Trustees, start your reviewing! Super funds and the 'Member Outcomes Act': what needs doing, and when

Written by Partner Michelle Levy and Lawyer Zoe Chapman

Background

The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2019 was first introduced in the Senate in September 2017. One and a half years later, and with significant amendments, the Bill is now an Act, having passed both houses of Parliament and receiving Royal Assent on the same day, 5 April 2019.

The Act amends the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and the Corporations Act 2001 (Cth) (the Corporations Act) to introduce a number of wide-ranging and significant reforms, designed to 'deliver a more transparent and accountable compulsory retirement savings system'.¹

As most of the provisions commenced on the day after Royal Assent (6 April 2019), trustees of superannuation funds will need to start work now so that they are ready to undertake their annual outcomes assessments and hold their annual member meetings. They will also need to immediately review any services or benefits they provide to employers and their associates.

Ban on employer-sponsor incentives

What is it?

As reported in our earlier article, the Government amended the Bill in the Senate to expand the existing ban on employer-sponsor incentives. Section 68A of the SIS Act had contained a reasonably narrow restriction on trustees of superannuation funds and their associates offering or refusing to offer goods or services (or discounts, etc on goods or services) to employers. The prohibitions applied where the services and discounts were provided on the condition that one or more of their employees would be, or would apply or agree to be, members of the fund.

Recommendation 3.6 of the Final Report of the Financial Services Royal Commission stated:

Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts [summarised above] where the act may reasonably be understood by a recipient to have a substantial purpose² of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund.

The provision should be a civil penalty provision enforceable by ASIC.

The Bill takes recommendation 3.6 and goes further. From 6 April 2019, the new section 68A prohibits trustees and their associates from offering or refusing to offer goods or services (or discounts, etc on goods or services) to employers if that action could reasonably be expected to influence the fund to which the employer pays superannuation contributions, or encourages their employees to be members of the fund. The could 'reasonably be expected to influence' test is wider, and easier to satisfy, than the 'substantial purpose' test proposed by Commissioner Hayne.

Implications for trustees of superannuation funds

The Financial Services Royal Commission heard evidence in relation to corporate hospitality³, and it appears recommendation 3.6 may have been made in relation to submissions on that point. Nevertheless, the amendments to section 68A are broad, and would be likely to capture more than that, including, in some cases, services provided by trustees to employers on arm's length terms. Accordingly, trustees of superannuation funds should urgently review any services or benefits they provide to current and prospective employer-sponsors, to ensure their arrangements may not be 'reasonably expected to influence' fund choice.

Annual outcomes assessment

What is it?

The Act amends section 52 of the SIS Act to introduce new covenants that require trustees of superannuation funds to determine in writing 'annual outcomes assessments', which must be published on the fund's website 28 days after the determination is made.

The annual outcomes assessment is a two-fold exercise. First, for each MySuper or choice product, the trustee must determine whether the financial interests of the members who hold the product are being promoted by the trustee, having regard to a comparison of the MySuper or choice product with other MySuper or comparable choice products, and consider:

1. the fees and costs that affect the return to the members holding the product;
2. the return for the product;
3. the level of investment risk for the product;
4. whether the options, benefits and facilities offered are appropriate;
5. whether the investment strategy, including investment risk and return target, is appropriate;
6. whether the insurance strategy is appropriate;
7. whether any insurance fees inappropriately erode the retirement income of the members who hold the product; and
8. any other relevant matter, including those set out in the prudential standards.

Second, the trustee must determine whether it is promoting the financial interests of the members of the fund as a whole, as assessed against benchmarks specified in regulations.

Additionally, the Act requires trustees of superannuation funds that offer MySuper products to include an investment strategy for each MySuper product, and include in that strategy:

9. a 10 year investment return target for the assets attributed to the MySuper product; and
10. the level of risk appropriate to the investment of those assets.

The new 'annual outcomes assessments' covenants are consistent with but, in many ways, possess much wider terms, than the 'strengthening superannuation member outcomes' prudential package released by the Australian Prudential Regulation Authority (APRA) in December 2018 – comprising new Prudential Standard SPS 515 Strategic Planning and Member Outcomes, amended Prudential Standard SPS 220 Risk Management, and new Prudential Practice Guide SPG 515 Strategic and Business Planning and Prudential Practice Guide 516 Outcomes Assessment.

Implications for trustees of superannuation funds

The amended section 52 covenants commenced on 6 April 2019. This means the first annual outcomes assessment will need to be completed by 8 April 2020. The difficulty for choice products will be particularly acute because they must be reviewed against their 'comparable choice products'. As to what they are, we await regulations. The regulations may also prescribe other benchmarks against which MySuper and choice products will have to be assessed. In the meantime, trustees should not wait. They should start identifying and collating comparative data, beginning to benchmark each MySuper and choice product, and turn their mind to whether the financial interests of members are being promoted by the trustee in light of this data. Member communication teams (and the lawyers) might also think about what will be published. Each determination must be published on the fund's website no later than 28 days after the determination.

Authority to offer a MySuper product

What is it?

Until 6 April 2019, section 29T of the SIS Act provided that APRA must be satisfied that an RSE licensee is likely to comply with the enhanced obligations for MySuper products and the general and MySuper fee rules in order to authorise a MySuper product. Likewise, the current section 29U of the SIS Act permits APRA to cancel such authority if it is no longer satisfied the RSE licensee is likely to comply with those obligations and rules.

The Act amends sections 29T and 29U of the SIS Act to allow APRA to refuse or cancel an authority to offer a MySuper product if APRA has reason to believe the RSE licensee may fail to comply with the enhanced obligations for MySuper products or the general fee rules and the fee rules in relation to MySuper products. In relation to cancellation, APRA can form that view after a previous failure to comply with such obligations and rules, or for any other reason.

Implications for trustees of superannuation funds

The amended sections 29T and 29U of the SIS Act commenced on 6 April 2019. Trustees of superannuation funds should be mindful that the tests for getting a MySuper authorisation, and losing it, have shifted, giving APRA a slightly wider discretion to refuse to authorise a MySuper application, or cancel the authority to, offer MySuper products.

Director civil and criminal penalties

What is it?

The Act inserts sections 54B and 54C into the SIS Act to prohibit the contravention of a covenant that is to the effect of a covenant set out in sections 52 and 52A of the SIS Act. It also provides that the contravention of such covenants is a civil penalty provision as defined by section 193 of the SIS Act – with civil and, with the necessary dishonesty and intention, criminal consequences.

Implications for trustees of superannuation funds

These new sections will apply to all contraventions occurring on, or after, 6 April 2019. The obvious implication is that trustee directors will now be liable for civil (and potentially criminal) consequences for the breach of sections 52 and 52A covenants. Trustees of superannuation funds should urgently require their directors to undertake refresh training on sections 52 and 52A of the SIS Act – and their governance obligations more broadly.

Approval to own or control an RSE licensee

What is it?

The Act amends the SIS Act to allow APRA to refuse authority for a change in ownership or control where it has concerns about the RSE licensee's ability to satisfy its obligations. Importantly, new section 29JCB of the SIS Act imposes a strict penalty of 400 penalty units for each day on which the person holds a controlling stake in the RSE licensee without approval.

Additionally, under new section 131EB, APRA has the power to give a direction to a person to relinquish control of an RSE licensee, whether that person has a controlling stake or practical control of the RSE licensee, where APRA has reason to believe that because of that control, the RSE licensee has been unable to, or is likely to be unable to, satisfy one or more of its trustee covenants. Similarly to section 29JCB, a reckless or intentional failure to comply with a direction under section 131EB is an offence subject to 400 penalty units per day.

APRA's decision to refuse to give a person approval to hold a controlling stake in an RSE licensee, or to issue a direction to relinquish control, is merits reviewable in the Administrative Appeals Tribunal, under an amended definition of 'reviewable decision'.

Implications for trustees of superannuation funds

For all but section 29JCB, these new sections will apply on and from 5 July 2019. Section 29JCB (the penalty provision) will apply three months later, being 5 October 2019. For existing controlling stake holders, they are deemed to have an approval from APRA for their controlling stake.

APRA directions power

What is it?

As reported in our earlier article, the Act inserts a new part 16A in the SIS Act to 'strengthen APRA's supervision and enforcement powers' and 'include the power to issue a direction to an RSE licensee where APRA has prudential concerns'.⁴ The purpose being to 'align the directions powers in the SIS Act with similar reforms being made across the banking and insurance laws'.⁵

This new part 16A increases dramatically the breadth of the directions (and the circumstances in which APRA can use them) to include directions:

1. to comply with Superannuation Law;
2. to remove or appoint a responsible officer;
3. to order an audit or order an actuarial investigation;
4. to remove or appoint an auditor or actuary;
5. not to accept contributions;
6. not to borrow any amount;
7. not to accept any new liability or discharge any existing liability to any person;
8. to make changes to the RSE licensee's systems, business practices or operations;
9. to do, or refrain from doing, 'anything else' in relation to the affairs of the RSE licensee.

APRA now has power to give a direction to an RSE licensee and, in some cases, their connected entities, where:

1. APRA has a reason to believe that the RSE licensee either has, or is reasonably likely to, contravene its prudential obligations; or
2. certain financial risks are present, or there are risks to the interests of the members of the fund or the financial system more generally.

Implications for trustees of superannuation funds

These amendments apply to events that occur on or after 6 April 2019. As noted above, APRA's new powers are expansive, and there is little limitation on their use. Trustees of superannuation funds will need to examine any exercise by APRA of its new powers, as well as any statements APRA makes about when and how it will use them.

Portfolio holdings disclosure

What is it?

The current section 1017BB of the Corporations Act will be repealed and substituted for an amended obligation to publicise investment information. In summary, for each investment option, trustees must publicise information about the investments they, or an associated entity, invest in. Information about investments in the first non-associated entity must be disclosed, but not in subsequent non-associated entities. In detail:

• trustees of superannuation funds must make the following information about each investment option publicly available on its website no later than 90 days after each reporting day (which occurs after 31 December 2019):
  • sufficient information to identify each investment item allocated to that investment option – called a 'disclosable item', and the value and weighting or exposure, at the end of the reporting day; and
  • the total value, and the total weighting or exposure, of all disclosable items, at the end of the reporting day;
• however, this obligation will not apply to the trustee if:
  • the investment option has been closed to new members for at least 5 years;
  • the investment item is not a material investment;
  • the investment item is invested solely to support a defined benefit interest; or
  • the investment item is invested in a life policy.

There is an exception. The new portfolio holdings disclosure rules will not apply to the trustee for up to five per cent of the investment items (other than derivatives) if those investments are commercially sensitive, and making information publicly available about them would be detrimental to the interests of members. Each trustee can determine which investment items make up that five per cent.

Implications for trustees of superannuation funds

The commencement date for the new portfolio holdings disclosure regime under the Act is 31 December 2019. ASIC has announced it will continue the deferral of choice product dashboards, but does not appear to be planning any further deferral for portfolio holdings disclosure.

Initial industry concern about look through requirements (in the earlier formulation) have been listened to. However, the concern about confidentiality will be relevant at the first non-associate entity level. Accordingly, trustees of superannuation funds should review their investment management agreements to ensure that disclosure is permitted or understood by their investment managers to be required.

Annual members' meetings

What is it?

In our introduction, we stated the object of the Act is to increase transparency and accountability in Australia's superannuation system. Trustees of superannuation funds must provide annual reports and periodic statements, and provisions of the Corporations Act like other financial product issuers, give members the right to ask for certain information from trustees.

The Act now goes further still, introducing annual members' meetings to provide an avenue for members to 'directly engage with the trustee and ask questions' – an 'effective way for trustees and funds to identify and respond to issues that are of interest to their members'.⁶

Sections 29P-29PE will require RSE licensees to hold annual members' meetings, and:

1. notice of the meeting (which must be sent to certain people, and contain certain information) must be sent no later than 6 months after the end of the fund's financial year, and at least 21 days before the meeting;
2. the meeting must be held within 3 months after the notice is given;
3. it appears the meeting can be held electronically;
4. a quorum of directors, the responsible officers, the auditor and the actuary of the fund must attend the meeting;
5. the RSE licensee must give members reasonable opportunities to ask questions about the RSE licensee, any audit or actuarial investigation or any other information included in the notice of meeting;
6. the directors, responsible officers, auditor and actuary must answer such questions – these obligations carrying penalties of 50 penalty units – unless:
   1. the question is not relevant to an action or omission by the RSE licensee in relation to the fund, or one or more members of the fund;
   2. it would be in breach of the fund's governing rules, the SIS Act or any other law; or
   3. answering the question would result in detriment to the members of the fund taken as a whole; and
7. lastly, minutes of the meeting must be made available on the RSE licensee's website.

Implications for trustees of superannuation funds

Sections 29P-29PE commence on 6 April 2019. That means the first annual members' meetings must be held in respect of the entity's year of income, beginning on or after 8 April 2019.

1. prepare to send notices of meeting;
2. decide whether a meeting will be held at a venue or electronically; and
3. prepare to answer questions in relation to the fund.

Finally, while the risk of 'shareholder activism' is probably lower in respect of superannuation funds, trustees should be aware of, and prepare for, any potential questions dealing with investment choice and investment risk – eg, questions in relation to investment performance, service providers and ESG policies. There may also be a risk that members who have had personal complaints about disablement benefits and the like may raise them at the annual members' meeting. RSE licensees and their officers must be prepared to answer all of these questions.