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 1 Overview of the Protecting Your Super Package

Outline of chapter

1.1 This Bill contains amendments to the SIS Act, SUMLM Act ITAA 1997 and TAA 1953 to protect individuals' retirement savings from erosion, ultimately increasing Australians' superannuation balances.

1.2 This Chapter provides an overview of those amendments.

Context of amendments

1.3 Superannuation is a major part of Australia's retirement income system. Together with the Age Pension and savings outside superannuation, it supports Australians in their retirement years.

1.4 Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). It is projected to grow rapidly in the coming decades, as the superannuation system matures.

1.5 Given the importance of superannuation to Australians, the Government is seeking to ensure that people's hard-earned savings are not unnecessarily eroded by fees or inappropriate insurance arrangements.

1.6 In 2015-16, accounts with balances below $6,000 comprised over 40 per cent of all accounts in the system. These accounts face disproportionately high fees and insurance premiums.

1.7 For these accounts, the principal source of growth is through compulsory contributions; however, high passively incurred fees (such as administration and investment fees) can mute this growth. These fees are imposed under the equal fee structures built into default MySuper products and many choice products and are highly regressive in their impact on low balance accounts.

1.8 In addition, a significant number of people hold duplicate or inappropriate insurance policies, in large part due to the current default MySuper settings and the relative ease with which an individual can inadvertently hold multiple superannuation accounts across different funds. The current MySuper settings mandate the provision of death and total and permanent disability insurance, primarily on an opt out basis and allow for income protection insurance to be provided on an opt out or opt in basis.

1.9 Insurance in superannuation plays an important role given the benefits it can provide to individuals. However, insurance premiums can be a key driver of account balance erosion, and can reduce a low income earner's retirement balance by 10 per cent or more (compared to no insurance) - with the effect increasing for every set of policies held.

1.10 While there is a current regime for transferring lost superannuation savings to the Commissioner to protect them from erosion, this regime requires longer periods of inactivity before amounts are transferred, and savings can be eroded entirely by fees in the interim. In addition, numerous exceptions permit trustees to not transfer balances below $6,000 to the Commissioner, allowing these balances to continue to be subject to ongoing fee and insurance premium erosion.

1.11 Historically, there have been high levels of member disengagement with the superannuation sector. In addition, past and current restrictions on a member's ability to choose a fund have forced individuals to hold their superannuation savings in multiple accounts. The combination of these factors has led to outcomes that do not reflect the needs of the default and low balance cohorts of members.

1.12 The changes in the Bill will not replace existing account consolidation processes which will remain available to members. The changes supplement the current arrangements to streamline consolidation of balances for disengaged members, ensuring that superannuation savings are better protected from inappropriate or excessive erosion by fees and insurance premiums.

1.13 Reducing the number of low balance accounts will generate system-wide efficiencies by reducing administration costs for funds and better targeting default insurance cover.

1.14 The Bill protects members' superannuation savings from erosion by:

•

limiting fees so that low balance savings can grow and are protected from disproportionately high fees;

•

banning exit fees to remove a barrier to account consolidation;

•

ensuring that arrangements for insurance in superannuation are appropriate so that members are not paying for insurance cover that they do not know about or premiums that inappropriately erode their retirement savings; and

•

strengthening the ATO's role in reuniting small, inactive balances to reduce the costs to members and consolidate the accounts of members that have accrued multiple superannuation accounts.

1.15 Together, these changes will provide a comprehensive solution to many of the issues faced by Australians with low balance, inactive and multiple accounts.

1.16 Except in Chapter 4, in this explanatory memorandum, the term 'account' is used as it is commonly understood in the superannuation sector, meaning a member's interest in either a MySuper product or a choice product held within their superannuation fund.

Summary of new law

Fees charged to superannuation members

1.17 Schedule 1 to this Bill prevents trustees of superannuation funds from charging certain fees and costs exceeding 3 per cent of the balance of a MySuper or choice product annually where the balance of the account is below $6,000.

1.18 The fees that are capped are administration and investment fees. The costs that are capped are amounts as prescribed in regulations incurred by the trustee for administration of the fund and investment of the fund's assets and not otherwise charged as a fee.

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

1.20 This will prevent inappropriate erosion of low balances by high passively-incurred fees, and will remove a disincentive to account consolidation or rollovers by members.

Insurance for superannuation members

1.21 Schedule 2 to this Bill prevents trustees from providing opt out insurance to new members aged under 25 years, members with balances below $6,000 and members with inactive MySuper or choice accounts, unless a member has directed otherwise.

1.22 This will better target default insurance cover and prevent inappropriate erosion of retirement savings caused by insurance premiums.

1.23 Members will still be able to obtain insurance cover within their superannuation if they choose to do so.

Inactive low-balance accounts and consolidation into active accounts

1.24 Schedule 3 to this Bill requires the transfer of all superannuation savings with balances below $6,000 to the Commissioner if an account, related to a MySuper or choice product has been inactive for a continuous period of 13 months.

1.25 The account will not be transferred if the member has chosen to maintain insurance or if the existing insurance cover has not ceased.

1.26 The Schedule also enables the Commissioner to proactively pay amounts held by the ATO into a member's active superannuation account, where the reunited account balance would be greater than $6,000.

1.27 This will increase the rate of account consolidation in the superannuation industry, decrease low-balance account erosion and reduce insurance premium and fee duplication for many members.