Challenges for the superannuation industry to overcome
Like all industries, superannuation is facing some immense challenges caused by the COVID-19 pandemic. Key among those challenges will be dealing with the fallout – both immediate as well as longer term – of the Government's announced changes to superannuation settings as part of its economic response to the pandemic. Virtually all aspects of a superannuation fund's operations will be impacted in some form or another, and we can also expect the regulatory reform agenda to shift in light of the current crisis.
The Coronavirus Economic Response Package Omnibus Bill 2020 has been passed and will amend the SIS Regulations to allow members to access up to $20,000 of their superannuation savings across the 2019-20 and 2020-21 financial years. Only one application for up to $10,000 can be made per financial year.
To apply, members must meet certain eligibility criteria, which include that they are unemployed, are receiving certain social security benefits, or on or after 1 January 2020, have been made redundant or had their working hours reduced by 20% or more. Members who are sole traders whose business has been suspended or has suffered a reduction in turnover of 20% or more can also apply. Members must make applications direct to the ATO. Once the ATO has made a determination in relation to the member's application, trustees will be required to pay benefits as soon as practicable, without requiring any additional application from members.
This extended early release option will be available for a period of six months following the amendments coming into effect (currently expected to be mid-April), although the Government may extend the measure beyond this timeframe, given the uncertainty as to how COVID-19 will progress.
Reduction in minimum drawdown rates for account-based pensions
In a bid to help pension and annuity account balances to recover from the economic shock stemming from the crisis, the minimum drawdown rates for retirees will be halved for the 2019-20 and 2020-21 income years, meaning that pensioners will be entitled to keep more money in the superannuation environment if they wish to do so.
Social security deeming rates
A reduction to the social security deeming rates has also been announced in recognition of the impact that a low interest rate environment has on an individual's expected savings income. From 1 May 2020, the upper deeming rate will be 2.25% and the lower deeming rate will be 0.25%, which the Government expects will mean an average increase of $105 to the Age Pension.
- Be ready for queries: The early release measure has been widely publicised in the media and forms a crucial part of the Government's financial assistance response. We expect the announcement will prompt a significant number of member enquires.
- Prepare communications: Fund websites should be updated as soon as possible with information about the new rules, its implications and links to the myGov website in preparation for when the changes take effect, which is expected to be mid-April. Information should also be published about the reduction in minimum drawdown rates where relevant, so that members can make a choice as to whether they wish to make changes to their drawdown amounts.
- Establish payment processes: Trustees should consider how they will confirm member identities and bank account details before payments are made. Paying benefits by way of cheque should be the option of last resort in the current climate as this typically requires members to physically visit a bank branch.
- Consider financial advice: There will be an important role for financial advice in supporting members who are considering whether to access their superannuation early (and take other steps such as moving investment options). Trustees should give thought to what steps they can take in either providing that advice (where they hold the appropriate authorisations to do so and have appropriate protections in place) or facilitating members' access to advice.
- Remember low balances: A watching brief should be kept on a possible increase in the number of low-balance accounts arising as a consequence of market movements or withdrawals. Processes for transferring accounts to the ATO and applying fee caps under the PYS legislation should be robust.
Funds will likely be able to pause or slow their preparations for a large number of upcoming regulatory changes.
APRA and ASIC have stated that many of their regulatory reforms will be suspended, but funds will need to await further announcements on some specifics.
The reform agenda previously slated to go before Parliament in the coming months will also be suspended. The Government has not made an official announcement on this – but in practice it will be on hold until at least Parliament's next sitting day, which has been postponed to 11 August 2020. This includes Treasury's Exposure Draft Bills to implement the last of the Financial Services Royal Commission Recommendations (a number of which had been proposed to commence on 1 July 2020).
Overall, funds can expect that:
- Supervision activities will be refocused. The regulators will switch their supervision focus to managing the response to COVID-19 and other serious or time-critical issues. ASIC regards outstanding customer remediation as being in this category and will work with businesses to accelerate payments. We expect the regulators may temporarily cut funds some slack on other existing or pending investigations (but funds cannot assume the issues will go away in the longer term).
- New regulatory measures may be introduced to respond to COVID-19. We expect the regulators will be actively considering whether any COVID-19 specific measures are required for funds.
- AFCA will consider COVID-19 circumstances when dealing with complaints. AFCA has said it will take into account the unprecedented circumstances (including if firms are not in a position to quickly act on requests for information). It has also said it will fast-track COVID-19 related complaints. Funds will need to be prepared to prioritise those complaints.
ASIC has said it may provide relief or waivers in response to difficulties faced by funds in the current environment. We expect APRA to adopt a similar approach. We recommend that funds be proactive in seeking relief where needed.