Your Future, Your Super reform package: Draft legislation released

6 minute read  01.12.2020

Draft legislation to implement the government's four point Your Future, Your Super reform package has been released for consultation.  A high level overview of the key changes being proposed is below.

Treasury has released a package of draft legislation for consultation proposing to implement the government's Your Future, Your Super reforms which were announced in the Federal Budget. The due date for submissions is 24 December 2020. Generally, the proposed commencement date for the changes is 1 July 2021.

Consistent with the government's previous announcement, the reform package includes four key elements.

1.Superannuation account follows (is 'stapled' to) the employee: The proposed changes include a new requirement for employers to make contributions into new employees' existing 'stapled' superannuation funds (provided that they have one and unless they choose an alternate fund).

2.Introduces a new annual performance test:

  • The Australian Prudential Regulation Authority (APRA) will conduct an annual performance test for MySuper products, and other products (to be specified in regulations).
  • Where a product fails the test, for two consecutive years, no new members will be unable to sign up to the product.
  • APRA will be able to lift the prohibition in certain circumstances (to be specified in the regulations) are met.

3. Enables the establishment of a new online comparison tool: Superannuation products will be ranked by APRA and these rankings will be published on an interactive website maintained by the ATO to enable members to more easily compare funds.

4. Strengthens existing requirements for trustees to act in the best interests of their members by specifying that trustees are required to act in the best financial interests of members.

Further detail: The four point reform package

1. Superannuation accounts will follow (be 'stapled' to) employees

  • If enacted, the changes will introduce a new requirement for employers to pay superannuation contributions into a new employee's existing 'stapled' fund.
  • Under the new rule, where a new employee starts their employment on or after 1 July 2021 and has not chosen a fund to receive superannuation contributions, employers will be required to request that the Commissioner of Taxation identify whether the employee has a stapled fund.
    • If advised by the Commissioner that the employee has a stapled fund, employers will be required to pay contributions into that fund. This applies even if an existing workplace determination or enterprise agreement is already in place.
    • If advised by the Commissioner that the employee does not have a stapled fund, an employer can opt either: pay contributions into a default fund chosen by the employer, or into a fund specified under a workplace determination or an enterprise agreement made before 1 January 2021.
  • The draft explanatory memorandum makes clear that employers are required to seek information about whether the employee has a stapled fund from the Commissioner and cannot determine this themselves.
  • The draft explanatory memorandum states that a new digital service will be established and maintained by the Australian Taxation Office to receive requests from employers and provide them with notifications for this purpose.

What is a 'stapled fund'?

  • The draft explanatory memorandum states that a 'fund is a stapled fund for an employee if the requirements prescribed by the regulations [not yet released] are met'.
  • The draft explanatory memorandum states that regulations (not yet released) will designate what requirements must be satisfied for a fund to be a 'stapled fund' including the requirement that the fund is an existing fund of the employee and is able to accept contributions. It's also 'anticipated' that regulations will include 'tie-breaker rules' to enable the selection of a single fund where an employee has multiple existing funds.
  • The measure is intended to address the issue of multiple accounts and will implement the government's response to Recommendation 3.5 of the Hayne Commission and Recommendation 1 of the Productivity Commission Superannuation Inquiry.

Proposed timing/implementation date

It's proposed that these changes will only apply to new employees whose employment commences on or after 1 July 2021. Arrangements for existing employees (those who are employed before 1 July 2021) would not be impacted by the changes.

2. Introduction of a new product performance test

If enacted, the changes will mean that:

  • APRA will be required to conduct an annual performance test of MySuper products and other products specified in regulations (eg trustee directed products) each financial year and to notify trustees of the result.
  • The requirements for the annual performance test will be set out in regulations (not yet released). The draft explanatory memorandum flags that the regulations may allow different performance requirements for different products and provide APRA with flexibility in applying the test.
  • Trustees of superannuation products that fail the annual test will be required to notify beneficiaries who hold the product that the product has failed within 28 days of APRA giving them notice of the test result (with regulations, not yet released, prescribing the requirements for the notice). The draft explanatory memorandum states that the regulations may specify that information relating to the ranking of products be included in the notification (eg by including a reference to the new YourSuper superannuation comparison tool).
  • Where a product fails the test in two consecutive years, it will be closed to new beneficiaries. The prohibition will remain in place until APRA lifts the prohibition. This will occur once circumstances specified in the regulations (yet to be released) are satisfied.
  • These obligations will be part of the section 52 covenants, and as such, a contravention will be subject to a civil penalty. Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies.

New resolution planning prudential standard making power for APRA

If enacted, the changes will also mean that APRA will be given a 'resolution planning prudential standard making power that relates to the resolution of an RSE licensee, a registrable superannuation entity or a connected entity of an RSE licensee, in order to best protect the interests of beneficiaries'.

The draft explanatory memorandum states that this is necessary to ensure that APRA

'…has clear powers to set appropriate prudential standards on resolution planning, and ensure that RSE licensees put in place measures to improve their preparedness for resolution. This allows APRA to ensure RSE licensees are prepared for a range of contingencies, including the possibility that the prohibition against accepting new beneficiaries into a product may lead to a material deterioration in the financial condition of the regulated superannuation fund.'

Proposed timing and implementation

  • It's proposed that the amendments relating to the new annual performance test will apply to MySuper products from 1 July 2021 and to and other products specified in regulations 1 July 2022.
  • It's proposed that APRA's new resolution planning prudential standard making power will apply on the day after Royal Assent.

3. Enables the establishment of a new YourSuper comparison tool as announced in the Federal Budget.

  • As announced in the Federal Budget, the Your Super Your Future Package includes the establishment of an online superannuation product comparison tool, which is intended to enable members to more easily assess the performance of superannuation products and make comparisons between products.
  • To facilitate this, and to provide transparency around the basis of the product rankings, its proposed that regulations will be made specifying one or more formulas for the ranking of superannuation products (by reference to 'relative fee levels, investment returns or any other criterion') by APRA. APRA's rankings will then be published on a new interactive website which will be maintained by the ATO.

4. Increased trustee accountability – new best financial interests test

If enacted, the proposed changes will mean that:

  • Trustees of registrable superannuation entities (RSE) and trustees of self managed super funds (SMSFs) will be expressly required to perform their trustee's duties and to exercise their powers in the best financial interests of beneficiaries.
  • Likewise, directors of the corporate trustee of a registrable superannuation entity will be required to perform their director’s duties and to exercise the director’s powers in the best financial interests of the beneficiaries.

It's proposed that the new best financial interests obligation will not be subject to any materiality threshold.

The draft explanatory memorandum makes clear that the purpose of the changes is to clarify the existing best interests duty.

'The purpose of this amendment is to clarify the range of interests covered by the obligation solely to financial interests (not non financial interests). Subject to the trustees complying with the sole purpose test, this does not preclude trustees undertaking actions that also yield non-financial benefits to the beneficiaries, but the action cannot compromise the best financial interests of members. How any action will yield financial benefits to the beneficiaries of the superannuation entity must be the determinative consideration for any trustee'.

The draft explanatory memorandum (p9) includes several examples of expenditure that is unlikely to be in members' best financial interests, and expenditure that is likely to meet the best financial interest test.

Reversal of the evidential burden

The draft Bill also proposes to reverse the evidential burden of proof so that the onus would be on trustees/directors of corporate trustees to prove they performed their duties/exercised their powers in the best financial interests of beneficiaries.

The draft explanatory memorandum states that this is intended to:

…'emphasise to trustees and directors of corporate trustees that they need to have strong systems and processes in place to ensure that all actions they take can be demonstrated to be in the best financial interests of beneficiaries. It should also highlight the need for trustees to keep clear records of the decision-making process'.

The draft explanatory memorandum states that the reversed onus will only apply to actions brought by a regulator and will not apply in private actions against trustees brought by beneficiaries (eg class actions).

The evidential burden of proof is not reversed for trustees of SMSFs, though the draft explanatory memorandum notes that SMSF trustees found not to be acting in the best financial interests of beneficiaries could be penalised under other regulatory provisions of the Superannuation Industry (Supervision) Act.

Other proposed changes

In addition, if enacted, the changes will mean that:

  • Regulations may be made prohibiting certain payments/prohibiting them unless certain conditions are met, regardless of whether the payment is considered to be in the best financial interests of beneficiaries.
  • Regulations may be made making a contravention of a record keeping obligation (specified in regulations) a strict liability offence.

Proposed timing and implementation

It's proposed that:

  • the new best financial interests duty will apply in relation to duties that are performed /powers exercised on/after 1 July 2021.
  • the amendments relating to the reversal of the evidential burden apply in relation contraventions that occur on or after 1 July 2021.
  • the amendments relating to record-keeping will apply to contraventions that occur on or after 1 July 2021.
  • the amendments allowing regulations to prohibit certain payments and investments will apply from the day after Royal Assent

[Sources: Your Future, Your Super reform package]


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