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Superannuation Legislation Amendment Bill 1998
Bills Digest No. 102 1998-99
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.
Superannuation Legislation Amendment Bill 1998
Commencement: The Act commences on the day on which it receives the Royal Assent. The dates on which the amendments proposed in the various Schedules commence are indicated in the Main Provisions of this Digest.
- Schedule 1 of the Bill to the Bankruptcy Act 1966 (the Bankruptcy Act)
- Schedule 2 of the Bill to the Superannuation Industry (Supervision) Act 1993 (the SIS Act), and in
- Schedule 3 of the Bill to the Superannuation (Resolution of Complaints) Act 1993 (the SRC Act)
to improve the efficiency and effectiveness of the superannuation supervisory framework.
The regulatory system for financial services changed on 1 July 1998.
The former Australian Securities Commission (ASC) was renamed the Australia n Securities and Investment Commission (ASIC) from 1 July 1998. ASIC enforces and administers the Corporations Law and consumer protection law for investments, life and general insurance, superannuation and banking (except lending) throughout Australia.
The Australian Prudential Regulation Authority (APRA) provides prudential regulation for deposit taking institutions, life and general insurance companies and larger superannuation funds.
The Reserve Bank of Australia (RBA) is responsible for monetary policy and the stability of the financial system. 1
The SIS Act provides for the prudential regulation of the superannuation industry between the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC). These changes which took effect from 1 July 1998 followed the implementation of the Wallis Report. 2 The SIS Act regulates the conduct of trustees of superannuation entities to ensure prudent management of superannuation fund monies. The monitoring and investigatory powers of both regulators are to be enhanced by the proposed amendments. The division of regulation of the superannuation industry between the two authorities has the prospect of creating grey areas where responsibility may not be clearly defined. As stated in the Second Reading Speech, 3 the Bill contains measures to finetune and clarify the operation of the supervisory framework to assist trustees in discharging their obligations to fund members.
The SRC Act established the Superannuation Complaints Tribunal to resolve member complaints about trustee decisions in a fair, informal and quick manner. The Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998 will give employees a greater role in the choice of funds to which their contributions could be directed. 4 Employees will be called upon to make informed decisions on the basis of disclosures made by trustees and managers of funds. The Tribunal may be expected to be called upon to deal with a significant increase in the number of complaints following the implementation of the choice of funds proposal. The measures in the Bill are intended to improve the efficiency and productivity of the Tribunal and to promote public confidence in the superannuation regime.
This section of the Digest will deal only with the significant provisions in each Schedule to the Bill. The reader is referred to the Explanatory Memorandum to the Bill for further details.
Uniform treatment of creditors’ access to superannuation funds in the event of bankruptcy of employees
Under the Bankruptcy Act 1966 (the Bankruptcy Act) any benefits that the bankrupt has in superannuation is not available to creditors up to the pension reasonable limit (RBL). 5
The amendments to the Bankruptcy Act are intended to ensure that benefits in an exempt public sector superannuation schemes are treated in the same manner as benefits in regulated superannuation funds. Proposed sub-subparagraph 116(2)(d)(iii)(c) inserted to the Bankruptcy Act by Item 1 of Schedule 1 provides that a member’s benefits in an exempt public sector superannuation scheme are not available to creditors up to the member’s pension RBL in the event of the member’s bankruptcy.
This amendment commences on the date of the Royal Assent under proposed clause 2(1) of the Bill.
Commissioner authorised to deal directly with custodian of fund or trust
The definit ion of relevant person in subsection 10(1) of the SIS Act is being expanded to include a custodian in relation to a fund or trust by the insertion of proposed paragraph 10(1)(e) by Item 1 of Schedule 2 . This will enable the Commissioner to obtain information relating to superannuation assets directly from a custodian instead of through the trustee of a fund or trust.
In-house asset rules where there are two or more employer-sponsors and al least one is unrelated
Part 8 of the SIS Act sets out the rules in r elation to the level of in-house assets of a regulated superannuation fund. At present, the ‘in-house asset ratio’ of a fund must not exceed 10 per cent. Section 74 of the SIS Act sets out the ‘in-house asset ratio’ as follows:
cost of the in-house assets of the fund x 100
cost of all the assets of the fund
An ‘in-house asset’ is defined in section 71 as an asset of the fund that is a loan to, or an investment in, an employer-sponsor of the fund or an associate of the employer-sponsor.
The rules set out a timetable for a phased reduction in the ceiling on a fund’s permitted ‘in-house’ assets, that is, from a limit of ten per cent of total fund assets on a historical cost basis in 1997-98, to five per cent of total fund assets on a market value basis by 2001-2002.
Section 72 of the SIS Act sets out how Part 8 applies to a fund which has two or more unrelated employer-sponsors in the fund. The section provides that unrelated employer-sponsors are treated separately for the purposes of the in-house asset rules. For example, for each unrelated employer-sponsor the in-house asset ratio is calculated by dividing the cost of the in-house assets in the employer-sponsor or an associate by the cost of the total fund assets multiplied by 100. The in-house asset ratio in relation to each unrelated employer-sponsor must not exceed ten per cent.
However, there is no provision at present for the separate treatment of groups of unrelated standard employer-sponsors in section 72. Item 7 of Schedule 2 repeals section 72 and substitutes proposed section 72 to provide for groups of unrelated standard employer-sponsors as well. The reader is referred to the Explanatory Memorandum for a detailed explanation of the proposed provisions and an example illustrating how in consequence groups of unrelated employer sponsors would be treated in the same way as individual unrelated employer-sponsors. 6
Modification of in-house asset rules for defined benefit funds
As mentioned above, Division 3 of Part 8 of the SIS Act sets out rest rictions on the ability of trustees to make loans to, or investments in, an employer-sponsor of the fund. Item 9 inserts proposed Division 3A to set out the limits on in-house assets of certain defined benefit funds which will enable them to hold their existing in-house assets and not have to sell them in order to comply with the phased reduction of in-house assets under Division 3. The reader is referred to the Explanatory Memorandum for the conditions that must be satisfied under proposed sections 83A to 83E for proposed Division 3A to apply, as well as an illustrative example. 7
Contractual rights of employer-sponsor to be protected to comply with paragraph 51(xxxi) of the Constitution
There is currently a general prohibition under subsection 117(3) on trustees of standard employer-sponsored funds paying an amount, or permitting a n amount to be paid out, to a standard employer-sponsor except as provided for in section 117. The trustee’s right to effect these retentions under this provision overrides a standard employer-sponsor’s contractual right to be paid. This could be constitutionally invalid as amounting to an ‘acquisition of property’ on unjust terms for the purposes of paragraph 51(xxxi) of the Constitution. Item 12 which inserts proposed subsection 117(3A) excludes the application of subsection 117(3) in circumstances where its application gives rise to the acquisition of property otherwise than on just terms and the acquisition would be invalid because of paragraph 51(xxxi) of the Constitution.
Monitoring and investigation powers of Commissioner to specifically cover former trustees of funds
Division 1 of Part 25 of the SIS Act outlines the monitoring and investigation powers of the Insurance and Superannuation Commissioner. It is uncertain whether these powers apply to the investigating of certain parties, including form er trustees of an entity. Proposed section 253A has the effect of ensuring that the powers in Part 25 apply to all relevant persons whether past or present.
Power of Commissioner to gather information and freeze assets of funds enhanced
Section 264 gives t he Commissioner the power to obtain information and to freeze assets. The power to obtain information is limited to the trustee or investment manager of a superannuation entity.
Item 24 repeals subsections 264(2), 264(3) and 264(4) and substitutes proposed subsections 264(2), 264(3), 264(4) and 264(4A) in the SIS Act
The Commissioner is given the general power under proposed subsection 264(2) to obtain information from a relevant person, which definition has been widened to include a custodian under proposed paragraph 10(1)(e) to be inserted by Item 1 of Schedule 2 .. Proposed subsection 264(3) enables the Commissioner to direct the trustee or investment manager subject to conditions as specified not to acquire assets, not to dispose of assets or to deal with assets in a particular way. The Commissioner is given the authority set out in proposed subsection 264(3) in relation to a person who has possession, custody or control of an asset by proposed subsection 264(4) .
The power of the Commissioner under proposed subsection 264(3) or (4) to direct a person not to deal in a particular way in assets of a superannuation entity includes the power to direct a person not to remove from Australia assets of the entity that are in Australia under proposed subsection 264(4A) .
Commencement of amendments proposed under Part 1 of Schedule 1
The above amendments as well as the other amendments proposed in Part 1 of Schedule 2 commence on the date of the Royal Assent.
Amendment of definition of ‘insolvent under administration’
Section 120 of the SIS Act prevents a disqualified person from being a trustee of a superannuation entity, an investment manager of a superannuation entity or a custodian of a superannuation entity. A person who is an ‘i nsolvent under administration’ is a disqualified person under paragraph 120(1)(b) of the SIS Act.
Under paragraph (d) of the current definition of ‘insolvent under administration’, in subsection 10(1) of the SIS Act, a person will be an ‘insolvent under administration’ for three years after entering into a deed of assignment or a deed of arrangement under Part X of the Bankruptcy Act. Similarly, under paragraph (e) of the current definition of ‘insolvent under administration’ a person will be an ‘insolvent under administration’ for three years after his or her creditors have accepted a composition under Part X of the Bankruptcy Act. On the other hand a discharged bankrupt can immediately take part in the management of a superannuation entity. Item 34 repeals paragraphs (d) and (e) of the definition of ‘insolvent under administration’ and inserts proposed paragraphs (d) , (e) and (f) to the definition of ‘insolvent under administration’.
The definition of ‘insolvent under administration’ will include a person:
- who has executed a deed of assignment and has not been issued with a certificate under section 232 of the Bankruptcy Act in respect of that deed of assignment ( proposed paragraphs (d ) )
- who has executed a deed of arrangement and has not been issued with a certificate under section 237A of the Bankruptcy Act in respect of that deed of arrangement ( proposed paragraphs (e) ), and
- whose creditors have accepted a composition and who has not been issued with a certificate under section 243A of the Bankruptcy Act in respect of that composition ( proposed paragraphs (f) ).
Payment from employer-sponsored funds to employer-sponsor
Paragraph 117(5)(d) provides that the trustee of a standard employer -sponsored fund must give notice to the members of the fund of an intention to pay an amount to the standard employer-sponsor in accordance with the governing rules of the fund. There is no provision concerning the manner in which the notice is to be given. Proposed subsection 117(5A) to be inserted by Item 40 requires that the trustee must be reasonably satisfied that all of the members of the fund, other than lost members, have been informed about the payment proposal.
Commencement of amendments proposed under Part 2 of Schedule 2
The above amendments as well as the other amendments proposed in Part 2 of Schedule 2 commence 28 days after the Royal Assent.
Responsibilities of Tribunal Chairperson
Proposed section 7A inserted by Item 1 of Schedule 3 provides that the Tribunal Chairperson is the executive officer of the Tribunal and is responsible for the overall operation and administration of the Tribunal. Proposed subsection 7A(2) requires the Chairperson to monitor the operations of the Tribunal, allocate its work among the members (including himself or herself and the Deputy Chairperson) and may establish written guidelines for the allocation of the work of the Tribunal.
The amendment by Item 2 to subsection 9(1) allows the Tribunal to be constituted by either one, two or three members, selected by the Tribunal Chairperson, and will enable efficiency gains and increased case through-put to be achieved.
It is interesting to note that proposed subsection 9(1A) inserted by Item 3 will enable the Chairperson to reconstitute the Tribunal dealing with a complaint before it has made a determination where the Chairperson considers that the reconstitution is desirable:
- to remove any perception of bias, or
- to ensure the timely performance or exercise of the Tribunal’s functions or powers.
Commencement of amendments proposed under Schedule 3
The above amendments as well as the other amendments proposed in Schedule 3 commence on Royal Assent under proposed subsection 2(1) .
As indicated in the Second Reading Speech, the amendments proposed in the Bill are to ensure that an effective regulatory regime is in place to enhance the security of members' benefits. It is part of an ongoing review that is necessary in the light of experience in implementing the legislation underpinning the regulatory framework for the supervision of superannuation entities.
1 These changes were effected by the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 and the Financial Sector Reform (Consequential Amendments) Act 1998 . The reader is referred to Bills Digest No. 194 1997-98 and Bills Digest No. 236 1997-98 for details of the changes that were effected by these two Acts.
4 February 1999
Bills Digest Service
Information and Research Services
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