An outcomes test for superannuation funds has passed the Parliament, along with changes to Portfolio Holding Disclosure.
The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2019 passed the House of Representatives on the last sitting day before the election. The Bill had already passed the Senate – it was introduced there first.
Treasurer Josh Frydenberg said the legislation would further improve outcomes for super fund members and enhance the powers of APRA.
“This legislation will help safeguard the retirement savings of millions of Australians and ensure that APRA can take effective action, including addressing underperformance and compliance with the best interests duty in the superannuation industry.”
The Bill requires large super funds – SMSFs and SAFs are excluded – to carry out annual outcomes assessments of their MySuper and Choice products to determine if the financial interest of members are being promoted.
The Bill as originally drafted by the Government only applied the outcomes test to MySuper products, but it was amended in the Senate to include Choice products.
Labor MP Clare O’Neil told the House of Representatives: “The changes, as the government had drafted them, would have largely exempted about 83 per cent of the bank-owned and other retail superannuation assets, and that is despite the fact that choice products are consistently delivering poorer returns to members than MySuper products.”
“I should make it really clear that that’s not to say that there are no issues with MySuper products—there are. But to leave the choice products out of the outcomes test was not going to fly with the Labor Party.”
Portfolio Holding Disclosure
Another of the changes included in the soon-to-be Act is to Portfolio Holding Disclosure. It requires large super fund to make information about their investment holdings available on their website within 90 days of the end of the quarter, starting from 31 December 2019.
This disclosure was originally going to start on 31 December 2018, but was pushed back – the Bill was introduced to Parliament in 2017.
A form of Portfolio Holding Disclosure had already been legislated and was originally meant to start on 31 December 2013, but the start date has been repeatedly delayed by ASIC.
“It will have taken a decade to get this up by the time the first disclosures are made. Delay, obfuscation and self-interest so often prevail in this industry,” said Jeremy Cooper – who Chaired the Super System review, which had portfolio disclosure as one of its recommendations – on Twitter.
Though the reporting will be more often – quarterly instead of twice annually – the new disclosure rules exclude some investments covered by the old rules.
Previously Portfolio Holding Disclosure was going to include investments in associated and non-associated entities. But under the new legislation investments held through non-associated entities wont need to be disclosed. Though super funds will need to ‘look through’ Pooled Superannuation Trusts (PST) to disclose assets held, irrespective of the PST being an associated entity or not.
The Government amended the Bill to implement two recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:
Recommendation 3.6 – No treating of employers
Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund. The provision should be a civil penalty provision enforceable by ASIC.
Recommendation 3.7 – Civil penalties for breach of covenants and like obligations
Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty.
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – Final Report Volume 1
Regulator and industry welcome passage of Bill
APRA has welcomed the passage of the Bill, saying it provides a “broad and long sought-after directions power”.
“It also gives APRA the power to take civil penalty action against trustees and their directors for breaching their obligations to members, including the duty to act in the best interests of members.”
Deputy Chair Helen Rowell said: “Previously, APRA could only direct a superannuation trustee after a contravention of the law had taken place, or where APRA believed there was an urgent, material threat to members’ interests. The new directions power gives APRA the ability to intervene at an early stage before members suffer significant harm.”
“In some instances, acting in the best interests of members will require underperforming funds to merge or exit the industry. If trustees and trustee directors are not willing or able to meet their best interests duties to members, they should be prepared to face serious consequences.”
APRA said the new outcomes test is “generally consistent” with its own, recently released, member outcomes prudential standard. The regulator is considering the extent to which it will need to amend the standard in light of the new law.
“APRA will provide guidance to industry on this as soon as possible,” said APRA.
Industry Super Australia also welcomed the passage of the Bill, with Deputy Chief Executive Matthew Linden saying it would “put the acid on trustees to perform or exit the industry”.
“From when the Bill was originally introduced in September 2017 Industry Super Funds argued the bill needed to be strengthened to protect members irrespective of the type of super fund or product they were in,” he said.
Mr Linden said the changes in the Bill, after it had been “significantly” amended, should raise the performance bar of super funds.
“This sets out the regulatory framework that will pave the way to weed out dud, underperforming super funds and products – giving consumers confidence their savings are being invested in better performing products.”
More to come.