House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 1 - Overview of MySuper

Outline of chapter

1.1 This chapter outlines the rationale for MySuper products, the core framework for MySuper products contained in this Bill and measures to be contained in subsequent tranches of legislation.

Context

1.2 Superannuation is a key pillar of Australia's retirement income system. For many Australians it will be their only substantial source of private saving for retirement, apart from the family home.

1.3 The importance of the superannuation system to the retirement incomes of Australians means there is a strong public interest in ensuring it operates effectively to invest retirement savings with the ultimate goal of providing adequate benefits to members in their retirement.

1.4 Despite this, there is evidence that many Australians do not take an active interest in managing their superannuation. Around 60 per cent of members do not make active choices in relation to their superannuation.

1.5 For many employees, retirement is considered remote and they may not have the time, interest or expertise to engage with their superannuation. Some employees fear they may make the wrong choice, so will adopt the default option offered through their employer.

1.6 Superannuation is also a complex financial product. Therefore, it is currently difficult for ordinary Australians to make comparisons of superannuation products. There is also a wide array of choices that can overwhelm and discourage individuals from protecting their own interests.

1.7 It is clear that the superannuation system already adequately caters for those who wish to make choices about their retirement savings. Importantly, MySuper products will not reduce the level of choice that is available within superannuation. For individuals that wish to choose an alternative product they will be free to do so.

1.8 The introduction of MySuper products will improve the experience of those members that accept the default option by placing them in a product that is appropriate and ensures their financial interests are protected.

1.9 First, MySuper will lift the standards that apply to default superannuation funds. RSE licensees will have a heightened obligation to act in the best financial interests of members that accept the default option. RSE licensees will also need to actively consider whether their MySuper product has access to sufficient scale to provide net returns that are in the best financial interests of members. MySuper products will also be appropriate for members that do not require or generally do not request additional services. Importantly, MySuper products will not allow commissions to be paid from the product.

1.10 Second, MySuper will simplify and standardise the default superannuation product available to Australians. Funds will be limited in the number of MySuper products that they will be able to offer. This will make comparisons more manageable by having a well-known and distinct cohort of MySuper products.

1.11 MySuper products will also have common characteristics meaning that they will be able to be compared based on a few key differences - cost, investment performance and the level of insurance coverage. MySuper products will be restricted to charging fees that are described in the same way so that they can be directly compared. Members of a particular MySuper product will also be generally charged the same fees, except in limited circumstances. This will enable members, employers and market analysts to make comparisons across MySuper products based on the actual fees paid and investment returns received by members. In addition, APRA will collect and publish data on MySuper products to ensure they are transparent and comparable.

Core framework for MySuper products

1.12 This Bill establishes the core framework for MySuper products.

1.13 The Bill establishes a process for APRA to authorise RSE licensees to offer a MySuper product. Authorisation is important as only MySuper products will be able to accept superannuation guarantee contributions made by or on behalf of members who do not have a chosen fund or have not elected in writing to have contributions paid to a specified choice product or products. The Bill also provides for circumstances where an RSE licensee will be able to apply for authorisation for more than one MySuper product per fund.

1.14 The Bill also provides that a MySuper product must meet core criteria. These include that for each MySuper product:

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there is a single diversified or lifecycle investment strategy;

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all members have access to the same options and facilities;

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the same processes are adopted in crediting or debiting member accounts;

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the only limits placed on the source or kind of contributions to a MySuper product are those prescribed by regulations or imposed under the general law or a law of the Commonwealth;

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a member's interest cannot be transferred without the member's consent except to another MySuper product within the fund or as required or permitted under a law of the Commonwealth;

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the MySuper product is only for the pre-retirement phase;

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only permitted fees can be deducted from member accounts; and

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the permitted fees are the same for all members in the MySuper product, with the exception of the administration fee.

Measures to be contained in subsequent tranches of legislation

1.15 The Stronger Super reforms will be implemented in several tranches of legislation.

1.16 MySuper provisions that are not contained in this Bill and will be addressed by the subsequent tranches of legislation are:

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specific trustee duties in relation to a MySuper product including:

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to manage the MySuper product at an overall cost aimed at optimising the best financial interests of members, as reflected in the net return over the long term;

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to clearly articulate an investment return target (over a rolling 10 year period) and level of risk appropriate to members of the MySuper product; and

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to actively examine and conclude whether the MySuper product has access to sufficient scale (with respect to both assets and number of members) to continue to provide net returns that are in the best financial interests of members.

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trustee duties for eligible rollover fund licensees that are similar to the specific trustee duties in relation to MySuper products;

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the power for APRA to make prudential standards in relation to superannuation and issue directions to RSE licensees;

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allowing defined benefit funds and schemes to continue to be a default superannuation product;

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rules for the charging of financial advice deducted from member accounts and charging for intra-fund advice;

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prohibition on deduction of commissions from member accounts;

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rules for the payment of performance-based fees by RSE licensees to investment managers in relation to the assets of a MySuper product;

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trustee obligations in respect of insurance;

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limitation of certain fees to cost-recovery;

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a rule for the fair and reasonable allocation of costs between each MySuper product and each choice product within a fund;

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enhanced data collection and data publication powers for APRA;

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specific disclosure requirements in relation to MySuper products, including a product dashboard;

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consequential amendments to deal with the nomination of superannuation funds in modern awards and enterprise agreements;

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consequential amendments to the Corporations Act 2001 (Corporations Act) that ensure the necessary obligations of that Act apply to MySuper products; and

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arrangements for the transition of member accounts from existing default superannuation products to MySuper products.