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Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019

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2016-2017-2018-2019

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Assistant Treasurer, the Hon Stuart Robert MP)

 

 



Table of contents

Glossary............................................................................................................. 1

General outline and financial impact........................................................... 3

Chapter 1 ........... Low balance accounts and members under 25............ 5

Chapter 2 ........... Regulation impact statement.......................................... 15

Chapter 3 ........... Statement of Compatibility with Human Rights.......... 47

 

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

APRA

Australian Prudential Regulation Authority

Bill

Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019

SIS Act

Superannuation Industry (Supervision) Act 1993

SMSF

Self managed superannuation fund

SUMLM Act

Superannuation (Unclaimed Money and Lost Members) Act 1999

 

 



Putting Members’ Interests First

This Bill contains amendments to the SIS Act to protect individuals’ retirement savings from erosion, ultimately increasing Australians’ superannuation balances.

Date of effect 1 October 2019

Proposal announced This Bill partially implements the Protecting Your Super Package announced in the 2018-19 Budget.

Financial impact:  The financial implications of the Bill are currently unquantified but are expected to result in a save to the Budget of less than $407 million over the forward estimates period. The financial impact of delaying the start date for members with account balances under $6,000 or new members under 25 by three months will be published as part of the 2019-20 Budget.

Human rights implications :  This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 3.

Compliance cost impact Medium to high

Summary of regulation impact statement

Regulation impact on business

Impact Combined with the amendments contained in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, the amendments have an estimated annual compliance cost impact of $28.5 million averaged over 10 years.

Main points :

•        The current superannuation regulatory framework provides no special protection for the erosion of retirement savings of low balances through fees and premiums for default insurance.

•        The scope of the RIS is the impact of excessive fees, inappropriate insurance arrangements and duplication of accounts on individuals. Addressing the root causes of account proliferation is beyond the scope of the RIS.

•        Three options were considered and detailed in the RIS.

•        Overall, Option 2 was determined as the preferred approach as it provides the greatest benefit to members at the lowest regulatory burden.

 



Chapter 1          

Low balance accounts and members under 25

Outline of chapter

1.1                   Schedule 1 to the Bill prevents trustees from providing insurance on an opt out basis to members who are under 25 years old and begin to hold a new product on or after 1 October 2019 and to members who hold products with balances below $6,000.

1.2                   In all circumstances the member may opt in to insurance offered by the trustee by making a direction to the trustee.

Context of amendments

1.3                   Superannuation is a major part of Australia’s retirement income system. Together with the Age Pension and savings outside superannuation, it supports Australians in their retirement years.

1.4                   Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). It is projected to grow rapidly in the coming decades, as the superannuation system matures.

1.5                   Given the importance of superannuation to Australians, the Government is seeking to ensure that people’s hard-earned savings are not unnecessarily eroded by inappropriate insurance arrangements.

1.6                   Currently, many superannuation trustees automatically provide insurance cover to members upon joining the fund. This arrangement is commonly referred to as ‘default insurance’ and requires a member to ‘opt out’ of insurance if the member considers the insurance to be inappropriate for them.

1.7                   Default insurance is part of the legislative framework for MySuper products. That is, the MySuper settings generally mandate the provision of death and total and permanent disability insurance on an opt out basis, and also allow income protection insurance to be provided on an opt out basis at the trustee’s discretion. Some choice products also include default insurance.

1.8                   Under the insurance covenant in the SIS Act, trustees must only offer insurance that does not inappropriately erode the retirement income of members. Despite the covenant, insurance premiums are a key driver to the erosion of superannuation savings for certain member cohorts.

1.9                   Young members, members with multiple and/or inactive products, and members with low balances can face significant erosion due to insurance premiums. 

1.10               In addition, as a result of the default nature of the insurance and of members being disengaged, many members may not be aware that insurance premiums are being deducted or that they have multiple insurance policies. This leaves the member’s retirement savings at risk of being significantly eroded by those premiums.

1.11               These amendments are in addition to the protections included in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018. That Bill, as amended by the Senate on 14 February 2019, will amend the SIS Act to prevent trustees from maintaining opt out insurance where a member’s account has been inactive for 16 months or more.

1.12               This Explanatory Memorandum has been prepared on the basis that the amendments in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 become law.

Summary of new law

1.13               Schedule 1 prevents trustees from providing opt out insurance to new members aged under 25 years and members with balances below $6,000 unless a member has directed otherwise.

1.14               This will better target default insurance cover and prevent inappropriate erosion of retirement savings caused by insurance premiums.

1.15               Members will still be able to obtain insurance cover within their superannuation if they choose to do so.



 

Comparison of key features of new law and current law

New law

Current law

Trustees can only provide insurance to a member of a choice or MySuper product if directed by the member where the member:

•        is under 25 years old and begins to hold a product on or after 1 October 2019; or

•        holds a product with a balance less than $6,000.

 

Trustees of choice products are not limited in how they can offer insurance beyond the restriction in the insurance covenant of the SIS Act.

For MySuper products, trustees must generally provide death and total and permanent disability insurance on an opt out basis.

Income protection insurance may also be offered on an opt out basis at the trustee’s discretion.

Detailed explanation of new law

1.16               Currently, under section 68AA of the SIS Act trustees are required to provide MySuper members with death, and total and permanent disability insurance cover on an opt out basis unless a reasonable condition applies.

1.17               There are no similar requirements for members who hold a choice product but some trustees of choice products choose to provide insurance on an opt out basis.

1.18               From 1 July 2019, a trustee must stop providing insurance on an opt out basis to a member who has had a product that has been inactive for 16 months or more unless the member has directed the trustee to continue providing insurance.

1.19               Schedule 1 to this Bill amends the SIS Act to provide additional circumstances when a trustee must not offer or maintain default insurance cover for members unless the member has elected to obtain or maintain the insurance provided.

1.20               The circumstances when a trustee cannot provide opt out insurance for a member under a product, either a MySuper product or a choice product are when:

•        the member is under the age of 25 and begins to hold the product on or after 1 October 2019; and

•        the balance of the product is less than $6,000 and has not been $6,000 or more on or after 1 July 2019.

[Schedule 1, item 1, subsections 68AAB(1) and 68AAC(1) of the SIS Act]  

1.21               Where a member meets one of the criteria set out at paragraph 1.20 the trustee may only provide insurance where the member has elected to obtain or maintain the insurance cover. [Schedule 1, item 1, paragraphs 68AAB(1)(c) and 68AAC(1)(c) of SIS Act ]

1.22               From 1 October 2019, the trustee must ensure that each member affected by these amendments can direct the trustee to take out or maintain their insurance where the trustee would otherwise provide insurance benefits to members. Directions by members in respect of their insurance must be made in writing. [Schedule 1, item 1, subsections 68AAB(2) and 68AAC(2) of the SIS Act]

1.23               A written direction by a member who is either under 25 or who has a balance of less than $6,000, to opt in to insurance will be valid indefinitely unless the product subsequently becomes inactive. An election to opt into insurance cover by a member who is under 25 will be taken to satisfy the opt in requirement for low balance products, and vice versa. [Schedule 1, item 1, subsections 68AAB(3) and 68AAC(3) of the SIS Act]

Example 1.1 

Aiden is 21 years old and holds a superannuation product with Noze Cachina SuperFund, with a balance of $4,000. He has elected to opt in to death, TPD and income protection insurance despite having a balance of less than $6,000. He does not need to make a separate election to opt into insurance because he is also under 25 years old.

1.24               The Electronic Transactions Act 2000 provides that if legislation requires a person to give information in writing, that requirement is taken to have been met if the person gives the information by means of an electronic communication.

1.25               The amendments do not affect a member’s right to be covered by insurance until:

•        the end of the period for which premiums have been deducted; or

•        the expiry date of the term of the member’s existing insurance cover.

[Schedule 1, item 1, subsections 68AAB(5) and 68AAB(6) of the SIS Act]

1.26               A breach of the new insurance rules is a breach of the RSE licensee law with which the trustee must comply.

1.27               Failure to comply with the RSE licensee law may result in consequences such as a direction from APRA to comply (see section 29EB of the SIS Act), cancellation of the trustee’s authority to offer a MySuper product (where relevant - see section 29U of the SIS Act) or cancellation of the RSE license (see section 29G of the SIS Act).

1.28               The obligation in section 68AA for a trustee to provide death or permanent disability insurance under a MySuper product is turned off while the member meets one of the criteria listed at paragraph 1.20. However, these obligations continue to apply to all other MySuper members that do not meet the criteria.

1.29               Once a MySuper member no longer meets the criteria listed at paragraph 1.20, the requirement under the MySuper rules for the trustee to provide opt out death and permanent disability insurance applies again. [Schedule 1, items 4 and 5, subsections 68AA(8A)(heading) and subsections 68AA(8A) and (8B) of the SIS Act]

Example 1.2 

In December 2019, Patricia aged 24 commences work. As Patricia does not choose a superannuation fund she is defaulted into a MySuper product.

Upon joining the fund, Patricia is sent a Product Disclosure Statement which outlines that she will be covered by death and total and permanent disability insurance once she turns 25. Her fund also offers her the opportunity to take up this insurance prior to her reaching this age.

Three years later, Patricia’s superannuation balance reaches $6,000. At this time, her fund provides her with insurance cover, in compliance with the MySuper insurance obligations.

Carve-outs

1.30               The new insurance rules do not apply to SMSFs or small APRA funds. [Schedule 1, items 2 and 3, section 68AAD (heading) and section 68AAD of the SIS Act]

1.31               The new insurance rules do not apply where an employer makes contributions to a fund in addition to its superannuation guarantee obligations which covers the full cost of the member’s insurance premiums on behalf of the member. [Schedule 1, item 1, paragraphs 68AAB(4)(d) and 68AAC(4)(d) of the SIS Act]

1.32               For this exception to apply, the employer must:

•        notify the trustee that it is paying the employee’s insurance premiums;

•        the amount the employer is contributing exceeds the employer’s superannuation guarantee obligations for the member; and

•        the excess is equal to or greater than the insurance premiums payable for the insurance benefit for the quarter.

1.33               The new insurance rules do not apply to a defined benefit member, an ADF Super member or a person who would be an ADF member if they had not chosen a fund. [Schedule 2, item 1, paragraphs 68AAB(4)(a), (b) and (c) and 68AAC(4)(a), (b) and (c) of the SIS Act]

Application and transitional provisions

1.34               The measure will impact insurance arrangements that are in place before 1 October 2019.

1.35               Generally, t he amendments apply to members who are under 25 years old and who start to hold a choice or MySuper product on or after 1 October 2019. [Schedule 1, items 8 and 9, Application of section 68AAB and Application of section 68AAC of the SIS Act]

1.36               A person who is under 25 years old and who began to hold a MySuper product or choice product before 1 October 2019 will not be impacted unless on 1 July 2019 the product had either been inactive for 16 months or the balance of the product had not been more than $6,000 since that date. [Schedule 1, item 9, Application of section 68AAC of the SIS Act]

1.37               However, the measure will apply to members who hold a product on 1 October 2019 which has not had a balance of $6,000 or more since 1 July 2019. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.38               Obligations are placed on trustees to notify members who have insurance arrangements in place before 1 October 2019 and who might be affected by the new measure to provide these members with an opportunity to elect for their insurance to continue. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.39               To determine the relevant members and products, a trustee must, undertake a ‘stocktake’ on 1 July 2019, whereby the trustee reviews all members and determines which members have a product with a balance less than $6,000. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

Notification obligations and elections for insurance under products with balances less than $6,000

1.40               Where a trustee identifies a member with a product with a balance below $6,000 on 1 July 2019, the trustee must give the member a written notice before 1 August 2019 which sets out:

•        that from 1 October 2019, the fund will not provide the member with insurance cover if the balance of the product remains below $6,000;

•        that cover can be maintained if the member elects to do so; and

•        the method for election.

[Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.41               If a member who holds a product with a balance of less than $6,000 has made an election prior to the 1 July 2019 stocktake, then the election is deemed to be effective on or after 1 October 2019 and the member does not need to be provided with a written notice. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.42               While the amendments do not require a member to have made the election in writing, if insurance is provided by the trustee on an opt out basis after 1 October 2019, and the member has not asked for it to be provided, the trustee may be in breach of the RSE licensee law. A trustee will need to be able to demonstrate that a member has elected to maintain cover, for example, through a record of a meeting, a note following a telephone conversation, or holding a record of a written election.

1.43               Where a member has simply contacted the fund to make a claim on their existing insurance, made an enquiry about the insurance offered by the fund or made a general enquiry about their superannuation savings, this would not suffice to demonstrate that the member has elected to have insurance cover.

1.44               For the trustee to be able to demonstrate that the member has elected to have insurance cover, the election must be directly related to the insurance cover and must demonstrate that the member has decided to have insurance provided through superannuation.

Example 1.1 

Lola has recently joined the workforce and has a superannuation balance of $2,000. She is worried her employer has not been making superannuation guarantee contributions so she calls her fund to find out if the right contributions have been made. The fund representative provides Lola with details on the contributions that have been made and her balance and Lola is comforted that her employer is making the right contributions.

The representative asks Lola if she had any other questions, or wanted to know about the insurance the fund offers but Lola declines as she is running late to her next university lecture.

This conversation should not be taken to be Lola electing to have insurance provided by her fund.

Example 1.2 

Emily is consolidating her multiple superannuation accounts held across multiple funds and wants to improve her understanding of the types of insurance offered by each fund. She makes enquiries with each fund and after some thought decides to roll all her superannuation savings into one particular product with a fund given the insurance offering. The combined balance of her consolidated superannuation savings is $4,500.

She contacts her fund and explains to the fund representative that she would like total and permanent disability and income protection insurance provided through the product.

The fund representative makes the necessary arrangements including by making a note of the conversation on Emily’s file. The trustee would be able to use this to demonstrate that Emily has elected to have insurance.

Example 1.3 

In 2017, Fletcher sought personal financial advice. As a result, Fletcher now has a single product, to which he is making ongoing contributions. He has a balance of $4,000 and he holds individually underwritten insurance within his superannuation given his unusual personal circumstances.

Fletcher’s fund has maintained a file for Fletcher which includes the statement of advice and underwriting paperwork. As a result, Fletcher’s fund maintains his insurance cover after 1 October 2019 despite his superannuation savings having a balance of less than $6,000.

Notification obligations for insurance for products first held between 1 July 2019 and 1 October 2019

1.45               Each trustee must also ensure that a member who acquired a product after 1 July 2019 and before 1 October 2019 is given a written notice that says:

•        from 1 October 2019, the fund will not provide the member with insurance cover if the product balance is less than $6,000 and it has not been more than $6,000 since 1 July 2019;

•        cover can be maintained if the member elects to do so; and

•        sets out the method for election.

[Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.46               If the member does not make an election before 1 October 2019 and the balance of the product is less than $6,000, insurance will not be provided from 1 October 2019.

1.47                   ASIC is the regulator responsible for the notification requirements in the transitional provisions. [Schedule 1, item 10, Administration of the application and transitional provisions]

Consequential amendments

1.48               The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 will amend the SUMLM Act to insert a new circumstance when amounts must be paid to the Commissioner of Taxation (that is, when an account is a low balance inactive account).

1.49               However, an account will not be considered inactive if insurance is being provided.

1.50               Schedule 1 to the Bill amends the definition of low balance inactive account in the SUMLM Act to recognise when a member still has a right to have insurance even though the account is less than $6,000. [Schedule 1, items 6 and 7, paragraph 20QA(1)(a) and subsection 20QA(3) of the SUMLM Act]

Contingent amendments

1.51               The Treasury Laws Amendment (2019 Measure No.1) Bill 2019 will increase the maximum number of allowable members in SMSFs and small APRA funds from four to six as announced in the 2018-19 Budget.

1.52               Contingent amendments are included in Schedule 2 to the Bill to update references to ‘5 members’ to ‘7 members’ if the Bill commences after the Treasury Laws Amendment (2019 Measure No.1) Bill 2019. [Schedule 2, items 1 and 2, subsection 68AAB(1)(note) and subsection 68AAC(1)(note) of the SIS Act]

 



Chapter 2          

Regulation impact statement

Background

2.1                   Superannuation is a major part of Australia’s retirement income system. Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). The system is projected to grow rapidly in the coming decades.

2.2                   Superannuation funds are required to place members who do not make a choice about their superannuation fund (default members) in MySuper products. These products have a simple set of product features and opt out life insurance, and place heightened obligations on the trustees that offer them. Trustees may also offer choice products which can provide members additional features (such as investment options). Choice products require a member to make an active choice for the product to receive their superannuation contributions.

2.3                   MySuper products are subject to legislated restrictions on when fees can be applied and the basis of their application (for example some fees can only be charged on a cost recovery basis). There is more discretion on fees charged for choice products.

2.4                   There are currently no special protections for lower balance accounts, which face disproportionately high fees and insurance premiums.

Fees

2.5                   For accounts with balances below $6,000, the principal source of growth is through compulsory contributions as opposed to growth driven by investment returns. However, passively incurred fees (such as administration and investment fees) largely mute this growth. Current fee structures are highly regressive in their impact on low balance accounts.

2.6                   Fees applied on exit - even where limited to cost recovery - can be significant, and act as a barrier to consolidation of accounts, and the transfer of accounts between funds more generally. In many cases exit fees comprise a significant proportion, and sometimes more than a member’s account balance - particularly for very low balance accounts.

Insurance

2.7                   Life insurance in superannuation can be on an individual or group basis. Trustees have substantial discretion to determine insurance arrangements in the interests of members. Except for MySuper products, they are simply required to have an insurance strategy and an insurance management framework.

2.8                   All trustees are obliged to ensure life insurance does not unduly erode member balances. This reflects that, even where designed appropriately, insurance premiums are a key driver of account balance erosion, and can reduce a low income earner’s retirement balance by 10 per cent or more (compared to no insurance) [1] - with the effect increasing for every set of policies held. 

2.9                   The Productivity Commission’s draft report on the competitiveness and efficiency of the superannuation system includes a draft finding that default insurance in superannuation offers good value for many, but not for all, members. For some members, insurance in superannuation is of little or no value — either because it is ill-suited to their needs or because they are not able to claim against the policy. Younger members and those with intermittent labour force attachment — groups which commonly have lower incomes — are more likely to have policies of low or no value to them.

Multiple accounts

2.10               The impact of fees and insurance premiums on outcomes for individuals through our superannuation system are inextricably linked to, and exacerbated by the presence of multiple accounts for individual members.

2.11               Historically, there have been high levels of member disengagement with the superannuation sector. Past and current restrictions on a member’s ability to choose a fund, as well as the inadvertent creation of additional accounts through the default system, have led individuals to hold multiple accounts, often with bundled insurance. The combination of these factors has led to market outcomes that do not meet the needs of the default and low balance members.

2.12               While there is a regime for transferring some lost superannuation balances to the Commissioner of Taxation (the Commissioner) to protect them from erosion, this regime requires long periods of inactivity, which can be up to five years, before amounts are transferred, assuming that the low balance account has not been entirely eroded by fees and insurance premiums by this time. It is also subject to several exceptions that allow accounts to remain with funds.

2.13               The Government has, over time, taken other steps to reduce the existence of duplicate accounts. Individuals are able to consolidate at their own initiative, either through mechanisms made available by funds, or through existing services made available to them by the Australian Taxation Office (ATO) through the MyGov portal.  However, the need to obtain consent from disengaged members means these mechanisms are not operating effectively. Proposed new electronic on-boarding arrangements being developed by the ATO will assist employees in making decisions about how to manage their accounts when they commence a new job.

Example 2.1: Max

The operation of the current system is exemplified by the cameo modelling of Max, included in material released by the Government at Budget on 8 May 2018. 

Max starts his first job at the age of 25, and works 4 jobs over his career. Each time he starts a new job, a new account is opened and starts to receive contributions, with contributions to the previous account ceasing. By the time Max is age 31 he has 4 superannuation accounts.  Three are inactive.

Under current settings, Max’s accounts that no longer receive superannuation contributions will be eroded over time by fees and insurance. As a result, Max will have a total superannuation balance at retirement worth $397,000.

Under the reforms set out in Option 2 of this Regulation Impact Statement: his active accounts under $6,000 will have certain fees capped; insurance within Max’s inactive accounts will be provided only on an opt in basis; exit fees will be banned; and accounts which are inactive and below $6,000 will be claimed by the Commissioner and reunited with his active account.

This results in Max having a higher total superannuation balance at retirement of $454,000, a difference of $57,000.

This analysis has a number of underlying assumptions. It assumes Max works part-time with a starting salary of $24,000 in 2019-20 and a new account is opened with every new job, with default insurance cover. This also assumes 7.5% annual returns, 0.85% investment fees, $66 annual fixed fee and $190 annual insurance premiums. Under the package, Max will have fewer default insurance policies and, as a result, an insurance payout may be lower if an insured event were to occur.

Balances at retirement are in 2019-20 dollars.

2.14               This Regulatory Impact Statement seeks to analyse options for addressing the erosion of retirement savings by fees, insurance premiums as well as ways to drive greater consolidation of superannuation accounts in the current system, to improve outcomes relative to those achievable under the current system

The problem

2.15               The current superannuation regulatory framework provides no special protection for the erosion of retirement savings of low balance accounts through fees and premiums for bundled insurance.

2.16               The scope of the RIS is the impact of excessive fees, inappropriate insurance arrangements and duplication of accounts on individuals.  Addressing the root causes of account proliferation is beyond the scope of this RIS.

•        The Government has legislation before Parliament intended to remove remaining restrictions on choice of fund for individuals - a significant cause of account proliferation - and is awaiting the final findings of the Productivity Commission report into the competitiveness and efficiency of the superannuation system which will further inform these matters. 

•        It is important to recognise that any system which allows individuals to choose how many accounts they have, and what amounts are held in those accounts, must be appropriately designed to ensure that adverse consequences for individuals who do have more than one account are minimised.

2.17               Low balance account holders are usually young members, who generally have lower superannuation balances, as well as low income earners (who disproportionately include women) and seasonal workers. Typically, these people are disengaged from superannuation and do not actively monitor or organise their accounts to minimise erosion of balances.

2.18               Low balance accounts comprise a significant proportion of the overall superannuation system and are at particular risk of erosion by fees and insurance premiums. As at 30 June 2016, there were around 9.5 million accounts with balances below $6,000. This is around 40 per cent of all accounts within the superannuation system. Of these low balance accounts, over 60 per cent (around 6 million accounts) had not received a contribution (or rollover) in the last 13 months. [2]

2.19               Low balance accounts are particularly vulnerable to erosion by fees and charges. Under the current fee rules for MySuper products, fees are generally required to be charged to all members on the same basis (subject to a few exceptions, such as caps on percentage-based fees). Charging fees on the same basis can lead to significant erosion for low balance accounts, particularly where flat fees are imposed on small accounts receiving small or no contributions.

2.20               Another key factor is the erosion of low balance accounts by insurance premiums. Currently, trustees of superannuation funds are generally required to provide their MySuper (default) members with default death and total and permanent disability (TPD) insurance on an opt out basis. Some trustees bundle this with income protection insurance (so that members are covered unless they choose to opt out).

2.21               Under the current insurance covenant, trustees must only offer insurance coverage if it does not inappropriately erode the retirement savings of members. However, even where trustees comply with this obligation, they do not have visibility of members’ other superannuation accounts with insurance. In addition, the obligation to provide all MySuper members with opt out death and TPD insurance means that trustees are required to provide all new default members with insurance, meaning that multiple accounts with insurance can be accrued with ease under current settings.

2.22               Of the around 11 million Australians with insurance inside superannuation, around 2.5 million individuals (over 20 per cent) have duplicate cover. Over 10 per cent of duplicate coverage holders are under the age of 25. [3] These members are likely to be over-insured and are therefore having their superannuation savings inappropriately depleted by insurance premiums.

2.23               The problem compounds for those who have multiple low balance accounts with duplicate insurance cover and account fees. At 30 June 2017, over 14.8 million Australians had a superannuation account. Approximately 40 per cent of these people had more than one superannuation account. [4]

2.24               In addition, as the Productivity Commission found it its draft report [5] , young members are less likely to derive value from insurance in superannuation as they are less likely to have dependants and are more likely to have lower incomes. This means that even where a young person has an account balance over $6,000, they may not be receiving value for money from their default insurance, and as a result, their superannuation balance may be needlessly eroded by insurance premiums for cover that is not appropriate for their circumstances. In 2015-16, there were 600,000 accounts belonging to members under the age of 25 with balances greater than $6,000.Under the current legislation, the burden of locating and consolidating superannuation generally falls on individual account holders. They must contact either their superannuation funds or the ATO (depending on timing of inactivity on the account) and request consolidation. The role of the ATO is limited to notifying people about lost or duplicate accounts (including through MyGov).

2.25               The ATO currently undertakes a number of initiatives to encourage members to claim ATO-held superannuation. For instance, following the ATO’s postcode campaign in October  2017 , close to 50,000 accounts worth $315 million were consolidated. [6] The ATO held $3.2 billion in unclaimed superannuation in 2016-17. The ATO’s postcode campaign is an initiative designed at encouraging the public to consider the consequences of holding multiple superannuation accounts. The ATO releases data collected through the lost and unclaimed superannuation regime, of the postcodes in Australia that have the highest levels of lost and unclaimed superannuation. This information is published on the ATO website alongside a description of the costs of holding multiple accounts and ways in which individuals can consolidate accounts.

Case for government action and objective of reform

2.26               The objective of reform is to limit the erosion of retirement balances for young and low balance account holders.

2.27               Government intervention is required to address the current regulatory settings and market failure which has resulted in mandating insurance for some members and the market failure of the insurance products not being appropriately tailored to the needs of its members.

2.28               The current default system where members are potentially allocated a new fund on every change of job, as well as past and current restrictions on members’ ability to choose their fund, have resulted in many individuals holding multiple accounts. When members are defaulted to the MySuper product under the current regulatory settings they receive default insurance unless they choose to opt out. The insurance provided is often not relevant to the needs of young and low balance account holders. This issue is compounded by the lack of engagement from young members and low balance account holders in signalling their requirements and preferences to providers of superannuation and bundled insurance services.

2.29               Under the current framework, trustees have limited visibility of the number of accounts of members outside their fund. When a trustee is determining the necessary insurance arrangements for its members, it does not factor in other accounts and relevant insurance coverage. Due to this information asymmetry, beyond encouraging members to consolidate accounts, the trustee does not assist individuals in determining whether insurance settings across all of their accounts is appropriate for their needs.

2.30               The current regulatory settings do not differentiate the charging of fees as a factor of account balance. This has resulted in fees having a disproportionate effect on low balance accounts. For example, a median annual MySuper account with a balance of $1,000 can be subject to average administration and investment fees of 9 per cent of its balance. [7]

2.31               Whilst a superannuation fund provides members with assistance to consolidate accounts, they usually require the consent of the individual prior to consolidation. This form of consolidation would result in a beneficial outcome for the member, however obtaining this consent can be difficult due to the levels of disengagement in the superannuation sector.

2.32               Due to the interactions between the taxation system and the superannuation system the ATO is able to monitor the number of superannuation accounts held by an individual. Under the current system the ATO reports figures in aggregate publicly, allows for consolidation using the MyGov system and conducts postcode campaigns to encourage individuals to consolidate their accounts. Actual consolidation of accounts is dependent on member engagement and assessment of need.

Policy options

Option 1

2.33               Under this option, the status quo would be maintained. This involves no specific protections for low balance accounts or accounts held by young members from fees or insurance premium erosion and a reliance on individual action to consolidate accounts. This option is the only non-regulatory option proposed.

Option 2

2.34               This proposal would:

•        prevent trustees from offering insurance on an opt out basis to new members under the age of 25;

•        prevent trustees from providing insurance on an opt out basis to new and existing account holders with balances below $6,000;

•        require insurance to only be offered on an opt in basis on accounts that have not received a contribution or rollover for 13 months unless the member has indicated to the fund that they wish to maintain cover;

•        impose a 3 per cent cap on administration and investment fees for accounts with balances less than $6,000 to address fee erosion;

•        ban any exit fees for all superannuation accounts - removing a barrier to account consolidation and also protecting accounts from fee erosion (but not percentage-based buy-sell spreads);

•        significantly overhaul the current lost and unclaimed superannuation regime by requiring all balances below $6,000 to be transferred to the ATO after 13 months of inactivity (that is, no contributions or rollovers); and

•        give the ATO the legislative power to pay balances held by the ATO into a member’s active superannuation account without their direction.

Option 3

2.35               This option would:

•        prevent trustees from offering any insurance to members under the age of 25 or with balances under $6,000;

•        prevent trustees from charging administration and investment fees to accounts with balances less than $6,000; and

•        require all balances below $6,000 to be transferred to the ATO after 13 months of inactivity (that is, no contributions or rollovers) and held until the individual directs the ATO to consolidate accounts.

Cost benefit analysis of each option / Impact analysis

Option 1

2.36               This option would retain current arrangements governing fees, insurance and the consolidation of lost and unclaimed accounts and therefore involves no further regulatory change. It has been used as the benchmark for considering the costs and benefits of the other options.

Insurance in superannuation

•        Currently insurance is provided to members generally on an opt out basis.

•        The primary types of life insurance cover provided through superannuation include:

-       Death cover (also called life cover) — which pays a lump sum upon the member’s death, to the member’s beneficiaries or dependants.

-       Total and permanent disability (TPD) cover (also called permanent incapacity cover) — which typically pays a lump sum if the member becomes totally and permanently disabled and can no longer work in their current occupation or another occupation for which they are reasonably qualified.

-       Income protection insurance (also called salary continuance cover) — which pays a regular income for a period of time (usually up to 75% of previous income for up to two years) if the member cannot work in the short term because of illness or injury.

•        Trustees of MySuper products are required to offer death and long-term disability insurance (generally lump sum total and permanent disability cover) on an opt out basis (subject to reasonable conditions). They are permitted (but not required) to offer short-term disability insurance (e.g. income protection, which generally covers up to 75 per cent of salary for up to 2 years). Death cover must meet minimum age-based benefit thresholds ($50,000 falling to $7,000).

•        Trustees of choice products may provide insurance to their members on an opt in or opt out basis at their discretion, limited only by the obligations in the SIS Act.

•        Trustees play a key role in this space - they have a duty to act in the best interests of members and to ensure that insurance arrangements do not unduly erode retirement balances. The design of insurance cover is a matter for trustees to decide.

-       Specifically, the SIS Act requires trustees to formulate, review regularly and give effect to an insurance strategy for the benefit of all beneficiaries. In addition, trustees are only allowed to offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of the beneficiaries. This requires a careful balance to be struck between providing benefits that adequately meet members’ needs and ensuring that the cost of insured benefits is not unduly high.

-       However, there is little guidance for trustees around these obligations, and as a result there is wide variation in the cost and quality of insurance provided through superannuation.

•        Under this option, millions of individuals are susceptible to having their retirement savings eroded by inappropriate insurance premiums. Insurance premiums can reduce low income earners’ retirement balances by 10 per cent or more (compared to no insurance), increasing with the number of policies held by an individual.

Fees in superannuation

•        Under the current regulatory framework there are restrictions on the types of fees charged and the basis (for example whether they have to be charged on a cost recovery basis or not) that these fees are charged. However, there is no longer any restriction on the amount of fees that can be charged in relation to the balance or earnings of an account.

•        Exit fees can be charged at the discretion of the fund.

•        Under this option, low balance account holders are subject to disproportionate fees that reduce retirement savings. Exit fees also act as a disincentive for account consolidation and combined with the disengaged nature of many individuals, results in millions of inactive superannuation accounts in the sector being eroded by fees. These accounts also create unnecessary administration costs for industry to administer.

Inactive superannuation accounts

•        Currently protections for inactive superannuation accounts are provided in limited circumstances by the lost and unclaimed money regime. A person’s superannuation account may be transferred to the ATO where either:

-       the member has been a member of a fund for longer than two years, and they joined the fund as a standard employer-sponsored member, and the fund has not received a contribution or rollover for the member within the last five years of their membership of the fund, and the balance of that account is less than $6,000, unless within the last two years the fund has verified that the member's address is correct and has no reason to believe that the address is now incorrect, or the member is permanently excluded from being a lost member under an exception; or

-       where the person has been an inactive member for

12 months and the superannuation fund is satisfied that it will never be possible to pay an amount to that member.

•        To claim ATO held superannuation under the current lost and unclaimed money regime the person must request the money from the ATO and direct that it be paid into a superannuation account, or where the balance is below $200 to the person.

•        Under this option, consolidation is dependent on individuals contacting either their fund or the ATO to consolidate account. The disengagement of members has resulted in industry holding around $14 billion of individual’s retirement savings as lost or unclaimed amounts. These amounts continue to be subject to fees until they are transferred to the ATO.

Option 2

Table 2.1 Regulatory burden estimate (RBE) table

Total Option 2 Costs - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$28.5

 

$71.4

$99.9

 

2.37               There is a significant regulatory cost of this option. The majority of costs are incurred in the first year of implementation. For industry, the updating of the current systems to enable them to implement the reforms and communicate to members drives the majority of the cost. The option for the systems update assumed that systems rebuild was not necessary for funds that operated an internal administration system. For individuals, the majority of the cost was on the basis that members would need to review the revised disclosure documents from funds notifying them of the changes.

2.38               The communication costs of this option have been costed assuming that the changes to the fee cap and insurance arrangements are done concurrently and therefore an update to the Product Disclosure Statements and communication with members is achieved through a consolidated approach. There would be a new cost on individuals as compared with the status quo as they review and comprehend the communications from industry on changes.

2.39               It was assumed that individuals would take one hour to review the new information and assess their individual needs.

Table 2.2 Regulatory burden estimate (RBE) table

Notification - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$4.2

 

$73.6

$77.8

Insurance in superannuation

2.40               Existing regulatory arrangements for insurance over the ages of 25 and above $6,000 will not be changed as a result of this option. That is, trustees will still be required to provide their MySuper members with opt out death and TPD insurance unless they are under-25, have an inactive account, or have a balance below $6,000.

2.41               Under this option, the new arrangements for members under the age of 25 would only apply to new accounts from the commencement date (unless such a balance is under $6,000). However, the new arrangements would apply to both existing and new balances below $6,000 from the commencement date.

2.42               Excluding existing accounts of members under the age of 25 (unless they are under $6,000 or inactive) recognises that these members may have accrued balances that are not at risk of erosion from their insurance premiums and may have held insurance coverage in these accounts for some time. However, going forward this option reflects the assumption that young people should not be provided insurance on an opt out basis given that they are less likely to have dependants or significant debts and are likely to be more vulnerable to account erosion.

2.43               This option would also require all insurance coverage to be opt in after 13 months of no contributions or rollovers (inactivity) to an existing or new account, regardless of the member’s age or account balance. The move to opt in insurance is intended to apply to all inactive accounts as inactive accounts are at particular risk of erosion. In addition, it is likely that an inactive account is a duplicate account, or that the holder of the account is not currently working and therefore that the insurance may not be appropriate for their current circumstances. Holders of such accounts, if they deem it appropriate, can communicate with their fund that they wish to maintain their insurance coverage despite inactivity.

2.44               Superannuation funds would be required to communicate to their members about their insurance coverage, including when their account is becoming at risk of being deemed inactive (that is, when an account has been inactive for 6 and 9 months).

2.45               This option does not prevent members from opting in to the insurance offerings of the fund at any time irrespective of age, account balance and inactivity.

Benefits

2.46               Over 60 per cent of the accounts with balances below $6,000 — or about 6 million accounts —are inactive. Insurance premiums are a key driver of account erosion for these accounts. Holders of these accounts, which include large numbers of young Australians, low income earners (which disproportionately include women) and seasonal workers, are more likely to have their superannuation balances unduly eroded.

2.47               Holders of duplicate low-balance accounts are likely to be over-insured in relation to their insurance needs. There is also a particularly costly outcome in relation to income protection, as members can only receive a benefit from one income protection policy, even if they are paying for multiple cover.

Costs

Costs for individuals

2.48               Relative to the status quo, this will result in circumstances where fewer people receive insurance payouts for an adverse event. Some individuals will have no insurance cover as a result of these changes depending on their circumstances. Others will continue to have cover, through a reduced number of policies. Claim rates for affected cohorts are not zero. Therefore it is expected that some individuals will no longer receive any form of payout. Resulting impacts on Government payments were factored into the overall cost of these measures as published in Budget Paper Number 2 2018-19.

2.49               Individuals in affected cohorts will be in a position to determine whether or not they wish to mitigate against an adverse event by opting-in to insurance within superannuation, as opposed to under option 3 where they are prevented from doing so. In addition, other proposals included in this option that increase consolidation of accounts through the ATO increase the likelihood that an individual would have an account over $6,000 (and thus be provided insurance on an opt out basis) relative to the status quo.

2.50               It is also expected that costs would be mitigated by information provided by industry, encouraging members to more actively consider their circumstances and whether or not they should obtain insurance. It can be expected that as a consequence members under 25, with low balances or inactive accounts who genuinely consider that insurance in superannuation is in their best interests will be better informed about the appropriateness and availability of such cover.

2.51               Those members that continue to hold default insurance in superannuation may also face increased premiums as a result of changes to the number of accounts and risk profile of the group insurance arrangements. There would be an effect on the cost of insurance as the fixed costs of providing insurance would be divided over fewer accounts. Any increase due to a change in risk profile would reflect an unwinding of cross-subsidisation across cohorts.

2.52               The proposal also results in transaction cost savings to individuals who have balances below $6,000 and/or are younger than age 25, and currently opt out of default insurance coverage. This cohort would no longer be required to actively opt out. However, there would be a transaction cost imposed on individuals and industry, wishing to opt in for insurance coverage (who would have been automatically covered under current arrangements) especially if that insurance coverage was individually underwritten.

2.53               The regulatory burden estimate results in a slight benefit of the policy change to individuals. The costing incorporated members who had accounts below $6,000 and members who were under the age of 25 (but held balances over $6,000) to ensure no cohorts were double counted. The costing assumed that it would take longer for these cohorts to opt out of insurance (pre-option 2) compared to the same cohorts opting-in to insurance (post implementation of option 2).

Costs for industry

2.54               The primary cost to industry under this option would be reduced premium inflow for insurers (up to $3 billion [8] offset by lower expenses from claims). However, to the extent that this reduction would affect duplicate or otherwise unneeded policies held by disengaged members (discussed above), the net effect would be a material efficiency gain at the economy-wide level. Superannuation funds would still be able to encourage young and low balance members to opt in to insurance coverage.

2.55               Superannuation funds would also face a cost around the provision of information to their members regarding the changes. For existing members with accounts that would have their insurance cease upon commencement, or for individuals with inactive accounts, applying these proposals would require sufficient disclosure to members before their insurance coverage ceases. Changes to funds’ product disclosure statements would be required, as well as timely and frequent communication to the member in the lead up to insurance coverage no longer being applicable, such that they have a sufficient opportunity to exercise choice around whether to maintain cover.

2.56               This proposal would impose a regulatory burden on superannuation funds, as they would have to update policies to account for the new proposals. This is likely to require revisions to insurance coverage and risk analysis, as well as re-negotiating the underlying group insurance contract with their insurance provider.

2.57               Some superannuation funds might also be required to modify their administrative and information technology systems to enable them to identify member cohorts at the opt in and opt out thresholds.

Table 2.3 Regulatory burden estimate (RBE) table

Insurance in superannuation  - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$15.1

 

($0.6)

$14.5

Overall Cost Benefit outcome

2.58               While this option would result in significant costs to funds and insurance providers, this is outweighed by the overall benefit to individuals in the form of better targeted insurance coverage and less erosion of retirement savings. The option would allow an estimated 5 million Australians who paid a combined $3 billion in insurance premiums in 2015-16 with the opportunity to choose if they want to be covered, rather than paying for it by default. 

Fees in superannuation

2.59               This option would impose a cap restricting administration and investment fees on low balance accounts to no more than 3 per cent of the balance. Funds would be required to assess annually account balance size, and thus eligibility for the fee cap.

2.60               This proposal would also ban exit fees for all superannuation accounts.

2.61               From the implementation date, both fee protections would apply to all new and existing accounts.

2.62                 The Australian Prudential Regulation Authority (APRA) would monitor how funds respond to the fee protections as part of their existing monitoring role to ensure that funds did not shift fees.

Benefits

2.63               By limiting the amount of administration and investment fees that superannuation funds can charge eligible accounts, the fee cap would significantly reduce the erosion of low balance accounts and help members grow their retirement savings.

2.64               Low balance accounts pay disproportionately high fees. Treasury analysis shows that the median annual administration and investment MySuper fees on these accounts are 9 per cent of their balance.

2.65               Treasury analysis indicates that a 3 per cent cap on administration and investment fees would have saved low balance members $120 million in fees had it been applied in 2015-16.

2.66               The ban on exit fees would remove a barrier to account mobility. The ban would also ensure that exit fees do not reduce account balances as funds transfer accounts to the ATO.

2.67                 Approximately one third of funds (79 funds) charge exit fees. At June 2017, the average exit fee disclosed by superannuation funds for MySuper products was $68, with total exit fees collected across the industry totalling $52 million [9] .

Costs

Costs for individuals

2.68               As accounts generally open with balances below $6,000, over time most individuals in the future will benefit from the fee cap.

2.69               Superannuation funds may need to amend their fee structures in response to the fee protections and, where they need to change fees due to restrictions on the amounts of fees charged to low balance accounts. Flow on implications of this reduction for other members cannot be predicted with certainty - it will be a matter for trustees. Fees on accounts above the $6,000 threshold may increase, however pricing decisions will also be affected by the significant reduction in overall administration costs for the industry that is expected to result from the reduction in the number of accounts as inactive low balance accounts are removed and consolidated through the inactive superannuation accounts element.

Costs for industry

2.70               As funds would need to reduce fees for eligible accounts, they would face a loss in revenue. However, as the inactive superannuation accounts proposal would reduce the number of low balance accounts over time, funds would face lower total costs of administering low balance accounts. Fees for accounts above the threshold could increase as the overall administration and investment cost is distributed over fewer accounts. However, this would be the unwinding of the current status quo whereby low balance accounts pay disproportionate fees.

2.71               The regulatory burden costing assumed that funds would face a one off administrative cost in adjusting their fee structures. This cost would involve a revised fee analysis. The costing assumed that a systems update would be required to be able to determine accounts subject to the cap as well as the requirement that funds may need to seek legal advice to implement this option. Funds would also be required to communicate fee changes to members, including by updating or revising existing disclosure material such as product disclosure statements and MySuper dashboards.

2.72               Funds would be required to assess the balance of all accounts annually and would need to monitor fees charged to accounts subject to the cap. However, as funds have the freedom to do the calculation in line with their end of financial year processes, the additional regulatory cost for funds of assessing the balance of accounts is unlikely to be significant compared to the status quo. 

Table 2.4 Regulatory burden estimate (RBE) table

Superannuation Fee Protections - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$7.2

 

 

$7.2

Overall Cost Benefit outcome

2.73               Though superannuation funds would face a regulatory cost of applying the fee cap, this option would significantly reduce fee erosion of low balance accounts. Accounts above the threshold could face increased fees however only due to the removal of the cross subsidy that low balance accounts previously provided.

2.74               This option would also remove a disincentive from members to consolidate accounts or exercise a choice to roll their balance to another fund. Consolidation of accounts, in particular, reduces members’ exposure to duplication of fees across multiple low balance accounts and reduces undue of erosion of their aggregate superannuation balances.

Inactive superannuation accounts

2.75               This element would involve the introduction of legislation requiring superannuation funds to transfer all balances below $6,000 to the ATO after 13 months of inactivity (that is, no contributions or rollovers).

2.76               It would involve giving the ATO the legislative power to pay unclaimed amounts back into a member’s active superannuation account without requiring the consent of the individual. Under the current policy settings members must actively participate in account consolidation. They can request their money be reunited either through lodging a form with the ATO or through the MyGov system.

Benefits

2.77               This option would generate significant system-wide efficiencies by allowing more inactive and low balance accounts to be transferred to the ATO, where they would be protected from fee erosion and would receive earnings based on CPI until such time as they can be reunited. It would also speed-up the process of reuniting accounts that have been transferred to the ATO. In the first year of this option, it is estimates that just under $6 billion will be returned to around 3 million individuals. [10]

2.78               While this option does not prevent the creation of new multiple accounts by members, it reduces the stock of duplicate accounts in the system by removing the requirement for the individual to actively locate and then consolidate them. This option would also reduce the adverse consequences of multiple inactive low balance accounts on relevant members. If this element had been applied in 2015-16, it is estimated that around 4 million Australians with inactive low balance accounts would have saved around $450 million in fees.  As the changes would also result in a significant reduction in the overall costs of administering the system, the flow on implications for this would be substantially smaller, or even positive depending on the fee and cost structures of particular funds, for other account holders than those which may arise from the application of the fee cap to active low balance accounts.

2.79               This option would also allow for higher consolidation of accounts despite the significant level of disengagement of members with the superannuation industry as individuals would no longer need to request for the consolidation to occur, but instead would benefit from the ATO action.

2.80               Under the proposed process, the ATO would use existing data matching techniques (which account for name changes) to assist in the reunification process.

2.81               By removing the requirement for the individual to locate an ATO-held amount and then consolidate funds, this proposal would seek to increase account consolidation and reduce the number of low balance accounts. Consolidation of low balance accounts would reduce the amount of fees paid on total superannuation balances. The ATO has estimated that for accounts that can be successfully matched to an active account, it would take less than a month to transfer the funds once they are received from the superannuation fund.

2.82               The regulatory benefit to individuals results from the change in policy that ensures that individuals do not need to request the ATO to reunite lost or unclaimed superannuation balances, as it would be proactively reunified by the ATO using data matching techniques. The value of an individual’s time was costed using the recommended standard hourly wage rate of $31 for leisure time. The benefit to individuals was calculated using an assumption on the current levels of members applying for consolidation.

2.83               The superannuation industry as a whole would also likely benefit from the consolidation of accounts as it would result in a lower administrative burden from maintaining multiple low balance accounts across funds.

Costs

2.84               While transferring inactive low balance accounts to the ATO would protect balances from erosion, it is possible that a small number of account holders intend to maintain multiple accounts. Under this proposal, if an account is inactive for 13 months, it would automatically be transferred to the ATO. Sufficiently engaged members wishing to retain multiple accounts could avoid this by making a nominal contribution to the account every 13 months. An after tax contribution can typically be made directly to the superannuation account by the member through a direct money transfer such as BPAY or direct debit payment.

2.85               Those members who wish to maintain insurance coverage will not be affected where they exercise their proposed right to direct that coverage does not cease on their account.

2.86               Under current legislation, the superannuation industry is already required to transfer certain lost or unclaimed superannuation accounts to the ATO. The costing assumed that the reset of the system would only occur in the first year.

2.87               This proposal would expand the conditions under which an account was required to be transferred to the ATO for accounts with balances less than $6,000 (low balance accounts) to 13 months of no contributions or roll overs to that account and the cessation of insurance linked to that account.

Table 2.5 Regulatory burden estimate (RBE) table

Inactive superannuation accounts - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$2.0

 

($1.6)

$0.4

Overall Cost Benefit outcome

2.88               This option would significantly reduce the erosion of low balance accounts. Superannuation funds would face an initial regulatory cost of updating the system for transferring inactive accounts below $6,000 to the ATO. However, the benefit to members in both protecting their superannuation from duplicate fees across multiple accounts and a reduced regulatory cost on individuals who no longer need to initiate the consolidation, strongly outweighs these costs. In the first year of the policy, it is estimated that just under $6 billion will be returned to around 3 million individuals through this process.

Option 3

Table 2.6 Regulatory burden estimate (RBE) table

Total Option 3 Costs - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$24.9

 

$95.8

$120.7

2.89               There is a significantly higher regulatory cost of this option compared to option 2 as there are fewer benefits to individuals under this option. As is the case with option 2, the majority of costs are incurred in the first year of implementation. For industry, the updating of the current systems to enable them to achieve the reforms and the communication to members drive the majority of the cost. The option for the systems update assumed that systems rebuild was not necessary for funds that operated an internal administration system. For individuals, the majority of the cost was on the basis that members would need to review the revised disclosure documents from funds notifying them of the changes and more individuals would have to apply for the consolidation of superannuation accounts.

2.90               This option has been costed assuming that the changes to fees and insurance arrangements are done concurrently and therefore an update to the Product Disclosure Statements and communication with members is achieved through a consolidated approach. There would be a new cost on individuals as compared with the status quo as they review and comprehend the communications from industry on changes.

2.91               It was assumed that individuals would take one hour to review the new information and assess their individual needs.

Table 2.7 Regulatory burden estimate (RBE) table

Notification - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$4.2

 

$73.6

$77.8

 

Insurance in superannuation

2.92               Under this proposal, trustees would be prevented from providing insurance inside of superannuation to members under the age of 25 or to members with accounts below $6,000. In contrast to option 2, even if these members wished to take up insurance inside of superannuation, they would be prevented from doing so.

Benefits

Benefits to individuals

2.93               As discussed above, insurance premiums and fees are a significant driver of account balance erosion, particularly for low balance accounts. Prohibiting insurance on low balance and accounts held by individuals under the age of 25 would ensure that such accounts are not eroded by the costs of insurance, allowing them to more rapidly increase balances. Ultimately, this would lead to higher superannuation balances at retirement.

2.94               In addition, this option would reduce instances of inappropriate default insurance within superannuation. That is, members who are under the age of 25, who are less likely to need cover for dependants or liabilities (such as mortgages) would not be provided with unneeded insurance.

2.95               The regulatory burden estimate generated a slight benefit of the policy change to individuals, who would have previously opted out of insurance and no longer had to, as insurance was not available under option 3.

Benefits to industry

2.96               Superannuation funds would no longer be required to offer insurance to these members. This may simplify underlying systems (for example, they would no longer need to provide services to allow members to opt out of coverage) and reduce existing disclosure requirements to the extent these members would otherwise be required to be notified.

Costs

Costs to individuals

2.97               The primary cost would be for those members with account balances under $6,000 or who are under 25 who would lose access to insurance within superannuation (which is subject to concessional tax treatment and often allows members to be covered under automatic acceptance rules). Individuals who wished to hold life insurance would be forced to do so outside superannuation - which is not always concessionally taxed and is unlikely to be offered under a group insurance arrangement (meaning likely to be more expensive and harder to obtain).

2.98               While 70 per cent of life insurance is currently held through superannuation [11] , only a small per cent of affected members would be expected to seek out insurance outside of superannuation.

2.99               As with option 2, those members who continue to hold default insurance in superannuation may also face increased premiums. However this is balanced against the benefits which accrue to those individuals who may be over-insured and therefore are having their superannuation savings inappropriately eroded through excess premiums.

2.100           The costing incorporated members who had accounts below $6,000 and members who were under the age of 25 (but held balances over $6,000) to ensure no cohorts were double counted. The regulatory impact overall was a cost, when factoring in the assumed number of both cohorts that would have to seek insurance arrangements outside of superannuation.

Costs for industry

2.101           The costs for industry would be similar to those identified in option 2. Funds would be required to send notification to current members that would be impacted by the changes and would be required to update disclosure material. This approach would likely have a higher impact on revenue.

2.102           Funds could be required to renegotiate contracts with their insurance providers, and insurance providers to superannuation funds would incur a cost from the reduction in the amount of default insurance cover provided.

Table 2.8 Regulatory burden estimate (RBE) table

Insurance in superannuation  - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$13.5

 

$8.6

$22.1

Overall Cost Benefit outcome

2.103           This option would be administratively simpler for industry to implement. This option would result in benefits to members in relation to retirement savings but would more strictly prevent a proportion of people from accessing insurance in superannuation.

Fees in superannuation

2.104           This proposal would prevent trustees from charging administration and investment fees to low balance accounts. Funds would be required to assess eligibility for the fee ban twice a year at the unclaimed money reporting dates.

2.105             As part of their existing monitoring role, APRA would monitor how funds respond to the fee ban to ensure that funds did not shift fees.

Benefits

2.106           This proposed fee ban would prevent the erosion of accounts by passively incurred fees such as administration and investment fees for low balance accounts, providing more complete protection for members’ retirement savings.

Costs

Costs for members

2.107           While members with accounts below $6,000 will be protected by fees, this will increase the level of fees charged on members with balances above $6,000. Superannuation funds would likely have to shift fees to members with accounts above the threshold of the ban, as they would not be able to recover any of the costs associated with administering accounts with balances below $6,000.

Costs for industry

2.108           As funds could not recover fees from low balance accounts, they may face a loss in revenue, to the extent that they would be unable to recover it from other accounts. Funds that have a large share of low balance accounts would be particularly adversely affected.

2.109           Similarly to option 2, this proposal would impose an additional regulatory burden on superannuation funds. Funds would face a one off regulatory cost associated with reviewing fee structures and updating product disclosure.

2.110           As the inactive superannuation element under this option would rely on assessments completed on the unclaimed reporting dates, the ongoing regulatory cost for funds of assessing the balance off accounts is unlikely to be significant.

2.111           Funds would face a one off administrative cost in adjusting their fee structures. Funds would also be required to communicate fee changes to members, including by updating or revising existing disclosure material such as product disclosure statements and MySuper dashboards.



 

Table 2.9 Regulatory burden estimate (RBE) table

Superannuation Fee Protections - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$5.1

 

 

$5.1

Overall Cost Benefit outcome

2.112           This option would still require systems updates and revised PDS documentation to be sent to members. The fee ban would significantly reduce the revenue for superannuation funds, creating risks to the viability of some funds. It would also likely result in a greater increase in fee shifting than under option 2 for accounts with balances above $6,000. 

Inactive superannuation accounts

2.113           Under this proposal the superannuation funds would be required to transfer all balances below $6,000 to the ATO after 13 months of inactivity (that is, no contributions or rollovers). While held by the ATO, the accounts would not be subject to any fees and would be adjusted for CPI.

2.114           Unlike option 2, under this option individuals would then need to contact the ATO (through existing mechanisms) in order to consolidate the ATO held funds with the superannuation account of their choice.

Benefits

2.115           This proposal would generate efficiencies by allowing more inactive accounts below $6,000 to be transferred to the ATO, where they would be protected from fee erosion and would receive indexation at CPI.

2.116           While this proposal would not prevent the creation of new multiple accounts by members, it would reduce the stock of inactive accounts below $6,000 in the system by moving them to the ATO. This proposal would reduce some of the adverse consequences of multiple inactive low balance accounts on relevant members.

2.117           Under this approach the balances would be consolidated with the account chosen by the member. Compared to option 2, this option would limit the risk of consolidation to an unwanted account in the event that an individual has multiple active accounts.

Costs

Costs for members

2.118           The majority of costs for individuals will relate to search costs in order to recover funds. To recover the money transferred to the ATO, a member would be required to either use the MyGov superannuation platform, or submit a request to the ATO in writing. If an individual does not have a MyGov account, they would need to establish the account and then link it to the ATO segment of the site. Once linked however, the individual would be able to view all superannuation information available to the ATO that relates to them. Under this approach it is likely that the funds will be held by the ATO for a longer period assumed under option 2 due to the low levels of engagement in the sector. While the account is with the ATO it will not be subject to funds, however will not receive earnings other than CPI indexation. Members may be financially disadvantaged depending on the returns that could be achieved following the consolidation of accounts within a fund. This option requires the member to be sufficiently engaged to actively request their superannuation to be transferred into an active account to benefit from the consolidation of their accounts.

2.119           The costing assumed that as more accounts were transferred to the ATO, a higher volume compared to the status quo would apply for consolidation of accounts. The costing was informed by the latest available estimate of the number of accounts that would be in scope to be transferred to the ATO and an assumption on rates of consolidation was applied. This assumption was higher in the first year, as more people would be aware of the change when it was announced, and reduced over time. The regulatory impact overall was a cost, as more individuals had to forgo leisure time (using the assumed $31 per hour rate).

Costs for Industry

2.120           This option would result in a higher cost to industry as compared to option 2 as funds would be held by the ATO for longer periods than under the previous option. Due to the high levels of member disengagement with the system, member initiated consolidation is low. This would mean that as inactive balances are removed from funds and held by the ATO, the system as a whole would have lower balances to invest and generate returns. However, the affected amount is marginal relative to total funds under management in the sector. Option 2 has the advantage of more timely consolidation as the ATO will be proactively identifying accounts and transferring balances, reducing the amount of time that members’ balances are outside the superannuation industry.

2.121           Under current legislation, the superannuation industry is required to transfer lost or unclaimed superannuation accounts to the ATO. The regulatory costing was calculated for industry on the same assumptions as option 2.

Table 2.10 Regulatory burden estimate (RBE) table

Inactive superannuation accounts - Average annual regulatory costs (ten years)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$2.0

 

$13.5

$15.5

Overall Cost Benefit outcome

2.122           Under this option members would benefit from the protection of inactive accounts with balances below $6,000 from fee erosion by transferring them to the ATO, and the indexation at CPI those accounts would receive while held by the ATO. However account holders would have to actively claim these accounts from the ATO to consolidate them into an active superannuation account which would impose a time cost. Under this proposal members would not automatically enjoy the benefits of account consolidation that option 2 allows.

2.123           The current issue of inactive accounts below $6,000 is largely a result of member disengagement. Based on current rates of requested returns from ATO held lost and unclaimed superannuation money, it is unlikely that a large proportion of accounts would be requested from the ATO.

2.124           Option 3 would provide more limited benefits to superannuation funds compared to option 2 due to lower rates of consolidation and fewer funds held. However, it would still impose a cost on superannuation funds to update their reporting and IT systems to transfer accounts to the ATO. On balance the costs outweigh the benefits of this option.

2.125           Option 3 would be administratively simpler for the ATO to implement than option 2 because it would not involve updating systems to accommodate the proactive consolidation of ATO held accounts.

Consultation overview

2.126           Stakeholder consultation on exposure draft legislation to implement the Protecting Your Super Package commenced on Budget night and closed on 29 May 2018. During this period, Treasury met with 22 organisations and received 44 written submissions.

2.127           The key areas for consultation were consideration of current fee structures of relevant accounts, the effect of altering current insurance arrangements and arrangements for transferring superannuation accounts to the ATO. In addition, consultation sought views on the best method of communicating to members any proposed changes, as well as on the changes to systems and procedures required by industry to enact and comply with any possible changes.

2.128           The Government has been cognisant of a range of other public consultative processes that either directly or indirectly involve elements of the proposed package. Fees in the superannuation industry have been a matter of consideration by the Productivity Commission through its inquiry into the competiveness and efficiency of Australia’s superannuation system. Insurance through superannuation arrangements have recently been discussed through the Insurance in Superannuation Working Group process with the formulation of the industry’s voluntary code of practice. In addition, the Government was mindful of the findings of the Parliamentary Joint Committee on Life Insurance Industry. The Pre-Budget Submissions for the 2018-19 Budget, also articulated some industry concerns with the current ATO held superannuation accounts.

2.129           The key issues that were raised in consultation, and how they were addressed, are as follows:

Fee changes

2.130           A number of stakeholders raised concerns about the administrative complexity of implementing the proposed fee cap on a six monthly basis and prospectively. In response to this feedback, the drafting was amended to simplify the fee cap such that it is calculated annually on a backward looking basis (i.e. rebated where actual fees exceed the threshold), lowering the regulatory burden for funds while achieving the same outcome.

2.131           Stakeholders also sought clarification as to which fees and costs were captured by the cap. The legislation was subsequently amended to clarify that the fee cap includes any amounts directly or indirectly deducted from members’ returns where they relate to administration or investment.

2.132           Some stakeholders raised concerns that the ban on exit fees would result in the cost of transferring out of funds being pushed into less transparent fees such as buy-spread spreads. No change was made in response to these concerns, as trustees are required to charge buy-sell spreads on MySuper and choice products on a cost recovery basis and APRA’s ongoing reporting and monitoring would allow any changes of this nature to be identified over time should they arise.

Insurance changes

2.133           In relation to the insurance elements, a key theme of consultation was the impact of the changes on levels of default cover or costs of insurance. No changes were made in response to these concerns as the purpose of the changes is to ensure that default insurance is better targeted. Any increase in the cost of premiums will be dependent on the responses that funds and insurers determine in response to the changes.

2.134           Some stakeholders raised concerns about the administratively burden that would be placed on employers and individuals who currently are provided insurance through employer-paid insurance schemes within their superannuation. In response to this feedback, a carve-out was drafted for members who hold insurance within superannuation through these schemes, where the employer pays the premiums in full and in excess of the mandatory superannuation guarantee (SG) obligations. This will ensure that the intent of the policy is achieved (that is, account balance erosion is better balanced against the provision of insurance) while minimising burden on individuals and businesses.

ATO consolidation regime

2.135           Many stakeholders sought clarification of how the transfer would work in practice, for example how the requirements would interact with accounts that have insurance coverage.  While already provided for, clarifying amendments have been made in the legislation and Explanatory Memorandum to allow the interactions to be more easily understood and applied.

2.136           A number of stakeholders called for a carve-out for accounts in the pension phase, self managed superannuation funds and small-APRA regulated funds, which was subsequently adopted in the final legislation.

2.137           Some stakeholders called for a longer period of inactivity before the account is required to be transferred to the ATO. No change is recommended in response to this feedback as this period takes into account the erosion that low balance inactive accounts can face as well as average periods of maternity leave.

Option selection / Conclusion

2.138           Throughout stakeholder consultation the vast majority of stakeholders supported the proposals under option 2. Most parties recognise the need to address the erosion of low balance accounts by fees and inappropriate insurance premiums as well as a greater need for consolidation of accounts in the system.

2.139           A number of stakeholders raised concerns about the regulatory costs of updating systems and implementing new procedures required to implement the changes. All of the proposed options would require some type of systems update (as well as changes to disclosure documents). A number of stakeholders indicated that the systems updates for the fee cap calculation are similar to systems previously used to implement the Member Protection Standard that applies prior to MySuper. This would allow funds to re-activate this functionality in their system and update the parameters for the proposed setting, reducing the cost of implementing the fee cap.

2.140           The imposition of a fee cap as opposed to the option of banning all fees for accounts below $6,000 is the preferred option as it provides protection for low balance accounts while recognising that there is an inherent cost in the provision of superannuation products. Option 2 would therefore result in less cross-subsidisation of administration and investment costs associated with low balance accounts by other members in the system.

2.141           A significant number of stakeholders raised the importance of the provision of insurance through superannuation. This highlighted the value insurance provides for a number of young and low balance superannuation account holders. Stakeholders also noted the work that had been done to date through the Voluntary Code of Practice established by the Insurance in Superannuation Working Group (ISWG), which has already proposed measures that would require new notification requirements and updates to funds’ PDSs (such as the automatic cessation of insurance in the event of inactivity or the specific consideration of certain cohorts of members (e.g. young members) by trustees when designing insurance benefits).

2.142           A number of stakeholders raised concerns around the reduced levels of insurance coverage that will result from the package. While there will be some people who will no longer have insurance coverage as a result of the package, this will be balanced against the benefits that will accrue to individuals that currently hold duplicate or inappropriate insurance products, whose retirement savings are being unduly eroded by premiums as a result.  For this reason the proposed option 2 offers the highest net benefit at a system and individual level. Under this approach, individuals will still have the option to request the insurance products they deem to be necessary for their personal circumstances, however they will not be defaulted into arrangements which could unnecessarily erode their retirement balance. There will be a regulatory cost of updating systems to account for the monitoring of accounts for the proposed option. However, this option retains the aspect of choice for young members which would be removed under option 3.

2.143           In addition, account consolidation was a key issue raised by stakeholders throughout the consultation process. A number of stakeholders raised that there was a large number of inactive accounts in the system and the disengagement of members of funds made it difficult to address this issue.

2.144           Some stakeholders proposed an alternate model whereby the ATO would advise funds where members hold active accounts, and the consolidation would be facilitated through a direct fund to fund transfer. This approach has the advantage that member’s accounts do not lose the financial gains from investment returns during the reunification process. However, option 2 remains the preferred approach. The advantage identified by stakeholders who raised the alternate model was that accounts would lose earnings for the time the ATO would take to reunite accounts. However, for an average account, the ATO estimate that when an active account has been identified, it would take less than a month from the time the funds are transferred to the ATO to when the funds are transferred to an active account. This timing should not have a material adverse effect on the earnings of accounts.

2.145           In addition, as the ability to reunite inactive balances is a significant responsibility it is important that the reunification process be administered by an independent party who has no interest other than the timely reunification of accounts. Clearer accountabilities come from executing reunification via the ATO. For accounts where no active account can be located, the account will remain with the ATO and receive earnings based on CPI and not be subject to erosion from fees or premiums.

2.146           Overall, option 2 is the preferred approach as it provides the greatest benefit to members at the lowest regulatory burden for industry.

7. Implementation and evaluation / review

2.147           The implementation of the policy will require system updates and reviews of current practices for the industry, as well as engagement with individual members of funds to ensure they are aware of the changes.

2.148           The legislation to amend the current regulatory framework has been drafted to ensure the changes take effect on the same date so that a streamlined approach can be made to update processes and communication with members. As previously stated, there is a high level of member disengagement in the superannuation sector, and this is likely to be the biggest challenge to implementation. Funds will have an element of discretion on how they communicate with their members to inform them of the changes to fee structures, insurance arrangements and the alteration to the consolidation regime administered by the ATO. To reduce costs in communication with members these materials can be provided in a consolidated form as well as through electronic means.

2.149           Changes to the fee structure through the introduction of a fee cap and the banning on exit fees will need to be communicated to members, however no action is required from members to obtain these benefits.

2.150           Insurance arrangements will require the active consideration by members to assess their need for insurance cover and therefore communication will be essential. Funds will communicate with members on the change from opt out to opt in as well as be required to send periodic updates to members as they approach the inactivity threshold of 13 months.

2.151           Due to the introduction of the new inactivity requirement for the ATO consolidation regime, there is likely to be a significant number of accounts transferred to the ATO in the first year of the new framework. This system will utilise the existing arrangements for transfer of funds to the ATO which will reduce the implementation risk. Following the initial transfer in the first year of new policy, transfers to the ATO should operate in a similar manner to the current framework, albeit with fewer exclusions.

2.152           The overall performance of the package of measures will be assessed through the analysis of member contribution statistics. This analysis will reveal the level of account consolidation following the introduction of the policy, as well as detail the amount of accounts subject to fee protections and changes to insurance arrangements.

2.153           Successful implementation of the package will result in a reduction in multiple superannuation accounts and duplicate insurance cover and minimised account balance erosion as a result of excessive fees and insurance premiums. A noticeable consolidation of multiple low balance superannuation accounts should occur within the first year, as the ATO expects that a large proportion of the money it holds will be reunited within the first year of the policy.

2.154           While the package does not target the root cause of account proliferation, as noted above any system which allows for - or indeed requires - individuals to hold multiple account needs to address the problems identified in this RIS.  While other processes underway, namely the Productivity Commission’s review of the competitiveness and efficiency of the superannuation system, can be expected to provide recommendations which address some of these root causes, any potential future Government action in this regard would not alleviate the need for the measures in this package.

2.155           As the measures outlined in the RIS are being progressed in the context of other significant reviews into the competitiveness, efficiency and effectiveness of the insurance and superannuation systems - some complete, others ongoing or yet to commence - the timing and scope of future reviews into the reforms set out in the RIS would be better determined when those reviews are more advanced. However, APRA and ASIC, in their ongoing supervisory duties and data collection roles, will be able to monitor the impacts of the package on the superannuation industry including any potential unintended consequences.



Chapter 3          

Statement of Compatibility with Human Rights

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

Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019

3.1                   This Bill 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

3.2                   This Bill contains amendments to the SIS Act and SUMLM Act, to protect individuals’ retirement savings from erosion, ultimately increasing Australians’ superannuation balances.

3.3                   Superannuation is a major part of Australia’s retirement income system. Together with the Age Pension and savings outside superannuation, it supports Australians in their retirement years.

3.4                   Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). Its importance is projected to grow rapidly in the coming decades.

3.5                   Given the importance of superannuation to Australians, the Government is seeking to ensure that people’s hard-earned savings are not unnecessarily eroded by fees or inappropriate insurance arrangements.

3.1                   The Bill will protect members’ superannuation savings from erosion by ensuring that arrangements for insurance in superannuation are appropriate so that members are not paying for insurance coverage that they do not know about or premiums that inappropriately erode their retirement savings.

3.2                   This Bill prevents trustees from providing opt out insurance to new members aged under 25 years or members with balances below $6,000, unless a member has elected otherwise.

3.3                   This will better target default insurance cover and prevent inappropriate erosion of retirement savings caused by insurance premiums.

3.4                   Members will still be able to obtain insurance cover within their superannuation if they choose to do so.

Human rights implications

3.1                   This Bill does not engage any of the applicable rights or freedoms.

Conclusion

3.2                   This Bill is compatible with human rights as it does not raise any human rights issues.

 




[1] Treasury analysis

[2] Treasury analysis using 2015-16 data sourced from the Australian Taxation Office.

[3]   Treasury analysis using 2015-16 data sourced from the Australian Taxation Office.

[4] ATO - Super accounts data overview: https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/Super-accounts-data/Super-accounts-data-overview/

[5] Productivity Commission draft stage 3 report on the competiveness and efficiency of the superannuation system, see http://www.pc.gov.au/inquiries/current/superannuation

[6] James O'Halloran, Deputy Commissioner, Superannuation, ATO Speech to the Australian Institute of Superannuation Trustees (AIST) Conference of Major Superannuation Funds Wednesday 14 March 2018

[7] Treasury analysis.

[8] Treasury analysis based on 2015-16 data sourced from the ATO

[9] Table 6 APRA Annual Super Bulletin 2017

[10] Treasury analysis analysis based on 2015-16 data sourced from the ATO.

[11] Rice Warner, Insurance through Superannuation, 20 April 2016.