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

CONTENTS

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

Passage History

Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998

Date Introduced: 12 November 1998

House: House of Representatives

Portfolio: Treasury

Commencement: Date of Royal Assent

Purpose

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).

Background

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 proposal.

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 fund.(3)

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 funds.(6)

The Wallis Report also noted the need for educating employers and employees if informed choices are to be made by employees, in particular.

Choice of fund proposal in 1997-98 Budget

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 that:

• 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 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.

Changes announced on 25 November 1997

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 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.

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:

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)

Main Provisions

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 1992

Part 1 of Schedule 1 sets out the proposed amendments to the Superannuation Guarantee (Administration) Act 1992 (the SGAA).

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 funds?

Proposed section 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:

2. it is a complying superannuation fund at that time, or

3. it is a complying superannuation scheme at that time, or

4. it is an RSA, or

5. 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

6. 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.

Proposed section 32E defines the term fund in Part 3A to mean:

• 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:

2. a limited choice offer as described in proposed section 32P, or

3. an unlimited choice offer as described in proposed section 32R.

Only eligible choice funds must be offered to an employee in the scheme of the proposed choice of superannuation funds legislation.

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:

• 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 fund.

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 employee.

• 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 32M(4).

In addition, an employer may offer a choice to an employee at any time the employer choses (proposed subsection 32M(5)).

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), or
• 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:

1. 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 employee, or
2. 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 32C(1)(b)) or

• 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 32C(2))
• 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 industrial awards
• 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 32(6)), and
• 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 employment ceases.

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 19(2B).(11)

What is the liability for acts done by the employer in complying with the choice of funds requirements?

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.

Concluding Comments

General

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 decision?

• 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 follows.

• 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.

• 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 share ownership.
• 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 AMP.
• 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 population.
• 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 investments.
• 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 percent respectively.
• 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 owners.

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 market.

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.

Endnotes

2. 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.

3. 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.

4. Ibid.,

5. 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.

6. The Twenty-eighth Report of the Senate Select on Superannuation titled Choice of Fund (March 1998).

7. Wallis Report; Recommendation 88, p. 62.

8. Ibid., p. 488.

9. The reader is referred to Bills Digest no. 137 1997-98 for an analysis of the measures in that Bill.

10. The reader is referred to the Bills Digest on this Bill for details.

11. Explanatory Memorandum to the Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998; paragraphs 1.27 to 1.41, pp. 13 to 18.

12. 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.

13. The Twenty-eighth Report of the Senate Select on Superannuation titled Choice of Fund (March 1998), Chapter 2, pp. 7-11.

14. Ibid., Government Senators' view, Chapter 14, p. 89.

15. Ibid., Non-Government Senators' Conclusions and Recommendations; paragraph 14.17, p. 91.

16. Ibid., paragraphs 14.35 and 14.36, p. 93.

17. Ibid., Australian Democrats' View; paragraph 14.97, p. 101.

18. ibid., pp. 71 to 72.

19. Explanatory Memorandum to the Bill, p. 41.

20. ASX News Release - AMP adds new investors to the market (1 February 1999).

Contact Officer and Copyright Details

Bernard Pulle
8 February 1999
Bills Digest Service
Information and Research Services

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ISSN 1328-8091
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