In brief
APRA yesterday released a draft guide on transferring a member's benefit from one superannuation fund to another without their consent. Because the member is not consenting, the law says that the receiving fund must, when compared with the existing fund, confer 'equivalent rights' in respect of benefits. APRA has interpreted this requirement narrowly. If APRA is correct, the requirement provides little, if any, protection to superannuation fund members. Senior Regulatory Counsel Michael Mathieson and Partner Michelle Levy report.
Most people know that APRA wants to facilitate the consolidation of superannuation funds. Its draft guide is certainly consistent with that position. In APRA's view, the equivalent rights test will rarely, if ever, be an impediment to a proposed transfer. Its view may be convenient for superannuation trustees wishing to carry out a transfer. However, we think its view should be approached with a degree of caution.
'Equivalent rights' assessment
APRA is keen to defer to the judgment of superannuation trustees who wish to implement a transfer. The trustees are 'best placed to consider the best interests of members'. A receiving fund can only be considered a successor fund if both the transferring and receiving trustees 'agree to confer on the members equivalent rights'.
Yet this is not the full picture. Agreement between the trustees as to equivalent rights is necessary, but not sufficient – the receiving fund must also, in fact, confer equivalent rights. Further, while trustees are undoubtedly well placed to consider the best interests of members, the ultimate arbiter will be a court, not the trustee. A court may be slow to impugn the trustee's judgment on the best interests question, but there are plenty of court cases (outside a successor fund transfer context) where exactly that has happened.
APRA considers, in our view correctly, that the first task is to identify the member's 'rights' in respect of benefits. However, APRA takes a very narrow view of what is a 'right'.
It says that a member's right to their accrued benefit is a relevant right (although that is a very limited right and is already protected by other means). It also says that a member's 'right to be informed about their benefit and changes to their benefit via a Product Disclosure Statement' is also a relevant right (although any such right is a statutory right, not vulnerable to diminution in the first place).
However, APRA's view is that 'features which are determined and can be changed at the discretion of' the superannuation trustee are not relevant rights. Such features include 'the amount of fees that will be charged to a member, product features and particular investment options'. There are two points to make here. The first is that the proposition that something cannot involve a right for a beneficiary if the trustee has a discretion in relation to it sits most uncomfortably with the case law concerning the ability of a responsible entity of a registered scheme to unilaterally amend the constitution. The second is that whether something can be changed at the trustee's discretion is a question of fact, which could be answered differently from one fund to the next. Some trust deeds are very prescriptive when it comes to matters such as fees and investment options.
APRA says that the equivalency assessment should be conducted on a 'bundle of rights' basis and that a 'line by line' comparison of rights is not required. This sounds fine but neither a 'bundle of rights' basis nor a 'line by line' comparison are concepts of precise meaning and they do not seem to assist much with the task at hand.
Finally, although the equivalent rights test applies, by its terms, in respect of each member individually, APRA says that, in practice, 'it may be appropriate to consider equivalent rights based on groups of members with common characteristics'. This may be thought to sound sensible but again it directs attention away from what the test in fact requires.
MySuper to MySuper successor fund transfers
Superannuation trustees may be surprised to learn that 'all MySuper members have the same rights under Part 2C of the SIS Act' and that 'all MySuper products offer the same rights'. It is true that all MySuper products must satisfy a common set of core characteristics but this falls a long way short of all MySuper products conferring the same rights in respect of benefits.
Nevertheless, APRA considers that a successor fund transfer of members from a MySuper product to another fund's MySuper product 'would generally satisfy the equivalence test'. APRA specifically says that a transfer from a MySuper product with a single diversified investment strategy to a MySuper product with a lifecycle investment option would generally satisfy the test. However, it says nothing about whether a transfer from a lifecycle strategy MySuper product to a diversified strategy MySuper product would satisfy the test. If it would not, we think APRA should say so and give its reasons.
APRA says that a transfer between MySuper products with 'different features such as a different asset allocation or investment strategy, different applicable fees or different insurance offerings' would generally satisfy the equivalent rights test. When you think about it, a superannuation product is little more than a combination of an investment, insurance cover and fees. If some or all of these can be materially different, and yet rights in respect of benefits be assessed as equivalent, the legal protection would seem to have very little work to do.
What if equivalence cannot be satisfied?
APRA says that if a proposed SFT is prevented from proceeding, 'for example, if legal issues cannot be resolved', then a superannuation trustee would be expected to 'review its plans'. Quite. One might think that, in such a case, APRA would consider exercising, at the trustee's request, its power to amalgamate funds under Part 18 of the SIS Act. However, there is no mention of that power in the draft guidance.
Conclusion
In the fine print in its draft guidance, APRA says that its guides 'do not themselves create enforceable requirements'. It also says that it 'disclaims any liability for any loss or damage arising out of any use of this prudential practice guide'. However, perhaps the final version of the guide should point out that a superannuation trustee that finds itself defending a claim that the equivalent rights test was not satisfied will get no material benefit from telling the court that it relied on APRA's interpretation.