Commonwealth Numbered Regulations - Explanatory Statements

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SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS (AMENDMENT) 1995 NO. 384

STATUTORY RULES 1995 No. 384

Issued by the authority of the Treasurer

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Regulations (Amendment)

The Superannuation Industry (Supervision) Act 1993 (the Act) and the Superannuation Industry (Supervision) Regulations (the Principal Regulations) provide for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by the Insurance and Superannuation Commissioner.

Section 353 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.

These regulations amend the Principal Regulations by making a number of miscellaneous amendments to the Principal Regulations including:

•       exempting from the member-protection standards unitised funds (i.e. funds in a member's benefits are determined by the number of units they hold in the fund) if the only reason the fund is not currently exempted from the member-protection standards is because it applies brokerage costs in the form of a buy/sell cost spread (i.e. the difference between the prices at which the units in the fund are bought and sold) and those brokerage costs are calculated as a percentage of the unit price;

•       providing that the member-protection standards set out in the Principal Regulations do not apply to traditional life insurance policies (i.e. policies where the payment of a premium entitles the holder to a given sum assured and which do not separately identify between fees, investment returns and insurance costs) and to benefits that a member receives in pension form; and

•       providing that excluded funds (i.e. a superannuation fund with less than five members or an approved deposit fund with only one beneficiary) are subject to the operating standard requiring them to formulate and give effect to an investment strategy having regard to, amongst other things, risk and return, diversification, cash flow needs and liabilities.

These amendments are mainly aimed at enhancing the operation of the member-protection standards, which have the purpose of protecting members with small amounts (generally speaking, those with withdrawal benefits of less than $1,000) and lost members (generally speaking, a member who is uncontactable).

The regulations are described in detail in the attachment.

Regulation 5 commences on 1 July 1996. The remainder of the regulations commence on gazettal.

ATTACHMENT

Superannuation Industry (Supervision) Regulations (Amendment)

Regulation 1 - Commencement

Regulation 5 will commence on 1 July 1996. The remainder of the regulations will commence on gazettal.

Regulation 2 - Amendment

Regulation 2 provides that the Superannuation Industry (Supervision) Regulations (the Principal Regulations) are amended as set out in these Regulations.

Regulation 3 - Regulation 1.03 (Interpretation)

Subregulation 1.03(3) of the Principal Regulations currently provides that in determining whether a member is a protected member the member's benefits are taken to contain mandated employer-financed benefits unless the trustee knows otherwise.

Regulation 3 amends subregulation 1.03(3) so as to allow trustees to use a reasonable assumption as to the source of a member's benefits up until and including 30 June 1995.

This means for contributions made before 1 July 1995, trustees who have classified such contributions (and benefits arising from them) on the basis of a reasonable belief will not have to go back and establish the character of the contributions (and benefits arising from them) with certainty. However, for all contributions made on and after 1 July 1995, trustees will have to treat the benefits arising from such contributions as mandated employer-financed benefits unless they can establish with certainty that the benefits are not mandated employer-financed benefits.

Regulation 4 - Regulation 2.05 (Members to whom trustees are not required to give information)

Regulation 4 amends subregulation 2.05(1) of the Principal Regulations in two ways:

1. Subparagraph 2.05(1)(a)(i) is amended so as to correct a drafting error.

2. A new paragraph 2.05(1)(c) is inserted that provides that a trustee of a superannuation entity need not give information to a member in the following circumstance:

•       the superannuation entity has had the member transferred to it; and

•       the transferring fund has already satisfied the other provisions of subregulation 2.05(1) in respect of the member (i.e. the member is already missing for disclosure purposes).

The original intention of the regulation was that, in these circumstances, the transferee fund would not have to verify that the member is missing, but rather could rely on the notification by the transferor fund that the member is missing for disclosure purposes. This amendment enables this intention to be fulfilled.

Regulation 5 - Regulation 4.09 (Operating standard - investment strategy)

Paragraph 52(2)(f) of the Superannuation Industry (Supervision) Act 1993 requires trustees of all superannuation entities to formulate and give effect to an investment strategy having regard to, amongst other things, risk and return, diversification, cash flow needs and liabilities. At present, these requirements are also adopted as an operating standard in Principal Regulation 4.09, but not for excluded funds.

Regulation 5 amends subregulation 4.09(1) of the Principal Regulations with the effect that excluded funds are now subject to this operating standard. This applies from 1 July 1996.

Regulation 6 - Regulation 5.01 (Interpretation)

Regulation 6 amends subregulation 5.01 (2) of the Principal Regulations so as to correct a drafting error.

Regulation 7 - Regulation 5.14 (Member-protection standards not to apply to certain funds)

Regulation 7 amends regulation 5.14 of the Principal Regulations for two reasons:

1. To make it clearer to which funds the regulation applies and in what situations the regulation applies to them.. With the exception of the inclusion of a provision regarding unitised funds which apply brokerage costs (see below in point 2), the amended regulation is intended to have the same scope as the existing regulation, i.e.:

•       the member-protection standards do not apply to unitised funds where all administration costs are reflected in the price of the units (new paragraph 5.14(2)(a)). This is because these funds are, in effect, complying with the member-protection standards;

•       where all administration costs are not reflected in the unit price (e.g. an account keeping fee applies), the unitised fund must ensure that the benefits of its members are protected in a manner consistent with the member-protection standards (new paragraph 5.14(2)(c)); and

•       the member-protection standards do not apply to a non-unitised fund where the administration costs of the fund are applied in direct proportion to the investment return applying to the member or the member's benefits (new subregulation 5.14(3)).

2. To include a provision regarding unitised funds who apply brokerage costs.

Brokerage costs for some unitised funds are charged in the form of a buy/sell cost spread (i.e. the brokerage cost is a component of the differential between the price at which units are bought and sold) with the amount actually charged being a percentage of the unit price. A fund that charges brokerage costs in this manner would currently not necessarily be able to be exempted under subregulation 5.14(2) (note in particular the effect of subregulation 5.14(1 A)).

Regulation 7 inserts a new paragraph 5.14(2)(b) into the Principal Regulations to specifically deal with a unitised fund which applies a buy/sell cost spread.

For such a fund to be able to be exempted from the member-protection standards, this buy/sell cost spread must be wholly comprised of brokerage costs applied proportionally to all units in the fund (i.e. applied proportionally to the unit price) and those fees and charges charged against a member's benefits which are not administration costs under subregulation 5.01(1), i.e.:

•       if the member was a member of the fund as at 30 June 1995, the exit fee applicable to the member's benefits at that date;

•       the cost of providing to the member an insured death benefit, or an insured permanent or temporary incapacity benefit; and

•       taxation costs.

In addition, all administration costs of the fund, except for brokerage costs referred to above, must be reflected in the unit prices if the fund is to be exempted.

The effect of this new paragraph is to provide that if the only reason a unitised fund is not currently exempted from the member-protection standards is because it applies brokerage costs in the form of a buy/sell cost spread then, provided those brokerage costs are calculated as a percentage of the unit price, the fund will now be exempted.

Regulation 8 - New regulations 5.15C an 5.15D

Regulation 8 inserts two new regulations into the Principal Regulations:

1. A new regulation 5.15C is inserted. This new regulation provides that that part of a member's benefits which has commenced to be taken in the form of a pension is not subject to the member-protection standards.

This is consistent with the policy intention that the member-protection standards apply during the build up stage of benefits but not the dissipation stage (that is, it would not be appropriate for them to apply simply because, for example, the member has chosen to withdraw amounts from the pension account).

2. A new regulation 5.15D is inserted. This amendment provides that that part of the member's benefits which is wholly determined by "traditional" life insurance policies is excluded from the member-protection standards.

Traditional life insurance policies, also referred to as "bundled policies", are a form of life insurance where the payment of a premium entitles the holder to a given sum assured. This sum is payable on the death of the policyholder, or the maturity of the policy, whichever occurs first.

These policies do not identify separately between fees, investment returns and insurance costs. Rather, these amounts are all included into the premium that the policy holder pays. It is therefore almost impossible to directly apply the member-protection standards to these policies. and as a result the Government has decided that they should be excluded from the member-protection standards in the Principal Regulations. Instead, appointed actuaries of life offices will ensure that new traditional fife insurance policies are only written where the terms are consistent with the member-protection standards.

Regulation 9 - Regulation 5.17 (Member-protection standards)

Regulation 9 amends Principal Regulation 5.17 in two ways:

1. Paragraph 5.17(9)(b) is amended so as to enable trustees to extend to lost members the same sort of treatment as protected members can already receive in bad investment periods under subregulation 5.17(6), i.e. funds can charge an amount equal to the investment return credited to the member's benefit, plus $10. This amendment has no practical effect until the lost member protection rules commence, i.e. 1 July 1996.

2. Subregulation 5.17(10) is amended so as to allow trustees to use a reasonable assumption as to the source of a member benefits up until and including 30 June 1995.

The amendment to subregulation 5.17(10) means that for the purposes of regulation 5.17, trustees who have classified contributions made before 1 July 1995 (and benefits arising from them) on the basis of a reasonable belief will not have to go back and establish the character of the contributions (and benefits arising from them) with certainty. However, for all contributions made on and after 1 July 1995, trustees will have to treat the benefits arising from such contributions as mandated employer-financed benefits unless they can establish with certainty that the benefits are not mandated employer-financed benefits.

Regulation 10 - Regulation 11.08 (Information regarding lost members to be provided to Commissioner)

Regulation 10 amends subregulation 11.08(3) of the Principal Regulations so as to ensure that lost members need only be reported when they do not already appear as lost on the register, i.e. they will only need to be reported when they become lost (under paragraph 11.08(3)(a)) and when they cease to be lost (under paragraph 11.08(3)(b)). This removes an anomaly that currently exists in the legislation that requires a lost member to be reported to the Commissioner every half-year. even if they have already been reported.

The amendment introduces a 'reasonable belief' provision which will mean trustees who have already reported a particular member lost, and who have no reason to doubt that the member is still recorded as lost on the register, will not have to again report the member.

Where a trustee is aware that a member has been reported lost, then ceased to be lost (and thus is no longer recorded as lost on the register), and then becomes lost again, the trustee will need to report the member as lost when the latter event occurs (as they will not be able to rely on a reasonable belief that the member is recorded as lost on the register).