House of Representatives

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 6 - Transition to MySuper

Outline of chapter

6.1 This chapter explains the requirements for certain existing member balances to be moved to MySuper products and the transitional rules applying to these requirements

Context of amendments

6.2 In responding to the Review, the Government noted that existing default funds will be required to transition to MySuper after an appropriate period.

6.3 The Government subsequently announced that the trustees of superannuation funds offering MySuper products will need to transfer certain existing 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.

Summary of new law

6.4 Amendments to the SIS Act will introduce a new concept of an 'accrued default amount'. This concept defines those parts of a member's interest in a fund which must be moved to a MySuper product. In essence, these are amounts where a member has not exercised an investment choice or amounts held in a default investment option of the fund.

6.5 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.

6.6 Provisions in the SIS Act will apply to this election to require the transfer of all accrued default amounts to MySuper products so that:

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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; and

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where a 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 take the action required under the relevant prudential standard to move these amounts to a MySuper product before 1 July 2017.

6.7 RSE licensees will also have to make a separate election that will also require the trustee to take action in accordance with the prudential standards to transfer amounts held in a MySuper product in circumstances where authorisation for a MySuper product is subsequently cancelled.

6.8 To remove impediments to the transfer of accrued default amounts, 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.

6.9 The Bill also ensures that APRA is able to make prudential standards dealing with matters relating to accrued default amounts and SIS Act matters of a transitional nature relating to the Stronger Super reforms.

Comparison of key features of new law and current law

Detailed explanation of new law

Amounts to be moved to MySuper products

6.10 Amendments to the SIS Act will introduce a new concept of an 'accrued default amount'. [Schedule 6, item 3, subsection 10(1)]

6.11 The accrued default amount for a member includes an amount that is attributed to the member of the fund in respect of which the member has not given a direction as to the investment option in which it is to be invested. [Schedule 6, item 4, subparagraph 20B(1)(b)(i)]

6.12 The definition of accrued default amounts also includes all amounts of members that are invested in the investment option that would have been the default option for the member at the time the assets attributable to the member were invested. 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. [Schedule 6, item 4, subparagraph 20B(1)(b)(ii)]

6.13 The meaning of accrued default amount specifically excludes certain amounts. These include:

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amounts already attributed to a MySuper product;

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amounts attributed to defined benefit members;

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amounts held in an eligible rollover fund;

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amounts that are invested in one or more of the following:

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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;

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a life policy providing benefits based solely on the realisation of a risk, and not related to the performance of an investment; and

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an investment 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.

•

amounts that support the payment of a pension (these cannot be part of a MySuper product under paragraph 29TC(1)(i) of the MySuper Core Provisions Bill);

[Schedule 6, item 4, subsections 20B(2), (3) and (4)]

Application to include election to move 'accrued default amounts'

6.14 An application by an RSE licensee for authority to offer a MySuper product will require an election that the RSE licensee will attribute to a MySuper product each accrued default amount in each fund for which the RSE licensee is the trustee. [Schedule 6, item 7, section 29SAA ]

6.15 An RSE licensee may attribute an amount to a MySuper product by obtaining authorisation for an existing default investment option as a MySuper product. In other cases, to attribute an accrued default amount to a MySuper product will require the amount to be transferred.

6.16 This election must accompany an RSE licensee's application for authorisation to offer a MySuper product, in writing and in the approved form. [Schedule 6, item 6, paragraph 29S(2)(f)]

6.17 For accrued default amounts in the fund for which the RSE licensee has applied for authorisation of a MySuper product, the RSE licensee will have to transfer the amounts by 1 July 2017 or within 30 days of receiving notice of authority to offer a MySuper product or notice of refusal of authority, whichever is later. [Schedule 6, item 13, paragraph 387(1)(a)]

6.18 An RSE licensee is not required to transfer an accrued default amount if the member directs the RSE licensee in writing not to. This ensures that members have the right to opt-out of having their existing balance moved to a MySuper product if they wish to. [Schedule 6, item 7, subparagraph 29SAA(1)(a)(i)]

6.19 The transitional period to 1 July 2017 is given effect to by applying provisions of the SIS Act that will apply to any election that is made before 1 July 2017. A transitional period is provided to allow RSE licensees to prepare for and manage the transfer of accrued default amounts from existing superannuation arrangements to the new MySuper environment. [Schedule 6, item 13, section 387 ]

6.20 Beyond the transitional period, the transfers must be made within 30 days of receiving notice of authority to offer a MySuper product, unless otherwise directed by the member. [Schedule 6, item 7, section 29SAA ]

6.21 The RSE licensee will also be required to elect to comply with relevant prudential standards before the later of 1 July 2017 and 90 days after notice of authorisation of a MySuper product has been given or refused in respect of:

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each accrued default amount for a member of the fund who is not eligible to hold an interest in a MySuper product offered by the fund; and

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each accrued default amount for members of any regulated superannuation fund for which the RSE licensee is trustee, and which does not offer a MySuper product.

[Schedule 6, item 7, paragraph 29SAA(1)(b) and subsection 29SAA(2)]

6.22 It is intended that the prudential standards or the regulations will similarly allow for a member to direct the RSE licensee in writing not to transfer these amounts.

6.23 The RSE licensee must also elect to comply with requirements to be prescribed in regulations to provide a notice to a member when their accrued default amount is moved to a MySuper product or is moved to another fund. It is expected 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. However, in some cases, there may be only immaterial changes to members' rights as a result of the RSE licensee being authorised to offer a MySuper product, for example, if an existing default investment option is simply able to be converted into a MySuper product. In this case, it is expected that a notice will be able to be given after the change has occurred. It is also expected that the Corporations Regulations will amended to ensure that an RSE licensee is not required to provide a notice under section 1017B of the Corporations Act where amounts are moved under this election to avoid duplication. ASIC will be responsible for enforcing the regulations prescribing that notices must be given to members. [Schedule 6, item 7, subsection 29SAA(3)]

6.24 APRA may cancel an authority to offer a MySuper product where it is satisfied the RSE licensee has failed to give effect to its election to transfer accrued default amounts to a MySuper product. [Schedule 6, item 8, paragraph 29U(2)(j)]

6.25 If the RSE licensee makes this election it will also be a condition of their license to give effect to this election. [Schedule 6, item 5, subsection 29E(6B)]

6.26 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. [Schedule 6, item 9, section 29XB ]

6.27 A provision of the governing rules of a superannuation fund that prevents an RSE licensee giving effect to an election to transfer an amount in an accrued default amount to a MySuper product is void to the extent it would prevent the RSE licensee from giving effect to the election. [Schedule 6, item 10, section 55B ]

Election to transfer amounts if MySuper authorisation cancelled

6.28 An RSE licensee's application for authorisation for a MySuper product must also be accompanied by another election. The RSE licensee must elect that it will transfer assets that were attributed to a MySuper product if the MySuper product authorisation is ever subsequently cancelled. [Schedule 6, item 7, section 29SAB ]

6.29 The transfer must be made in accordance with the actions required by the prudential standards that set out arrangements in relation to the transfer of these amounts. [Schedule 6, item 7, paragraph 29SAB(a)]

6.30 The RSE licensee will be required, by this election, to transfer amounts within 90 days of receiving a notice of cancellation of authorisation of that MySuper product. [Schedule 6, item 7, paragraph 29SAB(a)]

6.31 If the RSE licensee makes this election it will be a condition of their license to give effect to this election. [Schedule 6, item 5, subsection 29E(6B)]

6.32 The election must be in writing and in the approved form. [Schedule 6, item 7, paragraphs 29SAB(b) and (c)]

6.33 A provision of the governing rules of a superannuation fund that prevents a trustee giving effect to this election to transfer amounts in a MySuper product if authorisation is cancelled is also void to the extent it would prevent the RSE licensee from giving effect to the election. [Schedule 6, item 10, section 55B ]

Requirement to transfer amounts to MySuper product

6.34 Any RSE licensee who does not make an application for MySuper authorisation, and therefore does not make an election to transfer accrued default amounts, will still be required to transfer amounts to a MySuper product by 1 July 2017 under a new civil penalty provision. [Schedule 6, item 12, paragraph 193(l) and item 13, section 388 ]

6.35 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. It is expected that the arrangements to transfer accrued default amounts will include a requirement for RSE licensees to advise each affected member of the intention to transfer the amounts to a MySuper product, and of the member's right to opt out of the process. For the avoidance of doubt, the transfer of an accrued default amount is not required to be made to a successor fund as defined in the SIS Regulations. [Schedule 6, item 13, subsection 388(1)]

6.36 To put beyond doubt the application of these provisions regarding the transfer of accrued default amounts to a MySuper product, if the RSE licensee has not made an election, the requirement to transfer accrued default amounts will not apply to the extent that it would not be permitted by paragraph 51(xxxi) of the Constitution. [Schedule 6, item 13, subsection 388(3)]

6.37 A trustee's actions in giving effect to the civil penalty provision will not give rise to a liability to a member. [Schedule 6, item 13, subsection 388(2)]

6.38 Contravention of the civil penalty provision will mean that Part 21 of the SIS Act will apply.

Prudential standards and regulations on transition

6.39 Prudential standards will be able to be made in relation to the transfer of accrued default amounts that are held by members of the fund that is not eligible to hold a MySuper product offered by the fund or for members of a fund for which that RSE licensee does not offer a MySuper product. These prudential standards apply to both where the RSE licensee has elected to transfer these amounts and where the RSE licensee is required to transfer the amounts under the civil penalty provision. [Schedule 6, item 9, section 29X ]

6.40 The prudential standards may set out requirements that must be met in relation to the transfer of the amounts and any other matters that relate to the amount. [Schedule 6, item 9, paragraphs 29X(b) and (c)]

6.41 APRA will be able to make prudential standards dealing with matters of a transitional nature relating to the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 , the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 , and the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 . The specific provisions relating to prudential standards are set out in Part 3A of the Trustee Obligations and Prudential Standards Act. [Schedule 6, item 13, section 389 ]

6.42 These prudential standards on transition will deal with matters such as processes for identifying accrued default amounts, selecting a MySuper product to transfer certain amounts to and other actions required by the trustee in relation to the transfer of accrued default amounts.

6.43 Provision is made to enable regulations to be made dealing with transitional, saving and application matters related to amendments made by the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 , the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 , and the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 . [Schedule 6, item 13, section 390 ]

Other amendments

6.44 A definition of 'MySuper member' is inserted into the definitions at subsection 10(1) of the SIS Act. A MySuper member is a member that holds a MySuper interest in the fund. [Schedule 8, items 1 and 3, subsection 10(1)]