House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Regulation impact statement

Policy objective

2.1 The policy objective of the choice of fund proposal is to provide employees with greater choice as to which complying superannuation fund or RSA will receive compulsory superannuation contributions made on their behalf by the employer. Greater competition and better returns will benefit all persons with superannuation and will reduce, over time, pressure on the age pension system.

2.2 This measure is expected to increase competition, efficiency and performance within the superannuation industry and result in reductions in fees and charges for persons with superannuation.

Background

2.3 This proposal was first announced in the 1997-1998 Federal Budget. Previous legislation to implement the proposal was defeated in the Senate on 8 August 2001. Details of the measure were given in the Minister for Revenue and Assistant Treasurers Press Release No. C42/02 of 14 May 2002.

Implementation

General

2.4 The choice of fund regime would mean:

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an employee would be able to choose any complying superannuation fund or RSA into which their employer superannuation contributions would be deposited;

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that where employer contributions are being made to a defined benefit fund, the employer would need to advise an employee of the consequences of a choice that would reduce contributions or other specific entitlements (e.g. death and disability insurance);

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that to be effective, choice would need to be exercised within 28 days of an employer providing an employee a standard choice form;

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after making their initial choice, all employees would be able to make a further choice at least every 12 months thereafter;

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the employer would contribute to a default fund if the employee failed to choose an eligible choice fund within the specified time;

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employers may be served a contravention notice and be subject to financial penalties if they fail to give effect to valid employee choice; and

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in line with workplace relations reforms, choice would be subject to the terms of workplace agreements which provide employees with a choice of superannuation fund for their employer contributions.

Education programs

2.5 Groups affected by the measure will familiarise themselves with the changes using assistance provided by the ATO and ASIC.

2.6 The ATO will provide employers and employees with information in a number of forms. In particular, the ATO will provide information through:

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new pamphlets directed specifically at an impact group (e.g. employers or employees), which sets out the information in a question and answer style;

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the ATOs existing Internet facilities; and

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the ATOs existing telephone help lines.

2.7 The private sector may also contribute to the education of affected groups.

Assessment of impacts (costs and benefits)

Impact groups

2.8 The following groups will be impacted:

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employers (approximately 0.654 million will be affected);

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employees (approximately 4.819 million will be affected);

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superannuation funds and RSA providers;

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professional advisers (e.g. investment and tax advisers);

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the ATO;

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the APRA; and

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the ASIC.

Analysis of the costs of the implementation

General

2.9 Both employers and employees may incur some cost if they choose to negotiate a workplace agreement. This is only likely to be significant where the primary purpose of that agreement is to provide employees with a choice of superannuation fund. Costs will be marginal where the provision of a choice of superannuation fund is part of a general workplace agreement.

2.10 The affected groups will incur the following compliance and administrative costs.

Initial costs

Generally

2.11 All impact groups will need to familiarise themselves with the change. The ATO and ASIC will need to devote additional resources in providing information support to the other impact groups.

Employers

2.12 Larger employers will need to update their technology in order to satisfy their obligations. Employers will not be able to vet the decision of the employee and will therefore be contributing to a greater number of funds or RSAs.

2.13 Employers will incur some costs in selecting the default fund that is to be used where an employee fails to make a choice. These costs are not likely to be incurred on a recurrent basis. However, these costs are likely to be relatively more significant for smaller employers.

Fund/RSA providers

2.14 Fund/RSA providers will need to update their technology, as they may be receiving contributions from a wider range of employers.

Recurrent costs

Employees

2.15 Employees will incur costs in choosing a fund as they may need to seek information from alternative funds.

Employers

2.16 Employers will also need to provide employees with a PDS for the fund or RSA that is the default fund. These will be available from the particular default fund or RSA.

2.17 Employers will be required to make contributions to a greater number of funds and RSAs than at present. Larger employers will have a greater relative capacity to absorb these additional costs, particularly those employers who contribute to funds by electronic means. On the other hand, contributions will be made to more funds and RSAs where an employer has a large number of employees.

2.18 Employers will be required to provide additional information to employees where that employers contributions are currently being made to a defined benefit fund. Employers will be required to provide prescribed information to these employees including the consequences of a choice that would reduce contributions or other specific entitlements (e.g. death and disability insurance). Data from APRA states that there are 575 defined benefit funds with 482,000 members. There are an additional 592 hybrid funds of which at least one member in each fund is a defined benefit member. Anecdotal evidence suggests that many of these funds are closed to new members. Therefore, it is expected that this requirement will only affect a minority of employers.

2.19 There will also be additional record keeping requirements. Employers will need to keep track of what choices were made, and when they were made. These costs will rise according to the number of employees, and will therefore be higher for larger employers.

Fund/RSA providers

2.20 The default fund provider will be required to distribute their PDS to employers, who will then provide the statement to employees. Costs associated with the preparation and production of PDSs are in addition to this proposal as, under current legislation, they are required to be produced by the providers.

ATO

2.21 Reporting and remitting obligations imposed on employers will result in a complementary increase in workflows for the ATO.

2.22 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in Table 2.1.

Table 2.1

2.23 In calculating the cost of compliance the following assumptions have been used:

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654,000 employers will be subject to choice; 500,000 of which will not be covered by workplace agreements;

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the cost to comply for an employer will be $18/hour after tax;

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initially it will take 3 hours to comply and 2 hours thereafter;

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the costs for employees are not available due to difficulties in predicting how they will react to the measure;

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the cost to comply for a fund/RSA will be $18/hour after tax; and

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initially it will take 3 hours to comply and 1 hour thereafter.

2.24 The costs of implementing and administering this measure (including the education campaign) are set out in Table 2.2.

Table 2.2

Consultation

2.25 The Government has engaged in consultation with a wide range of interested parties on the choice of funds proposal, including the superannuation industry (in particular, the Association of Superannuation Funds of Australia and the Investment and Financial Services Association), employer groups (in particular the Australian Chamber of Commerce and Industry), small business and those representing employee interests. As a result of those consultations, a number of enhancements to the original 1997-1998 Federal Budget announcement were made, particularly by reducing the burden of choice on employers while ensuring the key objective of greater choice of fund is preserved.

Conclusion

2.26 Providing choice of fund will necessarily increase costs for some employers. The Government believes the benefits of choice to employees and the community more generally, outweigh these costs.