House of Representatives

Revised Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 2 Annual MySuper outcomes assessment

Outline of chapter

2.1 Schedule 1 to this Bill amends the SIS Act to strengthen the obligations on superannuation trustees to annually assess and compare the appropriateness of their product offerings (both MySuper and choice), including how each product continues to promote the financial interests of members.

2.2 The purpose of these amendments is to ensure that trustees are promoting the financial interests of their members, which is expected to lead to an increase in the overall quality of products.

2.3 All legislative references in this chapter are to the SIS Act unless otherwise indicated.

Context of amendments

2.4 Under the SIS Act, only an authorised MySuper product is eligible to operate as a default product for employees who do not choose a fund to receive their mandatory superannuation contributions. Because of their default nature, MySuper products are subject to higher performance requirements, enforced by APRA. As a consequence, enhanced trustee obligations apply to trustees of in respect of their MySuper members.

2.5 These obligations were introduced in recognition of the fact that MySuper beneficiaries are generally 'default members' who do not make active decisions about their superannuation.

2.6 All superannuation funds that offer a default, MySuper product, regardless of the type of fund will be subject to the same high standard of oversight, transparency and accountability introduced through the expanded outcomes test.

2.7 The SIS Act requires superannuation trustees to promote the financial interests of their MySuper members as part of the enhanced trustee obligations in relation to a MySuper product. In particular, trustees must have regard to returns to those beneficiaries (after the deduction of fees and costs).

2.8 Currently, trustees are required to undertake an annual assessment of whether beneficiaries holding a MySuper product in their RSE are disadvantaged when compared to the experience of beneficiaries holding MySuper products in other RSEs because the trustee's MySuper product or RSE lacks sufficient scale (the scale test).

2.9 Whilst the scale test was designed to ensure that members were not disadvantaged by being in a small fund with high costs per member, there are limitations to the value of the current test. For example, trustees with a large number of members and assets in the MySuper product can easily pass the scale test, even if they are underperforming relative to other MySuper products.

2.10 The Government recognises that member outcomes are influenced by more than just the scale of the superannuation fund. When making their annual assessment, trustees should have regard to not only scale but also to the outcomes that are being delivered to members in that MySuper product. These include consideration of the returns, costs, fees, investment strategy and the insurance offering of the MySuper product to determine whether they are promoting the financial interests of members.

2.11 Accordingly, the amendments will replace the scale test with a new outcomes test covenants, which require trustees to determine whether the financial interests of their beneficiaries are being promoted by the trustee having regard to a comparison with other similar products and specified benchmarks and factors.

2.12 The new obligation that the trustees 'promote the financial interests' of beneficiaries reinforces and builds upon the existing trustee obligation to act in the best interests of beneficiaries by recognising that trustees must take actions to annually assess whether their MySuper or choice products are optimising outcomes for, and in the best interests of, members.

Summary of new law

2.13 The amendments strengthen the obligations on superannuation trustees to annually assess and compare the appropriateness of their product offerings (both MySuper and choice), including how each product continues to promote the financial interests of members.

2.14 The amendments also make consequential amendments to Schedule 4 (Approval to own or control an RSE licensee) as a result of Schedule 1. The amendments require each trustee of a regulated superannuation fund to make an annual determination, in writing, as to whether the financial interests of the members in the MySuper product are being promoted by the trustee, having regard to a range of factors.

2.15 The determination follows a two-step process.

2.16 The first step is for the trustee to compare products against required benchmarks (including other products); and

2.17 The second step is for the trustee assess whether the product promotes the financial interests of member, including against a specified range of factors.

2.18 The determination, together with a summary of the assessment and comparison on which the determination is based, are to be made publically available on the superannuation fund's website within 28 days of the determination being made.

Comparison of key features of new law and current law

Detailed explanation of new law

2.19 The amendments change the governing rules of each trustee of a regulated superannuation fund (other than a self-managed superannuation fund or a small APRA fund) to contain covenants that require trustees to:

•

promote the financial interests of their beneficiaries across all products (other than beneficiaries holding defined benefit interests); and

•

carry out annual outcomes assessments of all their MySuper and choice product offerings, including how each product continues to promote the financial interests of members.

[Schedule 1, item 6, subsections 52(9) to (13)]

2.20 The new outcomes test covenants require trustees to determine whether the financial interests of their beneficiaries are being promoted by the trustee having regard to a comparison with other similar products and specified benchmarks and factors. The new obligation that the trustees 'promote the financial interests' of beneficiaries reinforces and builds upon the existing trustee obligation to act in the best interests of beneficiaries by recognising that trustees must take actions to annually assess whether their MySuper or choice products are optimising outcomes for, and in the best interests of, members.

2.21 The new covenants apply to each trustee of a regulated superannuation fund. However, they do not apply in respect of a PST, approved deposit fund, a self-managed superannuation fund or a small APRA fund.

2.22 The new outcomes test requires trustees to assess their MySuper or choice product in respect to a range of product features including their insurance and investment strategies, and compare how their product is performing against other products and benchmarks, using certain performance metrics.

2.23 In this regard, the outcomes test provides trustees with a framework for assessing their product offering to determine whether it is achieving its intended outcomes and how it may be improved. The framework for the outcomes test endeavours to support the trustee's primary obligation to promote the financial interests of their members, in particular the net returns to those members.

2.24 A more comprehensive assessment of MySuper and choice products will make trustees more accountable for their products and enhance APRA's ability to take specific action to ensure the trustee rectifies the performance of their product where the financial interests of members are not being effectively promoted.

2.25 Choice products are all products that are not MySuper products or defined benefit products.

2.26 Under the current law, these obligations apply to trustees only in respect of their beneficiaries holding MySuper products.

2.27 As the obligations are extended to also apply in respect of choice products, the provisions on trustee obligations in relation to MySuper are being relocated from Part 2C of the SIS Act (provisions relating to MySuper) to Part 6 of the SIS Act (provisions relating governing rules of superannuation entities).

2.28 Schedule 1 nonetheless preserves the operation of existing obligations on each trustee to include in the investment strategy for a MySuper product:

•

the details of the trustee's annual outcomes assessment determination: and

•

to update each year the ten year return target for assets attributable to the MySuper product and the appropriate level of risk to the investment of those assets.

2.29 Schedule 1 recognises that although the features of MySuper products and choice products differ, the obligation to undertake an annual outcomes assessments in respect of beneficiaries holding either MySuper products or choice products should be done in as similar a way as is possible, recognising that trustee obligations to members should apply irrespective of product type.

2.30 For both MySuper products and choice products, the determination retains its two-step process approach:

•

compare products against required benchmarks (including other products) (step one); and

•

assess whether the product promotes the financial interests of member, including against a specified range of factors (step two).

2.31 The determination, together with a summary of the comparison and assessment on which the determination is based, are to be made publically available on the superannuation fund's website within 28 days of the determination being made.

The regulations may also specify additional benchmarks against which each trustee must determine, in writing, whether each trustee is promoting the financial interests of beneficiaries. [Schedule 1, item 6, paragraph 52(9)(aa)]

2.32 Choice products do not have the same defined features as MySuper products and so it is open for a choice product to be substantially different from one or more other choice products. For example, MySuper products have a single investment strategy that applies to all members (except MySuper lifecycle investment products) which differs from choice products which offer a whole range of investment choices.

2.33 As the differentiation amongst choice products and between choice products and MySuper products can be significant, it would be very difficult to apply a single methodology for comparing both MySuper and choice products when carrying out the annual outcomes assessment.

2.34 In comparting a MySuper product with other MySuper products, or a choice product with comparable choice products, the trustees of a fund must compare:

•

the fees and costs that affect the return to beneficiaries holding the relevant products;

•

the returns for the products;

•

the level of investment risk for the products;

•

any other matter specified in the prudential standards; and

•

any other matter specified in the regulations.

[Schedule 1, item 6, subparagraphs 52(9)(a)(i) and (ii) and subsections 52(10) and (10A)]

2.35 Allowing the regulations or APRA prudential standards to supplement the benchmarks for making further comparisons ensures that the most appropriate comparison methodologies applied to particular types of products. For example, APRA's reporting standards currently set out the preferred methodology for calculating the MySuper product dashboard metrics. APRA may choose to mandate these methodologies in its prudential standards.

2.36 The factors in step two for choice products are broadly the same as those currently applying to MySuper products, although some of the factors have been simplified with the details to unfolded in APRA's prudential standards. While all of the factors are relevant to MySuper products, some may not be relevant for a particular choice product. Trustees will need to review the relevance each year, but where it is not relevant the factor need not be assessed.

Consequential amendments

2.37 The revisions to enhanced director obligations, enhanced trustee obligations and superannuation entity director in subsection 10(1) of the SIS Act are to reflect the relocation of the provisions. [Schedule 1, items 1, 2 and 3, subsection 10(1)]

2.38 The revisions to sections 51A and 52A of the SIS Act and subsections 55(5) to (7) reflect that obligations under sections 29VN and 29VO being relocated to section 52. [Schedule 1, items 4, 5, 7 to 10 ]

2.39 The amendments also add the terms 'benchmark' and 'comparable choice products' to the dictionary for the SIS Act. [Schedule 1, items 1A and 1AA, definitions of 'benchmark' and 'comparable choice products' in subsection 10(1)]

Application and transitional provisions

2.40 The amendments will apply to annual determinations required to be made by a trustee of a regulated superannuation fund from the day after the Bill receives the Royal Assent, in regards to whether the financial interests of the beneficiaries of the fund holding a MySuper product are promoted by the trustee.

STATEMENT OF COMPATIBILITY OF HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Annual MySuper outcomes assessment

2.41 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.42 Schedule 1 to this Bill amends the SIS Act to strengthen the obligation on superannuation trustees to consider the appropriateness of their MySuper product offering annually including how that product continues to deliver appropriate outcomes to MySuper members.

Human rights implications

2.43 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.44 This Schedule is compatible with human rights as it does not raise any human rights issues.