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Unravelled: APRA's guidance on the Protecting Your Super changes

16 May 2019

Written by Senior Regulatory Counsel Michael Mathieson

On 8 May, APRA released its answers to some 'frequently asked questions' about the Protecting Your Super changes. I would politely suggest that the questions asked and answered by APRA make up a fairly small subset of the questions that are, in fact, being asked (in some cases very frequently) about the PYS changes. Even so, I would like to say something about some of APRA's answers.

3% fee cap for account balances under $6,000

Applying the cap 'at the product level'

APRA asks whether the 3% fee cap applies 'at the product level or to a member's entire interest in the fund?'. The answer provided by APRA is, in one sense, uncontroversial – the fee cap applies 'at the product level', meaning it applies separately in relation to each MySuper product or choice product for a member within a superannuation fund. However, the answer is also incomplete. This is because the legislation also makes it clear the cap applies in relation to an 'account balance'. An account balance may often be, but need not always be, co-extensive with a MySuper product or a choice product.

Where an account balance spans more than one MySuper or choice product, APRA's answer covers the situation (more or less) – the cap applies in relation to so much of the account balance as relates to one product and, separately, to so much of the account balance as relates to the other product. However, it is equally possible to have two account balances within the one product. Assume, for example, that the account-based pension division of a superannuation fund comprises a separate choice product. Assume also that a member has two account-based pensions, each with a separate account balance. In that case, the cap would apply separately to each account-based pension. They would not be aggregated for the purpose of applying the fee cap.

Applying the cap to the 'a member's investment choices'

APRA then asks: how does the fee cap 'apply to a member's investment choices?'. APRA's answer is, again, uncontroversial – the cap 'applies to each of a member's choice products individually', with the consequence that a trustee 'will need to determine whether a member's investment choices are part of a single choice product, or whether they are individual choice products'. I agree. However, a trustee will need to arrive at an authoritative determination of the nature and number of choice products within its superannuation fund, not only for the purpose of the 3% fee cap, but also for the purpose of the annual member outcomes assessment, the first of which must be carried out by 6 April 2020.

More specifically, a trustee will likely want to ensure its determination makes sense having regard to the concept of a 'comparable choice product' that it will be required to use under the annual member outcomes assessment. However, the concept of a 'comparable choice product' is to be prescribed by regulation, and at this stage we have neither the regulation nor even an exposure draft. And yet, a trustee does not have the luxury of time (to wait and see what the concept might look like), as it needs to work out, now or very shortly, how to apply the fee cap. It is an invidious situation for trustees.

Flat dollar administration fees where an account spans multiple products

In order to consider the last question asked and answered by APRA, it is necessary to remember how, in many cases, the division between MySuper products and choice products was implemented back in 2013.

Suppose the superannuation fund had a pre-existing default option, being the balanced option. This was rebadged as the fund's generic MySuper product, with no corresponding balanced option being created for the choice product. So, when a MySuper member made an investment selection, under which they switched some of their account balance to one or more other investment options, but left the rest in the balanced option, they continued to be a MySuper member with a MySuper product, but also became a choice member with a choice product. And because of the MySuper fee-charging rules (which largely prohibit differential fees), any flat dollar administration fee was said to be wholly referable to the MySuper product (and it was also said not to be referable at all to the choice product).

Fast forward to 2019, and the 3% fee cap is bearing down on us. As explained, the cap needs to be applied separately to the member's MySuper product and to their choice product. In the scenario I have outlined, how does APRA say the flat dollar administration fee should be treated? Regrettably, APRA does not answer that question. Instead, it says: 'Single flat dollar based fees that apply to MySuper products must be treated separately to single flat dollar based fees that apply to choice products'. In this way, APRA answers a small question but, unfortunately, leaves unanswered the much larger question of how to apply the fee cap in the scenario I outlined.

APRA then goes on:

However, for accounts where a single flat dollar based fee applies across choice products, an RSE licensee may allocate the fee across the choice products on a proportion of assets basis. For example, a choice product holding 90% of an account's assets would account for 90% of the single dollar based fee for the purpose of applying the fee cap.

The legal basis for this statement is not clear. At least, it is not clear to me.

Opt-in insurance for inactive accounts

Opt-in elections to be 'in writing'

I will confess that, when I learnt APRA had issued FAQs on the PYS changes, I was very eager to see what APRA would say about the requirement for opt-in elections to be 'in writing'. Alas, I was disappointed – this was another of many topics not dealt with. In recent months, I have heard many interesting views on what the words 'in writing' may (or, more to the point, may not) require. I am not sure all of them were entirely sound. I do think the electronic transactions legislation should be amended so that it is brought into the 21st century - otherwise, it should be repealed.

Investment strategy changes

APRA asks whether changes in a member's investment strategy are a sign of activity by the member, and answers: 'No'. This is not one of the harder PYS questions, nor one that, in my experience, is being asked very frequently (or at all).

Ensuring a benefit is not provided by taking out or maintaining insurance

One of the harder PYS question is what, precisely, a trustee must do to ensure a benefit is not provided by taking out or maintaining insurance. APRA simply says:

On and after 1 July 2019, trustees must stop providing insurance that is provided under a product to any member who has not opted in and whose product has been inactive for a continuous period of 16 months or more.

I do wish APRA had grappled a little more with my hard question and dealt with practical matters such as cancellation activities and reinstatement considerations.

ATO transfer for inactive low-balance accounts

On this last topic, APRA sets out, for the most part, the ATO's views on a number of questions, and refers the reader to the ATO website for more information.

APRA does ask whether a transfer to an eligible rollover fund, or a successor fund transfer, would 'reset' (specifically, restart) the period of inactivity. The ATO view is that it does. APRA goes on to say:

Given this, APRA expects that when undertaking any account transfers including SFTs, RSE licensees consider the implications of these transfers to ensure that account consolidation is not avoided or delayed contrary to the best interest of members.

To this I would simply say that a delay in transferring at least some inactive low-balance accounts to the ATO is not necessarily inconsistent with the best interests of members. Indeed, it is pretty easy to think of cases where such a delay would likely be eminently sensible.

Other articles in this edition of Unravelled

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Compensating superannuation members for 'fees for no advice'
APRA and ASIC issued a joint letter to all RSE licensees entitled 'Oversight of fees charged to members' superannuation accounts' in early April. The letter is in response to the so-called 'fee for no advice' issue that attracted so much attention in the Royal Commission.
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