Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Choice of superannuation funds

Overview

5.1 Part 1 of Schedule 5 to the Bill will amend the Superannuation Guarantee (Administration) Act 1992 (SGAA) to:

•

require employers to make compulsory superannuation contributions to a complying superannuation fund or retirement savings account (RSA) in compliance with the choice of fund requirements; and

•

increase the amount of Superannuation Guarantee Charge (SGC) payable by the employer (if any) where these contributions do not comply with the choice of fund requirements.

5.2 Parts 2 and 3 of Schedule 5 to the Bill make amendments to the Retirement Savings Accounts Act 1997 and Superannuation Industry (Supervision) Act 1993 respectively, which are consequential on the amendments made in Part 1 .

Summary of the amendments

Purpose of the amendments

5.3 The overall purpose of the amendments is to give employees greater choice as to the superannuation fund or RSA into which superannuation contributions are made.

5.4 Where an employer makes a superannuation contribution which is not in compliance with the choice of fund requirements, the employer may be subject to a higher SGC amount.

5.5 The amendments provide employers with a range of options under which they could comply with their choice of fund requirements.

5.6 The arrangements will increase competition and efficiency in the superannuation industry, leading to improved returns on superannuation savings and placing downward pressure on fund administration charges.

Date of effect

5.7 The amendments will apply from the date of Royal Assent. To avoid having to pay any increase in SGC, employers are required to provide superannuation support in compliance with the choice of fund requirements:

•

from 1 July 1998 - for all employees who commence employment after this date (ie. new employees); and

•

from 1 July 2000 - for all employees who were employed by the employer immediately before 1 July 1998 and who continue to be employed by the employer (ie. existing employees).

Background to the legislation

5.8 The SGAA prescribes a minimum level of superannuation support which employers should provide for each of their employees. Employers failing to comply with the prescribed minimum standard are subject to a superannuation guarantee charge based on the superannuation shortfall in their superannuation support plus an additional amount for an administrative charge and an interest component.

5.9 Section 19 of the SGAA is used to ascertain whether an employer has a superannuation shortfall in respect of an employee. Under this section, an employer's 'individual superannuation guarantee shortfall' in respect of an employee is the sum of the quarterly shortfalls, calculated in accordance with subsection 19(2).

5.10 In order to determine if an employer has a individual superannuation guarantee shortfall in respect of an employee, it is necessary to determine:

•

the percentage level of superannuation support the employer is expected to provide for the employee (the charge percentage which is specified in sections 20 and 21 of the SGAA); and

•

the percentage level of superannuation support actually provided for the employee (calculated in accordance with sections 22 and 23 of the SGAA).

5.11 If the actual level of support is equal to or exceeds the legislated level then the charge percentage is reduced to zero and no shortfall arises. If the actual percentage level of superannuation support is less than the legislated level of support, a shortfall will arise. This shortfall is calculated by multiplying the employee's salary and wages for the contribution period by the charge percentage remaining after deducting any reductions for superannuation support provided.

5.12 Currently the SGAA requires an employer to make contributions to any complying superannuation fund or RSA in order to meet their Superannuation Guarantee (SG) obligations.

5.13 The Government announced in the 1997-98 Budget, that it would introduce measures that provide employees with greater choice as to the superannuation fund or RSA to which their superannuation is paid. As a result of extensive consultation with superannuation funds, industry associations and employer and employee representatives, the Government announced on 25 November 1997 a range of enhancements to the original Budget proposal. These enhancements are designed to significantly reduce the administrative burden on employers while ensuring the key objective of providing choice of fund to employees is achieved.

Explanation of the amendments

5.14 The explanation of the amendments is presented under the relevant heading which is in the following table:

1. Overview

5.15 Broadly, the amendments provide that an employer's quarterly shortfall (if any) may be increased by an amount determined in accordance with new subsections 19(2A) and 19(2B) , where an employer makes a superannuation contribution in respect of an employee that does not comply with the choice of fund requirements. [Items 23 and 24]

5.16 Item 32 inserts new Part 3A into the SGAA which sets out the choice of fund requirements. Essentially, an employer will meet these requirements where they provide superannuation support or make contributions to a fund chosen by the employee in accordance with the provisions. Where there is no employee chosen fund at the time of the contribution, the employer may make a contribution to a default fund in order to satisfy the choice of fund requirements.

5.17 New Part 3A also provides the process to be followed where an employer is required to offer a choice of fund to employees. Employers may offer their employees a choice using a limited choice offer (ie. a minimum of 4 complying superannuation funds and RSAs must be offered) or an unlimited choice offer (ie. employer must accept any complying superannuation fund or RSA nominated by the employee).

5.18 The Bill also sets out the other circumstances where superannuation contributions are made in compliance with the choice of fund requirements, for example, contributions made in accordance with a workplace agreement [item 32; new subsection 32C] , and makes a number of other changes related to the introduction of choice.

Terminology

5.19 The Bill, in new Part 3A , makes frequent reference to 'a fund'. A fund is defined for these purposes to mean a superannuation fund, a superannuation scheme and an RSA. [Item 32; new section 32CB] The term 'contribution to a fund' used in new section 32C also includes notional contributions to a defined benefit scheme (see new subsection 19(2B) and the note at the end of new section 32C ). Also, a holder of an RSA is taken to be a member [item 32; new subsection 32CB(2)] since the Retirement Savings Accounts Act 1997 refers to the term RSA holders , not members of an RSA. This explanation of the Bill should be read with these points in mind.

2. Calculating an SGC increase where choice requirements are not met

5.20 Item 24 inserts new subsections 19(2A) and 19(2B) into the SGAA. These are the key subsections as they potentially give rise to an increase in the amount of an employer's quarterly shortfall determined under subsection 19(2). New subsection 19(2A) may apply where an employer provides superannuation support for an employee to an RSA or a superannuation fund other than a defined benefit scheme. New subsection 19(2B) may apply where a defined benefit scheme is used.

5.21 It should be noted that an increase in an employer's quarterly shortfall will also lead to an increase in the interest component under subsection 31(1) and potentially an increase in the administration component under section 32.

(a) Increases in quarterly shortfall where contributions are made to an RSA or a superannuation fund other than a defined benefit scheme.

5.22 Where an employer makes a superannuation contribution in respect of an employee to an RSA or a superannuation fund other than a defined benefit scheme, and that contribution is not in compliance with the choice of fund requirements, new subsection 19(2A) may apply to increase the employer's quarterly shortfall. [Item 24; new subsection 19(2A)] The amount of any increase is calculated in accordance with a formula which is 25% of the shortfall that would apply if the contributions had not been paid. As expressed in new subsection 19(2A) the formula is:

25% * (Notional quarterly shortfall - Amount worked out under subsection 19(2))


5.23 The following examples outline the steps an employer will take in determining whether any increase in the quarterly shortfall arises.

Examples:

5.24 Examples 1 to 4 assume the following information:

•

Lucille is the only employee of Roger. Lucille has chosen a superannuation fund in compliance with the choice of fund requirements set out in new Part 3A .

•

Lucille's salary is $36,000 (ie. $9,000 per quarter) which is also her notional earnings base.

•

The Superannuation Guarantee (SG) charge percentage for the year is 7%.

•

For simplicity, only the calculations for a particular quarter have been performed. All contributions are made to complying funds.

Example 1

Roger does not make any superannuation contributions for the quarter on behalf of Lucille.

Step one: determine quarterly shortfall for employee

Since the prescribed SG charge percentage has not been reduced by any amount, the charge percentage remains at 7% (ie. 7% prescribed less 0% provided). The quarterly shortfall under section 19(2) in respect of Lucille is therefore $630 (7% of $9,000).

Step two: determine any increase in quarterly shortfall

As Roger does not make any contributions in respect of Lucille, new subsection 19(2A) does not apply.

Accordingly, Roger is not subject to any increase in the SGC he must pay under subsection 19(2).

Example 2

Roger makes a $630 superannuation contribution for the quarter on behalf of Lucille. The contribution is not made to the fund chosen by Lucille.

Step one: determine quarterly shortfall for employee

Since the contribution represents 7% of Lucille's notional earnings base, the charge percentage is reduced to 0 (ie. 7% prescribed less 7% provided). The quarterly shortfall under section 19(2) in respect of Lucille is therefore $0.

Step two: determine any increase in quarterly shortfall

Since the contributions are not made in compliance with the choice of fund requirements, the quarterly shortfall under section 19(2) will be increased using the formula under new subsection 19(2A) (see paragraph 5.20 above). Note that the quarterly shortfalls can be increased from nil under new subsection 19(2D) .

The amount of the increase in SGC is determined as follows:

•

the notional quarterly shortfall is what the quarterly shortfall would be had Roger not made the contributions that did not comply with the choice of fund requirements (in this case, if Roger had not made any contributions), that is:

7% * $9,000 = $630


•

the amount worked out under subsection (2) is the amount calculated under step one above, that is $0.

•

using the formula in new subsection 19(2A), the increase in Roger's quarterly shortfall is:

25% * ($630 - $0) =$157.50


Example 3

Roger makes a $360 superannuation contribution for the quarter to Lucille's chosen fund and $270 to another fund not chosen by Lucille.

Step one: determine quarterly shortfall for employee

The total contribution of $630 is 7% of Lucille's notional earnings base. Therefore, the quarterly shortfall worked out under subsection 19(2) is $0.

Step two: determine any increase in quarterly shortfall

$270 of the contributions (3% of Lucille's notional earnings base) do not comply with the choice of fund requirements. Under new subsection 19(2A) :

•

the notional quarterly shortfall is worked out on the basis that this contribution had not been made. If this were the case, the charge percentage would only be reduced to 3%. Therefore, the notional quarterly shortfall is:

3% * $9,000 = $270


•

the amount worked out under subsection (2) is $0.

•

using the formula in new subsection 19(2A), the increase in Roger's quarterly shortfall is:

25% * ($270 - $0) = $67.50


Example 4

Roger makes a $630 superannuation contribution for the quarter to Lucille's chosen fund and $270 to another fund not chosen by Lucille.

Step one: determine quarterly shortfall for employee

The total contribution of $900 is 10% of Lucille's notional earnings base. Roger's charge percentage is accordingly reduced to 0%. Therefore, the quarterly shortfall worked out under subsection 19(2) is $0.

Step two: determine any increase in quarterly shortfall

$270 of the contributions (3% of Lucille's notional earnings base) do not comply with the choice of fund requirements. However, as Roger has met the required SG with contributions that satisfy the choice of fund requirements, there is no increase in the quarterly shortfall.

That is, using the formula under new subsection 19(2A) :

•

the notional quarterly shortfall is worked out on the basis that the $270 contribution had not been made. If this were the case, Roger's charge percentage would still be reduced to 0% as Roger has contributed the prescribed amount to Lucille's chosen fund. Therefore, the notional quarterly shortfall is:

0% * $9,000 = $0


•

the amount worked out under subsection (2) is $0;

•

using the formula in new subsection 19(2A), the increase in Roger's quarterly shortfall is:

25$ * ($0 - $0) = $0


(b) Increases in quarterly shortfall where contributions are made to a defined benefit scheme

5.25 Subject to paragraphs 5.28 to 5.39 below, new subsection 19(2B) may apply where an employer provides superannuation support in respect of an employee through a defined benefit scheme. If an employer currently provides superannuation support on behalf of employees to a defined benefit scheme, there must be a benefit certificate (covering the whole or part of the contribution period) specifying a notional employer contribution rate for a class of employees in the scheme or schemes to which the employer is providing support in order for the employer to meet his or her SG obligations. [Item 24; new subsection 19(2B)]

5.26 Employers who use such schemes are still required to provide superannuation support in compliance with the choice of fund requirements. This is tested by reference to notional contributions to the defined benefit scheme. If on any day in the quarter the notional contributions to the scheme would not have been in accordance with the choice of fund requirements, the employer may be liable to extra SGC, calculated as:

25% * (notional quarterly shortfall - Amount worked out under subsection 19(2)) * (Number of breach of condition days / Relevant days in quarter)


Examples

5.27 Examples 5 and 6 assume the following information:

•

Ben is an employee of IQ Pty Ltd whose salary and wages for the quarter is $10,000.

•

Ben is an employee for the whole of the quarter and the number of days in the quarter is 90 days.

•

The charge percentage is 7%.

•

IQ provides superannuation support for all of its employees through a defined benefit scheme. IQ has a benefit certificate specifying a notional employer contribution rate of 7% which has effect for the quarter.

•

Ben is a member of the defined benefit scheme for the whole of the quarter (ie. 90 days).

•

Ben chooses a different fund in compliance with the choice of fund requirements set out in new Part 3A , which becomes Ben's chosen fund 60 days into the quarter (ie. there are 30 days which are in breach of the choice of fund requirements).

Example 5

Step one: determine quarterly shortfall for employee

Since IQ has a benefit certificate covering the whole of the quarter, the quarterly shortfall worked out under subsection 19(2) is $0.

Step two: determine any increase in quarterly shortfall

Since there is at least one day in the relevant period which is not in accordance with the choice of fund requirements (in actual fact, there are 30 days in breach of the choice of fund requirements), the quarterly shortfall under section 19(2) will be increased using the formula provided at paragraph 5.26 above.

•

the notional quarterly shortfall is the amount that would have been worked out under subsection 19(2) if no reduction were made under subsection 22(2) in respect of the scheme. That is, the formula initially assumes that all of the notional contributions to the scheme are not in compliance with the employee's choice of fund. In this case, the charge percentage would remain as 7%, giving a notional quarterly shortfall of $700.

•

the number of breach of conditions days is 30 days.

•

the number of relevant days in the quarter is 90 days (note, that in this case, the value of B in the formula in subsection 22(2) is1, as the scheme membership period equals the employment period for the quarter)

•

using the formula in new subsection 19(2B), the increase in IQ's quarterly shortfall is:

25% * ($700 - $0) * (30/90)
25% * $233.33 = $58.33


Example 6

Assume the same information as in example 5 except:

•

Ben commenced employment at the beginning of the quarter, and becomes a member of the defined benefit scheme after 30 days, (and this membership continues for the remainder of the quarter)

•

Ben has a chosen fund, in compliance with the choice of fund requirements, 70 days into the quarter (ie. 20 days will be in breach of the choice of fund requirements).

Step one: determine quarterly shortfall for employee

In this case, IQ is not covered by the benefit certificate in respect of Ben for the first 30 days of the quarter and is covered for the remaining 60 days of the quarter. Under subsection 22(2), the employment period (ie. 90 days in the quarter) is greater than the scheme membership period (ie. 60 days), which means the reduction in the charge percentage is:

A * B
= 7% * (60/90) = 4.67%


Therefore, IQ's quarterly shortfall worked out under subsection 19(2), is 2.33% (ie. 7% - 4.67%) multiplied by Ben's quarterly salary and wages ($10,000), which equals $233.33.

Step two: determine any increase in quarterly shortfall

Since there is at least one day in the quarter which is not in accordance with the choice of fund requirements (actually there are 20 days in breach in this case), the quarterly shortfall under section 19(2) will be increased using the formula provided at paragraph 5.26 above.

•

the notional quarterly shortfall in this example is $700 (for the same reasons given in example 5, that is, assuming all of the notional contributions to the scheme are not in compliance with the employee's choice of fund. Therefore, the charge percentage would remain as 7%, giving a notional quarterly shortfall of $700).

•

the number of breach of conditions days is 20 days.

•

the number of relevant days in the quarter is 60 days. (note, that in this case, the value of B in the formula in subsection 22(2) is .333 (see above)).

•

using the formula in new subsection 19(2B), the increase in IQ's quarterly shortfall is:

25% * ($700 - $233.33) * (20/60)
= 25% * $155.66 = $38.91


(c) No quarterly shortfall increase where contributions made to certain defined benefit schemes for certain members

5.28 New subsection 19(2B) will not apply to increase the quarterly shortfall of an employer, in respect of an employee and a scheme, where new section 19A is satisfied. [Item 24; new paragraph 19(2B)(c) & Item25; new section 19A] There are two circumstances in which new section 19A will apply. These are:

•

in respect of existing employees, where a defined benefit scheme is in surplus (see paragraphs 5.31 to 5.37 below); and

•

where a defined benefit member of a defined benefit superannuation scheme has achieved their maximum benefit accrual (see paragraphs 5.38 and 5.39 below).

5.29 Item 10 inserts a definition of defined benefit superannuation scheme into the Act.

5.30 Item 11 inserts a definition of defined benefit member into section 6 of the Act. A defined benefit member is a person whose superannuation benefit is defined by reference to either of the following:

•

the amount of the persons salary at retirement, at an earlier date or the persons salary as averaged over a period before retirement. An example of the average system is where the salary is taken to be the highest average salary for a year over the last 3 years before retirement; or

•

a specified amount.

(i) Defined benefit schemes in surplus

5.31 Where an employee of an employer is a member of a defined benefit scheme the application of the SG law is determined by reference to a benefit certificate provided by an actuary in respect of the scheme. Whether an employer is required to in fact make contributions to the scheme during a period will depend on the solvency of the scheme. The solvency of a scheme is also determined by an actuary. Where the scheme is in surplus (that is, broadly, that the assets of the scheme exceeds its liabilities) and the employer is not required to make contributions for a period, the employer is said to be enjoying a 'contributions holiday'.

5.32 A defined benefit scheme may have a surplus because, for example, additional superannuation contributions have been made by the employer or through the achievement of higher than expected investment returns.

5.33 A defined benefit scheme will be considered to be in surplus, for the purpose of effectively exempting an employer from the choice of fund requirements for a quarter, where the following conditions apply:

•

an actuary has provided a certificate stating that the employer is not required to make contributions for the quarter; and

•

an actuary has provided a certificate stating that at all times from 1 July 2000 until the end of the quarter that the assets of the scheme are, and will be equal to or greater than 110% of the greater of the schemes liability in respect of vested benefits and the schemes accrued liability. This certificate is to be updated at least every 15 months. [Item 25; new subsection 19A(2)]

5.34 The term scheme's liability in respect of vested benefits is defined to mean the value, at a particular time, of benefits payable from the scheme if all the members entitled to those benefits terminated their employment with the employer at that time. The term schemes accrued actuarial liabilities is defined to mean the total value, at a particular time, of the future benefit entitlements of members in respect of their membership up to that time. The calculation of the schemes accrued actuarial liabilities is to be performed by an actuary. [Item 25; new subsection 19A(4)]

5.35 The requirement that an actuary certify that the schemes assets are equal to or greater than 110% of the greater of the schemes liabilities in respect of vested benefits and the schemes accrued actuarial liabilities is designed to provide a buffer against short term decreases in the value of the assets backing the vested benefits and to ensure that the scheme is truly in surplus.

5.36 The effective exemption from the choice of fund provisions only operates in respect of existing employees who are members of a defined benefit scheme immediately before 1 July 2000 and who continue that membership. [Item 25; new paragraphs 19A(2)(a) and (b)] (An existing employee is a person who was an employee of the employer immediately before 1 July 1998 and has not ceased to be an employee of that employer.) This ensures that the exemption only applies in respect of employees who do not have to be offered choice by their employer until 1 July 2000. Employers of new employees (those who commence with the employer on or after 1 July 1998) will not benefit from the exemption even if the new employee subsequently joins a defined benefit scheme that is in surplus.

5.37 Where a scheme is in surplus for all quarters after 1 July 2000 the employer remains exempt from the choice of fund provisions until the schemes surplus is extinguished. Where the surplus ceases to exist the employer will have to offer choice to its employees.

(ii) Maximum benefit accrual

5.38 Where a defined benefit scheme has defined benefit members who have reached their maximum benefit accrual, employers of those members are effectively exempt from making further superannuation contributions for those employees, for the period a benefit certificate (see section 10 of the Act) remains in effect for the scheme. In these circumstances the employer will be exempt from the proposed choice of fund legislation in relation to those employees.

5.39 An employee will be considered to have reached his or her maximum benefit accrual if after the start of the quarter the defined benefit that has accrued to the employee will not increase except as a result of the following changes:

•

an increase in the employees remuneration (eg, a pay rise);

•

increases in the employees benefit due to investment earnings of the fund;

•

increases in the benefit by virtue of indexation;

•

any other way that is prescribed.

[Item 25; new subsection 19A(3)]

3. Complying with the choice requirements - overview

5.40 Contributions made by employers for the benefit of employees must be in accordance with the choice of fund requirements for employers to fully meet their SG obligations. [Item 32; new section 32C]

5.41 It should be noted that while new section 32C refers to 'contributions made', it also covers support provided through defined benefit schemes, including unfunded ones. This is because new subsection 19(2B) (see above), which deals with defined benefit schemes, refers to notional contributions to the scheme. It is these notional contributions, as well as actual contributions to superannuation funds, that are referred to in new section 32C (see note at end of new section 32C ).

5.42 The following contributions are made in compliance with the choice of fund requirements:

(i)

contributions to a chosen fund [item 32; new paragraph 32C(1)(a)] or a default fund [item 32; new paragraph 32C(1)(b)] ; or

(ii)

contributions to unfunded public sector arrangements (other than contributions in respect of 'Commonwealth employees' (defined in subsection 6(1) - see item 7 ) who are members of the Commonwealth Superannuation Scheme ('CSS' - defined in subsection 6(1) - see item 9 ) or the Public Sector Superannuation Scheme ('PSS' - defined in subsection 6(1) - see item 16 ) - see further (viii) below) [item 32; new paragraph 32C(1)(c)] ; or

(iii)

contributions made under, or in accordance with, an Australian Workplace Agreement (AWA) or a certified agreement under the Workplace Relations Act 1996 , or a certified agreement under the Industrial Relations Act 1988 [item 32; new subsection 32C(2 )] or made under certain Victorian agreements [item 32; new subsection 32C(2A)] ; or

(iv)

contributions made in respect of an employee who is employed under a 'State industrial award' (defined in subsection 6(1) - see item 20 ) [item 32; new subsection 32C(3)] ; or

(v)

contributions made under prescribed laws [item 32; new subsection 32C(3A)] ; or

(vi)

contributions made before 1 July 1998 [item 32; new paragraph 32C(4)(a)] ; or

(vii)

contributions made before 1 July 2000 in respect of existing employees as at 1 July 1998 who continue to be employed [item 32; new paragraph 32C(4)(b)] . (The effect of this point and the previous one is that the choice of fund requirements effectively apply to new employees from 1 July 1998, and existing employees from 1 July 2000.); or

(viii)

contributions made to the CSS or PSS before 1 July 2000 [item 32; new paragraph 32C(4)(c)] . (Note that contributions made for State and Territory employees who are members of the CSS or PSS would be covered under (ii) above after 1 July 2000.); or

(ix)

contributions made in respect of existing employees (see (vii) above) where the employee ceases employment before 1 July 2000 and the contribution is made after the employee ceases employment but is in respect of the employment [item 32; new subsection 32C(5)] .

4. Complying with the choice requirements - chosen funds and default funds

(a) Chosen funds and default funds

5.43 Generally speaking, leaving aside:

•

employees who are covered by workplace agreements;

•

employees who are members of an 'unfunded public sector scheme' (defined in subsection 6(1) - see item 22 );

•

employees who are employed under a State award;

•

contributions for the benefit of an employee to a particular fund under a prescribed law; and

•

transitional issues.

an employer will need to make contributions on behalf of an employee to either a chosen fund or a default fund. If superannuation support is provided at a time when there is neither a chosen fund nor a default fund for the employee, the employer will face an extra SGC liability.

5.44 The Bill sets out what the chosen fund of an employee will be [item 32; new sections 32D and 32E] and when a fund ceases to be a chosen fund [item 32; new section 32F] .

5.45 The key rules about chosen funds are:

•

only eligible choice funds may become chosen funds of an employee (see paragraphs 5.51 to 5.55);

•

a fund is a chosen fund if the employee has selected the fund in accordance with the choice process set out in new Division 5 (see paragraphs 5.56 to 5.72); [Item 32; new subsection 32D(1)]

•

a fund becomes a chosen fund 2 months after the employee provides the employer with written notice in accordance with new section 32Q . [Item 32; new subsection 32D(2)] However, an employer may agree for a chosen fund to start earlier than this time;

•

a fund becomes a chosen fund 2 months after an employer has accepted a written nomination from an employee for a particular fund to become the employee's chosen fund. [Item 32; new subsection 32E(2)] However, an employer may agree for a chosen fund to start earlier than this time;

•

a fund ceases to be a chosen fund if there is another fund that is a chosen fund for the employee and the employee has given the employer written notice stating that the old fund is no longer a chosen fund; [Item 32; new subsection 32F(1)]

•

a fund ceases to be a chosen fund if the employee requests the employer to offer choice, and the employer does not do so by the specified time; [Item 32; new subsection 32F(2)]

•

a fund ceases to be a chosen fund where the employer can no longer contribute to a chosen fund; [Item 32; new subsection 32F(3)]

•

a fund ceases to be a chosen fund if the fund ceases to be an eligible choice fund for the employer (see paragraphs 5.54 and 5.55). [Item 32; new subsection 32F(4)]

5.46 The Bill also sets out the times when there will be a default fund for an employee. [Item 32; new section 32G] In broad terms, these are:

•

during such times as are reasonable to allow the choice process to occur and the employee to choose a fund; and [Item 32; new subsections 32G(1), (2), (4) and (5)]

•

when an employee does not have a chosen fund and does not choose one when given the chance. [Item 32; new subsection 32G(3)]

5.47 Having established the times when an employee has a default fund, the Bill sets out the particular fund or funds that are or can be the default funds of the employee. These are either:

•

the last fund or funds (which are eligible choice funds for the employer) to which the employer contributed in compliance with the choice of fund requirements and to which the employer is still able to contribute on behalf of the employee, not being such a fund to which the employer contributed before the last chosen fund of the employee. [Item 32; new subsections 32H(1) and (4)] This can include defined benefit schemes. For existing employees, this rule will generally set the default fund as the fund to which the employer currently contributes for the employee; or

•

if the first point does not apply, any eligible choice fund selected by the employer and set out in the offer of choice to the employee. [Item 32; new subsection 32H(2)]

5.48 A fund that is a default fund of the employee under new section 32H will cease to be a default fund if the employer is no longer able to contribute to the fund on behalf of the employee [item 32; new subsection 32H(3)] or if the fund ceases to be an eligible choice fund [Item 32; new subsection 32H(3A)] . In these cases, the employee still has a default fund under new subsection 32G(5) for a period that allows the employer time to offer that employee a choice (see also new subsection 32K(4) ). The particular fund or funds that are default funds during this period are determined by the rules in paragraph 5.47 above.

5.49 It may be noted from the above that a chosen fund for an employee may become a default fund. This could occur, for example, where a chosen fund ceases under new subsection 32F(2) (ie. the employer did not give the employee an offer on time). The chosen fund becomes the default fund because it is the last fund to which the employer contributed in accordance with the choice requirements (see paragraph 5.47 above). This mechanism ensures an employer cannot alter the fund to which contributions are made in compliance with the choice requirements without the consent of the employee.

5.50 It may also be noted that the chosen fund and default fund provisions complement each other. For example:

•

as a chosen fund does not commence until 2 months after the employee chooses it [item 32; new subsections 32D(2) and 32E(2)] , there is a default fund for that period [item 32; new subsections 32G(2) and 32G(4)] ;

•

when a chosen fund ceases without there being another chosen fund [item 32; new subsections 32F(2), (3) and (4)] , there is a default fund if the employer offers choice within the required times [item 32; new subsections 32G(2) and 32G(5)] . While a chosen fund ceases under new subsection 32F(3) when it is impossible for the employer to contribute to it on behalf of the employee, a default fund does not commence under new subsection 32G(5) until the employer becomes aware the chosen fund has ceased (which may be a later time). That 'gap' represents a period when the employer is not aware there is not a chosen fund, so that there is no need for a default fund (the employer should not be trying to contribute to any fund other than the chosen one).

Example 7

•

On 1 July 1999, Paula starts employment with MagpieCo.

•

On 24 July 1999, MagpieCo makes a limited choice offer (see paragraphs 5.63 and 5.64 below) to Paula.

•

On 10 August 1999, Paula advises MagpieCo in writing that she wishes to choose Lavender Superannuation Fund, one of the funds nominated by MagpieCo.

•

The default fund is Tulip Superannuation Fund.

•

On 1 February 2000, Paula requests MagpieCo to offer her another choice of fund. MagpieCo ignores this request.

In these circumstances, MagpieCo did not have to offer a choice of fund on Paula's request, as Paula had been offered a choice within the previous 12 months - see new subsection 32K(2) . As long as MagpieCo continues to contribute to Lavender, they will be complying with the choice of fund requirements. New subsection 32F(2) does not operate to cease the chosen fund, as the request is taken, under new subsection 32K(2) , never to have been made.

•

On 30 July 2000, Paula again requests MagpieCo to offer her a choice of fund.

•

As of 26 August 2000, MagpieCo has not made Paula an offer.

This time, Paula's request is over 12 months since the previous offer. Under new subsection 32K(2), MagpieCo must offer a choice within 28 days of Paula's request. New subsection 32F(2) provides that there is no longer a chosen fund when those 28 days pass without an offer from MagpieCo. As there is no default fund in these circumstances, any contribution made by MagpieCo in respect of the period after 27 August 2000 will not be made in accordance with the choice requirements.

•

On 1 September 2000, MagpieCo offers Paula an unlimited choice.

•

On 12 September 2000, Paula chooses Jasmine Superannuation Fund.

Lavender is the default fund after the offer is made and in the two month period after Paula makes her choice because MagpieCo previously contributed to that fund in compliance with the choice of fund requirements. Assuming it is still possible for MagpieCo to contribute to Lavender for Paula, new subsection 32H(1) provides that it is the default fund. (b) Eligible choice funds

5.51 A fund is an eligible choice fund at a particular time if:

•

it is a complying superannuation fund at that time; or

•

it is a complying superannuation scheme at that time; or

•

it is an RSA; or

•

at that time a benefit certificate is conclusively presumed under section 24 of the Act to be a certificate in relation to a complying superannuation scheme (see paragraph 5.53 below); or

•

contributions made by the employer to the fund at that time are conclusively presumed under section 25 of the Act to be contributions to a complying superannuation scheme (see paragraph 5.53 below).

5.52 Only eligible choice funds may become chosen funds of an employee. [Item 32; new section 32QA, new subsection 32N(1) and new paragraph 32P(1)(a)] Similarly, only eligible choice funds may be default funds. [Item 32; new paragraph 32H(1)(a) and subsection 32H(2)]

5.53 If an employer is unsure about the status of a fund selected by an employee under an unlimited choice offer the employer may seek from the employee a statement provided by the trustee of the kind referred to in section 24 and 25 of the SGAA. These statements broadly attest that the scheme:

•

is a resident regulated superannuation fund; and

•

is not subject to a direction by the Insurance and Superannuation Commissioner not to accept contributions by an employer-sponsor (see section 63 of the Superannuation Industry (Supervision) Act 1993 (SIS Act)).

5.54 If the employee does not provide the statement within 28 days then the fund selected by the employee ceases to be an eligible choice fund. [Item 32; new subsection 32CA(2)] The employer is then able to contribute to a default fund for the employee to satisfy the choice of fund requirements. [Item 32; new subsection 32G(6)]

5.55 More broadly, a fund ceases to be a chosen fund or a default fund if the fund ceases to be an eligible choice fund. [Item 32; new subsections 32F(4) and 32H(3A)] An employer must offer a choice of funds to an employee within 28 days of becoming aware that a fund has ceased to be an eligible choice fund, except where the fund ceases to be a chosen fund because of new subsection 32CA(2) (see paragraph 5.54 above). [Item 32; new subsections 32K(3) and (4)] New subsection 32G(5) creates a default fund for 28 days after the employer becomes aware a fund is not an eligible choice fund, to give the employer time to make the offer.

(c) The choice process

When does an employer have to offer a choice?

5.56 The rules outlined above about the times when there is a chosen fund or a default fund effectively dictate when an employer must make an offer of choice to an employee. These times are summarised in new section 32K . The requirements set out in this section are obligations for employers only in the sense that they set out what must be done by the employer to avoid having a period when there is neither a chosen fund nor a default fund for an employee. [Item 32; new section 32J] If an employer makes a contribution during such a period, the employer may be liable to pay extra SGC.

5.57 The rules about when an employer must offer an employee choice correspond with the rules about when there is a chosen fund or a default fund:

•

the requirement to offer choice within 28 days of an employee first commencing employment [item 32; new subsection 32K(1)] corresponds with there being a default fund during that 28 day period [item 32; new subsection 32G(1)] ;

•

the requirement to offer choice within 28 days of an employee request [item 32; new subsection 32K(2)] corresponds with when a chosen fund ceases and when a default fund ceases because of a request made by the employee [item 32; new subsections 32F(2) and 32G(3)] . Note that an employer is not required to offer a choice where an employee's request is made within 12 months from the time of the last offer made by the employer or from the time the employee and employer entered into an informal agreement under new paragraph 32E(1) [item 32; new subsection 32K(2)] ;

•

the requirement to offer choice within 28 days of an employer becoming aware that he or she can no longer contribute to a chosen fund [item 32; new paragraph 32K(3)(a)] corresponds with when a chosen fund ceases for this reason [item 32; new subsection 32F(3)] (see also paragraph 5.50 above);

•

the requirement to offer choice within 28 days of an employer becoming aware that a fund ceases to be an eligible choice fund [item 32; new paragraph 32K(3)(b)] corresponds with when a chosen fund ceases for this reason [item 32; new subsection 32F(4)] ;

•

the requirement to offer choice within 28 days of the employer becoming aware that he or she can no longer contribute to a default fund [item 32; new paragraph 32K(4)(a)] corresponds with when a default fund ceases for this reason [item 32; new subsection 32H(3)] ; and

•

the requirement to offer choice within 28 days of the employer becoming aware that he or she can no longer contribute to a default fund [item 32; new paragraph 32K(4)(b)] corresponds with when a default fund ceases for this reason [item 32; new subsection 32H(3A] .

5.58 In addition to these requirements, an employer may also offer a choice of funds at any time. [Item 32; new subsection 32K(5)] This allows, for example, an employer to offer choice of funds to existing employees in preparation for 1 July 2000.

How must a choice be offered?

5.59 When an employer is required to offer an employee a choice of funds, the next step is to decide how that choice must be offered. Employers may use one of two options to do this: a limited choice offer or an unlimited choice offer . The relevant provisions are contained in new sections 32L to 32QA .

5.60 It may be noted that at any time an employee may propose a fund as a chosen fund and the employer may accept that fund as a chosen fund for the employee. [Item 32; new section 32E] Where this occurs, there will be no need for the employer to proceed with an offer.

5.61 It may also be noted that the choice an employer has between a limited choice offer and an unlimited choice offer applies in respect of each employee. An employer may use the one method for all employees, or one method for some and another method for others.

5.62 Further, the choice of fund requirements must be met separately by each employer of an employee. Therefore, a choice made by an employee under an offer made by one employer will not be the chosen fund for that employee in respect of another employer. [Item 32; new section 32R]

Limited choice offer

5.63 Under this option, an employee may select a chosen fund from a choice of at least four eligible choice funds. [Item 32; new section 32M and new subsection 32QA(1)] Each fund or RSA offered must represent a separate fund or RSA and the employee must be entitled to become a member of each of them. There must be included in the offer:

•

at least one 'public offer superannuation fund' (defined in subsection 6(1) - see item 17); [Item 32; new subsection 32N(3)]

•

at least one RSA or 'capital guaranteed fund' (defined in subsection 6(1) - see item 6 ); [Item 32; new subsection 32N(4)]

•

if there is one or more of the following kinds of funds at least one of those funds must be offered:

-

a 'standard employer-sponsored fund' (defined in subsection 6(1) - see item 19 ) of which the employer is a 'standard employer sponsor' (defined in subsection 6(1) - see item 18) and of which the employee is eligible to be a member; or

-

an 'exempt public sector superannuation scheme' (defined in subsection 6(1) - see item 13 ) of which the employee is eligible to be a member as a result of the employee's employment with the employer.

[Item 32; new subsection 32Q(5)]

•

if there is one or more 'industry-based superannuation funds' (defined in subsection 6(1) - see item 15 ) of which the employee is eligible to be a member - at least one of those. [Item 32; new subsection 32Q(6)]

5.64 If a particular fund or RSA falls into more than one of the above categories, it may be used to satisfy any one of those categories. The employer may choose which. [Item 32; new subsection 32N(7)]

Unlimited choice offer

5.65 Under this option, an employee may select any eligible choice fund as his or her chosen fund. [Item 32; new section 32P and new subsection 32QA(2)]

5.66 It may be noted that if an employer is unsure about the status of a fund selected by an employee under an unlimited choice offer, the employer may seek from the employee a statement provided by the fund trustee of the kind referred to in section 24 and 25 of the SGAA. (See paragraphs 5.53 and 5.54 which deal with these requirements.)

What information must be included in an offer?

5.67 An offer must be in writing and include certain information depending on the option chosen by the employer. The requirements are set out in new section 32M for a limited choice offer and new section 32P for an unlimited choice offer.

5.68 Regulations will be made to specify the detailed information about funds to be included in offers to employees (eg. key feature statements). In addition, the regulations may provide that additional information be made available to employees, in which case the offer must state when and where the information may be accessed by the employee. [ Item 32; new paragraph 32M(1)(e) and new subsection 32M(2) for limited choice offers, new paragraph 32P(1)(e) and new subsection 32P(2) for unlimited choice offers]

When and how must an employee respond to an offer?

5.69 Employees are provided with 28 days to make a choice. The choice must be in writing. Choices made after 28 days are not effective unless the employer agrees to accept it. [Item 32; new section 32Q]

5.70 Where an employee receives a limited choice offer, the fund chosen must be one of the funds offered. [Item 32; new subsection 32QA(1)]

5.71 Where an employee receives an unlimited choice offer, the fund chosen must be an eligible choice fund for the employer at the time the choice is made. [Item 32; new subsection 32QA(2)]

5.72 If the employer requests from an employee a statement of the kind referred to in section 24 and 25 of the SGAA, the employee will need to approach the trustee of the fund to obtain the statement. If the employee does not provide the employer with the statement within 28 days, the fund selected by the employee ceases to be an eligible choice fund. [Item 32; new subsection 32CA(2) and new section 32QB] The employer is then able to contribute to a default fund for the employee to satisfy the choice of fund requirements. [Item 32; new subsection 32G(6)]

5. Complying with the choice requirements - other

(a) AWAs and certified agreements

5.73 Where an employer makes contributions under, or in accordance with, an Australian Workplace Agreement (AWA) or a certified agreement, new subsection 32C(2) 4 provides that those contributions are made in compliance with the choice of fund requirements. [Item 32; new subsection 32C(2)] The AWA must be made under the Workplace Relations Act 1996 , and the certified agreement must be made under either the Workplace Relations Act 1996 or the Industrial Relations Act 1988 .

(b) Victorian State agreements

5.74 There are a number of Victorian State individual and workplace agreements that were in force prior to the referral of Victoria's industrial relations power to the Commonwealth. These agreements are now preserved under the Commonwealth's Workplace Relations Act 1996 , and are in essence no different to other workplace agreements made under that Act.

5.75 Contributions by an employer to a fund will satisfy the choice of fund requirements where that contribution is made under or in accordance with an employment agreement that was in force under the Employee Relations Act 1992 (Vic) and which continues by virtue of section 515 of the Workplace Relations Act 1996 . [Item 32; new subsection 32C(2A)]

(c) State award employees

5.76 Contributions made by an employer in respect of employees employed under a State industrial award (defined in subsection 6(1) - see generally items 8, 14, 20 and 21 ) are made in compliance with the choice of fund requirements. [Item 32; new subsection 32C(3)] These employers may be required to comply with any relevant State choice of fund requirements.

(d) Contributions under prescribed laws

5.77 In some cases an employer is obliged under a law to make contributions for the benefit of an employee to a particular superannuation fund. In these cases, the employer's contributions may be taken to be made in compliance with the choice of fund requirements because the fund to which the contributions are made is an unfunded public sector scheme ( new paragraph 32C(1)(c) ) or the employee is employed under a State industrial award ( new subsection 32C(3) ).

5.78 However, if the relevant scheme is not an unfunded public sector scheme and the employee is not employed under a State award, the employer faces the problem of having to satisfy both the choice of fund requirements and the terms of the relevant law. This could mean that the employer would need to contribute twice the minimum level of superannuation contributions in order to avoid any SGC.

5.79 Regulations will be made which prescribe laws which cause this kind of difficulty for employers. Contributions made under a prescribed law will be taken to be made in compliance with the choice of fund requirements. The use of regulations allows a flexible approach under which each case where a law potentially causes difficulties may be considered on its merits, and be prescribed if appropriate. [Item 32; new subsection 32C(3A]

(e) Unfunded public sector schemes

5.80 Generally, where employers provide superannuation support on behalf of employees through unfunded public sector schemes (defined in subsection 6(1) - see item 22 ), any contributions made (or notionally made - refer to paragraph 1.44) are in compliance with the choice of fund requirements. However, this rule does not apply in respect of Commonwealth employees who are members of the CSS or the PSS. [Item 32; new paragraph 32C(1)(c)]

5.81 Contributions made to the CSS or PSS before 1 July 2000 are also in compliance with the choice of fund requirements. [Item 32; new paragraph 32C(4)(c)] This means that choice must be offered to Commonwealth members of the CSS and the PSS from 1 July 2000. However, contributions made for Territory employee members of the CSS or PSS would continue to be in compliance with the choice of fund requirements under new paragraph 32C(1)(c) (see paragraph 5.80 above).

(f) Transitional rules - new employees and existing employees

5.82 Contributions made to a fund before 1 July 1999 are in compliance with the choice of fund requirements. [Item 32; new paragraph 32C(4)(a)]

5.83 Contributions made in respect of employees who commence employment on or after 1 July 1999 (ie. new employees) must be made in compliance with the choice of fund requirements, as set out in new Part 3A .

5.84 For employees who were employed by an employer immediately before 1 July 1999 and who have not ceased to be employed, contributions made to a fund before 1 July 2000 are also made in compliance with the choice of fund requirements. [Item 32; new paragraph 32C(4)(b)] This means that employers will need to act before 1 July 2000 to ensure there is a chosen fund or a default fund for these employees at that time.

5.85 Contributions made for employees who were employed before 1 July 1999 but who cease to be employed before 1 July 2000 will also be made in compliance with the choice of fund requirements if the contribution is made before the employee ceases employment. [Item 32; new paragraph 32C(4)(b)]

5.86 If a contribution is made after the employee ceased employment but is nevertheless made in respect of the employment, the contribution is taken to be made immediately before the employee ceased employment, and so could be in compliance with the choice of fund requirements under new paragraph 32C(6)(b) . [Item 32; new subsection 32C(5)]

6. Other matters

(a) Earnings bases

5.87 The minimum level of contributions required under the SGAA is calculated as a percentage of each employee's notional earnings base. Generally, an employee's notional earnings base will be one of the following figures:

•

ordinary time earnings (OTE), which is basically the employee's earnings for their ordinary hours of work; or

•

a measure of the employee's earnings used in an applicable authority (this is defined under subsection 13(5) of the SGAA as an award, a law, an occupational superannuation agreement or a superannuation scheme) under which the employer's superannuation obligation is determined. This earnings base is only available where the employer was contributing for an employee in accordance with the award, or under a like authority since before 21 August 1991; or

•

if the employer provides superannuation support in accordance with an award, then the award earnings base.

5.88 Compliance with the choice of fund requirements could mean that an employer faces a higher notional earnings base in respect of an employee, and accordingly a higher cost in meeting their SG obligations. This would occur, for example, where an employer currently contributes on behalf of an employee under an award to a particular fund named in the award, but under choice is required to contribute for the employee to another fund that the employee chooses.

5.89 To prevent this occurring, the Bill allows an employer to use an existing notional earnings base for an employee where it is reasonable to assume, if the choice of fund requirements did not apply, the employer would instead have contributed to another fund which gives rise to the existing notional earnings base. [Item 32; new section 32T]

5.90 For example, where an employer currently contributes for an employee to a particular fund in accordance with an award, it would be reasonable to assume the employer would have continued to contribute to that fund in the absence of the choice of fund requirements. It would also be reasonable to assume the employer would have contributed in accordance with the award for a new employee, where that employer would have been required to make contributions to a particular fund on behalf of that employee in accordance with the award.

5.91 The 'other fund' in respect of which it is reasonable to assume contributions would have been made, or support provided, if the choice of fund requirements did not apply, may be either a superannuation fund that is not a defined benefit scheme [item 32; new subsection 32T(1)] or a defined benefit scheme [item 32; new subsection 32T(2)] . The preserved notional earnings bases are, however, only used where an employer is contributing on behalf of an employee to a superannuation fund that is not a defined benefit scheme, since it is only in these cases that the notional earnings base is directly used in reducing the SG charge percentage. [Item 32; new subsections 32T(3) and (4)] The section only applies if the employer is contributing to a chosen fund or a default fund. It does not apply if contributions are made under a workplace agreement.

(b) Overriding awards

5.92 The Bill makes a requirement in a Federal award to make contributions on behalf of an employee to a superannuation fund unenforceable to the extent that the employer instead makes the contributions to another fund in compliance with the choice of fund requirements. [Item 32; new section 32U] Employers of employees under Federal awards are accordingly free to comply with the choice of fund requirements without facing action for non-compliance with an award (note that employees under State awards are effectively excluded from the choice of fund requirements - see paragraph 5.42).

5.93 The provision overrides Federal awards only to the extent a contribution is made to another fund that is a chosen fund or a default fund. Accordingly, if an award requires contributions of 6% of salary to a particular fund, and contributions equivalent to 4% of salary are instead made to a chosen fund of the employee, the award remains enforceable in respect of the remaining 2% of salary payable as superannuation contributions.

(c) Employer liability

5.94 The Bill protects employers from liability to compensate any person for loss or damage arising from anything done by the employer in complying with the choice of fund requirements. [Item 32; new section 32V]

5.95 Accordingly, if an employee selects a fund from material provided by the trustee or RSA provider through his or her employer in compliance with the choice of fund requirements, and the fund subsequently performs badly, the employer would not be liable to compensate the employee.

5.96 It should be noted the protection does not extend to things done by the employer which are not undertaken in complying with the choice of fund requirements.

(d) Application to Commonwealth Departments

5.97 The Commonwealth as an employer currently has overall responsibility for ensuring that individual departments and certain authorities meet their SG obligations. The Bill contains amendments which have the effect of treating individual Commonwealth Departments as separate employers. [Items 1 to 5] The provisions, as amended, will be similar to those in the Fringe Benefits (Application to the Commonwealth) Act 1986 .

5.98 This means that individual departments and certain authorities will be responsible for satisfying their SG obligations, including the choice of fund requirements.

(e) Signposting

5.99 A number of signposts have been inserted in the SGAA in order to guide readers from existing provisions to new Part 3A . [Items 26 to 31]

7. Consequential amendments

(a) Retirement Savings Accounts Act 1997

5.100 Part 2 of Schedule 1 of the Bill amends the Retirement Savings Accounts Act 1997 (the RSA Act) to give effect to the choice of fund requirements in relation to retirement savings accounts (RSAs).

5.101 Section 52 of the RSA Act currently requires employers to provide employees with a choice of alternative superannuation vehicles before making an application for an RSA on behalf of the employee.

5.102 The effect of the amendments to be made to the SGAA by Part 1 of Schedule 5 to the Bill (which imposes obligations on employers in relation to choice of fund) will mean that section 52 is no longer necessary. Section 52 is therefore repealed and references in the RSA Act to section 52 are omitted. [Items 33 and 35]

5.103 Subsection 53(3) of the RSA Act, which provides that an RSA institution does not have to provide information to a prospective RSA holder where the employer is applying to open the RSA on the employee's behalf, is omitted. This subsection is omitted because it is inconsistent with the choice of fund policy that all employees be given prospective information to enable an informed choice to be made. [Item 34]

5.104 Subsection 62(1) of the RSA Act is amended in order to clarify the operation of the cooling-off period. At present, section 62 provides that, where an RSA is opened or issued as a result of an application by an employer on the employee s behalf, the employee may request the RSA provider to close the RSA and transfer the balance to another superannuation vehicle within 14 days after receipt of specified documentation.

5.105 This is inconsistent with the primary choice of fund provisions in Part 1 of Schedule 5 of the Bill as the employee is provided with 28 days in which to make a decision as to whether he or she wishes to have compulsory employer contributions made to the RSA. Inconsistency also arises as, under the choice of fund provisions, if an employee chooses to close the RSA during the 14 day period, the employer does not have to agree to that employee's request to change the superannuation vehicle to which compulsory employer contributions are made within 12 months of the employee making his or her choice. Employees may also be confused by believing a choice has to again be made within 14 days.

5.106 To overcome these inconsistencies, subsection 62(1) of the RSA Act is amended to provide that the cooling-off period will not apply where the RSA is chosen as a result of the exercising of choice under Part 3A of the SGAA (as inserted by Part 1 of Schedule 5 of the Bill). [Item 36]

(b) Superannuation Industry (Supervision) Act 1993

5.107 Part 3 of Schedule 5 to the Bill amends the Superannuation Industry (Supervision) Act 1993 (the SIS Act) to give effect to the choice of fund requirements in relation to superannuation funds.

5.108 The main objective of these amendments is to ensure that provisions in the SIS Act, which require information to be provided to prospective members and employer sponsors and prohibit false and misleading conduct in relation to the issuing of regulated documents, apply to all regulated superannuation funds. These provisions currently apply only to public offer superannuation funds.

Definitions and cross references

5.109 The definitions of regulated document , reviewable decision and stop order in section 10 of the SIS Act are amended because of the amendments made by item 50 . [Items 37 to 40]

5.110 Subsection 323 of the SIS Act, which provides relief from civil liability for contravention of certain provisions, is amended to make reference to subsection 148B(2) rather than subsection 162(2). This is necessary because of the amendments made by item 50 . [Item 56]

Prospective information

5.111 The SIS Act is amended to require all regulated superannuation funds to provide information to prospective members and employer-sponsors.

5.112 Currently, Subdivision 3A of Part 19 of the SIS Act requires prospective information to be provided only by public offer superannuation funds. This is inconsistent, however, with the choice of fund provisions in Part 1 of Schedule 5 to the Bill which require an employer to provide information about a regulated superannuation fund to employees to enable an informed choice to be made.

5.113 Therefore, to enable the implementation of a consistent disclosure regime for all regulated superannuation funds, regardless of whether the fund is a public offer superannuation fund or a non-public offer superannuation fund (eg, industry or corporate fund), the SIS Act is amended to transfer the requirements to provide prospective information from Part 19 of the SIS Act to Part 14 of the SIS Act and to replace all references to public offer entity in these requirements with superannuation entity. [Items 41 and 42, 58, 60 to 62, 64]

Prohibited conduct in relation to superannuation interests and regulated documents

5.114 Part 18 of the SIS Act is being amended by items 43 to 50 to provide that the prohibitions in this Part covering false and misleading conduct in relation to superannuation interests also apply to regulated documents. These provisions are a means of ensuring that persons do not make a decision to join a superannuation fund based on false or misleading information.

5.115 These amendments will insert new sections 148A and 148B into the SIS Act, to impose criminal and civil liabilities on the trustee of a superannuation entity where the trustee issues, or authorises the issue of, a regulated document in which there is a false or misleading statement or a material omission. [Item 50]

5.116 The amendments also insert new section 148C into the SIS Act, which provides that the trustee of a superannuation entity must not intentionally or recklessly issue a regulated document which includes a statement made by, or based on a statement of, an expert, unless the written consent of the expert to the inclusion of that statement has been obtained and not withdrawn prior to the issue of the document. [Item 50]

5.117 New sections 148D, 148E, 148F and 148G provide the Insurance and Superannuation Commissioner with the power to issue a stop order. Such an order will prevent the trustee from issuing superannuation interests where a regulated document is issued which contains a false or misleading statement. [Item 50]

5.118 New sections 148A to 148G are presently set out in Part 19 of the SIS Act. Under Part 19, they apply only in relation to regulated documents issued by trustees of public offer superannuation funds. The amendments transfer these provisions to Part 18 so that they will apply to trustees of all superannuation entities issuing regulated documents.

5.119 This is necessary because amendments to be made to the SIS Act by items 41 and 42, 58, 60 to 62, 64 and to the Superannuation Industry (Supervision) Regulations will require trustees of all regulated superannuation funds to provide up-front information (ie, a regulated document) to prospective members to enable them to make a choice about the superannuation vehicle into which their employer is to direct SG contributions.

5.120 The amendments also repeal Division 3 and Division 4 of Part 19 of the SIS Act which have been moved to Divisions 2 and 3 of Part 18 (false and misleading documents and stop orders) and Division 2 of Part 14 (information to prospective beneficiaries), as described above [items 53 to 55] . Paragraph 150(2)(b) of the SIS Act has been amended to reflect these amendments. [Item 52]

14 day cooling-off period

5.121 Subsection 171(2) of the SIS Act is amended to clarify the operation of the 14 day cooling-off period. The amendment will provide that the 14 day cooling-off period will not commence until after the member has been notified of the cooling-off period rather than when he or she becomes a member of the fund. The notification will occur after the person becomes a member of the fund.

5.122 This amendment will ensure that the commencement of the cooling-off period is consistent between life insurance products and RSAs, and will provide new members with more time before the 14 day cooling-off period commences. [Item 54]

Modifiable provisions

5.123 The definitions of modifiable provision and temporarily modifiable provision in section 327 of the SIS Act will be amended because of the amendments made by items 42 and 50 of the Bill. These amendments will maintain the Insurance and Superannuation Commissioner's power to modify the provisions of Part 19 of the SIS Act which have been moved to Parts 14 and 18. [Items 57 to 64] Application

5.124 The amendments made by this Part will apply to acts and omissions after the commencement of item 65 .

Regulation Impact Statement

Policy objective

5.125 The policy objective of the choice of fund proposal is to provide employees with greater choice as to which complying superannuation fund or retirement savings account (RSA) will receive compulsory superannuation contributions made on their behalf by the employer. Greater competition and better returns will benefit all persons with superannuation and will reduce, over time, pressure on the age pension system.

5.126 This measure is expected to increase competition, efficiency and performance within the superannuation industry and result in reductions in fees and charges for persons with superannuation.

Background

5.127 The choice of fund proposal was announced in the 1997-98 Budget. It is one of a number of measures announced in that Budget designed to encourage private saving and enhance Australia's retirement income system.

Implementation options

General

Options subject to workplace agreements

5.128 All of the options discussed below would be subject to the terms of workplace agreements which provide employees with a choice of superannuation fund for their employer contributions. It would be inconsistent with recent workplace relations reforms for the terms of a workplace agreement to be overridden by the choice of fund requirements.

Education programs

5.129 Groups affected by the measure will familiarise themselves with the changes using assistance provided by the Australian Taxation Office (ATO) and the Insurance and Superannuation Commission (ISC).

5.130 The ATO will provide employers and employees with information in a number of forms. In particular, the ATO will provide information through:

•

new pamphlets directed specifically at an impact group (eg. employers or employees), which sets out the information in a 'question and answer' style;

•

the ATO's existing internet facilities; and

•

the ATO's existing telephone help lines.

5.131 Under some of the options outlined below, fund/RSA providers will be required to prepare key feature statements (KFSs) for the fund or RSA. These statements will be prepared in accordance with guidelines set out by the ISC.

5.132 The private sector may also contribute to the education of affected groups.

Option 1

5.133 Under this option:

•

an employee would be able to choose any complying superannuation fund or RSA into which their employer superannuation contributions would be deposited, however their choice would be subject to the approval of their employer. This amounts to an informal workplace agreement between the employee and their employer.

Option 2

5.134 Under this option:

•

an employee would be able to choose any complying superannuation fund or RSA into which their employer superannuation contributions would be deposited.

•

where employer contributions are being made to a defined benefit fund, the employer would need to advise an employee of the consequences of a choice that would reduce contributions or other specific entitlements (eg. death and disability insurance).

•

that choice would need to be made within a specified time, ie., for new employees on or after 1 July 1999, 28 days from the commencement of employment, and for existing employees at 1 July 1999, before 1 July 2000.

•

after making their initial choice, all employees would be able to make a further choice at least every 12 months thereafter.

•

the employer would contribute to a default fund if the employee failed to make a choice within the specified time.

•

employers would be subject to financial penalties under existing Superannuation Guarantee arrangements if they fail to give effect to valid employee choices.

Option 3

5.135 Under this option:

•

an employee would be able to choose from at least four complying superannuation funds or RSAs offered by their employer. The choice offered would need to include an RSA, a public offer fund, and, where available, an industry fund and an in-house superannuation fund.

•

key feature statements (KFSs) for each of the funds nominated by the employer would need to be provided or made available to each employee by the employer. KFSs would be prepared by the fund or RSA provider.

•

where employer contributions are being made to a defined benefit fund, the employer would need to advise an employee of the consequences of a choice that would reduce contributions or other specific entitlements (eg. death and disability insurance).

•

that choice would need to be made within a specified time, ie., within 28 days of being provided with the KFSs by the employer.

•

after making their initial choice, employees would be able to make a further choice at least every 12 months thereafter.

•

the employer would contribute to a default fund if the employee failed to make a choice within the requisite time.

•

employers would be subject to financial penalties under existing Superannuation Guarantee arrangements if they fail to give effect to valid employee choices.

Option 4

5.136 Under this option:

•

employers can choose to use one of option 1, 2 or 3.

Assessment of impacts (costs and benefits) of each option

Impact groups

•

Employers (approximately 654,000 will be affected)

•

Employees (approximately 4,065,030 will be affected)

•

Superannuation funds, RSA providers (140,000 will be affected)

•

Professional advisers, eg., investment and tax advisers

•

ATO

•

ISC

Analysis of the costs of the implementation options

General

5.137 Both employers and employees may incur some cost in negotiating a workplace agreement. This is only likely to be significant where the primary purpose of that agreement is to provide employees with a choice of superannuation fund. Costs will only be marginal where the provision of a choice of superannuation fund is part of a general workplace agreement.

Option 1

5.138 The affected groups will incur the following compliance and administrative costs under option 1:

Initial costs

Generally

•

All impact groups will need to familiarise themselves with the change. The ATO and the ISC will need to devote additional resources in providing information support to the other impact groups.

Employers and fund/RSA providers

•

Larger employers and fund/RSA providers may need to update their technology. This may not be significant, as the employer will be able to vet the decision of the employee and continue to contribute to existing funds or RSAs.

Recurrent costs

Employees

•

Employees will face costs in choosing a fund, as they have an unlimited choice and will likely need to seek information from alternative funds.

•

Employees will also face costs in negotiating with employers in order to agree on a fund or RSA.

•

There will also be additional record keeping requirements. Employees will need to keep track of what choices they agreed to.

Employers

•

Employers will face costs in assessing whether to accept an employee's nominated fund.

•

Employers will also face costs in negotiating with employees in order to agree on a fund or RSA. These costs are likely to be more significant for larger employers, who have a greater number of employees.

•

Employers may make their contributions to a greater number of funds than at present. However the impact of this cost is likely to be reduced by the ability of employers to override the choice of employees. Larger employers will have a greater relative capacity to absorb these costs.

•

There will also be additional record keeping requirements. Employers will need to keep track of what choices they agreed to.

5.139 There are no estimates of the costs involved with this option. The costs are likely to be slightly lower than the costs involved with options 2 and 3, as this option imposes less of a burden on employers.

Option 2

5.140 The affected groups will incur the following compliance and administrative costs under option 2:

Initial costs

Generally

•

All impact groups will need to familiarise themselves with the change. The ATO and the ISC will need to devote additional resources in providing information support to the other impact groups.

Employers

•

Larger employers will need to update their technology in order to satisfy their obligations. These costs for employers will be greater than under option 1, as the employer will not be able to vet the decision of the employee and will therefore be contributing to a greater number of funds or RSAs.

Fund/RSA providers

•

Fund/RSA providers will need to update their technology, as they may be receiving contributions from a wider range of employers.

•

Fund/RSA providers may also need to produce key feature statements (KFSs) for employers to provide to employees where the fund or RSA is the default fund.

Recurrent costs

Employees

•

Employees will incur costs in choosing a fund, as they will have an unlimited choice and will likely need to seek information from alternative funds.

Employers

•

Employers will incur some costs in selecting the default fund that is to be used where an employee fails to make a choice. These costs are likely to be relatively more significant for smaller employers.

•

Employers will also need to provide employees with a key features statement (KFS) for the fund or RSA that is the default fund.

•

Employers will be required to make contributions to a greater number of funds and RSAs than at present. Larger employers will have a greater relative capacity to absorb these additional costs, particularly those employers who contribute to funds by electronic means. On the other hand, contributions will be made to more funds and RSAs where an employer has a large number of employees.

•

Employers will be required to provide advice to employees where that employer's contributions are currently being made to a defined benefit fund.

•

There will also be additional record keeping requirements. Employers will need to keep track of what choices were made, and when they were made. These costs will rise according to the number of employees, and will therefore be higher for larger employers.

•

Employers will have reporting and remitting obligations under the Superannuation Guarantee regime where they do not satisfy their obligations.

Fund/RSA providers

•

The default fund provider will be required to distribute their KFS to employers, who will then provide the statement to employees.

ATO

•

Reporting and remitting obligations imposed on employers will result in a complementary increase in workflows for the ATO.

5.141 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in the table below:

5.142 The costs for employees are not available due to difficulties in predicting how they will react to the measure. Employee costs are likely to be higher under this option than under option 3 as employees can choose any complying superannuation fund or RSA and will likely need to seek information from alternative funds.

5.143 The costs of implementing and administering the measure would be similar to option 3 (see below).

Option 3

5.144 The affected groups will incur the following compliance and administrative costs under option 3:

Initial costs

Generally

•

All impact groups, particularly employers, will need to familiarise themselves with the change. This cost will be greater for employers under this option, because they will be required to comply with a wider range of obligations. The ATO and the ISC will need to devote additional resources in providing information support to the other impact groups.

Employers

•

Larger employers will need to update their technology in order to satisfy their obligations. These costs may be less than under option 2, as there is a reduced number of potential funds or RSAs to which the employer may be required to make contributions.

Fund/RSA providers

•

Fund/RSA providers will need to update their technology. These costs may be less than under option 2, as there is a reduced number of potential funds or RSAs to which the employer may be required to make contributions.

•

Fund/RSA providers who presently are not required to furnish KFSs will need to produce this information for employers to distribute to employees.

Recurrent costs

Employees

•

Employees will incur costs in choosing a fund from the suite nominated by the employer. These costs will be lower under this option than under options 1 and 2 because of the limited choices and the provision of KFSs for the nominated funds.

•

There will also be additional record keeping requirements. Employees will need to keep track of what choices were offered and made, and when they were offered and made.

Employers

•

Employers may be required to make their contributions to a greater number of funds than at present. These costs may be less than under option 2, due to the reduced number of potential funds or RSAs to which the employer may be required to make contributions. Larger employers will have a greater relative capacity to absorb these additional costs, particularly those employers who contribute to funds by electronic means.

•

Employers will be required to distribute KFSs for nominated funds/RSAs to employees. These costs are likely to be higher than under option 2 because there will be a greater number of KFSs to distribute.

•

Employers will be required to provide advice to employees where that employer's contributions are currently being made to a defined benefit fund.

•

Employers will face costs in nominating a suite of funds and RSAs. These costs will be higher than under other options as employers are required to nominate at least 4 funds or RSAs under this option. An employer's costs may be reduced by dealing with one provider who offers a range of products constituting the mix of funds and RSAs that must be nominated under this option. The costs will be more significant for smaller employers.

•

There will also be additional record keeping requirements. Employers will need to keep track of what choices were offered and made, and when they were offered and made.

•

Employers will have reporting and remitting obligations under the Superannuation Guarantee scheme where they do not satisfy their obligations.

Fund/RSA providers

•

Nominated fund/RSA providers will be required to distribute KFSs to employers, who will provide the statements to employees. These costs are likely to be higher than under option 2 because there will be a greater number of KFSs to distribute.

ATO

•

Reporting and remitting obligations imposed on employers will result in a complementary increase in workflows for the ATO.

5.145 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in the table below:

5.146 The costs for employees are not available due to difficulties in predicting how they will react to the measure. Employee costs are likely to be lower than under option 2 as employees can choose from a limited number of complying superannuation funds or RSAs and will be provided with key information by employers which will assist them in making that choice.

5.147 The costs of implementing and administering the measure are set out in the table below:

Option 4

5.148 This option allows employers to choose one of options 1, 2 or 3.

5.149 This will enable an employer to choose the option which minimises their costs. As outlined above, the costs of those options varies according to the size and set up of the employer.

5.150 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in the table below:

5.151 Employer costs are no more than under option 2. This is on the basis that, under options 2 and 3, the employer costs are average costs. However, each employer's cost will depend on their circumstances, so that option 3 may be less costly for a particular employer than option 2. This suggests that overall, employer costs will be no greater than those in option 2, and are likely to be lower. However, the extent to which costs will be lower is difficult to quantify.

5.152 The costs for employees are not available due to difficulties in predicting how they will react to the measure. Employee costs are likely to be lower where the employer chooses limited choice as employees will only have a limited number of complying superannuation funds or RSAs to choose from and will be provided with key information by employers which will assist them in making that choice.

5.153 The costs of implementing and administering the measure are similar to those set out in option 3 above.

Analysis of the benefits of the implementation options

Option 1

5.154 While employees are not limited in their choice of fund or RSA, the degree of control they will have over their superannuation savings will be less than that provided under other options, because of the need for their employer to approve the choice. The choice employees make will be without the assistance of the information that must be provided under option 3.

5.155 There will still be increased competition between fund and RSA providers, however the extent of that increase will be limited by the need for employers to approve the employee's choice. For cost reasons, employers will probably have a strong preference to retain the existing fund or RSA.

Option 2

5.156 Employees will have unlimited control and choice over their superannuation savings, however they will likely need to seek information from alternative funds.

5.157 Employers will avoid the cost of providing information, as they must under option 3, but will probably face additional costs due to contributing to more funds than at present.

5.158 There will be increased competition between fund and RSA providers. Under this option, fund and RSA providers would focus their advertising on employees.

Option 3

5.159 Although having a limited choice, employees will have greater control and choice over their superannuation savings than at present. They will be provided with information to assist them in making an informed choice.

5.160 Employers may avoid the costs involved in contributing to a large number of funds, but will face additional costs in nominating funds and providing information to employees about those funds.

5.161 There will be increased competition between fund and RSA providers. These providers will compete to be nominated by employers. Nominated providers will then compete for the choice of employees. This will bring more fund and RSA providers into the market, and create additional benefits for employees.

Option 4

5.162 The major benefit of this option is that employers have the flexibility to select the approach which minimises their costs, given their individual circumstances. The benefits of the various options that can be chosen by employers have been outlined above.

Consultation

5.163 The Government has engaged in consultation with a wide range of interested parties, including the superannuation industry (in particular the Association of Superannuation Funds of Australia (ASFA) and the Life, Investment and Superannuation Association (LISA)), employer groups (in particular the Australian Chamber of Commerce and Industry (ACCI)), small business and those representing employee interests. As a result of those consultations, a number of enhancements to the original announcement were made particularly by reducing the burden of choice on employers while ensuring the key objective of greater choice of fund is preserved

Conclusion and recommended option

5.164 After careful consideration, the Government considers option 4 to be the most appropriate.

5.165 Providing choice of fund will necessarily increase costs for some employers. The Government believes the benefits of choice to employees and the community more generally, outweigh these costs.

5.166 The Government's preferred option allows an employer to elect the most cost-effective way of implementing the measure, depending on that employer's circumstances. This establishes a balance between giving individuals control over their superannuation savings and limiting costs to affected parties.

5.167 Option 4 therefore provides the greatest flexibility, potentially accessing the benefits under all options while keeping costs to a minimum. Excluding employers and employees who are expected to be covered by workplace agreements, employers would face an estimated average cost of $30 per annum under this option, or less than $8 per employee per annum.

5.168 Option 1 is likely to involve lower costs than any of the other options. However, the need for employer approval for an employee's choice of fund or RSA is likely to nullify the objectives of the proposal. Under this option, it may be the case that employee's have no real control over their superannuation savings.