Explanatory Memorandum(Circulated by the authority of the Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)
Chapter 5 - Defined benefit members
Outline of chapter
5.1 This chapter explains amendments that will: allow for defined benefit arrangements to be used by an employer as a default fund regardless of whether the fund offers a MySuper product; and which exclude defined benefit members from the 500 employees for which an employer must contribute to the fund to qualify for a separate MySuper product.
Context of amendments
5.2 Defined benefit funds and schemes provide members with a specified benefit on retirement that is calculated by a formula or other process.
5.3 Defined benefit members are entitled, in whole or in part, to a specified benefit on retirement that is calculated by reference to their salary or a specified amount regardless of investment earnings or costs incurred by the fund. If the accumulated amount in the fund is insufficient to meet the specified benefit, in most cases, this shortfall will be met by the contributing employer. The member's defined retirement benefit will not usually be exposed to investment risk.
5.4 A defined contribution fund will provide a member with the accumulated amount, of contributions and investment earnings, when withdrawn by the member. The member bears the investment risk on their retirement benefit.
5.5 The MySuper regime will lift standards in relation to defined contribution products that are provided as the default option of a superannuation fund. In particular, it will ensure that there will be certain rules for charging of fees, additional duties for trustees and that an appropriate investment strategy is adopted in relation to members who do not make active choices.
5.6 In contrast, defined benefit members will be entitled to a benefit that is not altered by the charging of fees or the investment strategy adopted. Therefore, the MySuper regime is not designed to apply to defined benefit arrangements.
Summary of new law
5.7 Defined benefit funds and schemes will be able to continue to be used by employers for the contributions of employees that do not have a chosen fund.
5.8 An exemption will apply to the requirement that employers must make contributions to a fund that offers a MySuper product for an employee that does not have a chosen fund for any employee that is a defined benefit member of the fund to which the employer is contributing.
5.9 An exemption will also apply, in respect of defined benefit members, to the trustee's obligation to pay contributions into a MySuper product for members that have not given the trustee an election in writing that their contributions are to be paid into a specified choice product.
5.10 This will apply to any contribution on behalf of a defined benefit member whether it supports the defined benefits of the member or is held on a defined contribution basis.
5.11 Defined benefit members will not be able to be counted in working out whether an employer contributes to the fund for 500 or more employees and hence qualifies the trustee of that fund to apply for authorisation of a MySuper product that is open to the employees of that employer.
Comparison of key features of new law and current law
|New law||Current law|
|Employers may make contributions to a fund for employees that do not have a chosen fund but are a defined benefit member of that fund regardless of whether it offers a MySuper product.||The MySuper Core Provisions Bill will require employers to make contributions for employees that do not have a chosen fund to a fund that offers a MySuper product.|
|Defined benefit members will not be able to be counted in working out whether an employer is a large employer for the purposes of authorisation of a MySuper product under section 29TB of the MySuper Core Provisions Bill.||The MySuper Core Provisions Bill allows any employee that the employer contributes to the fund for to be counted in working out whether an employer is a large employer for the purposes of authorisation of a MySuper product under section 29TB.|
Detailed explanation of new law
5.12 Employers will be able to make contributions for employees that do not have a chosen fund to a fund that provides defined benefits to that employee, even if that fund does not offer a MySuper product provided it meets the other requirements in subsection 32C(2) of the SG Act (for example, the fund must be an eligible choice fund for the employee). In effect, this maintains the current operation of the SG Act in respect of contributions for employees that are defined benefit members of a superannuation fund. [Schedule 5, item 3, subsection 19(2CA)]
5.13 For these purposes, a defined benefit member is a member who is entitled to a benefit on retirement that is defined, wholly or in part, by reference to the member's salary at the date of retirement, an earlier date or averaged over a period before retirement, or is defined as a specified amount. This definition, therefore, excludes a member who is entitled to a specified benefit upon termination of employment but is not entitled to a defined benefit or who is entitled to a specified amount upon realisation of a risk such as death or permanent disability. These members must have contributions made to a MySuper product for the accumulation benefits they will receive on retirement.
5.14 The MySuper Core Provisions Bill requires trustees to pay a contribution into a MySuper product unless the member has elected that it be paid into a specified choice product. The requirement will now exclude contributions made on behalf of a defined benefit member. Therefore, trustees will not be limited to which product they pay contributions to for defined benefit members. Contributions that support the defined benefit can be made to the pool supporting those defined benefits. Contributions that are to be held on an accumulation basis can be made to either a MySuper product or a choice product in the fund. This permits trustees to hold accumulation contributions for defined benefit members outside of the MySuper regime. [Schedule 5, item 10, paragraph 29WA(1)(a)]
5.15 A defined benefit member may have an accumulation interest in connection with their defined benefit interest. It will often be appropriate for the fees, services and investment strategy for accumulation benefits of a defined benefit member to be treated differently to the benefits of members that only have accumulation benefits. For example, the fees charged to a defined benefit member may be paid out of the pool held to support the defined benefits. Therefore, this may permit the trustee to charge a lower fee on the accumulation amount of a defined benefit member than they would otherwise have to charge on a balance in a MySuper product. Therefore, as MySuper products must charge members the same fees (except in limited circumstances), trustees will be allowed to pay accumulation contributions of defined benefit members into a product that is best suited to the member and has an appropriate fee structure, services and investment strategy to complement these members' entitlements to a defined benefit.
5.16 The MySuper Core Provisions Bill allows for a trustee to apply for authorisation in respect of a MySuper product to be established for the benefit of the employees of a particular employer if that employer contributes to the fund for 500 or more employees. This will be amended to exclude defined benefit members from the employees that are counted in working out whether an employer qualifies. Defined benefit members will generally not have any contributions held within a MySuper product, and therefore, should not be counted for the purposes of working out whether an employer can be offered a separate MySuper product. [Schedule 5, item 7, subparagraph 29TB(1)(d)(i) and Schedule 5, item 6, subparagraph 29TB(1)(d)(ii)]
5.17 A power to make regulations will allow for regulations to prescribe whether a member of a superannuation fund is, or is not, a defined benefit member for the purpose of certain provisions of the SG Act or the SIS Act to ensure that these exemptions apply in the intended circumstances. [Schedule 5, item 2, section 6AA and Schedule 5, item 4, subsection 10(1A)]
5.18 Firstly, regulations may prescribe circumstances in which a member of a fund is not a defined benefit member. For example, the exemption is primarily intended to deal with members for whom a significant proportion of their retirement benefit is specified by reference to salary or is a specified amount. It is not intended to allow trustees to avoid the requirement to place contributions into a MySuper product by having a defined benefit that is an insignificant specified amount, such as $100 paid on retirement, for a class of members. In these circumstances, regulations could be made to ensure that members in this type of arrangement are not excluded from the protections of MySuper.
5.19 Secondly, regulations may prescribe circumstances in which a member of a superannuation fund who is not otherwise a defined benefit member is taken to be a defined benefit member. This will be used to ensure that where public sector employees have interests in two superannuation entities, one of which is a fully unfunded scheme that provides a defined benefit to the member, then the regulations will prescribe that they are deemed to be a defined benefit member across both schemes. This is necessary to ensure that the member is not disadvantaged by having to meet higher costs in a MySuper product simply because it must be paid into a different scheme than their defined benefit interest.
5.20 A savings provision will ensure that the existing definition of defined benefit member in the SIS Regulations continues in force and is incorporated into the new definition of defined benefit member to be inserted into subsection 10(1) of the SIS Act. [Schedule 5, item 5 ]