This article looks at the draft regulations proposing to abolish member protection rules, released on 17 January 2013 for comment.
Superannuation funds will need to start thinking about how this change will affect their internal systems and processes, as well as member communications and trust deeds.
Why is the Government abolishing member protection?
A recommendation to abolish member protection rules was made in the Final Report of the Super System Review (Cooper Review).
Member protection is aimed at preventing the erosion of member accounts under $1,000 where fees charged to a member are higher than investment earnings attributed to the member in a reporting period.
The Cooper Review recommended that member protection be abolished on the grounds of equity and efficiency. It observed that funds need to factor member protection into their processes and administrative systems, which adds complexity and cost.
In particular the Final Report of the Cooper Review said, ‘the Panel considers that member protection operates as a disincentive for members to consolidate small account balances, is administratively inefficient and has outlived its usefulness.’1
The Government response to the Cooper Review gave this recommendation ‘Support in principle’, stating that it would consider the recommendation further and consult with relevant stakeholders.2
To implement this recommendation of the Cooper Review, the Government released an exposure draft of regulations on 17 January 2013, proposing to abolish (from 1 July 2013) the member protection rules.
How does member protection work?
Member protection does not apply to all members or to all funds. For instance, member protection does not apply to a member’s benefits taken as a pension or to defined benefit members.
Also, member protection does not apply to self-managed superannuation funds. It also does not apply to unitised funds in particular circumstances or to non-unitised funds where all of the administration costs of the fund are applied to each member in direct proportion to the investment return credited or debited to the member’s account.
Member protection generally applies to a member who, at the end of a reporting period, has a withdrawal benefit less than $1,000 that contains employer contributions made to reduce any potential SG liability or contributions required to be made by an employer under a certified agreement or award (plus earnings, less costs, on those contributions).
Under member protection rules, the sum of amounts charged by a fund as administration costs in a reporting period against a member’s minimum benefits (where the member has withdrawal benefits of less than $1,000 at the end of the reporting period) must not exceed the investment return credited to or debited against the member’s minimum benefits for that period.
‘Administration costs’ are all fees and charges charged against a member’s benefits other than tax, pre-July 1995 exit fees, and the cost of providing insured death and insured temporary and permanent disability benefits.
Currently, compliance with these rules is quite complex and requires systems to detect where members are protected members and to administer the rules appropriately, so that relevant administration costs charged against a member’s account do not exceed the level allowed. It can also be costly in that the trustee may be unable to recover the full amount of administration costs relating to those protected members.
Where superannuation funds did not wish to incur the costs and complexity of implementing these member protection rules, they could choose to have a policy of rolling over member accounts under a certain dollar amount to an eligible rollover fund (ERF). This policy is often referred to in the industry as an ERFing policy.
There are important disclosure requirements that must be met when trustees have an ERFing policy. These requirements include providing specific information about the policy, details of the ERF and information about the effect of transferring benefits to the ERF in the Annual Report to Members and, where an amount will be transferred to an ERF if the member doesn’t choose another superannuation entity within a specified period, a notice containing specified information3 must be given allowing enough time for a decision to be made.
Many funds charge a fee to cover the costs of complying with the member protection requirements.
Member protection and MySuper
MySuper fee-charging rules require fees charged to all MySuper members (such as an administration fee or investment fee) to be charged in relation to a MySuper interest either at the same flat fee or the same percentage or the same combination of both of these methods.
While from a legislative viewpoint, the proposed change is fairly straightforward, from a practical viewpoint there is likely to be implementation work for funds
This is in direct conflict with the member protection requirement not to charge administration costs against a member’s minimum benefits in excess of the investment return credited or debited against the member’s minimum benefits in a reporting period where the member’s withdrawal benefit is less than $1,000 at the end of that period. Member protection would result in some
MySuper members being charged a lesser amount than others.
What do the draft regulations seek to do?
In summary, the draft regulations propose to delete the member protection standards and related definitions from the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). They also delete cross references to the member protection standards that would no longer be relevant.
The regulation4 that allows a greater degree of protection of a member’s benefits than required by the general benefit protection standards in the SIS Regulations would remain. (The general benefit protection standards include the minimum benefit standards).
Despite the retention of this regulation, funds with a MySuper offering will be unable to continue member protection and comply with the MySuper fee-charging rules at the same time.
Further, for those funds that are not going to provide a MySuper offering they must assess whether continuing to offer member protection would be consistent with the covenants in the Superannuation Industry (Supervision) Act 1993 (SIS Act) such as the requirement to act in beneficiaries’ best interests. There are also new trustee covenants from 1 July 2013 such as the requirement to act fairly in dealing with classes of beneficiaries in the fund, and to act fairly in dealing with beneficiaries within a class.
Work that funds would need to do to implement the abolition of member protection
While from a legislative viewpoint, the proposed change is fairly straightforward, from a practical viewpoint there is likely to be implementation work for funds in removing member protection.
This may include:
- considering whether any fees include provision for the cost of member protection;
- reviewing fee charging processes, which may also involve looking at administration systems and how they deduct fees;
- reviewing trust deeds to consider whether they need to remove reference to member protection and whether fee provisions or any other incidental provisions need to be amended;
- reviewing current ERFing policies and considering whether they are still appropriate; and
- reviewing all member communications that contain disclosure about member protection or a member protection fee (such as Product Disclosure Statements), and other communications that discuss ERFing.
The draft regulations to abolish member protection are not yet law and are only currently in consultation phase. However, they represent another step in the implementation of the Stronger Super reforms for trustees to work on.
1Super System Review: Final Report – Part Two: Recommendation packages, 30 June 2010, page 323
2‘Stronger Super’ – Government Response to the Super System Review, 16 December 2010, page 62
3Regulation 7.9.44 of the SIS Regulations
4Regulation 5.01B of the SIS Regulations