Government Responds To Productivity Commission Report On Superannuation Legislation

The Federal Government's final response to the Productivity Commission's review of the Superannuation Industry (Supervision) Act 1993 and other superannuation legislation was released today by the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan.

"The Government has agreed to a number of the Productivity Commission's recommendations, highlighting the Government's commitment to improving Australia's superannuation system," Senator Coonan said.

In its interim response, the Government noted that it did not want to pre-empt the outcome of other examinations of superannuation that were under way at the time, including the activities of the Superannuation Working Group (SWG).

The Government is already implementing a number of the Commission's recommendations through its response to the SWG's report on Options for Improving the Safety of Superannuation and through its superannuation election commitments.

"The Commission recommended that all trustees of super funds be licensed and that trustees be required to prepare and submit a risk management plan to APRA," Senator Coonan said.

"Similar proposals were put forward by the SWG and exposure draft legislation has already been released for industry consultation which includes proposals to implement these important reforms".

The Commission also looked at improving the accessibility of superannuation by raising the maximum age limit for personal superannuation contributions. This measure was part of the Government's election commitments and from 1 July 2002, the maximum age limit for personal superannuation contributions was lifted from 70 to 75.

Similarly, recommendations to allow temporary residents to access their superannuation benefits upon permanent departure from Australia formed part of the Government's election commitments and commenced from 1 July 2002.

In addition, in its response to the Commission's report, the Government has committed to examining the current requirements around compliance audits and the feasibility of repealing the Occupational Superannuation Standards Regulations Application Act 1992.

The final Government response is attached.

(An interim response was released on 17 April 2002.)

THE GOVERNMENT'S RESPONSE TO THE RECOMMENDATIONS CONTAINED IN THE PRODUCTIVITY COMMISSION REPORT INTO SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993 AND CERTAIN OTHER SUPERANNUATION LEGISLATION

Recommendation 4.1

The net tangible assets requirement for approved trustees should be strengthened through legislative amendment. All approved trustees which use an external custodian should be required to have an amount of net tangible assets (or approved guarantee or combination thereof) that is related to the value of assets under trusteeship, subject to specified minimum and maximum amounts in a manner similar to that required under the Managed Investments Act. Approved trustees who do not use custodians should continue to be required to have $5 million net tangible assets (or equivalent) in their own right.

Response

Not supported

On 28 October 2002, the Government announced a range of reforms to the prudential framework for superannuation following the work undertaken by the Superannuation Working Group (SWG). However, the SWG did not recommend changes to the net tangible assets requirement for approved trustees.

As noted in the Government's response to the report of the SWG, the Government supports, in principle, a risk-sensitive framework for the holding of capital to address operational risk. However, it considers that the combination of requirements that each trustee be licensed by the Australian Prudential Regulation Authority (APRA), and prepare a risk management plan, will substantially address concerns relating to operational risk.

The Government agrees that for approved trustees the holding of net tangible assets is seen as a commitment to deal with matters for which the trustee is responsible. However, it notes that the other reforms recently announced also add to the obligations for trustees to address areas of concern. As such, the Government will revisit the net tangible assets requirement for approved trustees should the other reforms not adequately address prudential concerns that the net tangible assets requirement is principally designed to address.

Recommendation 4.2

The eligible and liquid assets requirements for approved trustees should be revised so as to require all approved trustees to have sufficient liquidity. The requirement could be cast in terms similar to that required of responsible entities under the Managed Investments Act.

Response

Not supported

The Government has decided not to amend requirements for net tangible assets at this time. The Government believes that, as a prudential tool, the existing provisions for approved trustees should be retained until other reforms recently announced can be assessed. Should these reforms not adequately address prudential concerns, net tangible asset requirements will be revisited.

Recommendation 4.3

All trustees of superannuation entities regulated by APRA should be required to prepare a risk management strategy which addresses the various risk faced in management of funds, such as operational, investment and governance risk. Trustees should be required to obtain approval of these strategies from APRA and have them audited each year as part of their compliance audits.

Response

Agreed

On 28 October 2002, the Government announced a number of reforms to the superannuation framework, including the requirement that all trustees of APRA regulated funds prepare risk management plans (RMPs).

The Government believes RMPs will strengthen monitoring by trustees and help ensure that risks are adequately identified, considered and addressed.

The SIS Act will be amended to require all trustees to prepare a risk management strategy (RMS) for itself and an RMP for each fund under its trusteeship. The RMS and RMP will demonstrate arrangements trustees have in place to mitigate relevant risks including risks relating to investment, outsourcing, governance and risk management more broadly (including a requirement for a fraud control plan), as well as compliance with the legislation. As a pre-condition for fund registration, trustees must certify that the RMP meets APRA's requirements.

Other requirements will include that the RMS and RMP be signed off by the trustee; changes of a material nature to be advised to the regulator and members; an annual independent audit of both the RMS and the RMP, the RMP to be available to fund members; and other issues as considered necessary.

Trustees will be required to comply with the conditions of both the RMS and RMP on an ongoing basis, both for the trustee and the fund. This would include reviewing both when significant events or circumstances require them to be altered.

Recommendation 4.4

APRA, in conjunction with relevant parties, should review the need to confine the responsibility for a compliance audit to an approved financial auditor.

Response

Agreed

The Government will review current requirements for approved financial auditors to perform compliance audits.

The Government is committed to ensuring that auditing, be it compliance or financial auditing, satisfies the highest acceptable standards. It is noted that approved auditors are registered company auditors and will be subject to proposed changes to the Corporations Act 2001 under the forthcoming package of reforms under the Corporate Law Economic Reform Program No.9 - Corporate Disclosure.

Recommendation 4.5

APRA, in conjunction with relevant parties, should review the need to confine certain tasks in respect of accumulation funds to Members or Fellows of the Institute of Actuaries of Australia.

Response

Agreed

The Government will review current requirements for Members or Fellows of the Institute of Actuaries of Australia to perform certain tasks in relation to accumulation funds.

The Government supports measures to minimise compliance costs, subject to appropriate standards being maintained.

Recommendation 5.1

Age and employment requirements governing contributor status and compulsory cashing of benefits should be simplified. The most effective means of doing so would be removal of the employment tests, while limiting any adverse implications for taxation revenue by measures such as reasonable benefit limits and age-based deductible limits. Consideration should also be given to raising the age at which benefits must be compulsorily cashed.

Response

Noted

On 1 July 2002, the Government raised the maximum age limit for personal superannuation contributions from 70 to 75. Furthermore, the Government eased from 30 hours per week to 10 hours per week the work test requirement for people aged above 70 but less than 75 to avoid compulsory cashing of superannuation benefits. The Government continues to monitor the operation of Australia's retirement income system with a view to ensuring that it provides positive outcomes for all Australians in an efficient manner.

In this context, the Government has asked Treasury to review the monitoring requirements for superannuation funds in respect of the 10 hours per week gainful employment test for people aged between 65 and 75 years.

Recommendation 5.2

The present requirement on trustees to verify the addresses of all lost members should be removed. Protection of lost member accounts with balances in excess of $1,000 should also be removed.

Response

Noted

The Government supports the retention of address verification requirements for lost members and recommends industry make greater use of the ATO's `SuperMatch' system to reunite lost members with their accounts.

The Government removed member protection for lost member accounts with balances in excess of $1,000 with effect from 29 August 2002.

Recommendation 5.3

Superannuation benefits of bona fide non-resident employees below a specified small limit should be available to non-residents on permanent departure from Australia. Amounts above that limit should be subject to a taxation adjustment to offset Australian taxation concessions accorded to superannuation.

Response

Agreed

In its 2001 election statement, A Better Superannuation System, the Government announced its commitment to allow temporary residents to access their superannuation benefits upon permanent departure from Australia. The measure commenced on 1 July 2002 and provides departing temporary residents with access to superannuation benefits subject to withholding tax arrangements to retain tax concessions provided to the benefits.

The measure does not apply to departing residents who retain the option of retiring in Australia and accessing the Age Pension.

Recommendation 5.4

Requirements governing the content of risk management statements related in investment in derivatives should be simplified in order to reduce compliance costs and to sharpen the prudent management focus of trustees. The present requirements that such statements be prepared by both investment managers and trustees for compliance audit purposes should be reviewed in order to remove any unnecessary duplication.

Response

Agreed

The Government will review current requirements regarding risk management statements in the context of harmonising existing risk management requirements with the reforms outlined in the response to recommendation 4.3.

While the Government notes that the existing requirements for auditing procedures relating to derivative contracts require both internal and external audits, there are significant risks in undertaking derivatives transactions, even with the existing restrictions on such transactions. Any amendments to the content of the current requirements will need to take account of such risks.

Recommendation 5.5

The requirements for actuarial certificates should be simplified by APRA, in consultation with the Institute of Actuaries of Australia, DFACS and the ATO.

Response

Noted

The Government supports measures to simplify the superannuation legislative framework where it provides better outcomes for participants and supports APRA reviewing whether actuarial certificates can be simplified. APRA has indicated that it will undertake such a review.

Recommendation 6.1

There should be no expansion of the current list of exempt public sector superannuation schemes. Consideration should be given by Commonwealth, State and Territory governments to the feasibility of closing exempt schemes which are open to new members and electing to make any new schemes subject to the SIS legislation.

Response

Not supported

The existing Heads of Government Agreement (HOGA) for Exempt Public Sector Superannuation Schemes (EPSSS) has resulted in a high degree of compliance with the principles of the Commonwealth's retirement income policy by EPSSS.

Recommendation 7.1

The SIS legislation should be amended to simplify certain complex requirements which impose significant compliance costs, to increase competition amongst providers of certain services to superannuation entities, and to enhance the effectiveness of capital adequacy and other requirements imposed on trustees. Specific proposals for change are contained in the recommendations given above and in chapters 4 and 5.

Response

Agreed

The Government will continue to monitor the operation of the SIS legislation and the retirement income framework with a view to greater simplification where it provides better outcomes for participants.

Recommendation 7.2

The SIS legislation should be amended to require that trustees of superannuation entities be licensed by APRA subject to specific conditions pertaining to such matters as trustee capacity and the provision of a risk management strategy. The Government and APRA should consult widely on the details of such a licensing arrangement.

Response

Agreed

On 28 October 2002, the Government announced its intention to introduce a licensing regime for all APRA regulated trustees. The licence will require that all superannuation trustees are competent and have adequate systems to look after the interests of superannuation fund members.

Trustees will have to meet licence conditions on an ongoing basis. These conditions will include requirements for trustees to meet minimum standards of competency, have adequate resources, a risk management plan and adequate risk management systems (including a fraud control plan), systems to manage outsourcing, as well as any other conditions that APRA considers appropriate to operate the proposed business.

Either the trustee corporation or a `notional entity' of individual trustees would be licensed. Trustees would also be able to `buy-in' expertise to demonstrate competence and other licence conditions.

To ensure compliance with the new licensing framework, APRA will be given appropriate powers, including to issue directions, disqualify trustees, vary conditions and suspend or revoke the licence, subject to appropriate safeguards and review processes.

The Government and APRA will consult further with industry and other key stakeholders to develop the detail of the licensing regime.

Recommendation 7.3

Duplication between the SIS legislation and the Managed Investments Act should be reviewed jointly by APRA and ASIC. The aim of such a review should be to achieve consistency between the two regimes for their application to providers of retail investment products.

Response

Noted

A review of the Managed Investments Act 1998 has been completed. The Parliamentary Joint Committee (PJC) on Corporations and Financial Services has undertaken an inquiry into the review and released a report on its findings in December 2002. The Government is considering the findings of the PJC, together with the SWG findings, before deciding what action, if any, to take in respect of this recommendation.

Recommendation 7.4

APRA should review the possibility of removing the need for life insurance companies which write superannuation business in their statutory funds to comply with the prudential requirements of the SIS legislation.

Response

Noted

Since the completion of the Productivity Commission's report, APRA has further considered the issues and the views put by industry. The Government will work with APRA in considering the need for such a review.

Recommendation 8.1

Trustees should provide members with information about the categories of complaints that are excluded by legislation from consideration by the Superannuation Complaints Tribunal.

Response

Noted

The Government intends to consider this issue more closely in consultation with the Superannuation Complaints Tribunal (SCT).

Recommendation 8.2

The Superannuation (Resolution of Complaints) Act 1993 should be repealed, subject to some transitional arrangements.

All superannuation entities regulated by APRA should be required to join a disputes resolution scheme approved by ASIC. This should be mandated as part of the compliance requirements of those superannuation entities.

Response

Not supported

The Government supports the retention of the SCT. There is widespread industry support for the Tribunal, in particular its ongoing role as a statutory body.

Recommendation 8.3

Alternatively, the Superannuation (Resolution of Complaints) Act 1993 should be amended for the following purposes:

• to enable the Superannuation Complaints Tribunal to implement an incentive based system of charging superannuation entities for its resolution of complaints;
• to give the Tribunal discretion to extend beyond one year the time limit for its decision on complaints against trustees' actions on disability payments; and
• to give the Chairperson of the Tribunal discretion to name parties to complaints reviewed by it.