Senate

Revised Explanatory Memorandum

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

Chapter 3 - Default superannuation

Outline of chapter

3.1 Schedule 3 to the Bill amends the Fair Work Amendment Act 2012 (FW Amendment Act) to:

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allow an employer to make contributions for default fund employees to whom a modern award applies to a superannuation fund in respect of an employer MySuper product, subject to the product being approved by the Fair Work Commission (FWC) and specified on a Schedule of Approved Employer MySuper Products;

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establish a two-stage approval process under which an Expert Panel of the FWC will assess employer MySuper products to determine whether they are in the best interests of the relevant default fund employees;

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change the maximum number of funds that can generally be specified in a modern award in relation to a generic MySuper product from 10 to 15;

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ensure that the new requirements in modern awards in relation to both generic MySuper products and employer MySuper products do not apply before 1 January 2015;

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provide that the new requirements in relation to employer MySuper products will not apply in respect of a modern award (for example, a modern enterprise award) made between 1 January 2014 and 31 December 2017, until the second four yearly review of default fund terms; and

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make other consequential and technical amendments.

Allowing contributions to employer MySuper products

Employer MySuper products

3.2 An 'employer MySuper product' will be defined in new subsection 23A(1B) of the Fair Work Act 2009 (FW Act) as a tailored MySuper product or a corporate MySuper product. [Schedule 3, items 1 and 5]

3.3 A 'tailored MySuper product' is defined in new subsection 23A(2) of the FW Act as a MySuper product in relation to which section 29TB of the Superannuation Industry (Supervision) Act 1993 (SIS Act 1993) is satisfied. A tailored MySuper product can be offered by a public offer superannuation fund to one large employer (and its 'associates') where the employer and its associates have more than 500 employees who are members of the fund.

3.4 A 'corporate MySuper product' is defined in new subsection 23A(3) of the FW Act as a MySuper product offered by a non-public offer fund with a single employer-sponsor or associated employer-sponsors. A corporate MySuper product is administered in-house by an employer.

Default fund terms in modern awards

3.5 Modern awards specify particular funds to which employers are required to make compulsory superannuation contributions for the benefit of employees who have not chosen a fund ('default fund employees'). A failure to make contributions for such employees to a default fund specified in the award constitutes a contravention of the award, exposing the employer to civil penalties under the FW Act.

3.6 The FW Amendment Act provides that, following the first four yearly review of default fund terms in modern awards, such terms must require employers to make contributions for default fund employees either to a fund that is specified in the default fund term in relation to a 'generic MySuper product' or to a particular category of fund (for example, an exempt public sector superannuation scheme or a defined benefit scheme). Employer MySuper products (tailored and corporate MySuper products) are not currently included as a category of fund to which default contributions under modern awards are permitted.

3.7 The FW Amendment Act is amended to provide that default fund terms in modern awards must permit an employer to make contributions, for the benefit of a default fund employee, to a superannuation fund that offers an employer MySuper product that:

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relates to the employer; and

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is on the Schedule of Approved Employer MySuper Products.

[Schedule 3, item 11, new subsection 149D(1A)]

3.8 The new requirement that contributions can only be directed to a fund in respect of an employer MySuper product if the product has been approved by the FWC and included on the Schedule of Approved Employer MySuper Products will not apply until the FWC varies the modern award as part of the first four yearly review of default fund terms, which cannot occur before 1 January 2015. [Schedule 3, item 34, new clause 2A of Schedule 3 to the FW Act]

Approval process for employer MySuper products

The Schedule of Approved Employer MySuper Products

3.9 The FW Amendment Act is amended to insert a new Subdivision D of Division 4A of Part 2-3 of the FW Act, which provides for a two-stage process under which the FWC will assess employer MySuper products for inclusion on the Schedule of Approved Employer MySuper Products. [Schedule 3, item 30]

3.10 The FWC will be constituted as an Expert Panel when conducting both stages of the assessment process for employer MySuper products. [Schedule 3, item 32, new subsections 617(4) and (5)]

3.11 In each four yearly review of default fund terms, the FWC must make and publish the Schedule of Approved Employer MySuper Products and repeal any previous Schedule. [Schedule 3, item 30, new subsection 156L(1)]

3.12 The effect of an employer MySuper product being included on the Schedule is that an employer can make contributions, for the benefit of a default fund employee to whom a modern award applies, to a superannuation fund that offers the product, pending reassessment of the product as part of the next four yearly review. [Schedule 3, item 11, new subsection 149D(1A)]

3.13 Whether or not an employer MySuper product is included on the Schedule is not intended to affect the ability of an employee to choose a fund, or employers and employees to agree to enter into an enterprise agreement which nominates a different default superannuation fund or remains silent on default superannuation.

Applications for inclusion on the Schedule

3.14 Applications to have an employer MySuper product included on the Schedule of Approved Employer MySuper Products may be made by a superannuation fund that offers the product or an employer to which the product relates. [Schedule 3, item 30, new subsection 156N(1)]

3.15 Before making the Schedule, the FWC must publish a notice specifying the period in which such applications may be made as part of a four yearly review, referred to as the 'standard application period'. [Schedule 3, item 30, new section 156M and new paragraph 156N(2)(a)]

3.16 Applications to have an employer MySuper product included on the Schedule can also be made within an 'interim application period'. An interim application period between two four yearly reviews commences immediately after the Schedule of Approved Employer Products is made as part of the first four yearly review, and ends on 31 December, immediately before the year of the next four yearly review. [Schedule 3, item 30, new paragraph 156N(2)(b)]

3.17 If the FWC makes a determination to include an employer MySuper product on the Schedule as part of an interim application, the Schedule must be amended to specify the product, and published as amended. [Schedule 3, item 30, new subsections 156L(3) and (4)]

3.18 Applications must be accompanied by any fees prescribed by the regulations and must include information relating to the 'first stage criteria' referred to in new section 156F of the FW Act. [Schedule 3, item 30, new subsection 156N(3)]

3.19 The FWC must publish any application made. However, if the FWC is satisfied that the application includes information which is confidential or commercially sensitive, then the FWC may decide not to publish the information. If it does so, the FWC must instead publish a summary of the information which contains sufficient detail to allow a reasonable understanding of the substance of the information, without disclosing anything that is confidential or commercially sensitive. [Schedule 3, item 30, new subsections 156N(4)-(6)]

3.20 Only one application in relation to an employer MySuper product may be made in the period that commences at the start of the 'standard application period' and finishes at the end of the 'interim application period'. For example, if in respect of the first four yearly review, the period specified in the notice published by the FWC under new subsection 156M of the FW Act is 1 February 2014, then only one application could be made in respect of an employer MySuper product in the period from 1 February 2014 until 31 December 2017. [Schedule 3, item 30, new subsection 156N(7)]

Determining applications for inclusion on the Schedule

3.21 If an application is made to have an employer MySuper product included on the Schedule of Approved Employer MySuper Products, the FWC must make a determination about whether to include the product on the Schedule. [Schedule 3, item 30, new subsection 156P(1)]

3.22 When making or amending the Schedule of Approved Employer MySuper Products, and when determining applications to have an employer MySuper product included on the Schedule (whether the application is made as part of a four yearly review or in an interim application period), the FWC must be constituted as an Expert Panel. [Schedule 3, item 32, new subsections 617(4) and (5 ))]

3.23 For these purposes, the Expert Panel will consist of seven FWC Members and must include:

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the President, or a Vice President or Deputy President appointed by the President to be the Chair of the Panel; and

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three Expert Panel Members who have knowledge of, or experience in, finance, investment management or superannuation.

[Schedule 3, item 33, new subsection 620(1A)]

3.24 The FWC must not include an employer MySuper product on the Schedule of Approved Employer MySuper Products unless the product satisfies the first stage test and the second stage test. [Schedule 3, item 30, new subsection 156P(2)]

The first stage test

3.25 An employer MySuper product satisfies the first stage test if the FWC is satisfied that including the product on the Schedule of Approved Employer MySuper Products would be in the best interests of 'default fund employees', or a particular class of those employees, taking into account:

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the information provided in the application;

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the first stage criteria; and

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any submissions made in relation to satisfying the first stage test. [Schedule 3, item 30, new section 156Q]

3.26 'Default fund employee' is defined in new subsection 149C(2) of the FW Act, as an employee who is covered by a modern award and has no chosen fund, within the meaning of the SIS Act 1993.

3.27 The first stage criteria are provided in new section 149F of the FW Act and are the same as those the FWC is required to consider when determining applications to include a generic MySuper product on the Default Superannuation List. The criteria reflect those recommended by the Productivity Commission in its Report into Default Superannuation Funds in Modern Awards (Report No. 60) and include areas such as investment return, fees and costs, governance practices, insurance offered and administrative efficiency.

3.28 The FWC must ensure that all persons and bodies have a reasonable opportunity to make written submissions to the FWC about whether an employer MySuper product satisfies the first stage test. [Schedule 3, item 30, new subsection 156R(1)]

3.29 If a person or body makes such a submission and the person or body has an interest in relation to the superannuation fund that offers the product, or another superannuation fund referred to in the submission, then the person or body must disclose that interest in the submission. [Schedule 3, item 30, new subsection 156R(2)]

3.30 The FWC must publish any submission that is made. [Schedule 3, item 30, new subsection 156R(3)]

The second stage test

3.31 To be included on the Schedule of Approved Employer MySuper Products, an employer MySuper product must also pass the second stage test. [Schedule 3, item 30, new subsection 156P(2)]

3.32 An employer MySuper product passes the second stage test if the FWC is satisfied that including the product on the Schedule of Approved Employer MySuper Products would be in the best interests of default fund employees of an employer to which the product relates, or a particular class of those employees, taking into account:

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any submissions that were made in relation to satisfying the second stage test; and

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any other matter the FWC considers relevant. [Schedule 3, item 30, new section 156S]

3.33 The FWC must ensure that employees and employers to which the employer MySuper product relates, and any organisation that is entitled to represent their industrial interests, have a reasonable opportunity to make written submissions concerning whether the product satisfies the second stage test. [Schedule 3, item 30, new subsection 156T(1)]

3.34 If any person or body makes such a submission and the person or body has an interest in relation to a particular superannuation fund referred to in the submission, the person or body must disclose that interest in the submission. [Schedule 3, item 30, new subsection 156T(2)]

3.35 The FWC must publish any submission that is made. [Schedule 3, item 30, new subsection 156T(3)]

Number of funds that can be specified in a modern award

3.36 The FW Amendment Act currently requires the FWC to vary modern awards as part of a four yearly review to ensure that default fund terms specify at least two, but generally no more than 10, superannuation funds in relation to generic MySuper products. More than 10 funds can be specified if the FWC is satisfied it is warranted, taking into account the range of occupations of employees covered by the modern award.

3.37 The FW Amendment Act is amended to increase the maximum number of funds that can generally be specified in a modern award from 10 to 15. [Schedule 3, items 24, 26 and 28, new paragraph 156H(1)(b), note to new subsection 156H(1) and new subsection 156H(3)]

3.38 This amendment is intended to ensure that funds offering high performing generic MySuper products (including funds that offer employer-specific sub-plans within a generic MySuper product which provide discounted administrative fees and more beneficial insurance arrangements) have reasonable prospects of being positively assessed by the FWC and specified in relevant modern awards.

New requirements not to apply before 1 January 2015

3.39 The FW Amendment Act is amended to include a transitional provision which has the effect that the new requirements to be included in modern awards in relation to both generic MySuper products and employer MySuper products will not apply before 1 January 2015.

3.40 The transitional provision provides that in the first four yearly review of default fund terms, determinations varying the default fund term of a modern award under new sections 156H or 156J of the FW Act must take effect at the same time and must not take effect before 1 January 2005. [Schedule 3, item 34, new clause 2A of Schedule 3 to the FW Act]

3.41 Variations to default fund terms made under new section 156H are to specify at least two, but no more than 15, superannuation funds in relation to generic MySuper products that have been positively assessed by the FWC.

3.42 Variations made by the FWC under section 156J will ensure that default fund terms of modern awards comply with other requirements, including that such terms must permit contributions to funds that offer an employer MySuper product that is on the Schedule of Approved Employer MySuper Products.

Any new modern awards created between 1 January 2014 and 31 December 2017

3.43 If a modern award (for example, a modern enterprise award made under Schedule 6 to the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 ) is made in the period that starts on 1 January 2014 and ends on 31 December 2017, the award will not be required to comply with the new requirement in relation to employer MySuper products until it is varied as part of the second four yearly review of default fund terms in 2018. Such an award will permit contributions to be made to a fund in respect of an employer MySuper product that is not included on the Schedule of Approved Employer MySuper Products, pending assessment of the product by the FWC in the 2018 review. [Schedule 3, item 34, new clause 2B of Schedule 3 to the FW Act] .

Other consequential and technical amendments

Publishing documents under Division 4A of Part 2-3 of the FW Act

3.44 An amendment provides that if the FWC is required under new Division 4A of Part 2-3 of the FW Act to publish a document, then the FWC must publish the document on its website or by any other means it considers appropriate. This requirement applies, for example, to publication of the Default Superannuation List and the Schedule of Approved Employer MySuper Products. [Schedule 3, item 30, new Subdivision E, new section 156U] '

Generic MySuper products' to be renamed standard MySuper products'

3.45 Technical amendments are being made to the terminology used in the FW Amendment Act to describe MySuper products other than tailored and corporate MySuper products. In the FW Amendment Act, the term 'generic MySuper product' includes MySuper products relying on the exception in section 29TA of the SIS Act 1993 from the general rule of only one MySuper product per fund. General understanding and usage of the term 'generic MySuper product' in the superannuation sector would not cover these section 29TA 'goodwill' products. To avoid any possibility of confusion, the term 'generic MySuper product' in the FW Amendment Act is being replaced by the term 'standard MySuper product'. [Schedule 3, items 4, 5, 7, 8, 12, 15-20, 22, 23, 25, 27 and 31]

Contributions to funds in respect of a tailored MySuper product where the fund is specified in the modern award

3.46 Under new subsection 149D(1) of the FW Act, default fund terms of modern awards will be required to specify superannuation funds in relation to their 'standard MySuper products' (formerly referred to as 'generic MySuper products).

3.47 The FW Amendment Act is amended to include a note under subsection 149D(1), indicating that if a fund is specified in the default fund term of a modern award in relation to a standard MySuper product and the fund also offers a tailored MySuper product that a default fund employee is entitled to hold, then any contributions made by the employer to the fund for the benefit of that employee will be paid into the tailored MySuper product, rather than the standard MySuper product. This is consistent with proposed new section 29WB of the SIS Act 1993 (to be inserted by item 47 of Schedule 1 to the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2013), which requires a fund's trustee to direct a default fund employee's contributions to a tailored MySuper product where one exists in relation to the relevant employer. [Schedule 3, item 10]

3.48 Default fund terms in modern awards will therefore permit an employer to make contributions to a fund in respect of a tailored MySuper product in two circumstances. Such contributions will be able to be made where the tailored MySuper product is specified in the most recent Schedule of Approved Employer MySuper Products. In addition, such contributions will also be permitted to be made where the fund has been positively assessed in relation to its standard MySuper product in the last four yearly review of modern awards and is specified in the modern award. STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Superannuation Laws Amendment (MySuper Capital Gains Tax Relief and Other Measures) Bill 2013

3.49 These amendments are 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

3.50 Schedule 1 to the FW Amendment Act amends the FW Act to introduce new requirements in relation to modern award terms about default superannuation, and a process under which the FWC will review such terms every four years.

3.51 The amendments in the Bill ensure that superannuation contributions for default fund employees to whom a modern award applies can be directed to a fund in respect of an employer superannuation product, subject to the product being assessed by the FWC as being in the employees' best interests.

3.52 Employer MySuper products typically offer more favourable terms and conditions for members (for example, lower or discounted fees and more favourable insurance arrangements).

Human rights implications

3.53 The amendments engage and promote the right to just and favourable conditions of work in Article 7 of the International Covenant on Economic, Social and Cultural Rights (ICESCR) by minimising disruption for employees and continuing to protect their best interests.

3.54 Requiring corporate and tailored MySuper products to be assessed by an Expert Panel within the FWC will improve the transparency, objectivity and contestability of default superannuation fund selection and increase competition within the sector.

Conclusion

3.55 The amendments are compatible with human rights.

Minister for Financial Services and Superannuation and Minister for Employment and Workplace Relations, the Hon Bill Shorten