Funds management & superannuation: Update April 2009

Super Update: What's Happening in the Superannuation Industry

Conflicts of interest APRA guidance

APRA has recently released for public consultation draft guidance on managing conflicts of interest for RSE licensees. This consists of a discussion paper and draft Prudential Practice Guide 521 Conflicts of interest, following earlier consultation with government agencies and the industry. While the guidance is similar to ASIC RG 181, this has a SIS-focus.

The guidance recommends:
 

• the risk management strategy contain a conflict of interest policy, setting out measures to identify and manage potential conflicts
• the measures address:
  • director remuneration
  • fee charging and allocation
  • investment decisions
  • amendments to fund rules to change benefit structures
  • changes to crediting rate/unit pricing mechanisms
  • appointment, termination and super vision of service providers (including professional advisers)
  • decisions about nomination of eligible rollover fund
  • winding up and decisions on successor fund transfers
• conflicts training of directors
• disclosure of conf licts on director
• appointment and continuing thereafter
• regular declaration of conflicts by service providers
• monitoring processes of all potential conflicts and action

In particular, the guidance drew attention to embedded conflicts in a fund’s trust deed. For instance, in the case of a fund trustee forming part of a corporate group, the deed might require the trustee to outsource particular functions to specified service providers in the same corporate group or to invest in financial products marketed by a specified party. According to APR A, the binding nature of the trust deed does not relieve the trustee of the responsibility to reconsider the outsourced arrangement and in cases where the arrangement does not serve the members’ best interests, the trustee should
consider amending the deed or approaching the court.

Comments on the draft guide are due on 30 April 2009.

Member statements: disclosure of long term returns

As from 1 J uly 2009 superannuation funds will be required to report long-term returns prominently in periodic member statements. The purpose is to assist fund members to view superannuation as a long-term investment (Corporations Amendment Regulations 2009 (No 3)).

In particular, funds must disclose 5 and 10 year returns (expressed in the compound average effective net earning rate) in respect of the member’s investment option, or the member’s fund (or sub-plan). As a transitional measure, member statements for 1 July 2009-30 June 2010 need only contain the returns for the 5 period. These changes replace the fund
annual report requirement to disclose the 5 year returns.

Disclosure can be made either on the periodic statement or in a separate insert sent to members with the periodic statement.

Also, the document must include a disclaimer that the “returns are not the returns of the member’s investment in the option, sub-plan or fund.” T his is meant to warn the member that the long term return is not necessarily reflective of the member’s return over the same period, e.g. due to the member moving into the option or fund prior to the period or due
to the member splitting their account across more than one option. H owever, this wording may confuse members.

The Explanatory Statement adds 2 other points:
 

• where a member exits after the end of a reporting period but before the final return for the period has been set, the 5 and 10 year return figures can use the interim crediting rate for the period
• the information is not required where the periodic statement is being issued as a result of the death of the member.

Annual reports online

Under the same R egulations, a fund will also be able to use its website as the default method of delivering its annual report. T his is in line with annual reports for companies and managed investment schemes. T his will apply to the 2009-10 annual reports.

Temporary Residents

Conditions of relief

As from 1 April 2009 any person who is, or has ever been, a temporary resident is generally restricted in the manner in which they can access their superannuation benefits. A condition of release will be limited to death, TPD , terminal medical condition, Departing Australia Superannuation Payments or excess contributions. The restrictions do not apply to a temporary resident who satisfied a condition of release prior to 1 April or where the person currently holds a subclass 405 (investor retirement) visa or a subclass 410 (retirement) visa (Superannuation Industry (Supervision) Amendment Regulations 2009 (No 10)).

Funds and administrators should modify their benefit payment process to ensure the new rules are correctly applied. As an interim step, funds may need to collect the additional information in a separate declaration.

Unclaimed money

The obligation for funds (since 12 December 2008) to pay to the ATO unclaimed superannuation accounts of temporary
residents departed from Australia is now assimilated with the unclaimed money regime. The ATO will set due dates for payments and statements, instead of the mandatory 6 monthly returns (Tax Laws Amendment (2009 Measures No 1) Act 2009).

DASP withholding tax

From 1 April 2009, there will also be new withholding tax rates for DASPs, being:
 

• 35% for a taxed element of a taxable component
• 45% for an untaxed element of a taxable component.

These new rates apply to D ASPs where the application for payment is made on or after 1 April 2009.

The changes do not apply to fund members who are Australian citizens, N ew Zealand citizens, holders of a permanent or temporary visas, former temporary residents who have left Australia and holders of retirement visas who receive only an income stream (subclasses 405 and 410) (Temporary Residents Superannuation Legislation Amendment Act 2008).

Pension drawdown relief

The Government has issued regulations to give effect to the 50% reduction of the minimum payment amounts for account-based pensions and annuities for 2008-09. The temporary relief applies to account-based, allocated and market-linked (term allocated) pensions and annuities based on account balances at 1 July 2008. T he existing rules in relation to prorating minimum payments in the first year of a pension still apply before the application of the 50% reduction (Superannuation Industry (Supervision) Amendment Regulations 2009 (No 2)).

The regulations serve to remove any doubt that pension payments can cease for the remainder of this financial year where the pension has already paid out half of the previous minimum. The G overnment will continue to monitor market conditions and will examine options for a longer-term solution to this issue following the Henry Review.

Short selling ban extended

ASIC has announced it will keep the ban on covered short selling of financial securities in place until 31 May 2009, subject to continuing review. According to ASIC, the continued volatility in global financial markets and potential damage from aggressive or predatory practices from short selling outweighed the possible loss of some market efficiency or price discovery.

De facto relationships: judicial observations

A recent judgment in the V ictorian Supreme Court made some useful observations on determining whether a de facto relationship existed between the deceased and the claimant. Although the judgment concerned a claim to the intestate distribution of the deceased estate under Victorian probate legislation, the following points are pertinent to fund trustees in determining a death benefit claim by a de facto spouse, particularly in light of the gender-neutral definition of “spouse” in
recent changes to the SIS Act:
 

• It would be wrong to assume that the test of whether people are living in a genuine domestic relationship is to be judged against an inflexible model of a couple living together full-time, sharing fully domestic, financial and other responsibilities.
• People who are legally married live in married relationships in circumstances varying dramatically from one couple to another. A couple should not be judged by reference to a static model which does not reflect the reality of life and the diversity of arrangements existing between legally married couples.
• In this case the parties were not living with each other physically over the period, in the kind of model one might have in an idealised form.
• The court is assisted by affidavit evidence from third parties to the effect that:
  • the couple certainly appeared to third par ty X as a couple, as domestic par tners and in a good domestic relationship; and
  • third party Y , over the 20 years of her friendship with the two, always considered the two to be in a relationship as if they were husband and wife and certainly related to Y and others present on any other social occasions, as a couple and domestic partners and that that is how they conducted themselves to Y and to others.
• Applications such as these are difficult because of the potential to affect third party rights inadvertently and without a full and adequate testing of the evidence. Applications of this kind are frequently made without contest, without a contradictor challenging the claims made by an applicant. Hence, a court should be reluctant to make determinations too readily.

The court found that the independent third party evidence coupled with the claimant’s evidence was sufficient to grant the application (Re Estate of Sigg, decd.[2009] V SC 47 (9 February 2009; Pagone, J)).

Retirement benefit projections

Following ASIC Consultation P aper 101 on Superannuation forecasts (July 2008) consensus has emerged from recent talks
with ASIC involving the I nstitute of Actuaries, ASFA, I FSA, AIST/IFN on the use of retirement projections. The main points are:
 

• its purpose is education about adequacy, not as a fees and cost comparison
• relief is needed from the Corporations Act advice provisions with statutory protection from liability
• mandatory projections should be exempt for ER Fs, SMSFs, defined benefit, legacy products
• mandatory projections should be annually printed for existing members
• based on current contribution levels plus assumed salary increases
• based on current death/TPD benefit design and premium rates continuing
• not to allow for time outside workforce or changes in part-time hours
• standardised assumptions (set by ASIC/Australian Government Actuary)
• results shown in today’s dollars, using a wage based deflator
• results presented as income amounts, with the actuaries supporting an additional lump sum projection
• government pensions be included in the projections

The Joint Parliamentary Committee Report on ASIC Oversight recently recommended that ASIC investigate retirement projections as a matter of urgency. ASIC guidance is expected to be issued in the next few months.

AML/CTF update

AUSTRAC has foreshadowed the following exemptions will be announced by Determination:

• customer identification procedure on fund members with an account balance of $1000 or less
• risk-only life policies provided by a fund trustee where the member’s only interest is in a life policy with no prescribed minimum surrender value (other than that available in the policy documentation and promotional material).

AUSTRAC has released new Chapter 28 in the AML/CTF R ules which, inter alia, provides that in a fund merger process:

• the new fund is able to treat precommencement customers of the old fund as pre-commencement customers of the new fund; and
• the new fund is able to rely on the old fund’s customer verification and will not be required to re-verify the member’s identity prior to paying a benefit.

A frequent question that faces Trustees is whether they are required to block a transaction when making a suspicious transaction report. AUSTRAC has confirmed there are no legislative requirements in the AML/CTF Act requiring a reporting entity to refrain from providing a designated service. I t is a separate question for the trustee to consider its internal risk based controls whether to terminate the business relationship.

AUSTRAC has released a draft changes to the AML/CTF R ules to amend the definitions of ‘certified copy’ and ‘certified extract’ (contained in Chapter 1) by increasing the list of persons who can certify documents and extracts as being true copies of original documents.