House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5 - Merging multiple accounts in a superannuation entity

Outline of chapter

5.1 Schedule 5 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to expand the duties of trustees of particular superannuation funds to establish and implement procedures to consolidate accounts where a member of the fund has multiple accounts within a fund and consolidation is in the member's best interest.

5.2 This measure will facilitate a reduction in the number of unnecessary accounts. This will boost superannuation balances by ensuring members avoid paying unnecessary fees, including insurance premiums on multiple accounts and reduce the number of lost accounts.

Context of amendments

5.3 Many Australians have multiple superannuation accounts and are paying multiple sets of administration fees and insurance premiums, within the same superannuation fund. This can happen, for instance, when the member has had a succession of different jobs within the same industry and has been enrolled in the same default fund on different occasions.

5.4 Lost and unnecessary superannuation accounts can increase fees and reduce the retirement savings of the individuals concerned. They can also add to fund administration costs.

5.5 Similarly, members may be paying multiple insurance premiums, even in cases where they are no longer eligible for a payout (for instance, because they are no longer employed), or they are not eligible for more than one payout. It is common for group insurance policies to specify that they will not pay out more than once, even if the member has been paying multiple premiums.

5.6 The Government's Stronger Super reforms include a range of measures designed to protect the retirement savings of the many Australians who choose not to take an active role in managing their superannuation. The Stronger Super package of reforms was announced by the Government in response to the recommendations of the Cooper Review (the Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System ).

5.7 The requirement to consolidate multiple accounts within the same fund is one of several Government initiatives designed to support funds, individuals and the Australian Taxation Office to consolidate accounts and encourage people to save for their retirement.

5.8 The SIS Act requires trustees to perform their duties and exercise their powers in the best interests of their members.

5.9 The Office of the Australian Information Commissioner has been consulted on these amendments, and has indicated that trustees in identifying members with multiple accounts must do so with regard to the Privacy Act 1988 , which regulates the privacy aspects of the handling of personal information including tax file numbers.

5.10 This change has been developed in consultation with industry and demonstrates the Government's commitment to increasing the future retirement savings of Australians.

Summary of new law

5.11 These amendments expand the duties of trustees of particular superannuation funds to require them to establish and implement procedures to consolidate accounts where a member of that superannuation fund has multiple accounts within a fund and consolidation is in the member's best interest.

5.12 This duty will require trustees of particular superannuation funds to establish procedures in relation to the consolidation of multiple member accounts within their fund on a periodic basis. A first round of consolidation must be undertaken by 30 June 2014. This will apply regardless of the balances of the accounts concerned.

5.13 However, defined benefit interest accounts, accounts supporting an income stream and First Home Saver Accounts will all be exempt from this measure. Similarly, this duty does not apply to trustees of pooled superannuation trusts or self-managed superannuation funds.

5.14 When considering whether to merge a member's superannuation accounts, the trustee must consider whether the consolidation is in the member's best interests. Additionally, trustees will not be required to merge member's accounts where it is considered impracticable to do so.

Comparison of key features of new law and current law

Detailed explanation of new law

Terminology

5.15 While this requires trustees to merge what are commonly thought of as 'accounts', the term 'account' does not have a well-defined meaning.

5.16 For this reason, Schedule 5 introduces 'superannuation account' as a new defined term. This term is intended to be used in the context of these amendments only.

5.17 The Bill makes clear that a FHSA is not a superannuation account and therefore will not be subject to these amendments. [Schedule 5, item 4, subsection 108A(3) of the SIS Act]

5.18 A superannuation account is a record of a member's benefits, in relation to a superannuation entity in which the member has an interest, which is recorded separately:

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from other benefits of the member in relation to the entity (if any); and

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from other benefits of any other member in relation to the entity.

5.19 Schedule 5 uses the term 'benefit' because benefit is a concept used more broadly under the SIS Act (Parts 18 and 24) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) (see SIS Regulations 6.28 and 6.29).

Trustee's duty to identify and consolidate multiple superannuation accounts of members

5.20 These amendments will place a general duty upon trustees to establish rules setting out a procedure to identify members with multiple accounts within their fund, on an annual basis, and to consider whether it would be appropriate to merge them. This will apply regardless of the balances of the accounts concerned.

5.21 The amendments will require affected trustees to:

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establish rules setting out how they will find multiple accounts held by one member within their fund;

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search for multiple accounts at least once per financial year;

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merge the member's multiple accounts (except in the case of defined benefit and income stream accounts) where the trustee reasonably believes it would be in the member's best interest, regardless of the balances of the accounts; and

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ensure no fees are payable (other than buy/sell spreads) for any mergers of multiple accounts.

[Schedule 5, item 4, subsection 108A(1) of the SIS Act]

5.22 These amendments will impose a standard condition in the Registrable Superannuation Entity (RSE) licensee's RSE licence requiring the licensee to ensure compliance with this duty as set out as part of these amendments. This will require RSE licensees to ensure that the trustee complies with the new requirements. [Schedule 5, item 3 , subsection 29E(6) of the SIS Act]

5.23 Furthermore, under these amendments, trustees will be guilty of a strict liability offence if they fail to establish rules setting out the procedure for the consolidation of member's multiple superannuation accounts and execute the procedure annually. [Schedule 5, item 4, subsection 108A(5) of the SIS Act]

5.24 'Strict liability' is defined in section 6.1 of the Criminal Code . The offence for failing to establish rules setting out the procedure for consolidation of a member's superannuation accounts and executing those procedures is a strict liability offence in order to ensure the integrity of the regulatory regime. Making it a strict liability offence is also necessary as the matter of whether the trustee has satisfied their duty under this measure is peculiarly within the knowledge of the trustee.

Exercising the trustee's duty

Considering whether to merge member's multiple accounts

5.25 In the first instance, the trustee must consider whether there is a need to merge the accounts. The duty to merge accounts will only apply to accumulation accounts, and not to defined benefit accounts or income streams. Nor will this duty apply to trustees of pooled superannuation trusts, self-managed superannuation funds or First Home Saver Accounts (FHSA). [Schedule 5, item 4, subsection 108A(1) and paragraph 108A(2)(b) of the SIS Act]

5.26 The trustee must then consider whether or not merging the member's accounts is in the member's best interest. In deciding whether it is in the member's best interest to merge accounts, the trustee must take into account the possible savings in fees, charges and insurance premiums which will result if they merge two or more separate accounts creating a single account. [Schedule 5, item 4, Subsection 108A(4) of the SIS Act]

5.27 In general, multiple fees, charges and insurance may not be in the member's best interest, and one set of fees and charges may be more appropriate (see further discussion below).

Example 5.7

Brendan has two superannuation accounts with ABC Fund. Both accounts are structured identically (they have the same rights and benefits, though their balances happen to differ). Both carry insurance, though Jack is only entitled to one payout in the event of a claim.

The fund has the ability to merge the two accounts into one, on the basis that the rights and benefits in both accounts are equivalent and it is therefore in Jack's best interest. Brendan no longer pays two sets of fees and charges, nor two insurance premiums.

Example 5.8

Niamh is 23 and has $7,000 in a standard account with insurance in XYZ fund, and another $1,000 in a higher risk/return account without insurance in the same fund. The trustee considers that the potential additional earnings expected on the higher risk account (based on the target earning rate) are smaller than the extra fees and charges Niamh incurs by having two accounts. The trustee accordingly merges the accounts and eliminates duplication in fees, costs and insurance. In doing so, the trustee either:

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merges the underlying benefits; or

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retains the separate classes of benefits but with reduced fees and charges (that is, the trustee charges one administration fee, but possibly two variable fees).

Example 5.9

Sonia is 51 and has $500,000 in a standard account, and $500,000 in a higher risk/return account. The trustee considers that Sonia is a fully engaged member, and that any potential savings in fees and charges is small compared to potential differences in the earnings rates on the two accounts. Accordingly, the trustee does not merge the two accounts into one, though the trustee may consider bringing them both under one 'account' with a single set of fees and charges.

Considering whether it is practical to merge a member's accounts

5.28 Trustees are not required to merge accounts where they consider it to be impracticable. [Schedule 5, item 4, paragraph 108A(2)(a) of the SIS Act]

5.29 Impracticable circumstances may include where a member has an interest in a hybrid scheme, which may include a defined benefit and an accumulation benefit.

5.30 However, trustees should not ordinarily regard cases like the following as impracticable:

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where there is a cost associated with the implementation of the rules;

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where there are operational requirements that the fund determines to have a higher priority;

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where contributions have been paid into two or more accounts in the current reporting period; or

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where higher per account costs may arise as a result of the superannuation fund administering a smaller number of accounts.

Undertaking the process of merging a member's multiple accounts

5.31 The process of merging accounts covers two scenarios. In the first scenario, trustees can choose to retain separate benefits, reflecting different underlying investments, but record those benefits in a single 'account' with a single set of membership fees, charges and insurance. However, there would be no liquidation of the underlying investments in either account. The merged account would record the total balance of the different benefits.

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If trustees choose to maintain separate benefits as one account, the account would ordinarily include only one fee in respect of administration costs, though separate variable fees can be charged in relation to the separate benefits.

5.32 In the alternative scenario, a trustee would, in addition to consolidating records and rationalising costs, fees and insurance, decide to close one account, moving the member's funds into another benefit (the 'retained' account). In other words, the pre-merger accumulation accounts would be consolidated in to one kind of account.

5.33 When merging accounts, trustees should ensure the member has only one account balance, in respect of these accounts, following the merger. Although the account may also record sub-totals, relating to separate amounts of distinct underlying accumulation benefits, if those benefits have not themselves been merged. [Schedule 5, item 4, paragraph 108A(1)(c) of the SIS Act]

5.34 The trustees must develop rules setting out how they will comply with these requirements. In developing these rules the trustee would have regard to base generic circumstances where the trustee would reasonably believe that it would be in the best interest of a member to merge or consolidate multiple accounts. Subject to the obligations and duties above, trustees may develop their own procedures for dealing with multiple accounts.

5.35 It is up to the trustee to decide whether to retain separate benefits under one account, or to merge the benefits within the one account (except in the case of defined benefit and income stream accounts). In the latter case, it is also up to the trustee to decide which class of benefits to retain (the 'retained' benefits), taking into account the best interests of the member.

5.36 The fact that a MySuper interest does not involve investment choice is not, in itself, evidence that it is in the member's best interest to retain a choice interest. The trustee would also need to consider the savings in fees, charges and premiums which come from having fewer accounts, and the savings in fees which attach to MySuper accounts in their own right.

5.37 Similarly, the fact that two accounts have different investment strategies is not, in itself, evidence that it is in the member's interest to retain separate accounts.

5.38 Where one of the accounts is an eligible rollover fund account, it should usually be closed and merged into another account within the same fund.

5.39 Where accounts carry separate insurance rights, the trustee must develop rules regarding the aggregation or extinguishing of existing insurance cover.

Transaction costs associated with exercising the trustee's duty

5.40 If a trustee incurs transaction costs associated with disposing of assets and reinvesting the proceeds as a result of consolidating accounts, the trustee may recover transaction costs by way of a buy/sell spread fee.

5.41 This will be relevant where the trustee decides not only to merge the accounts (in the sense of combining the relevant records) and rationalise fees, costs and insurance, but also merges the underlying benefits.

5.42 However, trustees must not charge other fees for merging accounts, for example an administrative fee for account closure. [Schedule 5, item 4, paragraph 108A(1)(d) of the SIS Act]

Consent, privacy and disclosure

5.43 Trustees will not be required to obtain the consent of the member. However:

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if the separate accounts are significant, trustees could consider giving the member notice that the trustee plans to merge the accounts in order to seek their views; and

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the trustee will need to comply with any requirements set out by the Australian Securities and Investments Commission in relation to significant events.

5.44 Trustees must also consider the disclosure obligations in the Corporations Act 2001 and the Corporations Regulations 2001 when consolidating accounts.

5.45 Trustees will need to consider the circumstances of their particular fund and the individual involved in making decisions about appropriate disclosure, particularly with regards to ongoing disclosure of material changes and significant event disclosure pursuant to section 1017B of the Corporations Act 2001 . Where a trustee makes a decision that fundamentally affects a member's investment, including a decision to transfer a member's benefits without notice or consent, the trustee must disclose this change or event to the member either before, or as soon as practicable (but not more than three months) after the decision.

5.46 Paragraph 7.9.20(b) of the Corporations Regulations 2001 also requires specific disclosure of amounts of benefit rolled-over or otherwise transferred during the reporting period, to be included in a periodic statement for a member. Further, trustees will need to consider whether they include information in the periodic statements pursuant to section 1017D of the Corporations Act 2001 about the effect of account consolidation, particularly if consolidation is a change in circumstance affecting the investment that has not been notified since the previous periodic statement (paragraph 1017D(5)(f) of the Corporations Act 2001 ).

5.47 Disclosing information about consolidation is not one of the specific requirements for the shorter Product Disclosure Statement (PDS) regime under Schedule 10D to the Corporations Regulations 2001 . However, trustees can include additional information about the account consolidation processes in their PDS, including by incorporating this information by reference.

Consequential amendments

5.48 Consequential amendments have also been made to the interpretation section of the SIS Act to reflect the terms utilised in these amendments. This includes the terms 'buy/sell spread' and 'superannuation account' which are explained in further detail above. [Schedule 5, items 1 and 2]

Application provisions

5.49 These amendments will commence from 1 July 2013 and trustees are required to establish rules and complete their first annual consolidation process by 30 June 2014. [Schedule 5, item 5]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013

5.50 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview Schedule 5 expands the duties of particular superannuation trustees in the Superannuation Industry (Supervision) Act 1993 to establish and implement procedures to consolidate accounts where a member of the fund has multiple accounts within that fund and consolidation is in the member's best interest.

5.51 Many Australians have multiple superannuation accounts, and are paying multiple sets of administration fees and insurance premiums, within the same superannuation fund. This can happen, for instance, when the member has had a succession of different jobs within the same industry and has been enrolled in the same default fund on different occasions.

5.52 Lost and unnecessary superannuation accounts can increase fees and reduce the savings of the individuals concerned. They can also add to fund administration costs.

5.53 These amendments require trustees to establish rules for identifying and merging multiple accounts within their fund - if the trustee reasonably believes it is in the best interests of the member to do so, and subject to a practicability test. This will facilitate a steady reduction in the number of unnecessary multiple accounts in the superannuation system.

5.54 These amendments apply to trustees of Australian Prudential Regulation Authority regulated superannuation funds and approved deposit funds.

Human rights implications

5.55 Schedule 5 to this Bill engages the right to privacy in Article 17 of the International Covenant on Civil and Political Rights (ICCPR) in so far as it affects a member's personal affairs, as superannuation trustees are not required to obtain consent from a member to merge multiple accounts.

5.56 Article 17 of the ICCPR provides that no one shall be subjected to unlawful or arbitrary interference with their privacy. Interferences with privacy may be permissible, provided they are authorised by law and not arbitrary. In order for the interference not to be 'arbitrary', the interference must be for a legitimate objective and be reasonable, necessary and proportionate to that objective.

5.57 The United Nations Human Rights Committee (UNHRC) has interpreted 'reasonableness' in this context to imply that 'any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case'. While the views of the UNHRC are not binding as a matter of law, they are to be considered in good faith and considerable weight should be given to them by Government in the interpretation of Australia's obligations under the ICCPR.

5.58 While Schedule 5 interferes with a member's personal affairs, it does so in order to promote the right to just and favourable conditions of work in Article 7 of the International Covenant on Economic, Social and Cultural Rights (ICESCR), particularly Article 7(a)(ii) in relation to the provision of a decent living for workers and their families, which is what superannuation is designed to provide following retirement.

5.59 Where Australians have multiple superannuation accounts, they could be unnecessarily paying multiple sets of administration fees and insurance premiums, within the same superannuation fund. These fees reduce the savings of the individuals concerned.

5.60 The objective of Schedule 5 is to reduce the number of unnecessary multiple accounts by merging these accounts within the same superannuation fund. Consequently, the Schedule would reduce the amount affected members pay in multiple sets of administration fees and insurance premiums, and increase their retirement savings.

5.61 Members' privacy interests are protected through having specific conditions that are required to be satisfied prior to a trustee merging a member's accounts, namely that the trustee must reasonably believe that it is in the best interests of the member to merge the accounts. In determining whether it is in the member's best interest, the trustee must consider the total amount of fees and charges payable by the member.

5.62 While trustees will not be required to obtain the consent of the member before merging the separate accounts, if the separate accounts are significant, trustees could implement a model where members are given notice that the trustee plans to merge the accounts and the member's views are sought.

5.63 Trustees are also required to comply with the notice requirements set out by the Australian Securities and Investments Commission in relation to material changes or significant events. Where a trustee makes a decision that fundamentally affects a member's investment, including a decision to transfer a member's benefits without notice or consent, the trustee must disclose this change or event to the member either before, or as soon as practicable (but no more than three months) after the decision.

5.64 In identifying members with multiple accounts, the Office of the Australian Information Commissioner has recommended that trustees have regard to the Privacy Act 1988 , which regulates the handling of personal information.

5.65 By providing these additional safeguards, the amendments introduced by Schedule 5 are reasonable and necessary in the circumstances and required to meet the objects of the law.

Conclusion

5.66 This Schedule limits the right to privacy in a reasonable and proportionate way and is therefore compatible with human rights.

Minister for Financial Services and Superannuation, the Hon, Bill Shorten MP