Explanatory Statement

Issued by authority of the Assistant Treasurer

Explanatory Statement

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Amendment Regulations 1998 (No. 8)

The Superannuation Industry (Supervision) Act 1993 (the Act) and the Superannuation Industry (Supervision) Regulations (the Principal Regulations) provide for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission.

Section 353 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.

These regulations amend the Principal Regulations so that from 20 September 1998, annuities and pensions that meet certain characteristics such as being payable for a primary beneficiary's life expectancy (life expectancy annuities and pensions) can be separately identified for the purposes of qualifying for the higher superannuation pension Reasonable Benefit Limit (RBL). Currently, only annuities and pensions that are payable for the life of the primary beneficiary and comply with the standards set out in SIS Regulations 1.05(2) (lifetime annuities) and SIS Regulations 1.06(2) (lifetime pensions) qualify for the higher superannuation pension RBL. The regulations insert a new set of standards for life expectancy annuities and pensions into the Principal Regulations. The regulations will also remove the mandatory requirement to index lifetime annuities and pensions.

The new set of standards for life expectancy annuities and pensions being inserted by these regulations will require the contract or rules under which the annuity or pension is provided to ensure that:

·
the primary beneficiary purchases or becomes entitled to the annuity or pension on or after Age or Service pension age, and the annuity or pension is payable for a fixed term equal to life expectancy, or at least 15 years where life expectancy exceeds 15 years. Life expectancy is the life expectancy of the primary beneficiary as at the commencement date of the pension or annuity determined in accordance with the Australian Government Life tables;
·
benefit payments are made at least annually and that the total of benefit payments in the first and subsequent years of the annuity or pension is fixed, allowing for variation only in accordance with prescribed indexation limits;
·
the annuity or pension can be commuted to a lump sum only in accordance with prescribed terms which are generally consistent with those currently set out for lifetime annuities and pensions in the Principal Regulations;
·
the annuity or pension has no residual capital value; and
·
the annuity or pension can revert only in accordance with prescribed terms consistent with those currently set out for lifetime annuities and pensions and in the Principal Regulations.

The regulations amend the Principal Regulations to permit lifetime annuities and pensions to have optional indexation subject to a floor.

The regulations are intended to coincide with changes to the means testing of income streams in Schedule 3 of the Social Security and Veterans Affairs Legislation Amendment and Other Measures) Act 1998 which commenced on 20 September 1998. Under these new arrangements income stream products which are payable for a term of 'life' or 'life expectancy' and which meet certain standards are exempt from the Age/Veterans' pension asset test.

The regulations are described in detail in the Attachment.

The regulations commence on gazettal. While Regulation 4 provides that certain amendments will apply to benefits on or after 20 September 1998 no person (other than the Commonwealth or an authority of the Commonwealth) will be disadvantaged by the earlier application date in accordance with subsection 48(2) of the Acts Interpretation Act 1901. The regulations will provide annuitants and pensioners with a potential benefit being the ability to qualify for a higher pension RBL.

ATTACHMENT

Superannuation Industry (Supervision) Amendment Regulations 1998 (No. 8)

Regulation 1 - Name of regulations

Regulation 1 names the regulations as the Superannuation Industry (Supervision) Amendment Regulations 1998 (No. 8).

Regulation 2 - Commencement

Regulation 2 provides that the Regulations commence on gazettal.

Regulation 3 - Amendment of the Superannuation Industry (Supervision) Regulations

Regulation 3 provides that Schedule 1 amends the Superannuation Industry (Supervision) Regulations (the Principal Regulations).

Regulation 4 - Application

Regulation 4 provides that amendments made by Items 2, 3, 4, 5, 6, 7, 8, 9, and 12 of Schedule 1 apply to annuity contracts purchased by a primary beneficiary, or pensions to which the primary beneficiary became entitled to, on or after 20 September 1998. The purpose of the provision is to apply the Regulations, for life expectancy annuities and pensions, and the optional indexation of lifetime annuities and pensions, from 20 September 1998. The application date coincides with changes to the means testing of income streams in Schedule 3 of the Social Security and Veterans Affairs Legislation Amendment and Other Measures) Act 1998 which commenced on 20 September 1998.

Schedule 1 - Amendments of the Superannuation Industry (Supervision) Regulations

Item 1 of Schedule 1 - Regulation 1.01

Item 1 of Schedule 1 substitutes Regulation 1.01 of the Principal Regulations to name the Principal Regulations as the Superannuation Industry (Supervision) Regulations 1994.

Item 2 of Schedule 1 - Subregulation 1.03(1)

Item 2 of Schedule 1 amends subregulation 1.03(1) of the Principal Regulations by inserting definitions of two expressions for the purposes of the Principal Regulations, namely 'life -expectancy' and 'pension age'. 'Life expectancy' is defined by reference to the definition of life expectation factor in section 27H of the Income Tax Assessment Act 1936 (the Tax Act). 'Pension age' is defined by reference to the definition of pension age in subsections 23 (5A), (5B), (5C) or (5D) of the Social Security Act 1991 and section 5QA of the Veterans' Entitlement Act 1986. The definition of pension age recognises that a veteran within the meaning of the Veterans' Entitlement Act 1986 may be entitled to a pension under that Act prior to reaching pension age under the Social Security Act 1991.

Item 3 of Schedule 1 - Subregulation 1.05(1)

Item 3 of Schedule 1 substitutes existing subregulation 1.05(1) of the Principal Regulations with a new subregulation 1.05(1) which provides that an annuity is taken to be an annuity under the Act if it meets the standards under existing subregulations 1.05(2), (4), (6), (7) and (8) or new subregulation (9); that it is purchased with a rolled-over amount as defined in the Tax Act; and that in the case of a life expectancy annuity, the commencement day is the day when the annuity was purchased.

The purpose of the new definition of 'commencement day' to apply to life expectancy annuities is to ensure that there is no deferral of benefit payments. That is, in the case of a life expectancy annuity, the first annual period in respect of which benefit payments must be made must commence on the day the primary beneficiary purchased the annuity.

Item 4 of Schedule 1 - Paragraph 1.05(2)(c)

Item 4 substitutes existing paragraph 1.05(2)(c) of the Principal Regulations with a new paragraph 1.05(2)(c) which requires that, unless APRA otherwise approves, the sum payable as benefit in each year of a lifetime annuity is not less than:

·
the sum payable as benefit in the immediately preceding year - where CPIc is not less than CPIp; or
·
the sum payable as benefit in the immediately preceding year multiplied by CPIc and divided by CPIp - where CPIc is less than CPIp;

where: CPIc is the quarterly Consumer Price Index (CPI) first published by the Australian Statistician for the second-last quarter before the day on which payment is to be made.

CPIp is the quarterly CPI first published by the Australian Statistician for the same quarter in the immediately preceding year.

The purpose of new paragraph 1.05(2)(c) is to make indexation of benefit payments optional for lifetime annuities; and to require that, where a lifetime annuity provides for indexation of benefit payments, the annuity contract must ensure that the sum of benefits payable in a year is not less than the sum of benefits payable in the immediately preceding year where the CPI has not changed or has increased; and is not less than the sum of benefits payable in the immediately preceding year discounted by the fall in CPI, where CPI has decreased.

Item 5 of Schedule 1 - Subparagraph 1.05(2)(f)(iii)

Item 5 substitutes existing subparagraph 1.05(2)(f)(iii) of the Principal Regulations with a new subparagraph 1.05(2)(f)(iii) which provides that a lifetime annuity can be commuted if the eligible termination payment (ETP) resulting from the commutation is transferred directly to the purchase of another annuity or pension provided in accordance with existing subregulations 1.05(2), 1.05(3), 1.06(2) and 1.06(3) and new subregulations 1.05(9) and 1.06(7).

The purpose of new subparagraph 1.05(2)(f)(iii) is to allow a lifetime annuity to be commuted if the ETP resulting from the commutation is transferred directly to the purchase of another lifetime annuity, a lifetime pension, a life expectancy annuity or a life expectancy pension.

Item 6 of Schedule 1 - After subregulation 1.05(8)

Item 6 inserts new subregulation 1.05(9) into the Principal Regulations which prescribes the following standards for life expectancy annuities:

·
the primary beneficiary must purchase the annuity on or after the day the primary beneficiary became of pension age (inserted in subregulation (1.03)(1) by Item 2 of Schedule 1 of these Regulations); and
·
the contract for the annuity ensures that:

-
the annuity is paid to the primary beneficiary or to a reversionary beneficiary at least annually;

:
if the primary beneficiary's life expectancy (inserted in subregulation (1.03)(1) by Item 2 of Schedule 1 of these Regulations) is less than 15 years - for a term equal to the primary beneficiary's life expectancy (where the primary beneficiary's life expectancy is not a whole number of years, rounded up to the next whole number at the primary beneficiary's option); or
:
if the primary beneficiary's life expectancy is 15 years or more - for a term equal to at least 15 years but not greater than the primary beneficiary's life expectancy (rounded up to the next whole number at the primary beneficiary's option); and

-
the total amount of the annuity payment or payments to be made in the first year (not taking commuted amounts into account) is fixed, and that the payment or the first of those payments relate to the period commencing on the day the annuity was purchased; and
-
the total amount of annuity payments to be made in a year other than the first year (not taking commuted amounts into account) does not fall below the total amount of annuity payments made in the immediately preceding year (defined to be the previous total) and does not exceed the previous total:

:
by more than 5% of the previous total - where CPIc is less than or equal to 4%; or
:
by more than CPIc + 1% of the previous total - where CPIc is greater than 4%;

where: CPIc is the change (if any), expressed as a percentage, determined by comparing the quarterly CM first published by the Australian Statistician for the second-last quarter preceding the date on which the first of those payments is to be made and the quarterly CM first published for the same quarter in the immediately preceding year; and

-
the total amount of annuity payments to be made in a year may be varied only to allow commutation to pay the superannuation contributions surcharge; and
-
the amount paid as the purchase price is wholly converted into annuity income; and
-
the annuity does not have a residual capital value; and
-
the annuity cannot be commuted except:

:
within 6 months after the commencement day of the annuity; or
:
by payment on the death of the primary beneficiary to the benefit of a reversionary beneficiary or to the primary beneficiary's estate if there is no reversionary beneficiary; or
:
by payment on the death of a reversionary beneficiary to the benefit of another reversionary beneficiary or to the reversionary beneficiary's estate if there is no other reversionary beneficiary; or
:
if the ETP from the commutation is transferred directly to the purchase of another annuity or pension provided in accordance with existing subregulations 1.05(2), 1.05(3), 1.06(2) and 1.06(3) and new subregulations 1.05(9) and 1.06(7); or
:
to pay a superannuation contributions surcharge; and

-
if the annuity reverts or is commuted the reversionary component or commutation amount is not greater than 100% of the benefit payable immediately before the reversion or commutation; and

:
the annuity cannot be transferred to a person except:
:
on the death of a primary beneficiary to a reversionary beneficiary or to the primary beneficiary's estate if there is no reversionary beneficiary; or
:
on the death of a reversionary beneficiary to another reversionary beneficiary or to the reversionary beneficiary's estate if there is no other reversionary beneficiary; and

-
the capital value of the annuity and the income from it cannot be used as security for a borrowing.

Item 7 of Schedule 1 - Subregulation 1.06(1)

Item 7 of Schedule 1 substitutes subregulation 1.06(1) of the Principal Regulations with a new subregulation 1.06(1) which provides that a pension is taken to be a pension under the Act if it meets the standards under existing subregulations 1.06(2), (4), (6) or new subregulation (7); and that in the case of a life expectancy pension, the commencement day is the day when the primary beneficiary became entitled to the pension.

The purpose of the new definition of 'commencement day' to apply to life expectancy pensions is to ensure that there is no deferral of benefit payments. That is, in the case of a life expectancy pension, the first annual period in respect of which benefit payments must be made must commence on the day the primary beneficiary first became entitled to the pension.

Item 8 of Schedule 1 - Paragraph 1.06(2)(c)

Item 8 of Schedule 1 substitutes existing paragraph 1.06(2)(c) of the Principal Regulations with a new paragraph 1.06(2)(c) which requires that, unless APRA approves otherwise, the sum payable as benefit in each year of a lifetime pension is not less than:

·
the sum payable as benefits in the immediately preceding year - where CPIc is not less than CPIp; or
·
the sum payable as benefits in the immediately preceding year multiplied by CPIc and divided by CPIp - where CPIe is less than CPIp;

where: CPIc is the quarterly CPI first published by the Australian Statistician for the second last quarter before the day on which payment is to be made.

CPI p is the quarterly CPI first published by the Australian Statistician for the same quarter in the immediately preceding year.

The purpose of new paragraph 1.06(2)(c) is to make indexation of benefit payments optional for lifetime pensions; and to require that, where a lifetime pension provides for indexation of benefit payments, the pension contract must ensure that the sum of benefits payable in a year is not less than the sum of benefits payable in the immediately preceding year where the CPI has not changed or has increased; and is not less than the sum of benefits payable in the immediately preceding year discounted by the fall in CPI, where CPI has decreased.

Item 9 of Schedule 1 - Subparagraph 1.05(2)(e)(iii)

Item 9 of Schedule 1 substitutes existing subparagraph 1.06(2)(e)(iii) of the Principal Regulations with a new subparagraph 1.06(2)(e)(iii) which provides that a lifetime pension can be commuted if the ETP resulting from the commutation is transferred directly to the purchase of another pension or annuity provided in accordance with existing subregulations 1.05(2), 1.05(3), 1.06(2) and 1.06(3) and new subregulations 1.05(9) and 1.06(7).

The purpose of new subparagraph 1.06(2)(e)(iii) is to allow a lifetime pension to be commuted if the ETP resulting from the commutation is transferred directly to the purchase of another lifetime pension, a lifetime annuity, a life expectancy annuity or a 'complying' life expectancy pension.

Item 10 and 11 of Schedule 1 - Paragraphs 1.06(2)(g) and (h) and paragraph 1.06(4)(b)

Items 10 and 11 of Schedule 1 make minor amendments to the existing paragraphs 1.06(2)(g) and (h) and paragraph 1.06(4)(b) of the Principal Regulations.

Item 12 of Schedule 1 - After subregulation 1.06(6)

Item 12 of Schedule 1 inserts new subregulation 1.06(7) into the Principal Regulations which prescribes the following standards for life expectancy pensions:

·
the primary beneficiary must become entitled to the pension on or after the day the primary beneficiary became of pension age (inserted in subregulation 1.03(1) by Item 2 of Schedule 1 of these Regulations); and
·
the rules for the pension ensure that:

-
the pension is paid to the primary beneficiary or to a reversionary beneficiary at least annually;

:
if the primary beneficiary's life expectancy (inserted in subregulation 1.03(1) by Item 2 of Schedule 1 of these Regulations) is less than 15 years - for a term equal to the primary beneficiary's life expectancy (where the primary beneficiary's life expectancy is not a whole number of years, rounded up to the next whole number at the primary beneficiary's option); or
:
if the primary beneficiary's life expectancy is 15 years or more - for a term equal to at least 15 years but not greater than the primary beneficiary's life expectancy (rounded up to the next whole number at the primary beneficiary's option); and

-
the total amount of the pension payment or pension payments to be made in the first year (not taking commuted amounts into account) is fixed, and that the payment or the first of those payments relate to the period commencing on the day when the primary beneficiary became entitled to the pension; and
-
the total amount of pension payments to be made in a year other than the first year (not taking commuted amounts into account) does not fall below the total amount of pension payments made in the immediately preceding year (defined to be the previous total) and is not greater than the previous total:

:
by more than 5% of the previous total - where CPIc is less than or equal to 4%; or
:
by more than CPIc + 1 % of the previous total - where CPIc is greater than 4%;

where: CPIc is the change ( if any) expressed as a percentage, determined by comparing the quarterly CPI first published by the Australian Statistician for the second-last quarter preceding the date on which the first of those payments is made and the same quarter in the immediately preceding year; and

-
the total amount of pension payments to be made in a year may be varied only to allow commutation to pay the superannuation contributions surcharge; and
-
the pension does not have a residual capital value; and
-
the pension cannot be commuted except:

:
within 6 months after the commencement day of the pension; or
:
by payment on the death of the primary beneficiary to the benefit of a reversionary beneficiary or to the primary beneficiary's estate if there is no reversionary beneficiary; or
:
by payment on the death of a reversionary beneficiary to the benefit of another reversionary beneficiary or to the reversionary beneficiary's estate if there is no other reversionary beneficiary; or
:
if the ETP from the commutation is transferred directly to the purchase of another pension or annuity provided in accordance with existing subregulations 1.05(2), 1.05(3), 1.06(2) and 1.06(3) and new subregulations 1.05(9) and 1.06(7);
:
or to pay a superannuation contributions surcharge; and

-
if the pension reverts or is commuted the reversionary component or commutation amount is not greater than 100% of the benefit payable immediately before the reversion or commutation; and
-
the pension cannot be transferred to a person except:

:
on the death of a primary beneficiary to a reversionary beneficiary or to the primary beneficiary's. estate if there is no reversionary beneficiary; or
:
on the death of a reversionary beneficiary to another reversionary beneficiary or to the reversionary beneficiary's estate if there is no other reversionary beneficiary; and

the capital value of the pension and the income from it, cannot be used as security for a borrowing.