
results of financial deregulation of the Australian financial
system since the early 1980's, to establish a common regulatory
framework for overlapping financial products and to propose ways of
dealing with further financial innovation. The Final Report the
Wallis Committee was released in April 1997, and a number of
recommendations were made to intensify competition and efficiency
in the financial system, including recommendations for establishing
retirement savings accounts and choice of funds. The Wallis
Committee in its final report in March 1997 recommended that
superannuation fund members should have greater choice of
The Wallis Report also noted the need for
educating employers and employees if informed choices are to be
made by employees, in particular.
It is the joint responsibility of the industry
and regulators to ensure that consumers are educated and well
informed. Education could cover issues such as the rights of
members, different life cycle needs and their implications for risk
and return, and the benefits and costs of exercising choice.(7)
Choice of fund proposal in 1997-98
The proposal to give employees greater choice of
superannuation fund or retirement savings account (RSA) 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, were subsequently altered, to ensure
- employers would be required to offer a choice of a minimum of 5
complying funds or 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
- 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
Changes announced on 25 November
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. After consultation with superannuation funds, industry
associations and employer and employee representatives the
Government made changes to the original proposals. On 25 November
1997 the Assistant Treasurer in a Press Release announced the major
changes. These changes related to:
- employers would not be liable where they have complied with the
- 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.
Measures included in Taxation Laws
Amendment Bill (No. 7) 1997
The measures to give effect to the choice of
funds proposals were originally included in Schedule 5 to the
Taxation Laws Amendment Bill (No. 7) 1997 (TLAB No. 7 1997) which
was introduced into the House of Representatives on 4 December
1997. Schedule 5 of TLAB No. 7 1997, consisted of amendments to the
Superannuation Guarantee (Administration) Act 1992 (SGAA),
the Retirement Savings Account Act 1997 and the
Superannuation Industry (Supervision) Act 1993 to
implement the proposal. Briefly, the amendments required employers
to make compulsory superannuation contributions (SG contributions)
to a complying superannuation fund or RSA account in accordance
with the choice of fund requirements. A higher rate of SG charge on
employers who do not comply with the choice of fund requirements
was to be imposed by the legislation. These requirements apply only
to SG contributions and will not cover discretionary or salary
sacrifice contributions to funds.
Reasons for the introduction of the choice of
fund rules 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.
This reiterates the policy objectives underlying
the choice of funds proposal given by Shadow Ministers prior to the
1996 federal election referred to above.
The Bills Digest No 129 1997-98 should be
referred to for further details of the background and an analysis
of the measures relating to the choice of funds in that Bill.
Schedule 5 to the Taxation Laws Amendment Bill (No. 7) 1997 was
deleted from that Bill to ensure timely passage of other measures
in that Bill. The Bill with Schedule 5 excised was enacted as the
Taxation Laws Amendment Act (No. 3) 1998.
Measures in the Workplace Relations
Amendment (Superannuation) Bill 1997
On 3 December 1997, the Government also
introduced the Workplace Relations and Other Legislation Amendment
(Superannuation) Bill 1997 which had measures to remove
superannuation from the list of 'allowable award matters' set out
in subsection 89A(2) of the Workplace Relations Act
1988.(8) This Bill lapsed on the prorogation of Parliament
prior to the federal election on 3 October 1998 and the measures in
that Bill have been included in the Workplace Relations and Other
Legislation Amendment (Superannuation) Bill 1998.(9)
This section of the Digest will only deal with
the main provisions in Schedule 1 which proposes amendments to the
Superannuation Guarantee (Administration) Act 1992, the
Retirement Savings Accounts Act 1997 and the
Superannuation Industry (Supervision) Act 1993. The reader
is referred to the Explanatory Memorandum to the Bill for details
of other provisions.
Amendments to the
Superannuation Guarantee (Administration) Act
Part 1 of Schedule
1 sets out the proposed amendments to the
Superannuation Guarantee (Administration) Act 1992 (the
The basic requirements are that an employer must
offer an employee a choice of funds from certain categories of
eligible funds. The employee can choose one of the funds offered by
the employer or choose his or her own fund from other eligible
funds. The employer will need to make contributions on behalf of an
employee to either a fund chosen by an employee or a default fund.
If an employee does not have a chosen fund or a default fund to
which superannuation contributions are made by an employer, the
employer will face an extra SG liability under proposed
sections 19(2A) and 19(2B). The choice of fund
requirements is set out in Part 3A to be inserted
by Item 32 of Schedule 1.
What funds are eligible choice
32D sets out the definition of eligible choice funds
for an employer at a particular time.
A fund is an eligible choice fund for an
employer at a particular time if:
- it is a complying superannuation fund at that time, or
- it is a complying superannuation scheme at that time, or
- it is an RSA, or
- at that time, a benefit certificate in relation to the fund is
conclusively presumed under section 24, in relation to the
employer, to be a certificate in relation to a complying
superannuation scheme, or
- contributions made by the employer to the fund at that time are
conclusively presumed under section 25 to be contributions to a
complying superannuation fund.
However, a fund ceases to be an eligible choice
fund for an employer if the employer requests an employee to
obtain, in accordance with section 32U, a statement in relation to
the fund and the employer does not receive the statement before the
time specified in that section. The statement in relation to a fund
covered by section 32U is a statement from the fund that it
complies with the provisions of section 24 or 25.
section 32E defines the term fund in Part 3A to
- a superannuation fund
- a superannuation scheme, and
- an RSA.
For the purposes of this Part, the holder of an
RSA is taken to be a member.
What choice of funds must an employer
offer an employee?
Proposed section 32N provides
that an employer must make either:
- a limited choice offer as described in proposed section
- an unlimited choice offer as described in proposed
Only eligible choice funds must be offered to an
employee in the scheme of the proposed choice of superannuation
What is a limited choice offer?
An employer must give an employee the option to
choose from at least four eligible choice funds and each choice
must be an eligible choice fund for the employer (proposed
sections 32P and 32 Q). Further, the employee must be
eligible to be a member of each of the funds offered.
The four choices to be given to an employee must
under proposed section 32Q include:
- at least one public offer superannuation fund
- at least one RSA or capital guaranteed fund
- if there is one or more:
- standard employer-sponsored funds of which the employer is a
standard employer-sponsor and of which the employee is eligible to
be a member, or
- exempt public sector superannuation schemes of which the
employee is eligible to be a member as a result of the employee's
employment with the employer
at least one of those funds or schemes must be a
- if there is one or more industry-based superannuation funds of
which the employee is eligible to be a member-at least one of those
funds must be a choice.
If a particular fund or RSA falls into more than
one of the above categories, it may be used to satisfy any one of
those categories. However, it is still necessary for the employer
to offer choices from the other three categories of funds.
What is an unlimited choice offer?
Under an unlimited choice offer the employee may
choose any eligible choice fund as his or her chosen fund
(proposed section 32R). The employer may where the
employee has chosen a fund, request the employee to provide to the
employer a statement from the fund trustee referred to in sections
24 and 25 of the SGAA. Section 24 deals with certain benefit
certificates presumed to be certificates in relation to a complying
superannuation scheme. Section 25 deals with certain contributions
presumed to be contributions to a complying superannuation
At what times must a choice of funds be
offered to an employee?
Proposed section 32M sets out 5
occasions when offers must or may be made by an employer to an
- An employer must offer an employee a choice of funds within 28
days of the employee commencing employment with the employer under
proposed subsection 32M(1).
- Proposed subsection 32M(2) provides that
within 28 days of an employee requesting a choice of funds in
writing, the employer must offer a choice of funds. However, there
may only be one such request every 12 months.
- The employer must also offer a choice within 28 days of
becoming aware that the employer cannot contribute to the chosen
fund or the fund ceased to be an eligible choice fund
(proposed subsection 32M(3).
- The employer must also offer a choice within 28 days of
becoming aware that the fund ceased to be a default fund because
the employer cannot contribute to the fund or the fund ceased to be
an eligible choice fund (proposed subsection
In addition, an employer may offer a choice to
an employee at any time the employer choses (proposed
What is an employee chosen fund?
An 'employee chosen fund' is defined in
proposed sections 32F to 32H. A
fund will be classified as an 'employee chosen fund' if either:
- the employee accepts a fund from the choices offered by the
employer under proposed Division 6 by a notice in
writing within 28 days of being given the offer as required
proposed section 32S ( a choice made after this
date is not effective unless the employer agrees to accept it),
- the employee has given a written notice under proposed
section 32G proposing a fund as the chosen fund of that
employee and the employer has given a written notice accepting that
fund as the chosen fund for that employee.
What are default funds?
Proposed section 32J sets out
the times when there will be a default fund for an employee.
Generally, these are during such times as are reasonable to allow
the choice process to occur and the employee to choose a fund; and
when an employee does not have a chosen fund and does not choose
one when given the chance.
The Bill sets out the particular fund or funds
that are or can be the default funds of the employee in
proposed section 32K. These are either:
- generally for existing employees the last fund or funds (which
are eligible choice funds for the employer) to which the employer
contributed in compliance with the choice of fund requirements and
to which the employer is still able to contribute on behalf of the
- if (a) does not apply, any eligible choice fund selected by the
employer and set out in the offer of choice to the employee.
What contributions will satisfy the
choice of fund requirements?
Proposed section 32C provides
that the requirements will be satisfied in a number of
circumstances where the employer contribution is made for an
employee to a:
- chosen fund, as defined in proposed Division 4
of Part 3A (proposed paragraph 32C(1)(a))
- default fund, as defined in proposed Division
5 of Part 3A (proposed paragraph
- if the employee is not a Commonwealth employee who is a member
of 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 under the Workplace
Relations Act 1996 or a certified agreement under the
Industrial Relations Act 1988 (proposed subsection
- the contribution is made under or in accordance with an
employment agreement in force under the Employee Relations Act
1992 of Victoria
- for people employed under State awards, the requirements will
be satisfied if the contributions are made in accordance with State
- 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 or contributions to the PSS
or CSS before 1 July 2000 (proposed subsection
- if an employee ceases to be employed by an employer and a
contribution is made to a fund after the employee ceases that
employment the contribution is taken to have been made before the
Although proposed section 32C
refers to 'contributions made', it also covers superannuation
support provided through defined benefit schemes, including
unfunded schemes. This is effected by proposed subsection
19(2B) which deals with defined benefit schemes and
notional contributions to such schemes. If an employer at present
provides superannuation support on behalf of employees to a defined
benefit scheme, there must be a benefit certificate specifying a
notional employer contribution rate for a class of employees in the
scheme or schemes to which the employer is providing support. The
benefit certificate is required for the employer to meet his or her
obligations. The choice of fund requirements applies to employers
who provide superannuation support through defined benefit schemes.
This is worked out by reference to notional contributions to the
scheme. The employer may be liable to additional SGC based on the
formula in proposed subsection 19(2B). The reader
is referred to the examples in the Explanatory Memorandum which
illustrates the application of the formula.(10)
Penalty on employer for not complying
with choice of funds requirements
The penalty for failure to comply with the
choice of funds requirements is contained in Item
21 which will amend section 19 of the SGAA. 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. This is provided by
proposed subsections 19(2A) and
What is the liability for acts done by
the employer in complying with the choice of funds
Proposed section 32Y provides
that the employer is not liable to compensate any person for loss
or damage arising from anything done by the employer in complying
with this Part 3A.
A similar provision was included in
proposed section 32V of Schedule
5 of Taxation Laws Amendment Bill (No 7) 1997. Dennis Rose
QC took the preliminary view that proposed section
32V would not be valid as it does not have a sufficient
connection with taxation to make it a law with respect to taxation
under section 51(ii) of the Constitution. In consequence section
32V cannot come within the scope of the related incidental powers
under section 51(xxxix) of the Constitution. A copy of this opinion
is included as an attachment to the Senate Select Committee on
Superannuation report Choice of Funds.
The proposal to give employees greater choice as
to the superannuation fund or RSA into which superannuation
contributions are made has been the subject of extensive public
comment for nearly four years by superannuation funds, industry
associations and employer and employee representatives.
The major issues and concerns
The major issues and concerns resulting from the
policy of giving greater choice to superannuation contributors in
directing the destination of their contributions may be briefly
stated as follows.
- Are all employees capable of taking informed decisions if they
are asked to select a superannuation fund from a range of funds and
if they are given all the information required to make an informed
- What sorts of detailed information must be disclosed to
employees to be able them to make informed decisions before joining
a particular fund or RSA?
- What sorts of information must be disclosed on a continuing
basis to all employees to enable them to take informed decisions as
to whether they should remain in or exit a particular
superannuation fund or RSA?
- What role can employers play in assisting employees to select a
fund without a clash of interests where an employer-sponsored fund
is one of the choices offered to an employee?
Report of the Senate Select
Committee on Superannuation - The Choice of Fund
The Senate Select Committee on Superannuation
examined these in the report Choice of Fund.(12) The
observations in the report on the key issues may be summarised as
- The Government has acknowledged the importance of informed
choice and has indicated that the necessary education programs for
employers and employees will be in place. The private sector will
also play a significant role in this process.(13)
- Labor Senators believe that an education program must target
three separate groups. These are employees; employers, especially
small business and community organisations; and superannuation
providers. The education campaign should have two phases - an
introductory phase and an implementation phase.(14)
- Labor Senators welcomed the change to 'up-front" disclosure
model. It is essential that consumers have the appropriate
information and evidence in front of them before they make a
decision about the choice of fund.
- However, for employees to be able to make an informed decision
they must be able to compare, on an equal footing, information
about one superannuation fund with information about another fund.
This will require a consistent, standard disclosure regime for the
presentation of key statements.(15)
- Investment choice could also allow for greater democratisation
of superannuation funds. It should be used as a means by trustees
to gauge the desire of members on broader investment policy
decisions e.g. whether funds should invest funds offshore, or
whether a small proportion of funds could be allocated to venture
capital or infrastructure, or small business or housing. Such an
approach of allowing greater employee choice over investment could
partly free trustees from their onerous duties pushing them always
towards maximising short-term returns. Instead, all or some of the
members of a fund express a preference for investing, for example,
in Australian business, then the trustees would be expected to
largely comply with that request. However, the greater the nature
of choices provided the greater the cost of funds.(16)
The Senate Select Committee report cites
evidence given to it of the experience in the UK where a form of
choice was given in the mid 1980s and where 570 000 cases of
mis-selling leading to a total compensation bill of $AUS 10
billion.(17) While it is arguable whether the UK experience of the
mid 1980s will be repeated in Australia at the turn of the next
millennium, there is evidence that the adult population in
Australia has shown an increasing sophistication in exercising
choice in direct investments in recent years in shares. This
evidence is considered in the following paragraph.
Does the evidence of increased activity
of adult Australians in the share market bode well for the
implementation choice of funds proposal?
The Regulation Impact Statement states that
4,065,030 employees, in addition to 654,000 employers as well as
140,000 superannuation funds and RSA providers, will be affected by
the choice of funds legislation.(18)
The employee group is the largest affected as
well as the group over which questions have been raised about their
capacity and preparedness to make a choice of funds. A news
release(19) by the Australian Stock Exchange of 1 February 1999
shows that in recent years there has been a marked increase in
participation in share ownership by Australians with 4.4 million
adult Australians involved in direct share ownership. The key
findings of the ASX study are set out below.
Key findings of the study include:
- Total share ownership now stands at 40.3 percent of the
Australian adult population. This represents more than 5.5 million
Australians, including 4.4 million specifically involved in direct
- The proportion of Australians with direct exposure to the share
market has increased slightly from 28.5 percent in February 1998 to
31.9 percent today. The increase indicates an additional 400,000
direct share owners and is primarily due to the listing of
- Approximately 750,000 Australians have entered the share market
for the first time in the last eight months. Since 1995, a total of
2.3 million Australians have invested in the share market for the
first time. This represents 17 percent of the Australian adult
- Despite the lack of change in the overall level of share
ownership, there has been some change to its composition. Ownership
of shares only by indirect means declined from 12
per cent to 8 per cent between February and October 1998. Instead,
people have exchanged these investments for direct investments or
added direct investments to their existing indirect
- Only one quarter of Australians who currently own direct shares
have been in the market for ten years or more, while the majority
of direct share owners, 57 percent, joined the market in the period
1995 to 1998.
- On average, direct shareowners have 3 companies in their
portfolio. Currently around 4 in 10 have direct shares in only one
company, due to entering the market through a major public listing,
such as AMP.
- The average value of each share parcel bought and sold in the
last 12 months is $6,600.
Key demographic trends include:
- Overall male and female participation rates have not changed
significantly since February 1998 - currently 46 percent and 35
- Share ownership is higher among those aged 45-54 years compared
to other age groups, with more than half of this group owning
shares either directly or indirectly. However, there are
significant numbers of shareholders in all age groups, including
more than 1 million among those aged 25-34 years, 35-44 years,
45-54 years and 55 years and over.
- Although there have been no market changes between February and
October 1998, there are quite significant levels of share ownership
at relatively low levels of household income. Around half of
households with incomes between $30,000 and $50,000 per annum have
some form of share ownership and around one in four households with
an annual income of less than $30,000 are direct or indirect share
The findings of this study seem to suggest that
a significant number of the 4 million employees who will have to
take decisions on the choice of funds may already be among the 4.4
million adult Australians involved in direct share ownership. No
doubt 57% of this 4.4 million or 2.5 million Australians have only
joined the share market over the last three years and may not have
all the experience and capacity to take investment decisions of the
type that would be required for the choice of funds decisions under
the measures in the Bill. However, what the ASX study reveals is
that with an appropriate education program in a reasonable time the
majority of employees will be able to move forward with confidence
to exercise their rights to the choice of funds based on fund
performance, as have the entrants to the share market under the
education program conducted by the ASX. Others may argue that the
ability of new entrants to operate with confidence in the share
market must be tested over a longer period to know whether
education programs for new investors as those conducted by the ASX
can take them successfully through the various cycles in the
There is, however, the fall back position for
those who may not be interested or inherently incapable of taking
proper investment decisions in that apart from public offer
superannuation funds, the measures in the Bill offer 3 further
choices including an industry-based superannuation fund, an
employer-sponsored fund and a RSA or capital guaranteed fund.
- Superannuation and the Budget: Policy Development for the Next
Century, a paper presented to The Life Insurance Association of
Australia (LIFA) by Mr David Connolly MP, then Shadow Minister for
Superannuation and Retirement Incomes, 25 May 1995.
- The Federal Coalition's approach to superannuation - Address to
the Australian Superannuation Funds Association (ASFA) by the Hon
Peter Costello MP, then Shadow Treasurer, 2 November 1995.
- Financial System Inquiry (FSI) - Final Report (March 1997) -
Chairman Mr Stan Wallis. The FSI Committee and the FSI Report are
popularly referred to as the Wallis Committee and Wallis Report;
Recommendation 88, p. 62.
- The Twenty-eighth Report of the Senate Select on Superannuation
titled Choice of Fund (March 1998).
- Wallis Report; Recommendation 88, p. 62.
- Ibid., p. 488.
- The reader is referred to Bills Digest no. 137 1997-98 for an
analysis of the measures in that Bill.
- The reader is referred to the Bills Digest on this Bill for
- Explanatory Memorandum to the Superannuation
Legislation Amendment (Choice of Superannuation Funds) Bill 1998;
paragraphs 1.27 to 1.41, pp. 13 to 18.
- The reader is referred to the Explanatory Memorandum for
examples of how the penalty provisions will apply; paragraphs 1.22
to 1.41, pp. 9 to 18.
- The Twenty-eighth Report of the Senate Select on Superannuation
titled Choice of Fund (March 1998), Chapter 2, pp. 7-11.
- Ibid., Government Senators' view, Chapter 14, p. 89.
- Ibid., Non-Government Senators' Conclusions and
Recommendations; paragraph 14.17, p. 91.
- Ibid., paragraphs 14.35 and 14.36, p. 93.
- Ibid., Australian Democrats' View; paragraph 14.97, p. 101.
- ibid., pp. 71 to 72.
- Explanatory Memorandum to the Bill, p. 41.
- ASX News Release - AMP adds new investors to the
market (1 February 1999).
8 February 1999
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