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Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018



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ISSN 1328-8091

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BILLS DIGEST NO. 32, 2018-19 16 OCTOBER 2018

Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 Joseph Ayoub Law and Bills Digest Section

Contents

Glossary .......................................................................... 4

Bills Digest at glance........................................................ 5

Purpose of the Bill ........................................................... 7

Structure of the Bill ......................................................... 7

Structure of this Bills Digest ........................................ 7

Background ..................................................................... 7

Consultation ................................................................ 8

Productivity Commission........................................... 8

Committee consideration ................................................ 8

Senate Standing Committee on Economics ................ 8 Senate Standing Committee for the Scrutiny of Bills .............................................................................. 9

Policy position of non-government parties/independents...................................................... 9

Financial implications .................................................... 10

For the Government .................................................. 10

For business and individuals ..................................... 10

Stakeholder comments ........................................... 10

Table 1: Additional cost to Government and the economy ........................................................... 11

Statement of Compatibility with Human Rights.............. 12

Parliamentary Joint Committee on Human Rights ... 12 Schedule 1—fees charged to superannuation members ...................................................................... 12

Commencement ........................................................ 12

Date introduced: 21 June 2018

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1 to 3 commence on Royal Assent. Schedules 1, 2 and 3 commence the day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at October 2018.

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Background ............................................................... 12

About fees ............................................................... 13

Key provisions—caps on fees and costs.................... 14 Three per cent cap on low balances ....................... 14

Member holds product for the whole year........... 14 Member holds product for part of the year.......... 14 Nature of fees and costs that are capped ............... 15 Stakeholder comments—fee caps ............................ 16

Potential redistribution of fees ............................... 16

Timing of the fee cap calculation ............................ 17

Fee cap applied at the account or product level .... 17 Fee cap rate ............................................................. 18

Commencement ...................................................... 18

Key provisions—ban on exit fees .............................. 18

Stakeholder comments—ban on exit fees ................ 19 Opaque nature of cost and fees .............................. 19

Multiple withdrawals .............................................. 20

Schedule 2—Insurance for superannuation members..... 20

Background ............................................................... 20

Insurance in Superannuation Voluntary Code of Practice .................................................................... 21

Inquiry into the life insurance industry ................... 22 Productivity Commission......................................... 23

Review of default insurance in superannuation ..... 23 Key provisions—insurance ........................................ 25

Inactive accounts ..................................................... 25

Low-balance accounts ............................................. 25

Members under 25 years of age ............................. 26

Exceptions ............................................................... 26

Notification requirements prior to commencement ...................................................... 27

Inactive accounts ..................................................... 27

Low-balance accounts ............................................. 27

Stakeholder comments ............................................. 28

Members under 25 years of age ............................. 29

Low balance accounts ............................................. 31

Inactive accounts ..................................................... 31

High risk occupations .............................................. 32

Table 2: Retail insurance availability for high risk building and construction occupations ............ 32 Impact on the economy and retirement balances ................................................................... 33

Table 3: Impact of Budgetary changes on individual’s retirement balance .............................. 34

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Commencement ...................................................... 34

Schedule 3—Inactive low-balance accounts and ATO consolidation ................................................................ 35

Background ............................................................... 35

Productivity Commission......................................... 36

Key provisions ........................................................... 37

Accounts that are inactive low-balance accounts .. 37 Accounts that are not inactive low-balance accounts .................................................................. 37

Inactive low-balance members ............................... 38

Reporting obligations .............................................. 39

Paying amounts to the Commissioner .................... 39 Refund of overpayment .......................................... 40

Payments that must be made by the Commissioner .......................................................... 41

Stakeholder comments ......................................... 41

Recovery of overpayment ....................................... 41

Return of payment .................................................. 42

Reunification of superannuation balances ............. 42 Stakeholder comments ........................................... 43

Commencement ........................................................ 44

Appendix A: KPMG post budget analysis ........................ 45

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Glossary

ACTU Australian Council of Trade Unions

AFA Association of Financial Advisers Ltd

AIAA AIA Australia

AIST Australian Institute of Trustees

APRA Australian Prudential Regulation Authority

ASFA Association of Superannuation Funds Australia

ASIC Australian Securities and Investments Commission

CAANZ Chartered Accountants Australia and New Zealand

ClearView ClearView Wealth Management

Commissioner Commissioner of Taxation

FCA Financial Counselling Australia

FRLC Financial Rights Legal Centre

ISA Industry Super Australia

ISWG Insurance in Superannuation Working Group

ITAA97 Income Tax Assessment Act 1997

LCA Law Council of Australia

MetLife MetLife Insurance Limited

PC Productivity Commission

PC Draft Report Superannuation: Assessing Efficiency and Competitiveness

PJCCFS Parliamentary Joint Committee on Corporations and Financial Services

QCU Queensland Council of Unions

Rest Retail Employees’ Superannuation Pty Ltd

RSA Retirement savings account

RSA Act Retirement Savings Accounts Act 1997

SIS Act Superannuation Industry (Supervision) Act 1993

SMSF Self-managed superannuation fund

SUMLM Act Superannuation (Unclaimed Money and Lost Members) Act 1999

TAA Taxation Administration Act 1953

TAL TAL Life Limited

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Bills Digest at glance

What the Bill does

The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 contains three Schedules, the purpose of which is to make amendments to the SIS Act and the SUMLM Act to:

• limit the amount of fees that can be charged by a trustee of a superannuation fund for MySuper or choice products to three per cent of the balance of the account if the balance is less than $6,000

• prohibit superannuation funds and approved deposit funds from imposing exit fees when a member disposes of all or part of their interest in a fund

• prevent superannuation funds from providing insurance such as death, total and permanent disability or income protection insurance on an opt-out basis where:

- the member is under the age of 25 years and begins to hold a new superannuation account on or after 1 July 2019 - the member’s account balance falls below $6,000 or - the member’s account has not received a contribution for 13 months and is inactive • require retirement savings account providers and superannuation providers to pay the balance

of MySuper or choice accounts to the Commissioner of Taxation, where the account is inactive and the balance is less than $6,000 and

• require the Commissioner to consolidate any amounts received into a person’s superannuation account that will have a balance of $6,000 or more once consolidated.

Background

• The measures contained in the Bill were announced by the Government in the 2018-19 budget and form part of its ‘Protecting Your Super Package’.

• The Productivity Commission released its draft report Superannuation: Assessing Efficiency and Competitiveness following the 2018-19 budget.

Committee consideration

• The provisions of the Bill were referred to the Senate Standing Committee on Economics (Legislation Committee) for inquiry and report. The Committee recommended that the Bill be passed by the Senate.

• ALP Senators provided additional comments to the Committee’s report in which they stated that they would continue to evaluate possible amendments.

Stakeholder views

• The majority of stakeholders support the Government’s objective which is to prevent the erosion of low-balance accounts due to excessive fees and insurance. In particular, while some stakeholders have expressed their full support for the Bill, other stakeholders do not agree with particular aspects of the Bill.

• Key concerns include:

- the proposed fee cap may lead to an reallocation of fees and charges to members who have account balances that are greater than $6,000 - the proposed commencement date of 1 July 2019, particularly in relation to Schedule 2 of the Bill, will be challenging for super funds to meet and could lead to adverse outcomes for

members - the proposed changes to opt-out insurance may impact high risk occupations

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- the 13 month definition of inactivity may cause detriment to certain groups, including for example, those taking parental leave and/or intermittent workers - removing opt-out insurance coverage for active members with balances below $6,000 means that actively contributing members will not be covered for a period of time unless

they voluntarily opt-in - the age threshold of 25 years, being the age at which opt-out insurance can be provided for new members, may be too high and may result in members who are under 25 years old and

who have dependants and/or liabilities being uninsured - although the precise amount is debated, insurance premiums are likely to increase both because the insurance risk pool will be reduced and because high risk members are more

likely to opt-in and - ensuring that the ATO consolidates inactive accounts within an appropriate timeframe.

Other issues

• An inconsistency appears to arise under proposed paragraph 99G(1)(b) of the SIS Act which ‘switches-on’ the three per cent fee cap provisions if, on the last day of the income year of the fund, the member has an account balance that is less than $6,000. Example 2.4 of the Explanatory Memorandum to the Bill makes it clear that it is intended that the fee cap provision applies if a member has a low balance account and closes their account before the last day of the fund’s income year. However, the wording of proposed paragraph 99G(1)(b) does not make this particularly clear and may limit the application of the provision to a member who holds the product for only part of the income year, if they have a low balance account on the last day of the income year of the fund—but not if there was no account on that day. In latter case, it is possible that the fee cap in proposed section 99G of the SIS Act may not apply.

• There also appears to be a very minor error in the application clause in Part 2 of Schedule 3 to the Bill which makes reference to paragraph 20QA(1)(a) ‘as inserted by item 8 of this Schedule’. It is likely that the reference should be to item 30 of Schedule 3.

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Purpose of the Bill The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (the Bill) makes amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to:

• limit the amount of certain fees that can be charged by a trustee of a superannuation fund for MySuper or choice products to three per cent of the balance of the account if the balance is less than $6,000

• prohibit superannuation funds and approved deposit funds from imposing exit fees when a member disposes of all or part of their interest in a fund and

• prevent superannuation funds from providing insurance such as death, total and permanent disability or income protection insurance on an opt-out basis where:

- the member is under the age of 25 years and begins to hold a new superannuation account on or after 1 July 2019 - the member’s account balance falls below $6,000 or - the member’s account has not received a contribution for 13 months and is inactive. The Bill also amends the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act) to:

• require retirement savings account (RSA) providers and superannuation providers to pay the balance of MySuper or choice accounts to the Commissioner of Taxation (the Commissioner), where the account is inactive and the balance is less than $6,000 and

• require the Commissioner to consolidate any amounts received into a person’s superannuation account that will have a balance of $6,000 or more once consolidated.

The Bill also makes consequential amendments to the Income Tax Assessment Act 1997 (ITAA97) and the Taxation Administration Act 1953 (TAA).

Structure of the Bill The Bill consists of three Schedules:

• Schedule 1 of the Bill bans exit fees on withdrawals and limits the amount of fees that can be charged for MySuper or choice products where the balance of an account is less than $6,000

• Schedule 2 of the Bill prevents insurance being provided on an opt-out basis in certain circumstances and

• Schedule 3 of the Bill requires inactive low-balance accounts to be paid to the Australian Taxation Office (ATO) and requires the ATO to consolidate any amounts received into a superannuation account, the balance of which once consolidated will be at least $6,000.

Structure of this Bills Digest The relevant background, stakeholder comments and analysis of the provisions are set out under each Schedule number.

Background The 2018-19 Budget contained the Government’s ‘Protecting Your Super Package’, which is intended to ‘protect individuals’ retirement savings from undue erosion, ultimately increasing Australians’ superannuation balances’.1

1. Australian Government, Budget measures: budget paper no. 2: 2018-19, pp. 34-35.

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Consultation Accordingly, on 8 May 2018, the Minister for Revenue and Financial Services, Kelly O’Dwyer released an exposure draft of the current Bill for public consultation.2 At that time she reiterated that the Government was seeking to protect retirement savings ‘by introducing new measures to guard against the undue erosion of superannuation balances through excessive fees and inappropriate insurance arrangements’.3

Consultation ran until 29 May 2018 in which time Treasury received 45 submissions.4

Productivity Commission Following the announcement of the Protecting Your Super Package in the 2018-19 Budget, the Productivity Commission (PC) released its draft report Superannuation: Assessing Efficiency and Competitiveness (PC Draft Report) on 29 May 2018.5

In summary, the PC opined that the erosion of members’ balances is ‘substantial in size and regressive in impact’.6 The most substantial contributor to the erosion of member accounts are members with multiple accounts which comprise a third of all accounts (about 10 million) and erode member balances by $2.6 billion per year in fees and insurance.7 Further consideration of the recommendations made by the PC are set out under each Schedule heading.

Committee consideration

Senate Standing Committee on Economics The provisions of the Bill were referred to the Senate Standing Committee on Economics (Legislation Committee) for inquiry and report by 13 August 2018.8 Details of the inquiry are at the inquiry homepage (the Committee inquiry). The Committee received 34 submissions as well as additional information and answers to questions on notice. The Committee also held a public hearing on 20 July 2018. The Committee delivered its report into the inquiry to the Senate on 13 August 2018.9

The Committee recommended that the Bill be passed by the Senate.10

While the Committee acknowledged a range of concerns which had been raised by stakeholders,11 it ultimately considered that the Bill is ‘an important first step’ in addressing the erosion of members’ balances as a result of fees and insurance, and that the proposed measures ‘will have tangible benefits for Australians' retirement savings’.12

2. The Treasury, ‘Protecting your super package’, the Treasury website, 8 May 2018; K O’Dwyer, (Minister for Revenue and Financial Services), Budget 2018: Encouraging and rewarding Australians by protecting your superannuation, media release, 8 May 2018.

3. K O’Dwyer, Budget 2018: Encouraging and rewarding Australians by protecting your superannuation, op. cit., pp. 1-2. 4. Treasury, ‘Protecting your super package’, op. cit. 5. Productivity Commission (PC), ‘Superannuation: assessing efficiency and competitiveness’, PC website. 6. PC, Superannuation: assessing efficiency and competitiveness, Draft report, April 2018, Canberra, p. 51. 7. Ibid., pp. 2 and 51. 8. Senate Standing Committee for the Selection of Bills, Report, 6, 2018, The Senate, Canberra, 21 June 2018, p. 3. 9. Senate Standing Committee on Economics, Report, Inquiry into the provisions of the Treasury Laws Amendment (Protecting

Your Superannuation Package) Bill 2018, The Senate, Canberra, 13 August 2018. 10. Ibid., p. 47. 11. Ibid., pp. 45-47. 12. Ibid., p. 45

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Australian Labor Party (ALP) Senators provided additional comments to the Committee’s report, in which they stated that they ‘are cautiously supportive of the bill's broad objectives … and will continue to evaluate possible amendments in order to improve the legislation’.13

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.14

Policy position of non-government parties/independents At the second reading of the Bill, ALP gave ‘qualified support to the passage of the Bill through the House’, subject to the findings of the Committee, Chris Hayes, MP stated:

Our position on this bill will be subject to the findings of the Senate Economics Legislation Committee. We want to make sure that this bill delivers what it purports to do and that there are no unintended consequences. 15

Specifically, ALP Senators noted the following concerns that had been raised by stakeholders:

• the proposed fee cap may enable ‘funds to simply reallocate fees and charges’.16 The ALP Senators recommended that Treasury or the Australian Prudential Regulation Authority (APRA) should monitor funds’ responses to the measure.17 Similarly, the Committee suggested that consideration be given to regulatory monitoring of any changes with respect to buy-sell spread practices18

• the proposed commencement date of 1 July 2019 for the changes to insurance arrangements was particularly concerning for a broad range of stakeholders

• the proposed changes to opt-out insurance may impact high risk occupations

• the ‘strict’ 13 month definition of ‘inactivity’

• removing opt-out insurance coverage for active members with balances below $6,000

• the age threshold of 25 years, being the age at which opt-out insurance can be provided for new members

• the potential ‘anti-selection’ problem that may result from the proposed changes—that is, high risk people are more likely to opt-in which may increase the average risk of the pool and

• ensuring that the ATO consolidates inactive accounts within an appropriate timeframe.19

ALP Senators also considered that it was ‘unusual’ for the Government to be proceeding based on the PC’s Draft Report, and noted the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had only recently begun looking at superannuation and insurance arrangements within superannuation—its interim report was submitted to the Governor-General and tabled in Parliament on 28 September 2018.20 ALP Senators noted that further changes may be required in the near future.

13. Senate Standing Committee on Economics, Additional Comments from Labor Senators, Inquiry into the provisions of the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, The Senate, Canberra, 13 August 2018, p. 49. 14. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 7, 2018, The Senate, 27 June 2018, p. 15. 15. C Hayes, ‘Second reading speech: Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018’, House of

Representatives, Debates, (proof), 28 June 2018, p. 34. 16. Additional Comments from Labor Senators, op. cit., p. 50. 17. Ibid., p. 51. 18. Senate Standing Committee on Economics, Report op. cit., p. 54. 19. Additional Comments from Labor Senators, op. cit., pp. 53-64. 20. Ibid., p. 49.

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In a bid to increase women’s superannuation, the ALP subsequently announced that, if elected, it would among other things:

• pay superannuation on Commonwealth Paid Parental Leave and Dad and Partner Pay and

• phase out the $450 minimum monthly income threshold for eligibility for the superannuation guarantee.21

While the ALP’s announcement does not propose any amendments to the Bill, it is likely to result in a reduced number of superannuation accounts being deemed to be ‘inactive’ for the purposes of proposed Schedules 2 and 3 of the Bill. In particular, the payment of superannuation on Commonwealth Paid Parental Leave and Dad and Partner Pay means that that for the period it is paid, a superannuation account will not be considered to be ‘inactive’. Similarly, the phase out of the $450 minimum monthly threshold for eligibility for the superannuation guarantee will result in a greater number of superannuation accounts receiving contributions; this is likely to reduce the number of accounts considered to be inactive because each contribution will ‘reset the clock’ on the 13 month period of inactivity.

Financial implications

For the Government According to the Explanatory Memorandum, the measures are estimated to have a gain to the budget of approximately $850 million in fiscal balance terms and around $1,750 million in underlying cash balance terms over the forward estimates.22

For business and individuals A regulation impact statement (RIS) was prepared in relation to the measures in the Bill. The amendments are expected to have a regulatory cost of $28.5 million to business and $71.4 million to individuals averaged over ten years.23

Stakeholder comments However, the Association of Financial Advisors (AFA) consider that the ‘RIS has failed to adequately address the consequences of these reforms’ and in particular that the ‘initial impact will be a significant reduction in revenue for superannuation fund and insurers’, which will require a reduction or redistribution of costs leading to premium increase and potential job losses within the industry’.24

Rice Warner and AIA Australia (AIAA) also argued that the collective impact of the proposed reforms would be higher than the Government has estimated—being ‘an annual cost of $2.46 billion to the Government and the Australian economy.’25 Of concern is the potential for decreased taxation revenue both at the Commonwealth and state and territory level through the collection of income tax on claim payments or state and territory levied stamp duty.26 It is also argued that the reduced insurance coverage will result in increased reliance on social security

21. B Shorten, T Plibersek, C Bowen, L Burney and C O’Neil, Labor's plan to improve women's super security, media release, 19 September 2018, p. 2. 22. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 3. 23. Ibid., p. 49. 24. Association of Financial Advisers Ltd (AFA), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury

Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 24], 9 July 2018, p. 10. 25. AIA Australia (AIAA), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 17], 9 July 2018, p. 12; Attachment 2, p. 2. 26. AIAA, Submission, op. cit., p. 13.

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payments.27 AIAA submitted the following table which, according to AIAA, outlines the additional cost to Government and the economy.

Table 1: Additional cost to Government and the economy

Source: AIAA, Submission, p. 13.

However, at least in relation to the impacts of Schedule 2 of the Bill, the RIS states that ‘resulting impacts on Government payments were factored into the overall cost of these measures as published in Budget Paper Number 2, 2018-19’ (emphasis added).28

The 2018-19 Budget estimated that the cost to the Department of Social Services amounted to $64.8 million over the forward estimates.29 The Department of Social Services provided the following basis for the estimate:

Based on data provided by the Treasury, the Department of Social Services estimated over the forward estimates that an additional 1,482 people would receive Disability Support Pension; 4,799 people would receive Newstart Allowance or Sickness Allowance, both of which will become the new JobSeeker Payment from 20 March 2020; and 159 people would receive Youth Allowance (other). This includes people receiving a part-rate of payment.

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Treasury also stated that the broader fiscal impacts had been taken into account:

… the costing for the insurance changes included in the budget materials took account of broader impacts on the government's social security payments—for example, impacts on the cost of DSP and NDIS payments. The impact on DSP payments was small, particularly in comparison with the savings in the form of reduced tax concessions, and was taken into account in the overall costing of the package.

27. Ibid., pp. 13-14. 28. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 51. 29. Australian Government, Budget measures: budget paper no. 2: 2018-19, op. cit., p. 26. 30. Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation

Package) Bill 2018 [Provisions], Answers to Questions on Notice, Department of Social Services, 2 August 2018 p. 1.

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As there are no income or assets tests for NDIS, there is likely to be negligible, if any, impact on the NDIS from the changes to insurance in super. 31

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.32

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considered that the Bill does not raise any human rights concerns either because the Bill does not engage or promote human rights, and/or permissibly limits human rights.33

Schedule 1—fees charged to superannuation members Quick guide to Schedule 1 The amendments in Schedule 1 to the Bill prevent trustees of superannuation funds from charging certain fees or costs exceeding three per cent of the balance of an account annually if the balance is less than $6,000. The amendments also prevent trustees from charging exit fees on all superannuation accounts, regardless of a member’s account balance.

Commencement While Schedule 1 of the Bill commences the day after Royal Assent, the amendments apply in relation to fees and other amounts in relation to years of income of a regulated superannuation fund ending on or after 1 July 2019.34

Background Employers are obliged to provide most employees with the right to choose the superannuation fund into which their compulsory superannuation guarantee contributions are made. This is called the choice of fund requirement.

Broadly speaking, an employer satisfies the choice of fund requirement by either making contributions to a fund chosen by the employee or, where no choice is made, by contributing to its default fund.35 Only MySuper products are eligible as default funds.36

MySuper products were introduced by the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 and are governed by Part 2C of the SIS Act. 37 These products replaced the pre-existing default superannuation products in order to provide consumers with a ‘simple and

31. I Beckett (Principal Adviser, Retirement Income Policy Division, The Treasury), Evidence to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 90.

32. The Statement of Compatibility with Human Rights can be found at page 75 of the Explanatory Memorandum to the Bill. 33. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 6, 26 June 2018, p. 44. 34. Item 19 of Schedule 1 to the Bill. 35. Superannuation Guarantee (Administration) Act 1992 (SGAA), Part 3A. 36. SIS Act, section 29TC sets out the characteristics of a MySuper product. 37. In return for a range of tax concessions, the Superannuation Industry (Supervision) Act 1993 (SIS Act) provides for the

governance of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by APRA and ASIC and the Commissioner of Taxation: SIS Act, subsections 30(1) and (2).

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cost-effective superannuation product’ that ‘have a simple set of product features, irrespective of who provides them’.38

According to the Productivity Commission:

Over half of all accounts are in MySuper products (mostly with not-for-profit funds), though these products only account for a quarter of assets in APRA-regulated funds. Average balances for choice accounts are over twice those of MySuper accounts, and accounts in [self-managed super funds] SMSFs are about seven times as large again.

39

About fees The PC Draft Report makes the point:

Fees matter — they directly detract from members’ returns and, ultimately, their retirement incomes. Higher fees of just 0.5 per cent a year could reduce the retirement balance of a typical worker starting work today by around $100 000.

In 2017, members of APRA-regulated funds collectively paid $8.8 billion in fees (excluding insurance fees and premiums). In dollar terms, fees per member account rose over the preceding decade, largely due to account consolidation (reducing a regressive cross subsidy) and higher balances (corresponding to higher investment costs).

40

The types of fees paid by members to funds may include:

• administration fees—which can be levied as a dollar charge over time (for example per month) or as a percentage of a member’s assets

• investment fees—which are typically levied as a percentage of a member’s assets

• insurance fees—the cost of administering any insurance policy that is on a member’s account

• specific service fees—such as switching fees, withdrawal fees and fees for financial advice (which are levied based on a member’s individual activities).41

Of these, administration and investment fees represent the majority of fees charged by funds. These fees are incurred by members simply by virtue of holding a product and are a significant cause of account balance erosion, particularly for inactive accounts.42 The PC Draft Report states:

Higher fees are clearly associated with lower net returns over the long term. The material amount of member assets in high-fee funds (about 10 per cent of total system assets), coupled with persistence in fee levels through time, suggests there is significant potential to lift retirement balances overall by members moving, or being allocated, to a lower-fee and better-performing fund.

43

The Minister noted that regulatory protection for low balance accounts was removed in 2013 with the introduction of MySuper.44 ‘Member protection’ generally prevented trustees from charging administrative fees that exceed the investment return on the account, where the balance of the account was less than $1,000.45 The removal of member protection was recommended by the

38. Revised Explanatory Memorandum, Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2012, p. vii; SIS Act, section 29R. 39. PC, Superannuation: assessing efficiency and competitiveness, op. cit., p. 74. 40. Ibid., p. 127. 41. Ibid., p. 130. 42. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 9. 43. PC, Superannuation: assessing efficiency and competitiveness, op. cit., p. 47. 44. K O’Dwyer (Minister for Revenue and Financial Services), ‘Second reading speech: Treasury Laws Amendment (Protecting Your

Superannuation Package) Bill 2018’, House of Representatives, Debates, (proof), 21 June 2018, p. 17. 45. Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulation 2013 (No. 2), p. 1.

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Super System Review (the Cooper Review).46 The PC also noted in its Draft Report that it considered whether the member protection rebate should be reinstated, but decided that reducing the ‘lost inactive’ threshold from five to two years ‘would be reasonably effective at minimising erosion on low-balance accounts, without enacting a cross-subsidy from higher-balance accounts’. 47

Another type of fee is an exit fee:

Generally, exit fees are levied as fixed dollar amounts, ranging from small nominal amounts up to around $180 in 2016. For the average MySuper member, exit fees are 0.1 per cent of assets, or $50 for a representative member with a $50 000 balance. For choice members, average exit fees are around double this, at 0.2 per cent of assets, or $100 for a representative member.

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In addition, in some cases, exit fees can be charged as a proportion of assets, which can be very high. According to the PC Draft Report, there is ‘no justifiable basis for variable exit fees levied as a proportion of a member’s assets’.49

The PC Draft Report recommended that ‘the Australian Government should legislate to extend MySuper regulations limiting exit and switching fees to cost-recovery levels to all new members and new accumulation and retirement products’.50

Key provisions—caps on fees and costs

Three per cent cap on low balances Item 18 of Part 1 of Schedule 1 to the Bill inserts proposed section 99G into Part 11A of the SIS Act to limit the amount of fees that can be charged by the trustee of a regulated superannuation fund which offers a choice or MySuper product, where the balance of the account is less than $6,000 on last day of the income year of the fund.51

Member holds product for the whole year If the member holds the product for the whole year, the capped fees and costs that can be charged by the fund (the ‘fee cap’) must not exceed the amount worked out in accordance with the following formula:52

Member holds product for part of the year If the member holds the product for only part of the income year, the fee cap is worked out in accordance with the formula under proposed subsection 99G(5) and ‘apportioned based on the number of days the member held the account during the income year’.53

46. J Cooper et al., Review into the governance, efficiency, structure and operation of Australia's superannuation system, Part one: overview and recommendations, Final report, Treasury, January 2010, p. 18. 47. PC, Superannuation: assessing efficiency and competitiveness, op. cit., pp. 61; 260-261. 48. Ibid., p. 136. 49. Ibid. 50. Ibid., draft recommendation 12, p. 62. 51. SIS Act, proposed subsection 99G(1). 52. SIS Act, proposed subsection 99G(2). 53. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 12. The

Explanatory Memorandum also states: ‘If the member ceases to hold the account during the income year the amount of

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The Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) may set a fee cap percentage of no more than three per cent—that is, the cost and fees will be unable to exceed three per cent of the member’s account balance.54 Member’s account balance for the product on the last day of the year means so much of the member’s account balance with the fund on that day as relates to the product.55

Item 14 of Part 1 in Schedule 1 to the Bill inserts proposed paragraph 31(2)(dc) into the SIS Act which enables the SIS Regulations to stipulate rules for the calculation of the member’s account balance. According to the Explanatory Memorandum, such standards ‘will be used where necessary to provide guidance on the treatment of amounts that have not been credited or debited to account balances at the point of the calculation’.56

Nature of fees and costs that are capped The fees and costs that are capped are listed in proposed subsection 99G(3) as, broadly, administration and investment fees charged to the member in relation to the product for the year, and any amount worked out in accordance with the SIS Regulations that:

• is not charged to the member as a fee

• is incurred by the trustee of the fund in relation to the year and

• relates to the administration of the fund or the investment of the assets of the fund.57

In order to reduce the compliance impact of the measure, the superannuation fund is taken to have complied with the proposed fee cap on low balance accounts if the fund refunds any amount that exceeds the fee cap to the member within three months after the end of the year, or from the day the member ceases to hold the account.58

Under section 99E of the SIS Act a trustee is required to attribute the costs of the fund between the classes fairly and reasonably. Adherence to proposed subsection 99G could be interpreted as conflicting with the obligation under section 99E. Accordingly, proposed subsection 99G(7) confirms that compliance with proposed subsection 99G will not be in breach of section 99E of the SIS Act.

Items 2, 9, 10, 11 and 13 of Schedule 1 to the Bill make other necessary amendments to Part 2C of SIS Act, which governs MySuper products, to give effect to the proposed amendments.

administration fees, investment fees and prescribed costs that can be charged is calculated using the member’s balance on the day the member ceases to hold the account and is apportioned based on the number of days the member held the account in the fund.’ An inconsistency appears to arise under proposed paragraph 99G(1)(b) of the SIS Act which ‘switches-on’ the three per cent fee cap provisions if, on the last day of the income year of the fund, the member has an account balance that is less than $6,000. Example 2.4 of the Explanatory Memorandum to the Bill makes it clear that it is intended that the fee cap provision applies if a member has a low balance account and closes their account before the last day of the fund’s income year. However, the wording of proposed paragraph 99G(1)(b) does not make this particularly clear and may limit the application of the provision to a member who holds the product for only part of the income year, if they have a low balance account on the last day of the income year of the fund—but not if there was no account on that day. In latter case, it is possible that the fee cap in proposed section 99G of the SIS Act may not apply. 54. SIS Act, proposed subsection 99G(4). 55. SIS Act, proposed subsection 99G(2). 56. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 12. 57. SIS Act, proposed paragraph 99G(3)(c). 58. SIS Act, proposed subsection 99G(6).

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Stakeholder comments—fee caps While many stakeholders are supportive of the cap on low balance accounts, a range of stakeholder’s considered that the cap as set out in the Bill is likely to produce unintended consequence and anomalous outcomes.

Potential redistribution of fees Some stakeholders considered that it was likely to result in a redistribution of costs to those with account balances greater than $6,000, or alternatively lead to a reduction in services for those members with lower account balances. For example, AFA submitted:

The cost of running a superannuation fund and providing services to members has a large fixed cost element, a fixed member level cost and some level of costs that are variable based upon the services provided to individual members. Whilst we understand the rationale for this proposal, the consequences for those other members who will be subsidising those with low balances needs to be considered.

The practical reality is that a fair and reasonable allocation of costs within a superannuation fund will indicate that low balance accounts are almost as expensive to maintain as high balance accounts. 59

Rest Industry Super agreed that this may be an outcome.60

Deputy Chairman of APRA, Helen Rowell, stated that APRA supported the ‘policy intent of the proposals’ and considered:

The proposal to limit the fees that can be charged to members with balances under $6,000 will also require funds to review their fee structures, and both of these measures may lead to higher fees for members with balances over $6,000. 61

ISA considers that in the absence of proposed regulations being made available outlining the Government’s view on indirect fees, an amendment should be made to the Bill to include such a definition to ensure consistent application of the fee cap, stating:

… the supporting regulation is not available for review and there are already significant gaps and inconsistencies in how funds report data on fees and costs. This measure may further exacerbate the current lack of transparency in fee disclosure. For example, it would be unacceptable if the costs associated with interposed vehicles were capped, but investments made through platforms were not. This would result in increasing opacity in fee reporting and ultimately lower net returns for members whose savings are invested in listed assets compared with unlisted assets. ISA is concerned that the Bill’s objectives will not be achieved because of the imprecise nature and vague context of these changes.

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Australian Institute of Superannuation Trustees (AIST) considered that ‘the preferable course of action should be to await the outcome of the expert review of fees and costs’.63 AIST is referring to the external review by Darren McShane into Regulatory Guide 97: Disclosing fees and costs in PDSs

59. AFA, Submission, op. cit., p. 4. 60. Rest, Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 22], 9 July 2018, p. 2; see also: Australian Institute of Superannuation Trustees (AIST), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 10], 6 July 2018, p. 2; AFA, Submission, op. cit., pp. 4-5. 61. H Rowell (Deputy Chair, Australian Prudential Regulation Authority), Evidence to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 1. 62. Industry Super Australia (ISA), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 26], 9 July 2018, pp. 4-5. 63. AIST, Submission op. cit., p. 1.

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and periodic statements.64 According to ASIC, ‘RG 97 sets out ASIC's guidance on how to disclose fees and costs in product disclosure statements and periodic statements for superannuation funds and managed investment schemes.’65 The report, REP 581 Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements, was released on 24 July 2018.66 It is beyond the scope of this Digest to consider this report, however, the report does note that its ‘recommendations and observations … have been made without regard to the details of changes that might flow from the government’s “Protecting Your Super” Package.’67

Timing of the fee cap calculation As noted above, the fee cap is based on the member’s account balance on the last day of the income year or the last day on which the member holds the account. AIST and other stakeholders considered that because proposed section 99G does not take the member’s account balance for the previous 12 months into account, members could simply move funds out of the account prior to the balance day in order to have their account fees capped.68

Fee cap applied at the account or product level Stakeholders also submitted that it was not clear whether the fee cap is determined based on the member’s product balance, or their account balance (in the event that they hold multiple products).69 The LCA submitted:

The Committee notes that it is unclear from the Exposure Draft whether the $6,000 threshold for the purposes of the fee cap applies to: (a) the total value of a member’s interest in a fund; or, (b) the amount within each MySuper product or choice product. On one reading, it would be possible, for example, for a member to have $5,000 in six different choice products (representing a total balance of $30,000) and still have the amount of their fees capped. This would not appear to be the policy intent but arises from the wording of proposed s 99G … If each investment option is a separate product (as seems to be the schema of the section) then the fee cap applies for every investment option that has less than $6,000 invested in it.

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Similarly, Mercer Consulting Australia submitted that it is appropriate for the fee cap to apply at the product level, but given the uncertainty of the wording contained in proposed subsections 99G(1), (2) and (5), application of the fee cap at the product level ‘would result in much more complex administration requirements and inappropriate outcomes’.71

To this end, both the Association of Superannuation Funds Australia (ASFA) and Mercer argued that the total account be regarded as a single interest rather than each product.72

64. ASIC, ‘RG 97 review’, ASIC website, last updated 24 July 2018. 65. Ibid. 66. ASIC, ‘REP 581 Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements’, ASIC website, last updated 24 July 2018.

67. D McShane, REP 581 Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements, ASIC, July 2018, p. 20. 68. AIST, Submission, op. cit., p. 2. 69. AFA, Submission, op. cit., p. 5; Mercer Consulting Australia (Mercer), Submission to Senate Standing Committee on

Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 19], 9 July 2018, pp. 1, 5. 70. Law Council of Australia (LCA), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 20], 9 July 2018, p. 2. 71. Mercer, Submission, op. cit., p. 5. 72. Ibid; ASFA, Submission, op. cit., p. 6.

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Fee cap rate Consumer advocate group CHOICE supports the fee cap but questioned why it is set at three per cent when, ‘according to Rice Warner, on average superannuation fees are close to 1%’.73 CHOICE welcomed the ability of the SIS Regulations to set the fee cap at a lower rate and recommended that the ‘cap be reviewed as part of a broader review of the legislation within four years’.74

Financial Counselling Australia considered that if the fee cap is proven to be effective then it could be increased to include member balances up to $10,000.75

The LCA submitted that it was not clear whether the MySuper requirements in the SIS Act permitted trustees to vary down the fee cap for certain classes of members with balances less than $6,000, submitting:

The Exposure Draft makes it clear that a fund will not breach the MySuper fee charging rules to the extent that some MySuper members pay different fees as a result of their fees being subject to the cap. However, it is unclear whether fees must otherwise be calculated in the same way for all members (subject to the cap) or whether it will be permissible for there to be an altogether different regime for members with low account balances that would be subject to the cap. For example, say that a fund charges a standard fee of $180 per annum. For a member with a $6,000 cap, this equates to 3 per cent. Is it the case that, for all members with account balances less than $6,000, those remaining members must be charged precisely 3 per cent or would it be possible to charge those members a lower fee of, say, only 2 per cent?

76 (Emphasis added).

Mercer raised similar concerns, noting that a fund may wish to waive certain fees for low balance accounts in order to avoid the administrative complexity of applying elements of the fee. However, Mercer considered that the proposed amendment to section 29TC of the SIS Act by item 2 of Schedule 1 to the Bill did not necessarily permit such a variation, and as such Mercer recommended that it should be amended to permit variation from the standard fees ‘to the extent … considered necessary or expedient by the trustee …to comply with section 99G’.77

Commencement Some stakeholders consider that there is insufficient time to comply with the measure before its commencement.78 Mercer considered that 1 July 2020 is a more realistic commencement date.79

Key provisions—ban on exit fees Item 15 of Part 1 of Schedule 1 to the Bill inserts proposed section 99BA into the SIS Act to prevent a regulated superannuation fund or an approved deposit fund from charging exit fees except as prescribed by the SIS Regulations.80

An exit fee is defined under proposed subsection 99BA(2) as ‘a fee, other than a buy-sell spread,81 that relates to the disposal of all or part of a member’s interests in a superannuation entity.’82

73. CHOICE, Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 15], 9 July 2018, p. 5. 74. Ibid. 75. Financial Counselling Australia (FCA), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 29], July 2018, p. 2. 76. LCA, Submission, op. cit., p. 3. 77. Mercer, Submission, op. cit., p. 7. 78. AIST, Submission, op. cit., p. 2; ASFA, Submission, op. cit., p. 6. 79. Mercer, Submission, op. cit., p. 8. 80. SIS Act, proposed subsection 99BA(1). 81. SIS Act, subsection 29V(4) defines a buy-sell spread as a fee to recover transaction costs incurred by the trustee, or the

trustees, of a superannuation entity in relation to the sale and purchase of assets of the entity. 82. SIS Act, proposed subsection 99BA(2).

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According to the Explanatory Memorandum ‘this could include a deferred entry fee or a percentage based fee. It is not related to the cost of disposing the interest, rather it is a fee triggered by the disposal’.83

Similar to exit fees, buy-sell spreads must be charged on a cost recovery basis and are permitted to be charged by a regulated superannuation fund that offers a MySuper product.84

Items 1, 3-8, 12, 16 and 17 in Part 1 of Schedule 1 to the Bill make a number of consequential amendments to the SIS Act to update or remove references to exit fee.

Stakeholder comments—ban on exit fees

Opaque nature of cost and fees While stakeholders have generally welcomed the Government’s objective of preventing the erosion of member balances, a number of stakeholders are concerned that the measure, without appropriate safeguards, will lead to fees and costs being passed on in other ways. For example, while ISA, strongly supports the measure, it considers that there are ‘significant gaps and inconsistencies in how funds report data on fees and costs’, such that costs may be transferred elsewhere.85

Some stakeholder’s are of the view that the proposed ban on exit fees could be undermined by the exclusion of buy-sell spreads from the definition. For example, while CHOICE supports the ban on exit fees which it considers is ‘a barrier to switching and competition’,86 it submitted:

… under the proposal funds are free to charge for buy/sell spreads. These fees accrue when a fund buys into or sells an investment option, so will still be incurred when switching to another fund. Despite buy-sell spreads being disclosed alongside exit fees in product disclosures and a requirement that they be cost reflective, these fees are extremely opaque. Often the exact buy/sell spread is not known and therefore not disclosed in a product disclosure statement; a person is instead left with a percentage-based range they may be charged on exit.

87 (Emphasis added).

Cbus echoed these concerns around the lack of transparency around buy-sell spreads, recommending that the ban must also extend to buy-sell spreads:88

… failing to tackle buy/sell spreads will result in the exit fee being able to be gamed by funds imposing buy/sell spreads as a disincentive for members to exit … Cbus does not apply buy/sell spreads. 89

COTA Australia also welcomed the ban on exit fees but considered that a ‘switching fee’ may still be imposed under the SIS Act where a member moves all or part of their balance within the same superannuation fund.90

In response to stakeholder concerns regarding the ban on fees resulting in funds redistributing fees to other costs such as buy-sell spreads, the RIS states:

83. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 16. 84. SIS Act, 99C(1). 85. ISA, Submission, op. cit., p. 4. 86. CHOICE, Submission, op. cit., p. 6. 87. Ibid., pp. 6-7.

88. Cbus, Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 32], 9 July 2018, p. 17. 89. Ibid; see also: AIST, Submission, op. cit.; Financial Rights Legal Centre (FRLC), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions],

[Submission no. 11], 9 July 2018, pp. 2-3. 90. COTA Australia (COTA), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 30], 11 July 2018, p. 2.

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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. 91

CHOICE considers that a solution would be to provide the regulator with the power to monitor fee levels, and give it power to act via the regulations where unintended consequences are discovered.92

Conversely, the LCA submitted that there are some external costs incurred by funds which, although banned under the proposed arrangements, would nevertheless have to be priced in elsewhere by trustees:

… under the current law, exit fees can only be charged on a cost recovery basis. So the actual costs incurred (and which are currently passed onto members) will need to be paid for by other means. It will not necessarily reduce the costs incurred by trustees through services provided by outsourced administrators. Because the definition of ‘administration fee’ in s 29V(2) includes ‘costs incurred by the trustee’, fees for processing benefit payments charged by administrators will need to be absorbed within the general administration costs charged to all members.

93 (Emphasis added)

Multiple withdrawals Some stakeholders also expressed concerns around the effect of multiple withdrawals by members. For example, Rest considered that while a first withdrawal should be free, subsequent withdrawals should be subject to cost recovery fees to ‘ensure that fund members … are not disadvantaged by the activities and strategies of individual members’.94

While ASFA supports the ban on exit fees, it considered that this should not extend to partial withdrawals which ‘will increase costs for the broader membership and do nothing to reduce the number of duplicate accounts’.95

AFA considered that the exit fees should be limited to the actual cost of imposing the withdrawal.96

Schedule 2—Insurance for superannuation members Quick guide to Schedule 2 The amendments in Schedule 2 to the Bill operate to prevent superannuation trustees from providing insurance such as death, total and permanent disability (TPD) or income protection insurance on an opt-out basis where:  the member is under the age of 25 years and begins to hold a new superannuation account

on or after 1 July 2019  the member’s account balance is below $6,000 or  the member’s account has not received a contribution for 13 months and is inactive.

Background The connection between insurance and superannuation began in the 1950s with life insurance companies beginning to offer superannuation products (primarily to the public sector and to male

91. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, pp. 66-67. 92. CHOICE, Submission, op. cit., p. 7. 93. LCA, Submission, op. cit., p. 3. 94. Rest, Submission, op. cit., p. 10. 95. ASFA, Submission, op. cit., p. 7. 96. AFA, Submission, op. cit., p. 6.

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professionals in large companies). Following the introduction of compulsory superannuation in 1992, insurance continued to be provided in most default products.97

Legislative requirements to offer insurance were introduced in the 2005 Choice of Fund reforms which specified that default funds must provide a minimal level of life insurance cover (but not total and permanent disability or income protection insurance). Funds did not necessarily have to give members the choice to opt out.98

In 2012, the Australian Government made it mandatory for funds to provide life and total and permanent disability insurance, on an opt-out basis, in all MySuper products.99

Part 6 of the SIS Act contains provisions relating to the governing rules of superannuation entities. In particular, section 52 of SIS Act includes a range of covenants that must be included in, or are otherwise taken to be included in the governing rules of a registrable superannuation entity including:100

• to formulate, review regularly and give effect to an insurance strategy for the benefit of beneficiaries of the entity that addresses the type and level of insurance offered having regard to the demographic composition of the beneficiaries

• to consider the cost to all beneficiaries of offering or acquiring insurance

• to only offer or acquire insurance if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries and

• to pursue insurance claims with reasonable prospects of success.101

In relation to MySuper products, a regulated superannuation fund must ensure that the fund provides a permanent incapacity benefit and a death benefit in the form of insurance to each MySuper member of the fund—that is, TPD and life insurance.102 While most members can opt-out of either TPD or life insurance, the fund may require that the member opt-out of both if they elect to opt-out of either.103 However, funds are not required to allow MySuper product members to opt-out of TPD or life insurance if the trustee is satisfied that the risk to be insured cannot be insured at a reasonable cost, or be provided on an opt-out basis.104

The Insurance Operating Standards contained in the SIS Regulations also provide that a fund must not provide an insured benefit to a member other than for death, terminal medical condition, permanent incapacity and temporary incapacity for new members from 1 July 2014.105

Insurance in Superannuation Voluntary Code of Practice The announcement of the ‘Protecting Your Super Package’ followed the development of the Insurance in Superannuation Voluntary Code of Practice (the Code) which is owned by ASFA, AIST and the Financial Services Council (FSC).106 In November 2016, the Insurance in Superannuation

97. PC, Superannuation: assessing efficiency and competitiveness, op. cit., p. 321. 98. Parliament of Australia, ‘Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 2005 homepage’, Australian Parliament website. 99. Parliament of Australia, ‘Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012

homepage’, Australian Parliament website. 100. SIS Act, subsection 52(1). 101. SIS Act, paragraphs 7(a)-(d). 102. SIS Act, subsection 68AA(1). 103. SIS Act, subsection 68AA(6). 104. SIS Act, subsection 68AA(7); SIS Regulations, regulation 9.49. 105. SIS Regulations, regulations 4.07D; items 102, 102A, 103 and 109 in the table contained in Part 1 of Schedule 1 to the SIS

Regulations. 106. ASFA, ‘Insurance in Superannuation Voluntary Code of Practice’, ASFA website.

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Industry Working Group (ISWG) was established to develop the Code, which was finalised in December 2017 and came into effect on 1 July 2018.107 Funds adopting the Code have until 31 December 2018 to publish a transition plan and must comply with the Code no later than 30 June 2021.108 The Code partly addresses some of the issues that the Bill seeks to remedy. However the Code is not mandatory and failure to adhere to it is not subject to statutory regulation.109

Inquiry into the life insurance industry The Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) reported on its Inquiry into the life insurance industry in March 2018.110 Among other things, the terms of reference for the PJCCFS Inquiry included the requirement to assess the benefits and risks to consumers of group insurance.111 Chapter 7 of the PJCCFS final report considers many of the issues that the Bill seeks to address.112

The PJCCFS acknowledged that duplicate life insurance is a ‘substantial drain on superannuation balances with significant adverse consequences for retirement incomes, particularly for those with low super balances and/or not engaged with their accounts’.113

The PJCCFS considered that trustees’ failure to act to remedy duplicate life insurance was ‘completely unacceptable given that systems already exist which can be used to remedy the matter.’114 In this regard, the PJCCFS was of the view that the ATO’s SuperMatch system provides trustees with an appropriate avenue to assist members to resolve account and insurance duplication.115 The Committee made a number of recommendations, including:

• requiring funds to inform members annually where their account is subject to erosion because of the above factors, or ‘trigger points’ are reached, for example a low balance

• requiring the ATO to provide members with a Statement of Superannuation and Insurance (based on data provided by trustees) when a taxpayer’s notice of assessment is sent out

• requesting the life insurance industry to undertake a prominent media advertising campaign

• the Government should undertake a review of superannuation trustees to determine their compliance with the covenants in the SIS Act

• the Government should consider legislating to protect the retirement savings of low balance accounts holders and members who do not receive any value from insurance and

• the Government should consider legislating to require life insurers to provide regular updates to members regarding their policies.116

107. ASFA, Group insurance statement of intent, joint media release, ASFA website, 7 October 2016; ASFA, Insurance in Superannuation Industry Working Group, joint media release, ASFA website, 2 November 2016. 108. Insurance in Superannuation Voluntary Code of Practice, clause 3.6. 109. ASFA, Release of Insurance in Superannuation Voluntary Code of Practice, joint media release, ASFA website, 18 December

2017. Although failure to adhere to the Code is not subject to statutory regulation, the Code is monitored by the Life Code Compliance Committee which can sanction insurers for breach of the Code (L McKechnie and A Thurairasa, ‘2018 industry codes and proposed reforms - is your fund ready?’, Mills Oakley website, January 2018). 110. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the life insurance industry, The Senate, Canberra, 27 March 2018. 111. Parliamentary Joint Committee on Corporations and Financial Services, the terms of reference, submissions to the Committee and the Committee’s final report are available on the inquiry homepage. 112. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the life insurance industry, op. cit., p. 103. 113. Ibid. 114. Ibid., p. 110. 115. Ibid. 116. Ibid., pp. 111-113.

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Productivity Commission With respect to insurance policies offered by superannuation funds, the PC Draft Report found:

The deduction of insurance premiums can have a material impact on member balances at retirement. This balance erosion is highly regressive in its impact — it is more costly to members with low incomes. It also has a larger impact on members with intermittent attachment to the labour force, and those with multiple superannuation accounts with insurance (the latter comprise about 17 per cent of members). Balance erosion for low-income members due to insurance could reach a projected 14 per cent of retirement balances in many cases, and in extreme cases (for low-income members with intermittent work patterns and with multiple income protection policies) could be well over a quarter of a member’s retirement balance.

117 (Emphasis added).

The PC also found that ‘default insurance in superannuation offers good value for many, but not for all, members’.118 Insurance can be little or no value where the policy is ill-suited to the members’ needs, or the member is unable to claim against it—for example, in the case of income protection policies where the member is not working or where the member has multiple policies.119 According to the PC ‘younger members and those with intermittent labour force attachment … are more likely to have policies of low or no value to them’.120

The PC made a number of draft recommendations with respect to insurance including:

• insurance through superannuation should only be provided to members under the age of 25 on an opt-in basis (draft recommendation 14)

• ceasing insurance on accounts where no contributions have been obtained for the past 13 months, unless directed otherwise by the member (draft recommendation 15)

• adoption of the Code should be a mandatory requirement of funds to obtain or retain MySuper authorisation (draft recommendation 17) and

• the Government should commission a formal independent review of insurance in superannuation which includes an examination of the costs and benefits of retaining current insurance arrangements on an opt-out basis.121

Review of default insurance in superannuation KPMG’s report Review of Default Group Insurance in Superannuation was prepared in September 2017 at the request of the ISWG to ‘undertake analysis into the costs and benefits of default insurance in superannuation’122 and ‘to evaluate whether such ‘insurance may be unduly eroding retirement savings’.123

Broadly, group insurance is a single policy which insures a number of individuals who opt-in to the group, without the need for each individual to obtain a separate policy from the insurer. This typically means that individuals can be insured under a group policy without any, or otherwise minimal risk assessment being made by the insurer. However, at certain points, the insurer will generally review the collective risk of the group and determine whether adjustments need to be made to the premiums. In the context of superannuation, this means that a super fund can negotiate group insurance policies with insurers for fund members. Members are subsequently

117. PC, Superannuation: assessing efficiency and competitiveness, op. cit., p. 53. 118. Ibid. 119. Ibid. 120. Ibid. 121. Ibid., pp. 62-64. 122. KPMG, Review of default group insurance in superannuation, 20 September 2017, p. iii. 123. Ibid.

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insured (currently under opt-out arrangements for MySuper) without the need for the insurer to enter into individual contracts with the members and therefore consider their individual characteristics. Under a group insurance model, the collective risk of each individual is spread across the group rather than being attributed to each individual. This can either increase or decrease the premium you might otherwise pay under an individual policy depending on your risk factors.

KPMG summarised the benefits of having group insurance in superannuation as follows:

 Greater insurance coverage for a larger proportion of the Australian population, thus helping to reduce Australia’s well documented underinsurance issue.

 In some instances default insurance in super improves access to insurance for people in high-risk occupations.

 Higher levels of insurance benefits are paid through group insurance compared to government safety net social security benefits, thus allowing people to take better care of their family and dependants in the event of death or disability.

 80 percent of group insurance premiums are paid back to members in claims, with 12 percent spent on expenses and commissions. By comparison, 50 perent [sic] of individual insurance premiums are paid back as benefits and 40 percent are spent on expenses and commissions.

 There is lower cost and minimal need for underwriting in comparison to individual insurance held outside superannuation.

 The income protection benefits offered under default insurance disqualify recipients from claiming a full Disability Support Pension, representing a significant saving to the public purse.

 Income Protection benefits save the government between $3 - $4.2 billion over 10 years in terms of claims on the Disability Support Pension.

 Tax on insurance payments benefit the public purse by $2.9 billion over 10 years, outweighing the costs of tax concessions provided to group insurance in superannuation. 124

The report also found that ‘females and younger members tend to comprise a higher proportion of the low income earners’ and their ‘retirement savings are generally impacted to a greater extent than males, older members and high income earners’.125

KPMG canvassed possible alternatives to reduce balance erosion including:

• ensuring default insurance takes into consideration the different needs of different cohorts

• a premium cap linked to a member’s superannuation guarantee payments could be introduced to ensure that premiums are commensurate with a person’s salary

• cessation rules may be applicable in the case of casual workers and those who are likely to have interrupted or irregular work patters and

• querying whether it was necessary to have both TPD and income protection as opposed to one or the other depending on the cohort.126

Following the announcement of the ‘Protecting Your Super Package’, KPMG also released Insurance in Superannuation: The Impacts and Unintended Consequences of the Proposed Federal Budget Changes. Appendix A to this Bills Digest sets out some key findings from KPMG’s post budget analysis.

124. Ibid. 125. Ibid., p. viii. 126. Ibid., pp. x-xi.

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AIAA also commissioned Rice Warner to conduct research into the proposed changes, Economic Impact of 2018 Federal Budget Proposed Insurance Changes, which can be found at Attachment two of AIAA’s submission to the Committee.127

Key provisions—insurance Item 1 of Schedule 2 inserts proposed sections 68AAA-68AAE into Part 7 of the SIS Act.

Inactive accounts Under proposed section 68AAA of the SIS Act a regulated superannuation fund must ensure that insurance is not taken out or maintained by the fund for a member under a choice or MySuper product held by the member if:

• the member’s account is inactive in relation to that product for a continuous period of 13 months and

• the member has not made an election in writing to otherwise take out or maintain the insurance under the choice or MySuper product.128

A member’s account is taken to be inactive in relation to a choice or MySuper product if the fund has not received an amount in respect of the member that relates to that product during that period.129 Once such an amount is received, the prohibition from providing insurance ceases to apply until the account has been inactive for another 13 months.130

Proposed section 68AAA applies from 1 July 2019.131 However, the period before 1 July 2019 is taken into account when determining if an account is inactive.132 This appears to indicate that the date from which inactivity is determined is the last date on which the members account received an amount.

Low-balance accounts Under proposed section 68AAB of the SIS Act a regulated superannuation fund must ensure that insurance is not taken out or maintained by the fund for a member of the fund under a choice product or MySuper product held by the member if:

• the member has an account balance with the fund that relates to the product that is less than $6,000

• on or after 1 April 2019, the member has not had an account balance with the fund that is $6,000 or more and

• the member has not made an election in writing to otherwise take out or maintain the insurance under the choice or MySuper product.133

127. AIAA, Submission, op. cit., Attachment 2. 128. SIS Act, proposed subsections 68AAA(1) and (2); The requirement to give information in writing can be satisfied by way of electronic communication if the information is required to be given to a person who is neither a Commonwealth entity nor a person acting on behalf of a Commonwealth entity—where the person to whom the information is required to be given

consents to the information being given by way of electronic communication: Electronic Transaction Act 1999, paragraph 9(1)(d). 129. SIS Act, proposed subsections 68AAA(3). 130. SIS Act, proposed subsections 68AAA(4) and (5). 131. Subitem 3(1) in Part 2 of Schedule 2 to the Bill. 132. Subitem 3(2) in Part 2 of Schedule 2 to the Bill. 133. SIS Act, proposed subsections 68AAB(1) and (2).

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If the member makes an election to otherwise take out insurance notwithstanding an account balance of less than $6,000, the member is also taken to have made an election under proposed subsection 68AAC(2) (members under 25 years old) and vice-versa.134

Proposed section 68AAB applies from 1 July 2019.135 However, in order to ‘manage potential administrative and compliance burdens in relation to superannuation balances that fluctuate around the $6,000 threshold amount’,136 proposed section 68AAB only applies if the member’s balance does not reach $6,000 at any time on or after 1 April 2019. This means that once a member’s account balance reaches $6,000 on or after 1 July 2019, the proposed amendments will not apply unless the member’s account subsequently becomes inactive or where the member is under 25 years and began to hold the account on or after 1 July 2019.137

Members under 25 years of age Under proposed section 68AAC of the SIS Act, a regulated superannuation fund must ensure that insurance is not taken out or maintained by the fund for a member under a choice product or MySuper product held by the member if:

• the member is under 25 years and

• the member has not made an election in writing to otherwise take out or maintain the insurance under the choice or MySuper product.138

As noted above, if the member makes an election to otherwise take out insurance even if they are under 25 years old, the member is also taken to have made an election under proposed subsection 68AAB(2) (low-balance accounts) and vice-versa.139

Proposed section 68AAC applies from 1 July 2019 to members who are under the age of 25 years and begin to hold the product on or after 1 July 2019—that is, it does not apply to those who are under 25 years and already hold such a product.140

The LCA noted that from a practical perspective perhaps a grace period following a member’s 25th birthday is necessary, in which insurance can be established for the member—otherwise the fund may be in breach of the MySuper rules.141

Exceptions Proposed sections 68AAA and 68AAB of the SIS Act do not affect a member’s right to be covered by insurance until:

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

• the expiry date of the term of the member’s existing insurance cover.142

The prohibition on providing opt-out insurance under proposed sections 68AAA, 68AAB and 68AAC of the SIS Act is not universal. It does not apply to:

134. SIS Act, proposed subsections 68AAB(3) and 68AAC(3). 135. Subitem 4(1) in Part 2 of Schedule 2 to the Bill. 136. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 21. 137. SIS Act, proposed paragraph 68AAB(1)(b). 138. SIS Act, proposed subsections 68AAC(1) and (2). 139. SIS Act, proposed subsections 68AAB(3) and 68AAC(3). 140. Item 5 in Part 2 of Schedule 2 to the Bill. 141. LCA, Submission, op. cit., p. 4. 142. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 20; proposed

subsections 68AAA(7)-(8), 68AAB(5)-(6) of the SIS Act.

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• regulated superannuation funds with fewer than five members143

• a defined benefit member144

• a member that is or would be an ADF Super member145 or

• a member to whom the employer-sponsor contribution exception applies.146

The employer-sponsor contribution exception applies where a member’s employer makes contributions in addition to the superannuation guarantee which is equal to or greater than the insurance fees relating to insurance benefit for each quarter.147 The quarter is a period of three months beginning on 1 January, 1 April, 1 July or 1 October.148

Item 2 in Part 1 of Schedule 2 to the Bill ‘turns off’ a fund’s legislative requirement to provide TPD and life insurance, if such insurance is not permitted under proposed subsections 68AAA, 68AAB or 68AAC.149

Notification requirements prior to commencement Part 2 of Schedule 2 to the Bill contains provisions for the application, transitional and fund notification requirements required to give effect to the proposed changes. Item 6 in Part 2 of Schedule 2 to the Bill provides that ASIC rather than APRA has the general administration of the amendments inserted by items 3 and 4 of Schedule 2 to the Bill—that is, inactive accounts and low-balance accounts.

Inactive accounts Subitem 3(3) in Part 2 of Schedule 2 to the Bill requires regulated superannuation funds to ensure that on 1 April 2019 account balances that have been inactive for the previous six months are identified, and on or before 1 May 2019 each member associated with such accounts is given written notice specifying:

• insurance will not be provided from 1 July 2019 if the account is inactive for 13 months and

• the member can by written notice elect to take out or maintain that insurance.150

If, after 8 May 2018 but before 1 July 2019, the member gives the fund written notice by taking out or maintaining insurance in relation to the product, the fund is not required to provide notice to the member under subitem 3(4) in Part 2 of Schedule 2 to the Bill.

Low-balance accounts Similarly, subitem 4(2) in Part 2 of Schedule 2 to the Bill, requires superannuation funds to ensure that on 1 April 2019 they identify members with insurance products whose account balances are less than $6,000, and on or before 1 May 2019 each member associated with such accounts is given written notice specifying:

• that from 1 July 2019, the fund will not provide the member with insurance if they have not had an account balance of $6,000 or more on or after 1 April 2019 and

143. SIS Act, proposed section 68AAD. 144. SIS Act, proposed paragraph 68AAC(4)(a). 145. SIS Act, proposed paragraphs 68AAC(4)(b) and (c). 146. SIS Act, proposed paragraph 68AAC(4)(d). 147. SIS Act, proposed subsection 68AAE(1) and proposed paragraphs 68AAA(6)(d), 68AAB(4)(d) and 68AAC(4)(d). 148. SIS Act, proposed subsection 68AAE(2). 149. SIS Act, proposed subsections 68AA(8A) and (8B); SIS Act, subsection 68AA(1). 150. Subitem 3(4) of Schedule 2 to the Bill.

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• the member can by written notice elect to take out or maintain that insurance.151

Notice does not need to be given by the fund, if before 1 April 2019 the member gives the fund notice by taking out or maintaining insurance in relation to the product.152 In contrast to the notice requirement under subitem 3(6) of Schedule 2 to the Bill, written notice is not required. The Explanatory Memorandum states:

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 July 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, other than in writing by, for example, a record of a meeting or a note following a telephone conversation.

153

If a member begins to hold a product under which insurance may be provided after 1 April 2019 but before 1 July 2019, the fund must provide the member with written notice stating that the fund will not provide the member with insurance from 1 July 2019 if the member has an account balance of less than $6,000 and, on or after 1 April 2019, the member has not had an account balance of $6,000 or more and the member has not elected to take out or maintain insurance notwithstanding a low balance account.154

Stakeholder comments Stakeholder views vary on the scope and application of Schedule 2 to the Bill.

ISA welcomed the ‘good intention of protecting members’ superannuation balances’, but considered that the measure was too broad, stating:

Poorly targeted changes will result in more than 3.7 million Australians being excluded from default insurance, many of whom have a particular need for insurance. These reasons include having a mortgage, working in a high-risk occupation, or supporting dependants.

Importantly the consolidation of multiple accounts through the measures set out in Schedule 3 of the Bill will, by definition, address most instances of duplicate insurance cover in superannuation. Therefore, on this matter the need for separate measures to address duplicate insurance cover is significantly diminished.

155

Similarly, MetLife Insurance Limited (MetLife) supports the changes that would have occurred as a result of the Insurance in Superannuation Working Group, but considers that the current proposed changes go much further. Of particular concern is that the amendments may operate to increase ‘administrative costs and premiums for remaining members in the group insurance system, potentially leading to greater erosion of their retirement savings’.156

Conversely, ClearView Wealth Management (ClearView) supports the changes but considers that they should only be considered to be ‘a first, but important, step towards a scenario in which life insurance in super becomes optional on an opt-out basis for all workers’.157 In this respect

151. Subitems 4(2) and (3) in Part 2 of Schedule 2 to the Bill. 152. Subitem 4(5) in Part 2 of Schedule 2 to the Bill 153. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 24. 154. Subitem 4(6) in Part 2 of Schedule 2 to the Bill. 155. ISA, Submission, op. cit., p. 5. 156. MetLife Insurance Limited (MetLife), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 9], 9 July 2018, p. 1. 157. ClearView Wealth Management (ClearView), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 2], 6 July 2018,

p. 1.

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ClearView argues that there are various shortcomings with group insurance including that the ‘one-size-fits-all approach means the standard amount of cover is usually very limited, there is a lack of member education or advice, members pay for products that they do not or cannot use, the healthy subsidise the unhealthy and the reduced costs of group insurance are only ‘illusory’.158

While Chartered Accountants Australia and New Zealand (CAANZ) considered that the current model has led to some cases of fund members paying for insurance that they neither need nor want, it was of the view that allowing a member to opt-in changes the ‘contract dynamics and therefore the pricing that insurers are willing to offer’. To this end CAANZ submitted that the Government has insufficient data to model the medium and longer term impacts and suggested further research be undertaken by an expert.159

AIAA ultimately recommended that an opt-out model should be maintained for low-balance accounts and under 25 year olds. Furthermore, it considered that changes could be better effected though the Code which should be made mandatory.160

TAL submitted that the proposed changes fail to take account of a member’s previous election with respect to insurance. TAL recommended that those members who have previously applied for, changed or preserved their insurance cover should be excluded from the measure.161

Members under 25 years of age While AIAA broadly supports the opt-in insurance arrangements for inactive accounts, it submitted that the Government has not adequately considered the unintended consequences of removing opt-out insurance for under 25 year olds and low-balance accounts.162 AIAA submitted the following rationale for group insurance:

The system works by distributing risk across a pool of known members to form a ‘community rating’ within a fund, allowing for lower premiums, limited or no underwriting, broader coverage and fewer administration fees. This collective response to risk benefits all Australians and can only be achieved on an opt-out basis … By design, it provides cover to exactly those individuals who would either not opt in to or be unable to attain insurance cover at all, or on reasonable terms.

163

With respect to the removal of opt-out insurance for under 25 year olds, AIAA contends that it is an ‘ill-conceived’ notion that young Australian’s do not need the protections of life insurance, stating:

 AIAA paid $84 million on 1200 claims for people under 25 since 2015. This grows year on year.

 Rates of IP and TPD claims at AIAA are approximately the same for people aged 20 and those aged 30. This is also reflected industry-wide.

158. Ibid., pp. 3-5. 159. Chartered Accountants Australia and New Zealand (CAANZ), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 8], 9 July 2018, p. 3.

160. AIAA, Submission, op. cit., pp. 18-19. 161. TAL Life Limited (TAL), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 31], 11 July 2018, p. 4. 162. AIAA, Submission, op. cit., p. 2. 163. Ibid., p. 4.

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 Mental illness is the largest claim cause at AIAA for permanent disability for members up to 25. 164

AIAA also considered that under an opt-in model, those aged under 25 year will be significantly underinsured because of an apathy towards superannuation generally and the ‘misguided belief’ that they are unlikely to be the subject of a life insurance event.165 AIAA estimates that less than ten per cent (possibly as low as two per cent) of young people are likely to opt-in under the Government model.166

TAL agrees that the young people had different insurance needs to other superannuation members who in comparison are less likely to have dependants and liabilities.167 However, TAL considers that this is not the case for all young members. Accordingly, TAL recommends that individual trustees be given the discretion to determine the appropriate minimum age for opt-in insurance between the ages of 21 and 25 years.168 ISA took a similar view stating that ‘empirical data reveals insurance needs crystallise in the early rather than mid 20s for most’, and from the age of 22, workers are ‘significantly more likely to have insurance needs’.169 ISA submitted that the prescribed age at which opt-in insurance can apply should be lowered to 22 years old.170 This appears to be consistent with the Australian Government Actuary’s advice to Treasury which stated that ‘funds have very different allocations of members under age 25’.171

The Grattan Institute considered that it is not clear why it is desirable for members who are young, have inactive accounts or have small balances, to cross-subsidise other members as a result of opt-out group insurance.172 Mr Allan Hansell, Director of Policy and Global Markets at FSC submitted the following justification:

People talk a lot about cross-subsidisation between the various age cohorts. But if you look at a person, they will commence in an insurance scheme as a younger member, and, yes, there will be a level of cross-subsidisation that occurs between them and older people, and the sick; but then, as they move through the life cycle, they end up getting the same level of support from younger members at a future date, because they remain as a member of the scheme. The whole concept of pooling is cross-subsidisation. Members put money into the insurance pool to cover off their risks, and when their health is compromised or they suffer from an illness, they draw down on the risk pool. If someone's healthy, then that's great, but they've got that insurance cover in place and they pay the premium for it.

173 (Emphasis Added).

164. Ibid., pp. 5-6; see also: Maurice Blackburn Lawyers (Maurice Blackburn) Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 3], 9 July 2018, p. 4.

165. AIAA, Submission, op. cit., p. 7. 166. Ibid. 167. TAL, Submission, op. cit., p. 4. 168. Ibid. 169. ISA, Submission, op. cit., p. 9. 170. Ibid., p. 11 171. Letter from the Australian Government Actuary to Treasury dated 1 May 2018 (tabled by Treasury), Evidence to Senate

Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 5. 172. Grattan Institute, Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 33], July 2018, p. 4. 173. A Hansell (Director of Policy and Global Markets, FSC), Evidence to Senate Standing Committee on Economics, Inquiry into the

Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 33.

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Low balance accounts AIAA contended that notwithstanding that an account may be a low-balance account, those account holders are still making insurance contributions and accordingly have ‘insurance needs’.174 Of particular concern to AIAA is the period of time a member will remain uninsured until their account balance reaches $6,000:

For an average full-time working Australian with total earnings of $81,500, it would take 11 months to accumulate sufficient contributions in a new account to meet the $6,000 threshold. For the average working Australian with total earnings of just under $62,000, it would take almost 15 months to accumulate this amount.

175

Maurice Blackburn Lawyers expressed similar concerns, noting that a low-balance account shouldn’t be a determining factor in whether a member requires TPD and death insurance or not.176 AIAA also contended that the policy fails to consider the rise of mental health related claims, stating:

Mental ill health has grown to now represent the third largest area of all claims at AIAA, sitting behind only cancer and musculoskeletal conditions as the leading claim causes. Mental ill health is also the largest claim cause at AIAA for group insurance TPD claims for members under 25, representing one in four of all claims; and is the third largest claim cause for IP.

177

TAL submitted that only inactive members with account balances below $6,000 should be removed from opt-out insurance arrangements.178 TAL estimates that in the ‘financial year ended 30 June 2017, $560m was paid to members in life and disability claims with superannuation account balances less than $6,000’.179 Accordingly, TAL considers that if an account is receiving contributions, the member should be provided with insurance cover.180

Inactive accounts ISA and other stakeholders consider that the measure is likely to significantly impact women, submitting:

The proposed measures put the economic security of thousands of women and their children at risk. ISA analysis of Australian Bureau of Statistics (ABS) data shows that the reforms will affect 1.8 million inactive members, of whom 960,400 are women. Over 75 per cent of people impacted are over the age of 35 and three quarters of them have at least one dependant. Over a quarter of a million women between the ages of 35 and 44 will be declared inactive; 90 percent of these women have dependants. Overall, 1.65 million children will have at least one parent who is no longer eligible for default insurance coverage.

181 (Citations omitted).

The ACTU and MetLife expressed similar concerns.182

174. AIAA, Submission, op. cit., p. 8. 175. Ibid., p. 9 citing ABS- average weekly earnings November 2017. 176. Maurice Blackburn, Submission, op. cit., p. 3. 177. AIAA, Submission, op. cit., p. 16. 178. TAL, Submission, op. cit., pp. 2-3. 179. Ibid., p. 2. 180. Ibid., p. 3. 181. ISA, Submission, op. cit., p. 7. 182. Australian Council of Trade Unions (ACTU), Submission to Senate Standing Committee on Economics, Inquiry into the Treasury

Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 16], 9 July 2018, p. 8; MetLife, Submission, op. cit., p. 4.

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AIS submitted that members who need to opt-in to insurance arrangements as opposed to collective risk pooling, ‘will be subjected to underwriting, including health checks, and additional cost’.183

Treasury notes that 13 months was considered to be a reasonable time and consistent with the period adopted by the ISWG.184

High risk occupations Several stakeholders expressed concerns that it may be difficult for individuals to obtain insurance where they are engaged in a high risk occupation.185 For example, financial consultancy firm Rice Warner considered that ‘superannuation funds may be the only option to obtain insurance cover for individuals working in a range of high risk occupations.’186 Table 2 shows Rice Warner’s own investigation of the availability of cover in the retail market for some high risk occupations in the building industry.

Table 2: Retail insurance availability for high risk building and construction occupations

Source: Rice Warner, Submission, p. 4.

However, Professor Daley of the Grattan Institute emphasised that work-related accidents would be covered by workers’ compensation which ‘will be substantially more generous than anything available under default insurance’,187 and therefore default insurance effectively double insured a member:

For example, if a worker died through a work related accident in Victoria, the total compensation that would go to their dependants, or at least their partner as a dependant, is in the order of about $730,000, and then there will be additional money for children. In New South Wales, it is about

183. ISA, Submission, op. cit., p. 12. 184. I Beckett, Evidence to Senate Standing Committee on Economics, op. cit., p. 90. 185. Rice Warner, Submission, op. cit., p. 3; ISA, Submission, op. cit., p. 8; Corporate Super Association, Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill

2018 [Provisions], [Submission no. 6], 9 July 2018, p. 3. 186. Rice Warner, Submission, op. cit., p. 3. 187. J Daley (Chief Executive Officer, Grattan Institute), Evidence to Senate Standing Committee on Economics, Inquiry into the

Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 86.

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$791,000. It is worth comparing that to the average benefit through superannuation, which is only about $100,000, and even the high-end benefits … are only about $400,000. 188

Accordingly, Professor Daley encouraged funds and insurers to develop policies that covered members for non-work related accidents.189

Impact on the economy and retirement balances In advice to Treasury, the Australian Government Actuary advised that ‘… it is important to recognise that the proposed changes to insurance eligibility will have a major impact on the superannuation industry and individual members’.190 The Australian Government Actuary estimates that there will be a premium revenue loss in the industry of less than 50 per cent, which will represent a ‘significant reduction in premium revenue, possibly in the order of $1b to $1.5b’.191

Rice Warner estimates, based on its analysis of its Super Insight’s database, that ‘around 40%-50% of the total sum insured would be lost under the full suite of changes to insurance opt-in arrangements’.192

Different submissions have estimated the overall premium increases that will result from the measure depending on the group affected—that is members with low balances, those aged less than 25 years and those members with inactive accounts.193 The Australian Government Actuary estimated that premiums could rise in the order of:

• under 25 and less than $6,000—90 per cent

• under 25 and greater than $6,000—five per cent

• accounts held by over 25s after impact of cessation and opt-in for those with less than $6,000 and inactive accounts—seven per cent to ten per cent.194

Rice Warner acknowledged that ‘for most individuals who do not make a claim over their working life, removal of default life insurance will result in improved retirement outcomes’. However, it considered that such improvements would be minor. Table 3 below is Rice Warner’s own estimation of the effect of the measure on the retirement balance.

188. Ibid. 189. Ibid. 190. Letter from the Australian Government Actuary to Treasury dated 1 May 2018, op. cit., p. 5. 191. Ibid., p. 6. 192. Rice Warner, Submission, op. cit., Attachment 1, p. 5. 193. See for example: Rice Warner, Submission, op. cit., Attachment 1, p. 3; AIAA, Submission, op. cit., p. 13; KPMG, Insurance in

Superannuation: the impacts and unintended consequences of the proposed Federal Budget changes, June 2019, p. 3. 194. Letter from the Australian Government Actuary to Treasury dated 1 May 2018, op. cit., p. 4.

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Table 3: Impact of Budgetary changes on individual’s retirement balance

Source: Rice Warner, Submission, p. 5.

In response to the various submissions that contend that there would only be a marginal improvement on retirement balances, Treasury observed that ‘the modelling in these analyses appears to use certain assumptions, including that individuals only ever have one job, one super account and one set on insurance. This is unrealistic.’195

Commencement Almost all stakeholders considered that the 1 July 2019 commencement date is unrealistic and unworkable.196 To this end, Deputy Chairman of APRA stated:

To implement all of these proposals, funds will need to work closely with their administrators and insurers to ensure the required system changes and amendments to group insurance arrangements are in place. This will be challenging to achieve by the proposed implementation date of 1 July 2019, given both the complexity and extent of the changes that will be required to be made across the entire superannuation sector.

APRA is therefore concerned that unintended consequences may arise for members and that there will be significant pressure on and heightened operational risk for super funds and their insurers and administrators if sufficient time is not allowed to implement the proposals in an appropriate and orderly manner.

197

In relation to the 1 July 2019 start date, Rice Warner considered that ‘there is a risk that rushing to implement will mean that errors occur and could result in member complaints and/or members losing cover inadvertently’.198 Rice Warner, like many other stakeholders consider that the renegotiation of contracts with insurers and the development and implementation of system changes will divert significant resources away from funds.199 Many stakeholders consider that 1 July 2020 start date is more appropriate.200

Some stakeholder’s considered that account consolidation should be implemented as a first step, which would ensure that much of the low-balance account duplication is minimised. In this respect, Geoff Summerhayes of APRA stated to the Committee:

195. I Beckett, Evidence to Senate Standing Committee on Economics, op. cit., p. 90. 196. LCA, Submission, op. cit., p. 3; Rice Warner, Submission, op. cit., p. 8; see also: Mercer, Submission, op. cit., p. 11 who recommended a start date of 2021. 197. Rowell, Evidence to Senate Standing Committee on Economics, op. cit., p. 1. 198. Rice Warner, Submission, op. cit., p. 7. 199. Ibid. 200. Ibid., p. 8; Mercer, Submission, op. cit., p. 11 recommended a start date of 2021.

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… there is merit in the low account balance consolidation as a first measure, because that in fact tidies up a lot of the duplication, and then you would come back and, as a second stage approach to the insurance, you would be effectively doing it with a smaller cohort than you would if you did it at the same time that you were doing the account consolidation.

201

Schedule 3—Inactive low-balance accounts and ATO consolidation Quick guide to Schedule 3 Schedule 3 to the Bill makes amendments to the SUMLM Act to:  require RSA providers and superannuation providers to pay the balance of MySuper or choice

accounts to the Commissioner, where the account is inactive and the balance is less than $6,000 and  require the Commissioner to consolidate any amounts received into a person’s superannuation account that will have a balance of $6,000 or more once consolidated.

Background Amongst other things, the SUMLM Act provides a scheme for the payment of unclaimed superannuation monies and amounts relating to lost members held by regulated superannuation funds, Authorised Deposit Funds (ADF) or RSA providers (superannuation providers) to the Commissioner.202

The SUMLM Act requires superannuation providers to pay the balance of accounts to the Commissioner where:

 the person has reached preservation age and the fund has not received an amount in respect of the person within the last two years and the fund has been unable to contact the person after five years

 the person is deceased and the fund has been unable to pay the benefit to the rightful owner

 the amount from a super-split on divorce cannot be paid to a fund for the receiving spouse

 a member meets the definition of ‘lost member’ and the account balance is less than $6,000

 a member meets the definition of ‘lost member’ and their account has been inactive for 12 months and the fund is unable to contact the member or

 a member was a temporary resident who has left Australia. 203

Currently, the Commissioner can only consolidate amounts into another superannuation account where the person directs the Commissioner to do so.204

The ATO currently holds ‘5.7 million accounts for the total value of $4.05 billion’.205 Treasury have stated that in 2019-20 it expects around six million inactive accounts worth $7.5 billion to be transferred to the ATO.206

201. G Summerhayes (Member, APRA), Evidence to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 1. 202. SUMLM Act, sections 6 and 7. 203. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, pp. 27-28. 204. SUMLM Act, subsections 17(2), 20H(2) and 24G(2). 205. J O'Halloran (Deputy Commissioner, Superannuation, Australian Taxation Office), Evidence to Senate Standing Committee on

Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], 20 July 2018, p. 90. 206. Beckett, Evidence to Senate Standing Committee on Economics, op. cit., p. 90.

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Productivity Commission According to the PC Draft Report, over a third of all super accounts are ‘unintended multiples’— that is, they are created as a default account for a member when they change jobs or industries and the account is not subsequently consolidated.207 There are approximately ten million unintended multiple accounts which cost members ‘$1.9 billion a year in excess insurance premiums and $690 million in excess administration fees’ and ‘can leave a typical full-time worker six per cent (or $51,000) worse off at retirement’.208

The PC recommended that default superannuation accounts should only ever be created once for members who are new to the workforce and do not currently have a superannuation account.209 Further, the PC recommended that the ‘ATO should continue work towards establishing a centralised online service for members, employers and the Government’ which would:

 allow members to register online their choice to open, close or consolidate accounts when they are submitting their Tax File Number when starting a new job

 facilitate the carryover of existing member accounts when members change jobs

 collect information about member choices (including on whether they are electing to open a default account) for the Government. 210

The PC also recommended that a ‘best in show’ top ten super products should be provided to all members who are new to the workforce, and where the member does not choose a product within 60 days, they should be defaulted into one of the top ten products.211

In parallel to these measures, the PC recommended that the ATO should be empowered to actively reunite unintended multiples.212 Specifically, draft recommendation 8 provides that the Government should legislate to:

 ensure that accounts are sent to the ATO once they meet a definition of ‘lost’

 empower the ATO to auto-consolidate ‘lost’ accounts into a member’s active account, unless a member actively rejects consolidation

 allow a fund to exempt a ‘lost’ account from this process only where the member has provided an explicit signal that they want to remain in that fund (prior to the account meeting the definition of ‘lost’)

 reduce the ‘lost inactive’ activity threshold from five to two years

 require that all accounts held by Eligible Rollover Funds, regardless of their lost status, are sent to the ATO

 prohibit further accounts being sent to Eligible Rollover Funds. 213

207. PC, Superannuation: assessing efficiency and competitiveness, op. cit., p. 18. 208. Ibid. 209. Ibid., p. 58. 210. Ibid. 211. Ibid. 212. Ibid., p. 35. 213. Ibid., p. 61.

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Key provisions Item 30 of Schedule 3 to the Bill inserts proposed Part 3B—Payments of low balances in inactive accounts to the Commissioner, into the SUMLM Act.

Accounts that are inactive low-balance accounts Within new Part 3B of the SUMLM Act, proposed subsection 20QA(1) sets out when an account will be deemed to be an inactive low-balance account.

In the case of an account held by a regulated superannuation fund, the account will be an inactive low-balance account if amongst other things:

• the account is held on behalf of a member of the fund and the account relates in whole or in part to a MySuper or choice product held by the member

• the superannuation provider214 has not received an amount crediting the product within the last 13 months and

• the balance of the account that relates to the product is less than $6,000.215

The definition does not apply to:

• SMSFs and regulated superannuation funds that have fewer than five members216

• accounts that support or relate to a defined benefit interest217

• accounts for which a person has taken out or maintains insurance.218

In this respect, the SMSF Association supports the inclusion of the provision because it considered that up to 40 per cent of SMSF members potentially maintain additional products simply to take advantage of group insurance, and such accounts are likely to have less than $6,000 in them.219

AFA expressed the importance of ensuring that ‘robust mechanisms are developed’ to avoid the risk of someone with a low account balance who intentionally is paying insurance from an inactive account being transferred to the ATO with their insurance terminated.220

Accounts that are not inactive low-balance accounts An account will not meet the requirements of the inactive low-balance account definition if the member satisfies a condition of release which may be prescribed under proposed subparagraph 20QA(1)(a)(vi). ‘This recognises that where a person has retired they may no longer be contributing to their superannuation account, and may instead be drawing the balance down as either an income stream or in lump sums.’221

214. SUMLM Act, subsection 10(1) provides that the term superannuation provider means the trustee of a regulated superannuation fund, the trustee of an approved deposit fund or an RSA provider. 215. SUMLM Act, proposed subparagraphs 20QA(1)(a)(ii)-(v). 216. SUMLM Act, proposed subparagraph 20QA(1)(a)(i). 217. SUMLM Act, proposed subparagraph 20QA(1)(a)(viii). 218. SUMLM Act, proposed subparagraphs 20QA(1)(a)(viii) and (ix). 219. SMSF Association, Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment

(Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 28], 10 July 2018, p. 1. 220. AFA, Submission, op. cit., p. 9. 221. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 31.

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While Schedule 3 to the Bill commences on 1 July 2019, the period before the commencement will be taken into account when determining whether or not an account is inactive under proposed paragraph 20QA(1)(a).222

Each MySuper or choice product to which an inactive low-balance account relates is deemed to be an inactive low-balance product if the superannuation provider has not received an amount crediting the product within the last 13 months, the balance of the account that relates to the product is less than $6,000 and no insurance has been taken out or maintained by the member in relation to the product.223

In the case of account held by an RSA or approved deposit fund, the account will be an inactive low-balance account if the account is held on behalf of a member of the fund, the superannuation provider has not received an amount in respect of the member within the last 13 months and the balance of the account is less than $6,000.224

Accounts that support or relate to a defined benefit interest are excluded,225 and an account will not be an inactive low-balance account if the member satisfies any of the conditions of release prescribed in the Retirement Savings Accounts Regulations 1997 (RSA Regulations) under paragraph 38(2)(f) of the Retirement Savings Account Act 1997 (RSA Act) or otherwise prescribed in the RSA Regulations under proposed subparagraph 20QA(1)(b)(iv).226

Inactive low-balance members A person on whose behalf a superannuation provider holds an inactive low-balance account is deemed to be an inactive low-balance member.227

Some submitters opined that the period of inactivity—that is, 13 months—should be extended and/or activity could also be evidenced through other member activity on the account, for example, changing an investment strategy.228

ASFA submitted that the period before which an account is considered to be inactive is extended from 13 months to 24 months on the grounds that some people are likely to take extended leave from work, for example extended parental leave.229 Similarly, AIST, AustralianSuper and ISA submitted that the period of inactivity should be extended to 16 months.230

The RIS adopted the period of 13 months stating that it ‘takes into account the erosion that low balance inactive accounts can face as well as average periods of maternity leave.’231 Treasury gave evidence that it had:

… taken the view that there should be a rigorous definition of activity… In some ways, if people aren't receiving contributions, there's a good chance they're not working, in which case they might not be

222. Subitems 38(1) and (2) of Schedule 3 to the Bill. 223. SUMLM Act, proposed subsection 20QA(3). 224. SUMLM Act, proposed subparagraphs 20QA(1)(b)(i)-(iii). 225. SUMLM Act, proposed subparagraph 20QA(1)(b)(v). 226. SUMLM Act, proposed subparagraph 20QA(1)(b)(iv). 227. SUMLM Act, proposed subsection 20QA(2). 228. ASFA, Submission, op. cit., pp. 7-8; see also AIST, Submission, op. cit., p. 6; Rice Warner, Submission, op. cit., p. 3; ISA,

Submission, op. cit., p. 14. 229. ASFA, Submission, op. cit., p. 9. 230. AIST, Submission, op. cit., p. 6; AustralianSuper, Submission, op. cit., p. 2; AIS, Submission, op. cit., p. 14. 231. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 67.

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covered anyway [by income protection], or they've got another job and their contributions are going elsewhere, and so there's a risk of duplicate accounts. That's the problem we're trying to solve. 232

Reporting obligations Proposed Division 2 of Part 3B of the SUMLM Act imposes certain reporting obligations on superannuation providers with respect to inactive low-balance accounts.

For each unclaimed money day, a superannuation provider is required to give the Commissioner a statement on each inactive low-balance account as at the end of the unclaimed money day, and information relating to the administration of each inactive low-balance account.233 The statement must be given to the Commissioner (in the approved form) by the end of the scheduled statement day for the unclaimed money day.234 According to the Explanatory Memorandum:

The Commissioner already has the power to specify in a legislative instrument the unclaimed money day and the scheduled statement day that relates to that unclaimed money day. The existing instrument specifies those days as 30 June and 31 December and the scheduled statement days as 31 October and 30 April respectively. The power which allows the Commissioner to specify these days in a legislative instrument is expanded to also apply to inactive low-balance accounts.

235

The amendments made by Schedule 3 to the Bill apply in relation to unclaimed money days that occur on or after 30 June 2019.236 Accordingly, the first unclaimed money day will be 30 June 2019 and the first statement day will be 31 October 2019.237

If at the end of the unclaimed money day there are no accounts that are inactive low-balance accounts, the statement must still be provided to this effect.238 However, regulated superannuation funds with fewer than five members and no inactive low-balance accounts at the end of the unclaimed money day, are not required to report under proposed section 20QB of the SUMLM Act.

The statement must also include information about an account that ceases to be an inactive low-balance account between the end of the unclaimed money day and the statement day.239 The TAA provides offences and penalties for failing to provide the required information or providing false or misleading information.240

If the superannuation provider becomes aware of a material error or omission in any information in the statement, the superannuation provider must give the Commissioner the correct information no later than 30 days after they become aware of the error.241

Paying amounts to the Commissioner Proposed subsection 20QD(1) of the SUMLM Act requires a superannuation provider to pay the Commissioner the balance of an account, if the account is an inactive low-balance account at the

232. I Beckett, Evidence to Senate Standing Committee on Economics, op. cit., p. 90. 233. SUMLM Act Proposed subparagraphs 20QB(1)(a) and (b) of the SUMLM Act. 234. SUMLM Act Proposed subsection 20QB(5) of the SUMLM Act. 235. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 31; items 22,

23 and 24 of the Schedule 3 to the Bill; Unclaimed Money Days and Scheduled Statement Days. 236. Subitem 38(1) in Part 2 of Schedule 3 to the Bill. 237. Unclaimed Money Days and Scheduled Statement Days. 238. SUMLM Act, proposed subsection 20QB(2). 239. SUMLM Act, proposed subsection 20QB(3). 240. TAA, section 8K. 241. SUMLM Act, proposed section 20QC.

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end of the unclaimed money day, the account is held by the provider on behalf of the person and the account is still inactive either before the payment is made or before end of the statement day.242 The amount is due and payable at the end of the scheduled statement day.243

No amount is payable where the account balance is nil or below nil.244

The amount that is payable is the amount that would have been payable by the superannuation fund if the person had:

• in the case of a regulated superannuation fund—requested that the inactive low balance product be rolled over or transferred into a complying superannuation fund

• in the case of an RSA or approved deposit fund—requested that the balance held in the account be rolled over or transferred into a complying superannuation fund.245

If a family law payment split applies in relation to the inactive low-balance account, the amount is split but nevertheless paid to the Commissioner at the same time as the member’s payment.246

Once payment is made in accordance with proposed section 20QD, the superannuation provider has no more liability in respect of that amount.247

Under proposed subsection 20QE(1), the superannuation provider is liable to pay the general interest charge (GIC) on the unpaid amount.248

Proposed subsection 20QE(2) makes it an offence to engage in conduct that breaches the requirement to pay the commissioner an amount required to be paid under proposed subsection 20QD(1) (the inactive low-account balance) or proposed subsection 20QD(4) (where a family law payment split applies)—the maximum penalty for the offence is 100 penalty units.249

As the amount payable is a tax-related liability250 within the meaning of the TAA, the general interest charge and administrative penalties in Division 255 of Schedule 1 to the TAA may be imposed.251

Refund of overpayment If the Commissioner is satisfied that a superannuation provider has overpaid an amount required to be paid under proposed section 20QD, the Commissioner must repay the excess to the fund or if the fund no longer exists, to an equivalent fund.252

242. SUMLM Act, proposed subsection 20QD(1). 243. Ibid. 244. SUMLM Act, proposed subsection 20QD(7). 245. SUMLM Act, proposed subsection 20QD(2); SIS Act, section 34A. 246. SUMLM Act, proposed subsection 20QD(4). 247. SUMLM Act, proposed subsection 20QD(6). 248. SUMLM Act, section 17A. 249. SUMLM Act, proposed subsection 20QE(2) ; Section 4AA of the Crimes Act 1914 provides that a penalty unit is currently equal

to $210. This means the maximum penalty is equivalent to $21,000. 250. Under section 255-1 of Schedule 1 to the TAA a tax-related liability is a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable). Under subsection 995-1(1)

of the ITAA97, a taxation law means among other things, an Act of which the Commissioner has the general administration (including a part of an Act to the extent to which the Commissioner has the general administration of the Act). Under subsection 3AA(2) an expression in Schedule 12 to the TAA has the same meaning as in the ITAAA97. The Commissioner has the general administration of the SUMLM Act under section 40 of that SUMLM Act. 251. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 33. 252. SUMLM Act, proposed section 20QJ.

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Payments that must be made by the Commissioner Under proposed section 20QF, if certain criteria are met, the Commissioner is obliged to pay amounts that the Commissioner has received as inactive low-balance account amounts.253 Generally, the amounts will be paid to a superannuation fund where directed by the member to do so.254

In the event that the person has reached eligibility age, the amount is less than $200 or a terminal medical condition exists, the Commissioner must pay it to the person directly.255

Where the member has died, the Commissioner must distribute the amount between the person’s death beneficiaries in accordance with the formula set out at proposed subsection 20QF(4), if the Commissioner is satisfied that the superannuation provider would have been required to do so.256 Otherwise the Commissioner may pay the amount to the person’s legal personal representative.257

Stakeholder comments CHOICE expressed concern that it is unclear what the Commissioner’s obligations are when there is a dispute between beneficiaries, submitting that as the existing dispute resolution mechanism, the Superannuation Complaints Tribunal, soon to be the Australian Financial Complaints Authority, ‘is a better forum for deciding these escalated complaints’.258

The LCA also expressed concern about the requirement to distribute amounts to death beneficiaries on the grounds that the provision:

… presupposes that the Commissioner will, like super fund trustees, gather information about the member's potential beneficiaries (which can be complex, particularly where the member has been in more than one de jure or de facto relationship with children from each, and particularly if there are questions about whether a de facto relationship had commenced or ended shortly prior to the member's death).

259

The LCA considered that the legislation should either specify priority rules based on intestacy legislation, or otherwise in all cases require payment to a person’s legal personal representative.260

Where payments are made by the Commissioner under proposed subsection 20QF(2), the Commissioner is also obliged to pay interest worked out in accordance with the regulations.261

Recovery of overpayment If the Commissioner makes a payment under or purportedly under proposed Part 3B of the SUMLM Act and the amount exceeds the amount that was properly payable, the Commissioner may recover all or part of the excess from the person or superannuation fund as the case may be

253. SUMLM Act, proposed subsection 20QF(1). 254. SUMLM Act, proposed subsection 20QF(2). 255. SUMLM Act, proposed paragraph 20QF(2)(d) and proposed subsection 20QF(3); Under section 10 of the SUMLM Act, eligibility age is in the case of a man—65 years in the case of a woman—60 years.

256. SUMLM Act, proposed paragraph 20QF(2)(b) and proposed subsection 20QF(4). 257. SUMLM Act, proposed paragraph 20QF(2)(c). 258. CHOICE, Submission, op. cit., p. 19; See also FCA, Submission, op. cit., p. 4; FRLC, Submission, op. cit., p. 8. 259. LCA, Submission, op. cit., p. 4. 260. Ibid. 261. SUMLM Act, proposed subsections 20QF(5), (6) and (7).

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(the debtor).262 The Commissioner can recover the amount and the amount is deemed to be a debt due to the Commonwealth if:

• the Commissioner gives the debtor written notice as prescribed by the regulation of the proposed recovery and the amount

• at least 28 days pass since the notice is given and

• the amount recovered is not more than the amount specified in the notice.263

Return of payment A superannuation fund must repay an amount to the Commissioner if the payment is made by the Commissioner under proposed subsection 20QF(2) or (5) and the payment is not credited for the benefit of the member by the superannuation fund within 28 days from the date the payment is made.264 GIC is payable by the fund from the 28th day onwards until the amount originally paid by the Commissioner and GIC is paid.265

Proposed paragraph 20QM provides that the Commonwealth is liable to pay a reasonable amount of compensation to a person if proposed Part 3B would result in an acquisition of property otherwise than on just terms within the meaning on the Constitution.266

Reunification of superannuation balances Item 32 of Schedule 3 to the Bill inserts proposed Part 4B—Reunification of superannuation balances into the SUMLM Act, which sets out a procedure and gives the Commissioner power to transfer amounts received by the Commissioner under the SUMLM Act into a single active account held by the person without needing their permission to do so.267

Proposed section 24NA applies where a superannuation provider has paid an amount to the Commissioner under the unclaimed money provisions, the proposed inactive low balance account provisions or the lost member account provisions in the SUMLM Act, and despite the other reunification provisions, the Commissioner still holds the amount for the person, and the Commissioner is satisfied that the Commissioner can pay the amount in accordance with proposed subsection 24NA(2) of the SUMLM Act.268

The Commissioner must pay each amount held in respect of the person into a single fund if:

• the person has not died

• the superannuation provider holds an account for the person

• the superannuation provider has received an amount for the person during the prescribed period

• the balance will be equal to or greater than $6,000 if all the person’s super amounts are paid into the account, and

• the terms of fund and Commonwealth law permit the payment for the person.269

262. SUMLM Act, proposed subsections 20QK(2) and (3). 263. SUMLM Act, proposed subsection 20QK(4). 264. SUMLM Act, proposed subsections 20QL(1) and (2). 265. SUMLM Act, proposed subsection 20QL(4). 266. SUMLM Act, proposed section 20QM. 267. SUMLM Act, Proposed section 24NA. 268. SUMLM Act, Proposed subsection 24NA(1). 269. SUMLM Act, proposed subsection 24NA(2).

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According to the Explanatory Memorandum, ‘it is expected that at first, the time period [the prescribed period] will be that the fund has received contributions in the previous financial year.’270

If there is more than one fund into which a payment can be made by the Commissioner, the Commissioner must pay each amount in accordance with the Superannuation (Unclaimed Money and Lost Members) Regulations 1999.271

There is no prescribed timeframe to transfer amounts that the Commissioner holds or receives. However, the RIS states that the ATO estimates that ‘for accounts that can be successfully matched to an active account’, it would take less than a month from when the funds are received by the ATO.272

Stakeholder comments Some stakeholders consider that the Commissioner should be subject to a prescribed timeframe or meet certain benchmarks.273 However, ATO Deputy Commissioner, James O’Halloran has said:

Under the current arrangements, we probably have a matching rate, if you like, upon receipt of the data—but obviously conditional on the data from the funds—probably in the order of 75 to 83 per cent. It bounces around a little bit. In terms of once we can do a match, I've seen reference around how quickly we can then transmit that out. We certainly think that in this quite significant year, subject to the legislation, a month is certainly doable.

274

Various stakeholders, including ASFA, AIST and ISA consider that the ATO should facilitate a direct fund-to-fund transfer rather than transfer amounts to the ATO.275 ASFA argues that members are likely to see higher investment returns through fund-to-fund transfers managed by the ATO, rather than amounts earning interest while held by the ATO.276 ISA supports direct fund-to-fund transfers facilitated by the ATO in order to ensure ‘the best net returns for members’.277

The RIS states that the ATO’s ability to reunite amounts within a month ‘should not have a material adverse effect on the earnings of accounts’.278 The RIS also considers that it is important that reunification ‘be administered by an independent party who has no interest other than the timely reunification of accounts’.279 The Grattan Institute echoed these sentiments, submitting that funds had a vested interest in slowing down transfers while the ATO did not.280

As noted above, under proposed subparagraph 24NA(2)(d) the Commissioner can only consolidate accounts where the balance of the account will be equal to or greater than $6,000. ISA considers that this requirement should be removed and that consolidation occur into any active account. They argue that the amendment will operate to preclude some accounts from being consolidated, stating:

270. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 35. 271. SUMLM Act, proposed subsection 24NA(3). 272. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 57. 273. ASFA, Submission, op. cit., p. 9; ACTU, Submission, op. cit., p. 11; AustralianSuper, Submission, op. cit., p. 2; QCU, Submission,

op. cit., p. 4, CHOICE, Submission, op. cit., p. 17. 274. J O'Halloran, Evidence to Senate Standing Committee on Economics, op. cit., p. 90. 275. ASFA, Submission, p. 9; AIST, Submission, p. 6; ISA, Submission, p. 14. 276. ASFA, Submission, pp. 8-9; Cbus, Submission, op. cit., p. 15. 277. ISA, Submission, p. 15. 278. Explanatory Memorandum, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, p. 69. 279. Ibid. 280. Grattan Institute, Submission to Senate Standing Committee on Economics, op. cit., p. 7.

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ISA analysis of the 2015-16 ATO sample file shows 294,000 people who have had no superannuation contributions in the preceding year and whose total balance across all accounts was under $6000. In 2015- 16 the total balance in super of this group was $613 million. This group will have their super balances confiscated but they cannot be consolidated because no consolidation can produce a balance over $6000. Using the observed growth rates, ISA estimates that in 2019-20 there will be 336,000 people who cannot have their super put into an active account in which the total will exceed $6000. The money from 2019-20 that the ATO cannot consolidate in any reasonable time is estimated to be $725 million.

281 (Emphasis added).

Link Group raised similar concerns and submitted that members with a single account should be excluded from the consolidation measures.282

If a superannuation provider has not credited the payment made by the Commissioner under proposed subsection 24NA(2) or the regulations within 28 days of the payment being made, the provider is liable to repay the Commissioner’s payment to the Commonwealth.283 GIC is payable by the fund from the 28th day onwards until the payment and GIC is paid.284

The amendments made by Schedule 3 to the Bill apply in relation to unclaimed money days that occur on or after 30 June 2019.285 While the Commissioner will not have the power to reunite amounts until 1 July 2019, once in force, the Commissioner can reunite amounts that the Commissioner held before that date as well as amounts received after that date.

Commencement The amendments made by Schedule 3 apply in relation to unclaimed money days that occur on or after 30 June 2019. However as noted above, the period before commencement will be taken into account when determining whether or not an account is inactive under proposed paragraph 20QA(1)(a).286

There appears to be a very minor error in the application clause in Part 2 of Schedule 3 to the Bill which makes reference to paragraph 20QA(1)(a) ‘as inserted by item 8 of this Schedule’.287 Item 8 amends the table in subsection 307-142(3) of the ITAA97 which explains how to work out the tax free and taxable component of various payments made under the SUMLM Act. It is likely that the reference should be to item 30 of the Schedule.

281. ISA, Submission, p. 15. 282. Link Administration Holdings Limited (Link Group) Submission to Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions], [Submission no. 27], 9 July 2018, p. 3.

283. SUMLM Act, proposed subsection 24NB(1) and (2). 284. SUMLM Act, proposed subsection 20NB(4). 285. Item 38 of Schedule 3 to the Bill. 286. Subitems 38(1) and (2) of Schedule 3 to the Bill. 287. Subitem 38(2) of Schedule 3 to the Bill.

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Appendix A: KPMG post budget analysis

Insurance coverage impact Impact on individual members

Insurance premium impact

Retirement outcomes

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Source: KPMG, Insurance in Superannuation: the impacts and unintended consequences of the proposed Federal Budget changes, June 2019.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 47

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