Your guide to the 'Your Future, Your Super' package reforms

By Geoff Sanders, Katerina Dandanis
APRA Financial Services

In brief 8 min read

Consultation is now open on the Government's 'Your Future, Your Super' package.

As foreshadowed on Budget night, the package seeks to make three key changes to the current superannuation regulatory regime:

  1. introduce a new annual test for 'underperformance' of products (with associated consequences for failing that test);
  2. amend and arguably extend the current best interests test applying to the conduct of trustees and directors; and
  3. require employers to make contributions for new employees that join their organisation from 1 July 2021 onwards to a 'stapled fund' for that employee.

While much can and will be written about the relative pros and cons of each of those reforms (see our Insights here and here for just a start), we have set out below a slightly drier summary of each of the reforms to assist trustees and others to understand the nature of the changes.

For those looking to provide comment, submissions are due by 24 December 2020.

A new annual performance test of product underperformance

The exposure draft bill seeks to introduce a new Part 6A – Annual performance assessments into the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) that:

  • requires APRA to conduct an annual performance test each financial year for MySuper products and certain other products specified in regulations (which the exposure draft EM suggests will include trustee-directed products), starting on or after 1 July 2021 for MySuper products and on or after 1 July 2022 for other products;
  • allows the regulations to specify requirements (eg in respect of investment returns net of fees) or other considerations in respect of the detail of the underperformance test, including a suggestion in the exposure draft EM that regulations could provide a threshold minimum number of years of performance for a product to be subject to the test while allowing APRA the ability to nonetheless test the performance of products with a shorter performance history where the need arises;
  • requires a trustee to notify beneficiaries who hold a product of a 'fail' assessment of that product within 28 days after receiving notification from APRA – the content requirements will be specified in regulations, but the exposure draft EM makes clear that 'a superannuation product’s underperformance must be explained prominently, clearly and concisely to beneficiaries' and suggests regulations could require the notification to include a link to the new YourSuper comparison tool;
  • provides that, if APRA gives a trustee a 'fail' assessment for a product for a second consecutive financial year, the trustee will be prohibited from accepting any new members to the fund into that product (or allowing existing members of the fund to switch to that product) on and from 'the day' that notification is given – the exposure draft EM doesn't give any guidance as to how this can reasonably be expected to be implemented instantaneously (but we can only assume APRA will give affected trustees sufficient pre-warning that a notification is coming); and
  • allows APRA to determine that this prohibition may be lifted – that is, the product may re-open to beneficiaries when its performance has improved (as assessed against requirements to be specified in regulations).

The detail on perhaps the most important (and controversial) aspect of the new regime – how exactly APRA will rank products – is deferred to the regulations, so we will have to wait for further on that for the time being.

What we do know for now is that the exposure draft bill introduces the mechanism in new section 348B of the SIS Act for regulations to specify one or more formulas (from which APRA may be able to choose) as the basis for APRA's product rankings according to 'relative fee levels, investments returns or any other criterion'. The rankings will be published on an interactive website maintained by the ATO to assist beneficiaries to compare and select a superannuation product.

Also worth noting in respect of the implementation of the new underperformance test is that:

  • The exposure draft bill bolsters trustees' SIS covenants to reflect the amendments. That is, it introduces new section 52(14) to include covenants for the trustee to meet its requirements where it fails its annual performance assessment once or on two consecutive occasions, and new section 52(9)(a) to require a trustee to have regard to APRA's latest annual performance assessment for a product in making its own determinations for the purposes of its annual outcomes assessment for the same product.
  • There is an anti-avoidance provision which is designed to ensure that trustees cannot avoid being subjected to performance tests or the consequences of failing two consecutive tests – that is, a power for APRA to combine the performance tests for two separate products in circumstances to be specified in regulations (which the exposure draft EM suggests could include where a trustee has transferred members into a new but substantially similar product so no single product has failed the test in two consecutive years).
  • The exposure draft bill provides APRA with the power to make prudential standards in relation to 'resolution' planning – that is, the process by which APRA may manage or respond to a trustee, fund or connected entity of a trustee being unable (or being considered likely to be or become unable) to meet its obligations or suspending payment (or being considered likely to suspend payment).

The revised 'best financial interests' duty

With effect from 1 July 2021, the exposure draft bill seeks to achieve the following:

  • Most importantly, it will substitute the existing best interests duties of trustees and directors in sections 52 and 52A of the SIS Act with a 'best financial interests' duty – the exposure draft EM provides that 'how any action will yield financial benefits to the beneficiaries of the superannuation entity must be the determinative consideration' that, while arguably largely consistent with how the legal community has been interpreting the existing best interests duty to date, potentially demonstrates at least a desire of Parliament to go further than current practice given the nature of examples provided of acting and not acting in the best financial interests of beneficiaries set out in the EM.
  • The new rules also seek to make clear that the substituted best financial interests duty applies in respect of payments to a third party 'by, or on behalf of, the fund' – that is, it goes further than payments made by the trustee only. While we expect the legislative drafting may need some adjustment if it is to actually achieve this, the exposure draft EM suggests that this change would require a trustee to conduct reasonable due diligence when assessing payments to a third party and have oversight that the third party is using a payment made by the trustee for the intended purpose (including to ensure that, in service arrangements, the services ultimately provided to the fund satisfy the best financial interests duty), reflecting an expectation that trustees should reasonably know what the payments they make are purchasing.
  • The changes will also reverse the onus of proof for best financial interests breaches pursued by a regulator, such that new section 220A of the SIS Act provides that, in civil proceedings relating to a trustee or a director's duty to act in the best financial interests of beneficiaries, the presumption is that the trustee or director did not act in the best financial interests of beneficiaries unless they could produce evidence to prove otherwise on the balance of probabilities. The exposure draft EM notes that trustees will need 'robust quantitative and qualitative evidence to support their expenditures' as a result of this change and we expect trustees will need to carefully reconsider their current decision-making process in order to comply.
  • Finally, the changes introduce two new offences: a strict liability offence if a trustee contravenes an operating standard that relates to a record-keeping obligation, and an offence if a director was in a position to influence the conduct of the trustee and failed to take all reasonable steps to prevent the trustee from contravening an operating standard that relates to a record-keeping obligation.

While we will have to wait and see whether any regulations are made under this power, it is notable that the exposure draft bill seeks to introduce new sections 117A and 117B into the SIS Act that prohibits a trustee from making (and requires a director to ensure the trustee does not make) certain payments or investments prescribed by the regulations. The exposure draft EM doesn't give much away as to what may be prohibited, other than to note the power is broad and would include expenses associated with running a fund.

For further commentary, see Super, simplified (or is it?).

Single default account / 'stapling'

In respect of an employee's employment that starts on or after 1 July 2021 (for the duration of that employment and any subsequent employment), the exposure draft bill seeks to:

  • introduce new section 32C(1A) into the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) to allow an employer to satisfy its obligations under the choice of fund rules by making a contribution on behalf of the employee to the employee's 'stapled fund', provided that the employee has no chosen fund and the employer has requested the Commissioner of Taxation (Commissioner) to identify whether the employee has a stapled fund, and the Commissioner has notified the employer that he/she does; and
  • amend the SGAA to prohibit an employer satisfying the choice of fund rules by making contributions to the employer's default fund (or a fund specified in a workplace determination or an enterprise agreement made before 1 January 2021) if an employee has a stapled fund – that is, the prohibition seeks to ensure that an employer doesn't create a new superannuation account for an employee that has a stapled fund.

The definition of 'stapled fund' is subject to requirements to be prescribed by regulations – the exposure draft EM suggests the regulations will cover basic requirements (eg that the fund be an existing fund of the employee and able to accept contributions), 'tie-breaker rules' where an employee has multiple existing funds (eg with consideration to recent activity and account balances) and when a fund ceases to be a stapled fund for an employee.

Consequential amendments are proposed to ensure that a requirement in a state or territory law, or a provision of a federal or territory industrial award, for contributions to be made to a particular fund are not enforceable to the extent that an employer instead makes contributions to a stapled fund.

For further commentary, see A 'single default account' - your superannuation follows you.

Stay informed

Subscribe to our insights and updates