Protecting your super package - frequently asked questions
The recent passage through Parliament of Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (the PYSP) will require all RSE licensees to implement a number of reforms to address account erosion due to excessive fees or unnecessary insurance. APRA issued a letter and accompanying frequently asked questions to registrable superannuation entity (RSE) licensees informing them of this change.
Initial compliance with the Protecting Your Superannuation Package requirements
Note to industry:
The Government has indicated to APRA that it will pursue amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to ensure the Government’s policy intent, which underpinned the PYSP legislative reforms, is achieved in two areas that have been raised by industry (see below). Although the proposed amendments will not be made before the legislation takes effect on 1 July 2019, APRA supports trustees proceeding on the basis that the amendments will become law in due course.
APRA understands the Government will seek to amend the SIS Act to provide that:
- the legislative requirements allow for the aggregation of a members’ interests in one or more products held within a superannuation account; and
- the rights of members under fixed term insurance cover are not affected and insurance cover is not inappropriately removed. This may affect conventional products where the switching off of cover would have a demonstrable adverse financial effect on the member, such as products that are already fully paid up or currently non-premium paying, whole of life and endowment products, and certain legacy products. (Added 28 June 2019)
1. What action should a trustee take if it anticipates it will be unable to comply with any part of the Protecting Your Superannuation Package reforms by their commencement on 1 July 2019?
The legislation to implement the PYSP reforms is effective from 1 July 2019.
Where a trustee determines that any breaches of the PYSP legislation relate to either the product level application or the ‘fixed term’ insurance issue (refer Note to industry above), the trustee should inform APRA and provide details of how it intends to apply the law, including whether it is taking into account future law changes that have been signalled by the Government.
Where it determines that a significant breach has occurred or will occur, a trustee must ensure it follows its standard breach assessment procedures and reports any breaches relevant to APRA within the required timeframe. Where the breach may relate to future law changes, a trustee may rely on identifying this matter in its breach report, subject to further advice from APRA regarding whether any additional action is required.
Where the breach relates to any other matters other than the product level application or the ‘fixed term’ insurance issue, the breach notification must contain a clear outline of the nature of the breach, its impact on members and the trustee’s plan and timeframe for rectification and remediation. Further details on APRA’s breach reporting requirements are available here. Added 28 June 2019.
Fees charged to superannuation members
2. Does the new fee cap apply at the product level or to a member’s entire interest in the fund?
The fee cap applies at the product level.
The fee cap requires RSE licensees to cap their administration and investment fees (including indirect costs) at 3 percent per annum for members that have a final balance of less than $6,000 for their MySuper or choice product in an income year.
When establishing the account balance for the product, an RSE licensee is required to establish how much of a member’s overall account balance relates to the relevant product.
Therefore, for the purpose of applying the fee cap, each product that the member holds must be treated as having its own separate account balance, meaning a member may have more than one account balance for the purpose of applying the fee cap.
3. Can the fee cap apply to a member’s entire interest in the fund?
No. The fee cap applies to each of a member’s MySuper and choice products.
When determining products for the purpose of applying the fee cap, a trustee may determine that a member’s investment choices are one product (see FAQ 5).
However, a MySuper product cannot be considered to be a choice option within an account for the purpose of applying the cap, or for any other purpose.
4. Are pensions, paid-up whole of life and endowment products subject to the fee cap?
Yes. All products that are not defined benefit interests are subject to the fee cap.
5. How does the fee cap apply to a member’s investment choices?
The fee cap applies to each of a member’s choice products individually.
A trustee will need to determine whether a member’s investment choices are part of a single choice product or whether they are individual choice products for the purpose of applying the test. A trustee will need to consider the definition of choice product in the SIS Act, the rights and benefits attached to interests underpinning a member’s investment choices, and the way that the investment choice options have been presented to the member.
While the explanatory statement to the regulations provides an example that would suggest that a member’s investment choices could be aggregated for the purpose of applying the fee cap, the legislation does not provide that choice products are to be aggregated where they would otherwise be regarded as separate products.
6. How are the costs incurred from the implementation of the fee cap to be met?
The introduction of the fee cap may, for some RSE licensees, require some costs that were previously borne by members with balances less than $6,000 to be recovered through other avenues. In this regard, APRA would expect that RSE licensees would recover these costs in a manner that is in accordance with its duties to members, whether that is by making changes to fee structures or via (in the short term) the use of an appropriate reserve. That requires having regard to the best interests of its members, prioritising its duties to and the interests of members, and treating members fairly within and between classes of beneficiaries.
7A. What actions can a trustee take if it does not have fee structures that comply with the fee cap in place by 1 July 2019?
Trustees may, if necessary, refund excess fees that have been charged over the 3 percent cap at the end of their income year.
The legislation caps the fees that can be charged to a member with an account balance of a product that is below $6,000 at the end of the income year. If at the end of an income year a trustee determines that a member’s account balance that relates to the product is below $6,000 and the fees that have been charged are in excess of the 3 percent fee cap, the trustee is required to refund the excess fees to the member. Trustees have up to 3 months after the end of the income year to provide the refund, or in the case of a member leaving a fund part way through a year, 3 months from the day the member left the fund.
7B. How do fee refunds operate for members leaving part way through the year?
APRA considers that the policy intent of the legislation is that the fee cap would apply on exit during the year (including the refunding element) where an account was below $6000. However, the legislation provides that a trustee is taken to have complied with the fee cap requirements under the law if it provides a refund to the member within 3 months from the end of the year.
In respect to members leaving a fund part way through the year, APRA expects that a trustee acting in the best interests of members would endeavour to provide the refund for fees in excess of the fee cap to any exited members no later than 3 months after those members have left the fund. APRA’s view is that such action is not contrary to s 99G(6) and is consistent with the policy intent outlined in the Explanatory Memorandum (see Example 2.3 and paras. 2.24 and 2.25). Refunding any excess fees to a member as soon as practicable (and within 3 months) could mitigate any administrative difficulties or operational risks that may arise at a later date, for example issues that may arise where a trustee was not able to locate a member who had exited the fund earlier in the year.
Circumstances may result in some trustees not being able to refund exiting members until the end of the year. However, APRA expects trustees to put in place appropriate systems and processes that limit circumstances where they are not able to apply the fee cap at/close to the time of exit.
8. How should single flat dollar based fees that are applied at the account level be treated?
Single flat dollar based fees that apply to MySuper products must be treated separately to single flat dollar based fees that apply to choice products. However, for accounts where a single flat dollar based fee applies across choice products, an RSE licensee may allocate the fee across the choice products on a proportion of assets basis. For example, a choice product holding 90% of an account's assets would account for 90% of the single dollar based fee for the purpose of applying the fee cap.
9. Are funds compelled to rebate very small amounts to members and rebate fees where the cost to administer and process the rebates, coupled with the member experience impact, will be problematic?
The legislation provides that trustees are required to refund members any excess fees above 3 per cent for products with balances below $6,000, no matter how small the amount.
APRA would expect that trustees would minimise costs associated with the refund by directly crediting the products of their existing members. In respect to exiting members, APRA expects that trustees would establish whether an amount was required to be refunded at the time of exit or as soon as practicable after that time.
Refunding any excess fees to a member as soon as practicable (and within 3 months) could mitigate any excessive costs that may arise at a later date, for example issues that may arise where a trustee was not able to locate a member who had exited the fund earlier in the year.
Insurance for inactive accounts to be provided on an opt-in basis only
10. Does the change to insurance opt-in apply at the product or account level?
The insurance opt-in change applies at the product level.
11. Are changes in a member’s investment strategy a sign of activity by the member?
No. An inactive account is defined for the purposes of the insurance opt-in change as a MySuper or choice product for which no contributions and/or rollovers have been received for a continuous period of 16 months. No other actions may be taken to indicate activity.
12. How do the insurance opt-in changes apply for those trustees that consider insurance to be provided to members in respect to their overall membership of the fund?
The insurance opt-in changes apply at the product level, and as such, trustees need to establish the product to which the insurance is provided. This will generally be clear for members that have accounts that contain only one product. However, for members with accounts that have two or more products, trustees will need to identify the product under which the provision of insurance is being provided.
In the context of MySuper, in most instances insurance will be provided under the MySuper product. However, for choice products the legislation does not provide guidance on how to identify which choice product is considered to be the product under which insurance is provided. In these circumstances, trustees will need to consider the choice products held by a member and the insurance arrangements in place in respect of the member.
APRA considers it would be open for a trustee to interpret the legislation in a manner which uses the source of payment of insurance premiums to identify the product (or products) under which the insurance is provided. This interpretation would mean that if insurance premiums were being deducted from the member's balance in a particular product, but that product had not received any contribution amounts for 16 months, the insurance benefit associated with those premiums would be required to be removed (unless the member opts-in).
13. What action are trustees required to take to be compliant with the opt-in insurance changes?
On and after 1 July 2019, trustees must stop providing insurance that is provided under a product to any member who has not opted in and whose product has been inactive for a continuous period of 16 months or more.
Trustees need to continue to monitor member accounts and to provide written notice to members in cases of 9, 12 and 15 months of inactivity, with removal of insurance being required after 16 months of inactivity (unless the member opts-in).
14. Are pensions, paid-up whole of life and endowment products subject to the insurance opt-in changes?
Yes. All products that are not defined benefit interests will be subject to the insurance changes, including the disclosure obligations. Members can elect to maintain insurance in relation to any product that is inactive by making an election in writing.
15. Does an election made by a member for their insurance to continue in respect of their inactive account last indefinitely?
Yes. APRA considers that once a member makes an election in relation to the member's insurance under a particular product, that election continues indefinitely until the member advises the trustee otherwise. Trustees are required, at regular intervals, to notify members that have made an election how they can subsequently cease their insurance.
16. Can a trustee receive elections to maintain insurance in respect to products that are inactive electronically?
Section 68AAA provides members with the ability to elect ‘in writing’ to maintain insurance provided under a product that has been inactive for a period of 16 months or more. APRA notes that the policy intent of this section, as outlined in the Explanatory Memorandum, was to permit electronic communications. When determining whether this election is able to be provided electronically, a trustee would be expected to obtain its own legal advice and ensure it has a strong supporting rationale for the approach taken. APRA is aware of different views across the industry on this issue and is open to taking a pragmatic approach based on relevant circumstances.
Where trustees have concerns, they can discuss their approach with their APRA supervisor, providing details of the approach taken and their supporting rationale.
17. How does section 68AAA apply to a trustee’s product offerings?
Section 68AAA requires that a trustee does not take out or maintain insurance for members under a MySuper or Choice product where the product is inactive for a continuous period of 16 months.
As outlined in FAQ 14, the changes apply to all Choice products, which includes pension, paid-up whole of life, endowment and risk-only superannuation products. The only exemptions that apply in respect of section 68AAA are in relation to defined benefit members, ADF Super members (including a person that would have been an ADF Super member in certain circumstances) or where an employer-sponsor contribution exemption applies (per section 68AAAE).
Where a member’s rights in relation to insurance relate to any premiums paid prior to the prohibition applying and/or insurance cover provided for a fixed term that commences prior to the prohibition applying, the insurance opt-in changes protect members’ rights under such insurance arrangements even where the trustee no longer takes out or maintains insurance in respect of that member due to the operation of section 68AAA. APRA expects that subsections 68AAA(7) and (8) would operate in limited circumstances, for example, in respect of pre-paid insurance offerings and limited term policies. APRA takes the view that group life policies should not be considered to be fixed term cover for the purposes of subsection 68AAA(8) in light of the policy intent of these provisions.
In APRA’s view, the protection of the rights of members provided for in section 68AAA does not exempt these products from the requirement not to take out or maintain insurance for members where the product under which insurance is provided is inactive for a continuous period of 16 months.
18. Are insurance products where members are on claim, including income protection claims and lump sum claims, subject to the insurance opt-in changes?
Yes. Insurance products where members are on claim are subject to the PYSP insurance opt-in changes as these types of offerings are not excluded under section 68AAA.
Where members are on claim, APRA considers that the rights of these members in relation to the insurance benefit currently being paid would ordinarily not be affected by the insurance opt-in changes. That is, the operation of section 68AAA relates to the taking out or maintenance of insurance, not to the rights of a member in respect of the insurance cover. As such, while members currently on claim would ordinarily maintain their rights to the insurance benefit being paid, these members may still become inactive.
To reduce confusion to members currently on claim, APRA recommends that trustees ensure that all affected members are able to provide a written election for the continued provision of the insurance benefit for any future claims, or alternatively to make a contribution so that their superannuation product can remain active. APRA considers that any such written elections for the continued provision of the insurance benefit will be considered to remain effective for the particular product unless or until the member withdraws the election in writing. Trustees are required, at regular intervals, to notify members that have made an election how they can subsequently cease their insurance.
Inactive Low-Balance Accounts – transfer to the ATO
19. What action will RSE licensees need to take to be compliant with requirements for the transfer of ILBA to the ATO?
RSE licensees need to identify ILBAs as at 30 June 2019, and report and pay those amounts to the ATO by 31 October 2019. This process is to be repeated on a six monthly basis (i.e. the next sweep will require identification of ILBAs as at 31 December 2019 with reporting and payment to the ATO by 30 April 2020).
20. How does a trustee determine whether an account meets the definition of an inactive low balance account?
The ATO view is that, in determining whether an account meets the definition of an ILBA, the tests in subparagraph 20QA(1)(a)(iv), (v) and (viii) need to be applied at a product level, not at an aggregated account level that incorporates products. If any product within an account meets the tests, the account will be an ILBA and the details of it will need to be included in the statement required to be provided to the ATO in respect of their ILBAs.
The ATO has provided more detailed explanation of this in its material - Protect Your Super.
21. What amount is the payment to the ATO in respect of ILBAs?
The amount payable to the ATO in respect of the member is the amount that would be payable if the member had requested that the balance held in respect of each inactive low-balance product in the account be rolled over or transferred to a complying superannuation fund.
The legislation provides that ‘in a regulated superannuation fund, each MySuper product or choice product to which an inactive low-balance account relates in whole or in part and in relation to which subparagraphs (1)(a)(iv), (v) and (viii) are satisfied is an inactive low-balance product in the inactive low-balance account.
The ATO has provided more detailed explanation of this in its material - Protect Your Super.
22. Is a transfer to an eligible rollover fund or a Successor Funds Transfer a contribution for the purpose of resetting the time period of inactivity?
Yes, the ATO view is that the acceptance of an amount to a product in an account of a successor fund or ERF will mean that the successor fund or ERF has received an amount in respect of the member for crediting to a product. That is, the 16 month time period will start for the successor fund or ERF from the date that fund receives the amount from the predecessor/other fund. Given this, APRA expects that when undertaking any account transfers including SFTs, RSE licensees consider the implications of these transfers to ensure that account consolidation is not avoided or delayed contrary to the best interest of members.
The ATO has provided more detailed explanation of this in its material - Protect Your Super.