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Schedule 6 of the bill:
provisions and views
6—Transition to MySuper
Schedule 6 of
the bill establishes the requirements for existing member balances to be moved
to MySuper products. The government noted in its response to the Cooper Review
that existing default funds will be required to transition to MySuper after an
In April 2012, upon
releasing the draft of the third tranche, the government announced that the
trustees of superannuation funds offering MySuper products will need to
transfer existing default balances of their members to a MySuper product by
1 July 2017. Trustees that do not seek authorisation to offer a MySuper
product will also be required to transfer certain balances to a MySuper product
in another fund before 1 July 2017.
In its initial response to the Stronger Super Review, the government
announced that existing default amounts would be transitioned to MySuper by 1
July 2015. However, after the Stronger Super consultations, the government
amended its position to allow for these amounts to be held outside of the
MySuper rules until 1 July 2017.
emphasised in the Second Reading Speech on the bill that transferring balances
to MySuper will ensure that members are able to obtain the benefits of MySuper,
particularly the ban on commissions. He also emphasised that the government's
approach in making these transitional arrangements is consistent with the
recommendations of the Cooper Review and will allow many funds to simply
convert their existing default investment options to a MySuper product.
received by this inquiry provides two very different perspectives about the
risk and benefits that might arise at the moment of transfer. The retail funds
sector raised concerns that if members failed to engage and reconfirm a former
investment choice in writing, the bill would move them into a MySuper product
with a potentially a higher risk profile and a lesser standard of insurance
cover. In contrast, both Treasury and members of the industry fund sector
presented a different assessment of risk and benefit from the implementation of
the legislation. This chapter is principally concerned with this issue.
to be moved to MySuper products
would amend the Superannuation Industry (Supervision) Act 1993 to
introduce the concept of an 'accrued default amount'. This refers to those
parts of a member's interest in a fund which must be moved to a MySuper product.
section 20B of the SIS Act defines an accrued default amount:
(1) Subject to this section, an amount is an accrued default
amount for a member of a regulated superannuation fund if:
(a) the amount is attributed by
the trustee or the trustees of the fund to the member of the fund; and
(i) the member has not given the
trustee, or the trustees, of the fund a direction on the investment option
under which an asset (or assets) of the fund, or that part of an asset (or
assets) of the fund, attributed to the member in relation to the amount (the
member’s underlying asset(s)) is to be invested; or
(ii) the investment option under
which the member’s underlying asset(s) is invested is one which, under the
governing rules of the fund at the time the member’s underlying asset(s) was
invested, would have been the investment option for the member’s underlying
asset(s) if no direction had been given.
The definition of an
accrued default amount, therefore, has two limbs. The first is that the member
has not given the trustee of the fund any direction. The second limb of the
definition relates to members who have chosen a default fund. (Some submitters
noted that an example might be a 'cash hub' that is part of a 'wrap platform'.)
In this instance, while the member has exercised choice, s/he opted for a
default fund, and would therefore fall within the definition of an accrued
default amount. This amount would be transferred to a MySuper product. As the
The term therefore captures amounts where the member has
either explicitly or implicitly directed that the amount be invested in the
default investment option for that member. In this way, members who may have
decided to delegate responsibility for investment decisions to the trustee by choosing
the default investment option will also be placed in a MySuper product. This
will also mean funds will not need to operate duplicate investment options—one
for MySuper members and one for members wishing to choose the same investment
allocation that applies under MySuper.
Accrued default amounts specifically exclude:
- amounts already attributed to a MySuper product;
- amounts attributed to defined benefit members;
- amounts held
in an eligible rollover fund;
- amounts that
are invested in:
- a capital
guaranteed life insurance policy where the contributions and accumulated
earnings may not be reduced by negative investment returns or any reduction in
the value of assets in which the policy is invested;
- a life policy
providing benefits based solely on the realisation of a risk, and not related
to the performance of an investment; and
account contract that is held solely for the benefit of that member, and
relatives and dependants of that member—to cover legacy products such as
endowment and whole of life policies.
support the payment of a pension.
to transfer amounts
licensees will have until 1 July 2017 to transfer all accrued default amounts
to a MySuper product, unless the member opts-out in writing.
proposes that an application by an RSE licensee to APRA for authorisation to
offer a MySuper product will need to be accompanied by an election to transfer
accrued default amounts held in all funds for which the RSE licensee is trustee
to one or more MySuper products. Where the RSE licensee fails to give effect to
its election, APRA will be able to cancel the RSE licensee's authority to offer
a MySuper product.
In terms of
the election process, before 1 July 2017, all accrued default amounts in the
fund must be transferred to an authorised MySuper product offered by the fund,
unless the member opts-out in writing. If the member in the fund is not
eligible to hold a MySuper product in the fund, or where accrued default
amounts are held for members in other funds for which the RSE licensee is
trustee, the RSE licensee must move these amounts to a MySuper product before 1
would also require that RSE licensees must make a separate election requiring
the trustee to take the necessary steps to transfer amounts held in a MySuper
product in circumstances where authorisation for a MySuper product is
The EM states
that any trustee that transfers an accrued default amount in accordance with
these amendments will not have any liability to a member of their fund in
relation to that transfer. In addition, any governing rules that prevent an
accrued default amount from being transferred will be void.
Obligations and Prudential Standards Act (the basis for the second tranche of
the MySuper reforms) will provide APRA with the ability to make prudential
standards. The Further MySuper bill, if enacted, will enable APRA to make
prudential standards dealing with transitional matters.
Opposition to proposed subsection
20B(1b)(ii) of the SIS Act
of comment on the Further MySuper bill concerned the transitional arrangements
in Schedule 6. As noted above, several submitters and witnesses expressed
concern at the second limb of the definition of an 'accrued default amount' in
proposed subsection 20B(1) of the SIS Act. The following section presents the
following arguments in opposition to subsection 20B(1b)(ii) of the bill:
- those who have chosen a default fund have exercised choice and should
not be moved;
there may be various unintended consequences from the provision
- the possibility of members being transferred to a MySuper product
with a higher (unsuitable) risk profile;
the possibility of loss of insurance cover, given that MySuper
products would not offer certain types of coverage;
- the possibility that members may be subject to higher fees in a
- the possibility of trustees being absolved of liability to act in
their clients' best interests in giving effect to an election;
the inappropriate nature of the opt-out process given that:
- some members are simply not engaged with their investment;
- even those that are may be away on leave, sick or may have moved
- the cost of the transfer process and the possibility that this will
be borne by those members who transfer.
Members who have chosen a default
fund should not be moved
noted a contradiction inherent in proposed subsection 20B(1b)(ii) of the bill.
The policy premise for the legislation is a focus on those default members who
are disengaged. And yet, they argued, the proposed subsection would capture
those members who had chosen a default fund as part of their overall investment
strategy. These investors, despite having chosen the default option, would have
their default fund investment transferred to a MySuper product if they did not
The Corporate Super
Specialist Alliance (CSSA) gave the following example:
...many members of super funds have chosen an investment
option which includes a component of the default investment option. For
example, they may have chosen 50 per cent in the default option and 50 per cent
in a specific choice option. In this case it is clearer that the member has
chosen an investment strategy and not just chosen to place part of their moneys
in a default strategy. In many cases this may have been chosen by the member
without advice. The choice by the member should be recognised, and the member
should not be asked to tick any boxes or rebalance their strategy should moneys
be inadvertently switched to MySuper.
Services Council (FSC) also expressed concern that the definition of an
'accrued default amount' will capture choice member balances. Mr Andrew
Bragg, Senior Policy Manager at the FSC, told the committee:
The problem really is with the breadth of that drafting. It
goes well beyond the current definition of default investment option. It
actually captures members who have exercised choice of fund or choice of
investment option. Fundamentally we believe that members who have chosen a fund
should not be moved into a MySuper product. To do so would be a significant
divergence from the central tenet of the MySuper reforms, being to principally
protect members invested in workplace or default superannuation funds and in
the default investment options.
The FSC questioned
the 'presumption' that an explicit direction to invest in a default option or
to invest in a choice product is a delegation by the member to the trustee for
investment decisions. Rather, it argued that the member is exercising either
their right to choice of investment option under the SIS Act or their right to
select their own superannuation product.
argued that the bill's definition would capture the following three classes of
members who would have their balances compulsorily transferred as at 1 July
- members who have exercised choice of investment and invested all
or in part in the product's default option (whether or not it is an
employer-sponsor or a choice fund);
- members have exercised choice of fund, signed a PDS and elected
to invest in a choice product but have not given an explicit investment
- members who are explicitly invested in a choice superannuation fund
that has been subject to a prior a successor fund transfer.
In evidence to the committee, the FSC gave four examples of
investors who had exercised choice, who would nonetheless—under proposed
section 20B(1b)(ii) of the SIS Act—have their funds shifted to a MySuper
account. These are:
- people who have invested in cash through a platform wrap moved
into a balanced investment with high allocation equities;
- people who have invested in a growth fund moved into a balanced
- investments in a lifecycle fund moved into a balanced fund; and
- investments with a chosen provider moved to another.
Claims of unintended consequences
from proposed 20B(1b)(ii) of the SIS Act
The FSC foresaw that
proposed section 20B(1b)(ii) of the SIS Act would lead to:
- over one million non-default superannuation members within the
choice framework being transferred into MySuper;
- members having their pre-determined risk/return profiles of
investments jeopardised at critical stages of their lives (i.e. exposing a
large number of pre-retirees to significant levels of sequence investment
significant transactional costs and market impact arising from
the forced transfer of approximately $43 billion in choice member assets;
- loss of insurance and other member benefits; and
- a high level of post-transfer confusion and costs to unwind if
'opt out' communications are not actioned by each choice member captured by the
These consequences were expounded in evidence from various witnesses at
the public hearing. The FSC, the Association of Financial Advisers (AFA) and
the Corporate Super Specialist Alliance noted that it would be possible that
members who had chosen a low risk profile in a default fund could be
transitioned to a higher risk profile in a MySuper fund that was less
well-suited to their needs.
Mr Douglas Latto of the CSSA was asked of the likelihood of this occurring. He
It is extremely possible. A number of the funds we look after
give a range of defaults for the employer to choose from. There could be an
employer who chose a conservative default for the members and to go into
MySuper, and the MySuper fund could have a higher risk level than the fund that
they were in. So the answer is yes, it will be possible, and it will happen in
a number of cases.
Mr Phil Anderson, Chief Operating Officer of the AFA, told the
We are aware that within many retail master trusts there
could be a huge number of employers, each of whom can select a default option.
Those default options can be from a 50-50 split all the way up to 85 growth and
15 defensive. The trustees are going to have to choose one MySuper option,
which is presumably going to be somewhere in between. So people will have
either less exposure to growth assets than they want or more than they want.
You cannot get a perfect solution given the variety of default option
Several witnesses claimed that members who had chosen a default fund
could also lose some of their insurance cover—such as income protection—when
they are transitioned to a MySuper product.
The CSSA, for example, told the committee:
The CSSA also remains concerned that there will be a loss of
insurance benefits as a result of the mandatory transitioning of super accounts
to MySuper. CSSA figures show that 81 per cent of default members outside
corporate funds with a balance of more than $10,000 have insurance; the
majority do have insurance. Thus many members will be transferred to a new
MySuper default, and there is a significant risk that the automatic transition
of accounts to MySuper by July 17 could see the cessation or reduction of
insurance cover. This could have very serious repercussions for these
individuals, who may be relying on this insurance protection.
As noted above, the FSC also noted the possibility that a member who has
chosen a default fund would be compulsorily moved into a MySuper product in the
event that their fund is merged or there is a successor fund established. Mr
Nathan Hodge told the committee:
Another situation that may occur is that a lot of retail
funds like to amalgamate their super funds to create efficiencies for their
members. That person may have selected the cash option before the transfer, but
because the definition only focuses on elections made to the current trustee,
it would not recognise that past transfer, so even though they are in the cash
option in the new fund, they would still be caught.
The CSSA argued that another possible consequence of the transition to a
MySuper product is that the member could in fact face higher fees. As Mr Gareth
Hall, Treasurer of the CSSA, told the committee:
...there seems to be this underlying belief that MySuper is
going to be better and less expensive. Let me tell you, there are no fees in
cash in most wrap accounts. That is a fee free option. So the client is going
to go from somewhere where they are paying no fee to somewhere where they are
paying presumably one per cent or something invested in shares or whatever. So
the consequences are quite dramatic.
Trustees absolved of liability
Another theme raised by some witnesses and submitters in relation to the
adverse consequences of proposed section 20B of the SIS Act is that the
legislation would effectively absolve trustees of responsibility to act in
their clients' best interests. Proposed section 29SAA of the SIS Act would
provide that an RSE licensee's actions in giving effect to an election under new
section 29SAA will not give rise to a liability to a member.
The Association of Financial Advisers questioned the government's
We are particularly surprised that the government is giving
trustees a blanket protection from any action by members. How can a government
force members to move but then offer them no protection in the event that
something goes wrong? In raising the issue of the annulment of an adviser's
commission rights and the directly related issue of acquisition of property
rights on unjust terms, many will see this as merely an issue around
self-interest. The FOFA legislation, however, has recognised the existence of
property rights, as we have just heard, and has therefore put in place
grandfathering arrangements for existing clients. We are keen to explore why
the government has taken a different approach from what they took with FOFA.
The CSSA told the committee:
The proposed legislation transfers the liability of any loss
of consumer rights to the trustee and then absolves the trustee of all
liability. This leaves the consumer—that is, the member—with no recourse, whether
the loss is due to a change in investment strategy, a loss of insurance cover
or an error on the part of the fund.
The FSC also claimed that the bill would absolve the trustee of
liability for the loss of insurance.
However, as a later section of this chapter notes, other witnesses and
submitters were unconvinced of these arguments and did not see the election
process in Schedule 6 as absolving trustees of their prudential obligations.
AMP raised the issue of 'grandfathering' in relation to the bill's
requirement to move accrued default amounts to a MySuper product by 1 July
2017. It argued that the proposals in the bill 'effectively impose a
retrospective application of the legislation, under the guise of a transition
period'. AMP claimed that the requirement to transfer all accrued default
accounts to a MySuper offer by 1 July 2017:
...effectively prevents future commission payments to an
adviser on the ADA, even though the adviser holds a contractual right to
receive those payments prior to the introduction of the legislation. The
government has in their recent development of the Future of Financial Advice
(FoFA) legislation recognised the existence of legitimate contractual
arrangements across the financial services industry.
The committee asked Treasury its view of the discrepancy between the
FOFA and MySuper grandfathering arrangements. Treasury responded:
The essential arrangement here is quite different. Under
FOFA, we were talking about two parties to a transaction—an adviser and a
client—who had entered into an arrangement which may or may not have included
commissions. There is nothing in this legislation which forces any contractual
arrangement to be overturned. If there are contractual arrangements in question
when a trustee has to move balances to a MySuper product, that is a matter
between trustees and the other parties to those contracts. In fact, this was
one of the reasons that industry sought a long transition period to resolve
some of those contractual issues. The government provided a long transitional
period in case there were any contractual issues that needed to be sorted, but,
where a fund is offering MySuper, the legislation does not overturn any of
those arrangements. In fact, the trustee elects to go down that path. In the
other scenario, where a fund is not offering MySuper, there is a read-down
provision that says that, in the event that there is an acquisition of
property, the provisions do not apply.
Member (dis)engagement and the
witnesses who expressed concern with the drafting of proposed section 20B(1b)(ii)
of the SIS Act, also doubted the practical effectiveness of the 'opt-out'
provision. In essence, the argument is twofold. First, members who have chosen
a default fund are not necessarily engaged with their investment. As the FSC
...members of superannuation funds irregularly respond to
requests providing in writing from their chosen fund – often because members
feel that they have established their financial arrangements and should not
need to alter them subsequently.
There will be some people who have established arrangements
with a particular chosen fund, and they often tend to set and forget. Once
people turn their minds to their financial affairs—which often the last thing
they want to do—they sit down with an adviser or a fund and put in place their
arrangements, but they do not want to touch it again.
The CSSA told
the committee that in the case of members investing in a platform wrap with a
cash hub, some have established these arrangements without the help of a
financial adviser. As Mr Latto explained:
People do not go into wrap accounts just because of advisors.
Some people can go directly. Those sorts of people are just going to get
caught. Even a lot of those members who have made a choice—50 per cent in
default and 50 per cent somewhere else—are often not advised; they are by
themselves. So no adviser is going to ring them up and say, 'Remember to do
this.' They have got to do it themselves.
Second, it was
argued that there are reasons other than disengagement that may lead to a
member who has chosen a default fund to fail to 'opt-out'. The FSC explained
There are many reasons why a member may not respond to the
notice such as where letters are lost in the mail, superannuation funds are not
always provided with a member's current address, members may be on holidays
during the notice period or a member may simply forget to respond.
Similarly, Mr Gareth Hall of the CSSA noted that a member might be 'incredibly
engaged' with their superannuation and their insurances but might be overseas
and fail to 'opt-out'. He noted the potentially severe consequence of older
members failing to respond to their mail:
So you may find people in their 50s and 60s that have $1
million-plus of life insurance and their salary continuance insurance inside
their superannuation fund. If these people happen to be travelling the world or
doing something and they do not open the mail that is sent to them saying,
'Please do something or we're going to transition you to MySuper,' their whole
family's financial security could be destroyed.
The 'opt-out' process was also criticised for the process that it would
involve if the member was engaged and aware of the need to do so. Mr Bragg gave
the example of an employee whose default fund is Australian Super and is
seeking to invest in a direct product, BT Super For Life. He noted that in this
I would have to go to the website, look at the PDS, sign an
application form and establish that fund. Then I would have to take that to my
employer and say: 'I don't want you to pay it into Australian Super anymore. I
want you to pay it into this fund'.
The cost of moving accrued default
The AFA argued that the transition of accrued default amounts to MySuper
products will be 'an extremely expensive exercise to undertake'. It claimed
that this would particularly be the case for the retail funds.
Mr Richard Klipin, Chief Executive Officer of the APA, foresaw considerable
time and expense as part of the election and 'opt-out' process:
Maybe someone has assumed this is a simple exercise, given
that in one fund there may be hundreds of different employees and employers,
that there may have been a different decision made about what kind of default
option they should choose, and that this may change over time. The
determination of which members have an accrued default amount across hundreds
of thousands of members will be a huge challenge for trustees.
...It is a pity that the regulatory impact statement made no
effort to quantify cost. We question whether other MySuper members will need to
pick up the costs of this huge transfer exercise as it is totally unreasonable
to pass any of these costs on to fund members who have chosen a choice fund. Is
the cost of this exercise justifiable particularly in the context of the risks
these pose and the lack of consumer protection?
witnesses proposed an alternative approach to the current drafting of proposed
section 20B(1b)(ii) of the SIS Act and the 'opt-out' requirement. The CSSA, for
example, argued an 'opt-in' requirement to MySuper products would be more
The implementation of MySuper and the transition process will
be of considerable costs to funds without any apparent benefit. These costs
will inevitably be passed on to the member. The whole process is extremely
complex, and in many cases identifying the accrued default amounts will be a
very difficult process. We are firmly of the view that automatic transfers
should not occur. Transfers should be made on an opt-in basis rather than on an
opt-out basis. It is not the role of government to suggest that the current
investment strategy is incorrect and mandatorily transfer their moneys.
preference is also for an 'opt-in' approach.
However, it emphasised that if the proposed 'opt-out' approach is taken:
...there needs to be extensive consultation with members,
advertising that the government runs, mail-outs—all those sorts of things. One
simple communication will not get the attention of members. And it puts so much
of the emphasis on the trustees, when this is actually a government-driven
The FSC recommended
amending proposed subsection 20B(1b)(ii) of the SIS Act to state that an amount
is an accrued default amount if:
member is a standard employer sponsored member of the fund and the investment
option applying to the member’s entire balance in the fund under which the
asset (or assets) of the fund attributed to the member in relation to the
amount (the underlying asset(s)) is invested is one which, under the governing
rules of the fund, would be the investment option for the underlying asset(s)
if no direction were given except where the member has given a direction to the
trustee to invest in that investment option or to the trustee of any previous
fund prior to the transfer of benefits to the fund or to any predecessor of
that fund as a successor fund to invest in an equivalent investment option.
explained that by using the existing definition of 'employer sponsor' in the
SIS Act, this definition would ensure that members who have exercised choice of
fund and are no longer members of employer sponsored superannuation fund are
not captured by the definition. It also argued that this definition would assure
members who have instructed a trustee to invest their superannuation in an
investment option captured by the 'accrued default amount' definition, that
their investment will not be moved.
commented that the FSC's proposed definition of an 'accrued default amount' is
in accordance with how it believed the transition process had always been
envisioned. As he told the committee:
The Cooper review, the Stronger Super consultation process
that was chaired by Paul Costello, all the ministerial policy statements and
indeed the regulatory impact statement all talk about default members; they
have never discussed or canvassed in any way, shape or form transitioning
choice members into the MySuper environment by force of statute.
The FSC argued
that where trustees receive a direction from a member relating to the fund's
default option or a particular superannuation product prior to 1 July
2017, the trustee 'should not have to revalidate the initial direction'.
Support for proposed subsection 20B(1b)
of the SIS Act
The various views
presented above are in sharp contrast to those of other witnesses and
submitters, who strongly supported the definition of an accrued default amount
in Schedule 6 of the bill. These rejoinders are based on the following
- the Cooper Review specifically recommended transitioning existing
default amounts to MySuper;
- proposed section 20B(1b) will minimise the fees and commissions
paid by members to costly and substandard superannuation products through
transferring more members to MySuper products (than if only members who had not
given a direction were to be transferred);
- trustees must ensure that their design product does not
disadvantage their members. If this cannot be done, proposed APRA prudential
standard SPS 410 obliges the trustee to take other steps to protect the
interests of members;
government's role is not to 'second-guess' the motivations of
those members who chose a default fund. Accordingly, it is appropriate they be
given the option to choose the fund in the knowledge that if they do not, their
balance will be transferred to a MySuper product;
- the example of a 'cash hub' may not necessarily be captured by
the definition of an 'accrued default amount' in the bill; and
members of a MySuper product can choose the additional insurance
within an existing default product transferred.
Treasury was asked its response to the argument that those who have
chosen a default fund have already exercised choice, and should therefore not
be moved to a MySuper product. It responded:
Treasury, in working on the design of this legislation, has
taken the Cooper review as the blueprint for the reforms. Going forward the
Cooper review saw, and stated in the review report, that MySuper would replace
existing default investment options in funds. In fact, Cooper said MySuper had
been specifically designed around the concept of a default investment option to
ease, for many funds, the transition to the new regime.
...Cooper talked about transitioning the existing default
amounts to MySuper. He did not go into the detail of specifying the member
communication process, whether it would be an opt-out process. However, his
starting point was that MySuper would replace the existing default investment
options that currently exist.
While the Cooper Review had not recommended an 'opt-out' process,
Treasury had considered other options and concluded that 'opt-out' best suited
the key policy objective that the Review had identified.
More members transferred, lower
Institute of Superannuation Trustees (AIST), notably, supported both the
identification and transition of all Accrued Default Amounts and urged the
committee 'to resist calls to water down these provisions'.
Mr David Haynes, Project Director at AIST, told the committee:
The arrangements for identification of accrued default
amounts...are a sensible approach to transition that offer the best transition
for the largest number of people.
...There should be no further carve-outs from the transition
of accrued default amounts on to MySuper. The idea that accrued default amounts
have to meet some sort of additional criteria is, we think, unhelpful and
Super Network (ISN) was also strongly supportive of Schedule 6 of the bill. In
its submission to the inquiry, the ISN emphasised that the transfer of existing
default member balances to MySuper:
ensure that existing superannuation savings held in retail default products
that pay commissions are not eroded indefinitely and members benefit from the
consolidation of their savings. These provisions and the definition of accrued
default balances contained in the Bill are strongly supported and will ensure individuals
who are paying commissions on default superannuation balances but have never
seen a financial planner will have their savings protected into the future.
attention to a July 2011 Roy Morgan Research survey which found that among
those who identified themselves as retail fund members, 23 per cent
communicated yearly with their financial planner while 52 per cent have never
communicated with their planner.
ISN then compared
these responses with official APRA data on retail super fund segments and
market share. It found that almost 2.2 million retail super fund members
(out of nearly 5 million members) are paying commissions to a financial planner
whom they have never met.
The Network referred to these commissions as 'unethical' and described the
transition period of 1 July 2017 as 'more than generous'.
The key role of trustees and draft
prudential standard SPS 410
AIST countered the arguments of the FSC, AFA, the CSSA and the LCA that
members who have chosen a default fund and do not 'opt-out' would be
transferred to a MySuper product that was not suited to their needs. Mr Haynes
claimed that these predictions discounted the important role and obligations of
trustees and APRA's prudential standard SPS 410 dealing with the MySuper
transition. He argued that:
These comments did not acknowledge the active role of
trustees in designing a suitable MySuper product for their members. My response
is that funds will not be hamstrung to the extent that was suggested and this
is a process that funds in both the retail and the not-for-profit sector are
involved in as we speak.
The trustees will have some control over the process and
structure of their MySuper offerings. Each trustee offering a MySuper product
needs to design a product that meets the needs of their members and be MySuper
compliant. This is not a role for government or the regulator; it is a
responsibility of the trustee. Each trustee must ensure that their design product
does not disadvantage their members. If they cannot do that then the proposed APRA
prudential standard dealing with MySuper transition—that is, SPS 410—obliges
the trustee to take other steps to protect the interests of members. For
example, funds can have a cash heavy default option now and can have the same
investment option as their MySuper investment asset allocation, provided that
they can satisfy APRA that this is the appropriate diversified investment
option having regard to the nature of their members.
Mr Haynes told the
committee that draft prudential standard SPS 410 provides for two
mechanisms for the transition of members from an existing default into a
One of those is in relation to funds who effectively just
rebadge their existing default option as MySuper, and that is a fast-track
mechanism. For funds who decide to have a different MySuper product, including
in relation to changes in fees, changes in investment strategy or changes in
insurance, that will trigger additional notification requirements and APRA will
be actively engaged with those funds to make sure that the members of those
funds are not disadvantaged....
I would imagine that APRA will take all necessary steps to
ensure that members are not disadvantaged in the transition process.
Treasury was asked its view of the possibility of a member of a default
fund being shifted to a MySuper product with a higher weighting of risky
assets. It responded:
...you could equally have members who were in a very risky
option previously, potentially too risky an option, who will now be able to see
what the trustees' new assessment of the best asset mix is, make an assessment
of whether that is the option they want to be in and make their own choice of
where they want to be. We heard from some witnesses this morning about the
large number of default investment options that exist, particularly in some
master trust situations, where employers have played a role in selecting those
investment options on behalf of their employees. It was a clear conclusion of
the Cooper review that that is not an appropriate role for employers. The
appropriate accountability in the system for default investment options is with
the trustee, unless a member themselves makes a relevant choice.
Treasury also emphasised that where balances do have to be moved to
another fund, the trustee and APRA must work according to conditions of the
prudential standard to find a fund that is suitable to the member's needs. It
noted that this occurrence of moving balances to another fund happens
'reasonably regularly' under successive fund transfer situations.
Transferring insurance arrangements
The committee also received important evidence qualifying the claims of
various stakeholders in relation to the loss of insurance for members who move
to a MySuper product.
AIST told the committee that 'there is no evidence to suggest that funds
will be unable to obtain suitable insurance cover for their members in a
MySuper product at least at the level that applies' (in the default fund).
It put two arguments to support this view. The first is that the financial
institution that has designed the existing default option and the existing
insurance option will be designing the MySuper offering. In other words: 'it is
really their choice about whether there will be a significant difference in the
existing default option'.
The second argument is that members of a MySuper product can choose the
additional insurance within an existing default product transferred. As Mr
There are limitations on the sorts of insurance that can be
offered within superannuation generally, and that is reflected within the
MySuper product. But a person can have additional insurance within a MySuper
product. They can have additional insurance within an existing default product,
and they can have that additional insurance within an existing default product
transferred—it will be automatically transferred—across to their MySuper
product. So they will not lose insurance in that circumstance.
AIST did note that the exception is own-occupation insurance. While AIST
supports ongoing access to own-occupation insurance, the prohibition on this
type of insurance is not specific to MySuper.
The ISN described the risk that members who are defaulted into a MySuper
product losing insurance coverage as 'quite small'. Mr Linden noted that these
challenges occur currently in relation to successor fund arrangements or where
member balances are transferred from one fund to another.
Further, he pointed out that to the extent that people have made conscious
decisions about their superannuation in the past, 'we would expect that they
would be a relatively active member if they have made choices about those
Treasury was asked its view whether there was a chance that a member in
a default fund, who did not opt-out, could be worse off when moved to a MySuper
product. It responded:
...the risk of this is very, very small... In terms of fees
and charges and given that MySuper will be commission free, you would expect
that it is in the hands of the trustees to design a MySuper product that is
going to be put into APRA league tables. There will be a much greater degree of
transparency. They will be wanting to put forward a product that is
...We have heard other witnesses say that as a matter of
practice you can expect all funds to want to be offering a MySuper product
because, with up to 80 per cent of members potentially being default members,
unless the fund wants to count themselves out of that business going forward
they will need to offer a MySuper product. So we would expect nearly all funds
to offer a MySuper product.
...So we would expect that, in the vast majority of—if not
nearly all—circumstances, it will be possible for trustees to continue the
existing insurance arrangements which members may have and which may have more
favourable terms, conditions or benefits, so long as those arrangements are on
an op-out basis. Our understanding is that in many cases these policies are
already opt-out policies and that, if they are, it is a relatively simple
matter to make them opt-out policies whilst retaining the level of cover that
members have previously had. In the—what we think will be—small likelihood that
a fund does not offer a MySuper product, the trustee is required to transfer
balances to another fund offering a MySuper product.
Government's role is not to guess
Treasury also emphasised that the inclusion of proposed subsection
20B(1b)(ii) reflected the fact that it is difficult to determine the motivation
for a member being in a default investment option. When asked about the effect
of this subsection in terms of treating those who have made an active choice as
disengaged members, Treasury responded:
I would come back to the rationale for MySuper and its role
in replacing default investment options rather than saying that this is an
issue purely about engagement or disengagement. Where someone is in a default
investment option, whether they have defaulted into it or whether they have
selected to be in there, it is very difficult to know with any certainty what
the motivation was for their selecting to be in there in particular.
... It could be that the person has decided, 'For a
proportion of my money I am happy for it to be in the option that the trustee
is holding out as the default, which in some way reflects the trustee's view of
the asset mix that will cater for the broad membership, and I just want some
small amount in this other option that I select by myself.' Again, it is
virtually impossible for anyone other than the member themselves to know what
the motivation was for the selection of some proportion to go into the default
option, which is why the reliable way of determining is to ask the member.
Indeed, Treasury even queried whether the example of the cash hub would
actually be caught by the definition of an 'accrued default amount'. It noted
that in some circumstances it could be open to interpretation whether the money
is there as a result of a lack of an investment choice by the member or whether
it is actually a mandatory requirement of the product that the money be put
there. Treasury also suggested that cash hubs are 'a pretty small portion of
the landscape that we are looking at here'. 
Committee view on proposed section
20B(1b) of the SIS Act
believes that some stakeholders' concerns about members' loss of insurance and
changes to their investment risk profile as a consequence of the proposed subsection
20B(1b)(ii) of the SIS Act are overstated. There are several reasons why it
holds this view.
First, members will
be contacted by their fund to notify them that their default investment will be
moved to a MySuper product. This will give these members ample opportunity to
opt-out of a MySuper product. The committee understands that the regulations
will provide that a notice must be given 90 days in advance of an accrued
default amount being moved where it will result in a change to the fees,
insurance or investment strategy of the member's interest.
Second, the committee believes that arguments about the low level of
engagement of those members who would be subject to proposed subsection 20B(1b)(ii)
of the SIS Act are exaggerated. The point was made during the hearing that
these members have already actively engaged with their superannuation affairs
by choosing a default product. If they have made the choice once, it seems
highly unlikely that—having been contacted by their fund—they would fail to
make the choice to 'opt-out' if they so wished. It is also important to note
that all members will be notified before a transfer occurs and no member will
be forced to transfer their balance to MySuper if they do not want to.
Third, and crucially, the committee contests the view that the bill
effectively absolves trustees of liability to act in their members' best
interests. The EM is clear: RSE licensees which are required to transfer
accrued default amounts to another superannuation fund will have to comply with
requirements set out in regulations and relevant APRA prudential standards.
The committee does emphasise that APRA's prudential standard SPS 410 must
be clearly communicated to trustees and properly enforced. It is particularly
important that APRA is alert to those (relatively rare) cases where a member who
has chosen a default fund with one trustee is then moved to a MySuper product
managed by a different trustee.
It is also important that proposed section 29SAA of the SIS Act is not
interpreted by trustees that they will not be in any way responsible for the
new circumstances of members who are moved to a MySuper product. This is
certainly not the understanding of the AIST, and nor is it that of the
committee. Trustees must design a MySuper product that does not disadvantage
Fourth, and relatedly, trustees will have until 1 July 2017 to transfer
amounts to a MySuper product. It is the committee's view that this is a
considerable, but appropriate period of time to ensure that trustees communicate
properly with members who need to be notified that they will be moved to a
MySuper product. The committee has confidence that the four and a half year
timeframe will enable trustees to develop clear and effective communication
strategies with these members to ensure that the difficulties foreseen by some
stakeholders are minimised.
Fifth, the committee does not believe the transition to MySuper
arrangements in Schedule 6 of the bill will pose difficulties for members that
are transferred to MySuper products in terms of losing insurance. The trustee
of the MySuper product and the chosen default fund will generally be same
entity, and the trustee will continue to have a close relationship with its
Finally, the committee emphasises the basic intent of the MySuper
legislation: namely, to ensure that members of superannuation funds,
particularly inactive members, are not paying commissions for services they are
not aware of or do not get any benefit from. This was the main reason that the
Cooper Review recommended the MySuper proposal. Unfortunately, this issue has been
clouded in the debate on Schedule 6 of the bill.
The committee emphasises that minimising fees for members is an
important and laudable goal. The difficulties that may be faced in making the
transition to MySuper must always be seen in this light. As the Minister
emphasised in his Second Reading Speech:
Treasury estimate that the definition in the bill could result
in $90 billion more being moved to MySuper than the approach suggested by
stakeholders. Based on the assumptions of the Cooper review, this translates to
approximately $100 million per annum in fees being saved in the best interests
of superannuation fund members.
Constitutional concerns with the
The LCA raised a possible constitutional complication with the provisions
in Schedule 6 to elect to transfer accrued default amounts. Specifically, it noted
the possibility that the obligation on the trustee to transfer assets from one
portfolio to another with different fees will mean that a trustee will be
giving up those fee entitlements which is, arguably, an acquisition of property
This could be an unjust acquisition of property rights and in breach of section
51(xxxi) of the Constitution. As Ms Levy of the LCA told the committee:
...it appears to be a view that has been taken by government
because they think that is the only way to account for the election process. So
what the legislation requires is that, instead of saying you must transfer to
MySuper, it says if you apply for a MySuper authorisation you must elect to do
this where you are granted a My Super authorisation. Even if you are not, in
fact, you must make this election. So I think the argument would be that there
could be no unjust acquisition of property where you have elected or chosen to
Ms Levy agreed with the statement that if a challenge were brought on
the grounds that the legislation breached section 51(xxxi) of the Constitution,
the argument could be put that in substance it is not an election because the
trustee essentially has no option but to make the election.
She agreed with the proposition that the bill is drafted the way it is in terms
of the election process because the government thinks there is a risk that a
challenge could be brought. However, she also agreed that this drafting
technique is no guarantee that a constitutional challenge will not occur.
In its submission to this inquiry, the LCA argued:
...it is the Government’s responsibility to take legal advice
about whether paragraph 51(xxxi) applies to a particular provision of this Bill
or not. Following that advice, it should form a view. If it forms the view that
it does apply, the legislation should not ask trustees to elect to do something
which the Government could not require them to do; if it forms the view that it
does not apply, then it should require trustees to do that thing by means of a
Treasury's view and the Committee's
Treasury was asked its view on the potential constitutional issues
arising from the transfer of balances to a MySuper product. It responded:
Whenever Commonwealth legislation is developed, advice is
sought—where necessary—to ensure that the legislation brought before the
parliament is considered to be effective. This is no different: we have
received advice along the way. The government believes that the legislation
will operate as it is intended to.
The committee is satisfied that the government's approach in Schedule 6
meets the policy objective and places appropriate requirements on trustees.
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