WARNING:
This Digest was prepared for debate. It reflects the legislation as
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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
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.
To provide
employees with a greater choice in the selection of employer
sponsored superannuation provider.
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.
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.
- The Australian Financial Review, 31 December 1997.
- The Australian Financial Review, 15 January 1998.
- The Australian Financial Review, 11 December 1997.
- The Sydney Morning Herald, 8 December 1997.
- The Australian Financial Review, 22 December 1997.
Chris Field
6 July 1998
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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