House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)

Chapter 2 Fees charged to superannuation members

Outline of chapter

2.1 Schedule 1 to this Bill prevents trustees of superannuation funds from charging certain fees or costs exceeding 3 per cent of the balance of an account annually if the balance is less than $6,000.

2.2 Schedule 1 also prevents trustees from charging exit fees on all superannuation accounts, regardless of a member's account balance.

Context of amendments

2.3 Currently, the SIS Act does not limit the amount of administration fees or investment fees that can be charged for either choice or MySuper products. There are no limits on indirect costs that lower returns on a member's investments.

2.4 While MySuper charging rules require consistency amongst members in a given MySuper product, this does not always result in equitable outcomes as particular charging structures can result in low balance accounts paying disproportionately high fees.

2.5 A trustee of a superannuation fund can only charge certain fees in relation to a MySuper product if they meet the charging rules. These charging rules generally apply so that the trustee must charge the same flat fee, the same percentage of the account balance, or a combination of both, for all members of a MySuper product.

2.6 Because the charging rules do not impose a limit on the amount of fees that can be charged to a member, they can disproportionately erode the balances of low balance accounts.

2.7 Administration and investment fees represent the majority of fees charged by funds. These fees are incurred by members simply by virtue of holding a product and are a significant cause of account balance erosion, particularly for inactive accounts.

2.8 Exit fees are a disincentive for members to consolidate accounts or exercise a choice to roll their balance into another fund. Consolidation of accounts, in particular, reduces members' exposure to duplication of fees across multiple low balance accounts and reduces undue erosion of their aggregate superannuation savings.

Summary of new law

2.9 This measure amends the general fee rules in Part 11A of the SIS Act to introduce a 'fee cap' which restricts the total amount of administration fees, investment fees and associated costs as prescribed in regulations that can be charged where the balance of an account is less than $6,000.

2.10 The general fee rules are also amended to prohibit exit fees charged as a result of the disposal of all or part of a member's interests in a superannuation entity, regardless of the balance.

2.11 The amendments in this schedule do not apply to SMSFs consistent with the current application of the other rules in Part 11A.

2.12 The amendments apply equally to choice and MySuper products.

Comparison of key features of new law and current law

Detailed explanation of new law

Cap on fees and costs

2.13 From 1 July 2019, the total amount of administration fees, investment fees and prescribed costs that can be charged annually are 3 per cent of the balance of the account held by the member, if the balance is less than $6,000 at the end of the fund's income year or at the time of account closure. [Schedule 1, item 18, section 99G of the SIS Act]

2.14 For the purposes of the explanatory memorandum, the term 'prescribed costs' refers to an amount prescribed in regulations (if any) incurred by the trustee for the administration of the fund or investment of the fund's assets which are not charged to the member as a fee. The SIS Act is amended to include this regulation making power. The fee cap applies to these costs. [Schedule 1, item 18, paragraph 99G(3)(c) of SIS Act ]

2.15 It is expected that the regulations will capture amounts which directly or indirectly reduce the return on a member's investment. It would include the situation where the charging of these amounts may be deducted from a member's return before the investment earnings are attributed to the member.

2.16 It is expected that the regulations will prescribe these amounts with reference to the amount of indirect cost disclosed by the trustee.

2.17 It is the balance of an account that determines whether administration fees, investment fees and prescribed costs are capped and, if so, the maximum amount of these fees and costs that is charged.

2.18 That is, a member who has more than one account in a fund may have total combined superannuation savings in that fund greater than $6,000. However, if the balance of a particular account is less than $6,000, the administration fees, investment fees and prescribed costs that can be charged for that account will be capped and will be calculated based on the amount in that account.

Example 2.1

Cecilia holds two accounts with Glenbrook Super fund: a choice accumulation account with a balance of $150,000 and a MySuper account with a balance of $3,000. The total administration and investment fees, and prescribed costs that could be charged to the MySuper account would be capped and calculated with reference to the amount held in that account.

2.19 The amount of administration and investment fees, and prescribed costs that can be charged is worked out as:

2.20 The fee cap percentage can be no more than 3 per cent and will be set in regulations. The regulation power ensures the fee cap percentage remains appropriate and if necessary can be adapted to reflect changes in fee structures over time. [Schedule 1, item 16, subsections 99G(2) and 99G(4) of the SIS Act]

2.21 Operating standards can prescribe how the account balance is calculated. Operating standards will be used where necessary to provide guidance on the treatment of amounts that have not been credited or debited to account balances at the point of the calculation. [Schedule 1, item 14, paragraph 31(2)(dc) of the SIS Act]

2.22 If the trustee has charged more than the permitted administration fees, investment fees or prescribed costs, the trustee has up to 3 months after the end of the fund's income year to refund the excess to the member. [Schedule 1, item 18, subsection99G(6) of the SIS Act]

Example 2.2

Felicity holds a MySuper account with Glenbrook Super. Glenbrook Super's income year ends on 30 September. At 30 September 2021, Felicity holds $1,300 in the account and has held the account for the whole year.

The maximum administration fees, investment fees and prescribed costs that could be charged would be:

Step 1 - Calculate the fee cap for the whole year

=Fee cap percentage x member's account balance for the account on the last day of the income year

= 3% x $1,300

= $39

The fund would have until 31 December 2021 to refund any administration fees, investment fees or prescribed costs charged above this amount.

2.23 If the member begins to hold the account during an income year, the amount of administration fees, investment fees and prescribed costs that can be charged is calculated using the member's account balance at the end of the fund's income year apportioned based on the number of days the member held the account during the income year. [Schedule 1, item18, subsections 99G(2) and 99G(5) of the SIS Act]

Example 2.3

Julian opens a MySuper account with Glenbrook Super on 11 January 2021. The fund's income year ends on 30 September 2021, meaning Julian held the account for a period of 264 days. The balance of his MySuper account is $3,000 at 30 September 2021.

The maximum administration fees, investment fees and prescribed costs Glenbrook Super could charge the account over the income year would be:

Step 1- Calculate the fee cap for the whole year

= Fee cap percentage x member's account balance for the account on the last day of the income year

= 3% x $3,000

= $90

Step 2 - Apportion this for the time Julian held the account

= Fee cap for the whole year x No. of days during the income year for which member held the account / 365

= Amount calculated at Step 1 x No. of days during the income year for which member held the account / 365

= $90 x 264/365

= $65.10

The fund would have until 31 December 2021 to refund any administration fees, investment fees or prescribed costs charged above this amount.

2.24 If the member ceases to hold the account during the income year the amount of administration fees, investment fees and prescribed costs that can be charged is calculated using the member's balance on the day the member ceases to hold the account and is apportioned based on the number of days the member held the account in the fund.

2.25 If the total administration fees, investment fees and prescribed costs charged exceed the amount worked out under the cap, the trustee has up to 3 months from the day the member ceased to hold the account to refund the excess to the member.

Example 2.4

Rupert closes his choice accumulation account with Glenbrook Super on the 19 April 2022. It had a balance of $4,500 at this date. As per the examples above, Glenbrook Super's financial year runs from 1 October to 30 September.

The maximum administration fees, investment fees and prescribed costs Glenbrook Super could charge the account over the income year would be:

Step 1- Calculate the fee cap for the whole year

= Fee cap percentage x member's account balance for the account on the last day of the income year

= 3% x $4,500

= $135

Step 2 - Apportion this for the time Rupert held the account

Fee cap for the whole year x No. of days during the income year for which member held the account / 365

= $135 x 202/365

= $74.71

The fund would have until 19 July 2022 to refund any administration fees, investment fees or prescribed costs charged above this amount.

2.26 An administration fee or investment fee that is charged at a reduced rate for a member of a MySuper account to align with the fee cap is not a contravention of a trustee's obligation to only charge fees in accordance with the charging rules or the requirement to follow the same process for a class of member of the same beneficial interest. [Schedule 1, items 2, 9 to 11 and 13, paragraph 29TC(i)(d), subsection 29VA(11), paragraph 29VB(1)(d), subsection 29VB(4) and paragraph 29VE(c) of the SIS Act]

2.27 Similarly, the Bill clarifies for the avoidance of doubt, that a trustee that is meeting the fee cap is meeting its obligations under section 99E of the SIS Act to attribute the costs of the fund fairly and reasonably between classes. [Schedule 1, item 18, subsection 99G(7) of the SIS Act]

Application and transitional provisions - Cap on fees and costs

2.28 The amendments apply to administration fees, investment fees and prescribed costs charged on or after 1 July 2019. [Schedule 1, item 19]

2.29 A transitional provision is required to set out a methodology to manage the period after the commencement of the measure when a fund has an income year that does not run 1 July to 30 June.

2.30 A trustee will still need to apply the fee cap, apportioned for those days that fall between 1 July 2019 and the end of the fund's 2018-19 income year. This period is the transition period. [Schedule 1, items 20(2) and 20(3)]

2.31 The amount of administration fees, investment fees and prescribed costs that can be charged in this circumstance is worked out as:

[Schedule 1, item 20(2)]

2.32 The fee cap percentage is set as per the fee cap percentage for the ongoing fee cap provisions and will be set in regulations at no more than 3 per cent.

2.33 If the trustee has charged more than the calculated fees and costs the trustee must refund the excess within 3 months of the end of the fund's income year.

Example 2.5

Vhairi holds $2,400 in a MySuper account in Glenbrook Super on 30 September 2019 and has held the account for the whole year. As per the examples above, Glenbrook Super's income year runs from 1 October to 30 September.

The transition period, the period 1 July 2019 to 30 September 2019, is 93 days.

For the period between 1 July 2019 and 30 September 2019, the maximum administration fees, investment fees and prescribed costs Glenbrook Super could charge the account over the income year would be:

Step 1- Calculate the fee cap for the whole year

= Fee cap percentage x member's account balance for the account on the last day of the income year x number of days in the transition period / 365

= 3% x $2,400 x (93/365)

= $72 x (93/365)

=$18.35

The fund would have until 31 December 2019 to refund any administration fees, investment fees or indirect costs charged above this amount.

2.34 If the member holds the account for only part of the transition period, the fee cap is apportioned for that part of the transition period that the member holds the account. [Schedule 1, item 20(3)]

2.35 The methodology in this circumstance is:

[Schedule 1, item 20(3)]

2.36 The fee cap for the whole year would be the fee cap worked out for the transition period where the member held the account for the whole transition period.

2.37 The fee cap does not need to be applied if the member does not hold the account on or after 1 July 2019.

Prohibition on exit fees

2.38 From 1 July 2019, a trustee of a superannuation fund or an approved deposit fund cannot charge a member an exit fee (other than a buy-sell spread) when the member withdraws all or part of their interest from the fund or when the member's interest is transferred out of the fund, such as a transfer to the ATO under the SUMLM Act. [Schedule 1, item 15, section 99BA of the SIS Act]

2.39 The Bill inserts a new definition of exit fee into the SIS Act. An exit fee is a fee, other than a buy-sell spread, that relates to the disposal of all or part of a member's interests in a superannuation entity. [Schedule 1, item 15, subsection 99BA(2) of the SIS Act]

2.40 This could include a deferred entry fee or a percentage based fee. It is not related to the cost of disposing the interest, rather it is a fee triggered by the disposal.

Example 2.6

Maggie took out a superannuation policy with Thornton Superannuation fund in 1994. The policy was sold through a life insurance agent.

Maggie sought to transfer her superannuation savings to another fund in 2017 but was informed by Thornton that, if she withdrew before 2024, she would face an early withdrawal fee to recover the outstanding costs incurred when the policy was purchased.

From 1 July 2019, Maggie can transfer her savings to another fund without incurring any exit fee.

2.41 Regulations may prescribe circumstances when the ban on exit fees does not apply. [Schedule 1, item 15, subsection 99BA(1)]

Application and transitional provisions - Prohibition on exit fees

2.42 Exit fees cannot be applied to the balance or interest that is fully or partly withdrawn or transferred out of the fund on or after 1 July 2019. [Schedule 1, item 19]

Consequential amendments

2.1 References in the SIS Act to exit fee are updated or removed. [Schedule 1, items 1, 3 to 8, 12, 16 and 17, subsection 10(1), paragraph 29V(1)(e), paragraph 29V(2)(b), subparagraph 29V(3)(b)(ii), subsection 29V(6), paragraphs 29V(7)(b), (8)(b), and (9)(c), paragraphs 29VA(5)(a), (6)(a),and (7)(a), paragraph 29VB(5)(b), section 99C(heading) and subsection 99C(1) and (2) of the SIS Act]