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Australian Senate Standing Committee for the Scrutiny of Bills - Scrutiny Digests |
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Purpose
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Schedule 1 to this bill seeks to amend the Superannuation Guarantee
(Administration) Act 1992 to limit the creation of multiple superannuation
accounts for employees who do not choose a superannuation fund when they start a
new job
Schedule 2 to this bill seeks to amend the Superannuation Industry
(Supervision) Act 1993 to require the Australian Prudential Regulation
Authority to conduct an annual, objective performance test for MySuper products
and
other products
Schedule 3 to this bill seeks to amend the existing best-interests duty to
clarify that this duty requires the superannuation trustee
to act in the best
financial interests of the member
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Portfolio
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Treasury
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Introduced
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House of Representatives on 17 February 2021
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Bill status
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Before the House of Representatives
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2.139 In Scrutiny Digest 4 of 2021 the committee requested the Treasurer's advice as to:
• why it is considered necessary and appropriate to leave basic requirements for a fund to be a stapled fund for an employee to delegated legislation; and
• whether the bill can be amended to include at least high-level guidance regarding these basic requirements on the face of the primary legislation, such as the requirement that the fund is an existing fund of the employee.[49]
Treasurer's response[50]
2.140 The Treasurer advised:
Schedule 1 to the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 (the Bill) sets out the new choice of fund rules relating to stapled funds. As stapled funds are a new concept in the Superannuation Guarantee (Administration) Act 1992, flexibility about the definition of a 'stapled fund', including in relation to the basic requirements, is needed to ensure the definition can remain responsive to changing practices, particularly as the reforms are implemented by industry.
The explanatory memorandum to the Bill provides that the regulations prescribing the requirements for a fund to be a stapled fund for an employee will cover basic requirements. This will include the requirement that the fund is an existing fund of the employee.
I note that although this requirement could also be explicitly included in the primary law, it is already implicit through the various references in Schedule 1 to the Bill that refer to a stapled fund being a 'stapled fund for an employee' (as this indicates there must be an existing connection between the stapled fund and the employee). It should also be noted that in practice, an employer will only ever be able to make contributions to a fund that is an existing fund of an employee.
It is also envisaged that the regulations will also include other requirements to ensure that the rules are appropriately targeted. In particular, I am proposing that an existing fund will not be a stapled fund for an employee if the employee's only interest in that existing fund is a defined benefit interest. This approach reflects that if the employee only has a defined benefit interest in an existing fund, a new employer is unlikely to be able to make contributions to that fund.
The regulations are also expected to include tie-breaker rules for determining which fund is to be an employee's stapled fund where they have multiple existing funds. I note that a similar approach to tie-breaker rules is included in subregulation 14(2) of the Superannuation (Unclaimed Money and Lost Members) Regulations 2019, which applies for the purposes of identifying an 'active account' where a person has more than one eligible fund for receiving payments of lost and unclaimed money from the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999.
Prescriptive detail of this kind is consistent with the legislative framework established by the Bill. In my view, it is entirely appropriate that detail of this kind be included in subordinate legislation such as regulations. In line with usual government processes, the regulations prescribing the requirements that need to be met for a fund to be a stapled fund for an employee will be open to stakeholder input during consultations and remain subject to parliamentary scrutiny through the usual tabling and disallowance process.
Committee comment
2.141 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that flexibility about the definition of 'stapled fund' is needed as stapled funds are a new concept in the Act, and such flexibility is required to ensure the definition is responsive to changing practices. The committee also notes the Treasurer's advice that the requirement that the fund is an existing fund of the employee could be explicitly included in primary law, but that the requirement is already implicit through references to a stapled fund being a 'stapled fund for an employee', indicating that there must already be an existing connection between the stapled fund and the employee.
2.142 The committee further notes the additional matters outlined by the Treasurer that are expected to be included in the regulations, including that an existing fund will not be a stapled fund for an employee if the employee's only interest in that existing fund is a defined benefit interest and the inclusion of tie-breaker rules for determining which fund is to be an employee's stapled fund in circumstances where they have multiple existing funds.
2.143 While welcoming this additional information, it remains unclear to the committee why at least high-level guidance regarding these basic requirements cannot be included on the face of primary legislation. While the Treasurer notes that similar approaches have been used in other legislation in relation to superannuation, the committee does not consider this explanation to be, of itself, sufficient justification for leaving significant matters to delegated legislation.
2.144 The committee requests that an addendum to the explanatory memorandum containing the key information provided by the Treasurer be tabled in the Parliament as soon as practicable, noting the importance of these explanatory materials as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).
2.145 The committee draws its scrutiny concerns to the attention of senators and leaves to the Senate as a whole the appropriateness of leaving basic requirements for a fund to be a stapled fund for an employee to delegated legislation.
2.146 The committee also draws this matter to the attention of the Senate Standing Committee for the Scrutiny of Delegated Legislation.
2.147 In Scrutiny Digest 4 of 2021 the committee requested the Treasurer's advice as to:
• why it is considered necessary and appropriate to leave the following matters to delegated legislation:
• the definition of 'part 6A product';[52]
• the requirements for the annual performance test;[53]
• requirements for lifting a prohibition on accepting new beneficiaries into superannuation funds that have received two consecutive failure assessments;[54]
• whether the proposed scheme for annual performance assessments may have a retrospective application and, if so, whether any persons are likely to be adversely affected and the extent to which their interests are likely to be affected; and
• whether the bill can be amended to include at least high-level guidance regarding these matters on the face of the primary legislation.
2.148 The committee also requested that the explanatory memorandum be amended to include specific information about the intended operation of the annual performance testing scheme, as set out in Budget documents published by the Treasury.[55]
Treasurer's response
2.149 The Treasurer advised:
The legislation introduces an annual performance test that initially only applies for Part 6A products that are MySuper products. The legislation allows regulations to define additional Part 6A products which will be subject to the annual performance test. This regulation making power allows the test to be expanded, where appropriate, to existing products (other than MySuper products), as well as new superannuation products that may emerge in the future.
In contrast to MySuper products (which are prescriptively defined in primary legislation), such products may vary significantly in their structure and form, and new products are regularly being offered to the market. As such, the flexibility to capture these is best achieved by placing the definition in the regulations. Regulations are considered appropriate to deal with more technical details and can be amended more quickly than legislation to respond to a changing marketplace and keep closer pace with progressive product innovation. This approach is designed to allow timely future refinements to the definitions to ensure that the scope of additional products are defined correctly, providing certainty for industry on which products are in scope, over time.
The legislation ensures that products specified in the regulations cannot be subject to the annual performance test until 1 July 2022 at the earliest.
The specific requirements for the annual performance test involve setting out various technical matters including specifying complex mathematical formula and assumptions that are to be applied in performing the calculations. It is considered that regulations are the appropriate mechanism for setting out such technical details. Regulations provide flexibility to refine the technical details and formula to ensure the test operates as intended both initially and over time, as regulations may be amended more quickly than primary legislation. Regulations will enable the Government to be more responsive to update relevant assumptions to be used in the calculations, where there is a change in the investment environment that makes updates appropriate or necessary.
If a Part 6A product does not meet the requirements of the performance test in two consecutive financial years, the trustee cannot accept any new members into that product. The legislation seeks to introduce a provision whereby APRA may make a determination to lift this prohibition (that is, re-open the Part 6A product to new members).
Regulations will provide for requirement that need to be met for APRA to make such a determination. It is anticipated that the requirements would be of a technical nature, similar to the requirements for the annual performance test. That is, the requirements would likely involve specifying complex mathematical formula and assumptions to be used in the calculations. As outlined above, it is considered that details of this nature are most appropriately dealt with in regulations.
Any regulations dealing with the matters outlined above would, in line with usual government processes, be open to stakeholder input during consultations and remain subject to parliamentary scrutiny through the usual tabling and disallowance process.
The annual performance test is designed to assess performance against, tailored benchmark for each Part 6A product. In order to carry out the calculation, it is necessary to look back at a product's performance in past years, which could be viewed as having retrospective application. The intent is that the performance test is to be calculated over a time period that allows funds to target long-term returns, rather than having one or two years of poor performance result in a failure of the test.
To begin looking at long-term product performance in a timely manner, it is necessary and appropriate to take into account a product's performance prior to the making of the regulations prescribing the formula for the test Not doing so would mean that the first performance tests could not be conducted until many years after the regulations are made.
It is unlikely that any individual will be adversely affected by this approach. This approach ensures the annual performance test can begin to apply.in a timely manner after the regulations are made. This is likely to promote the interests of superannuation members, as members will be notified if they are in an underperforming product sooner, and not wait many years into the future, which could have an adverse effect on their retirement outcomes. The approach of assessing long-term returns seeks to prevent trustees being adversely affected by having one or two years of poor performance.
I believe the Bill provides guidance on the core framework for the new annual performance test, setting out matters such as the consequences that flow for trustees when, a product they offer is considered to be underperforming.
The matters raised by the Committee are best provided for in regulations as they relate to matters that may change or are very technical in nature. Having these matters prescribed in regulations allows for quicker reactions to these changes in the superannuation sector than would be available if these matters were prescribed in the primary law.
Guidance on the intended operation of the, annual performance testing scheme will be provided in the explanatory statement to the regulations. It is appropriate that this guidance accompany the regulations, which will set out the detailed requirements for the annual performance test.
Committee comment
2.150 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that the additional Part 6A products may vary significantly and that regulations are considered more appropriate to deal with more technical details and can be amended more quickly than primary legislation to respond to changes in the marketplaces and to account for product innovation.
2.151 The committee also notes the Treasurer's advice that regulations are appropriate for setting out the specific requirements for the annual performance test, as these requirements involve setting out various technical matters, including specifying mathematical formula and assumptions to be applied in performing calculations. The committee further notes the Treasurer's advice as to the technical nature of the requirements to be set out in regulations relating to determinations that may be made by APRA to lift a prohibition on accepting new members into a Part 6A product as a result of two consecutive failures by that product to meet the performance test.
2.152 The Treasurer further advised that the bill provides guidance on the core framework for the new annual performance test.
2.153 In relation to the committee's questions regarding retrospective application of the annual performance test, the committee notes the Treasurer's advice that, in order to carry out the calculation for the performance test, it is necessary to look back at a product's performance in past years, which could be viewed as having retrospective application. The Treasurer, however, advised that the intent of the bill is that the performance test is to be calculated over a time period that allows funds to target long-term returns, rather than having one or two years of poor performance result in a failure of the test. The Treasurer considered that it is necessary and appropriate to consider a superannuation product's performance prior to the making of the relevant regulations in order to begin looking at long-term product performance in a timely manner.
2.154 The Treasurer also advised that it is unlikely that any individual would be adversely affected by this approach, and that ensuring that the annual performance test can begin to apply in a timely manner is likely to promote the interests of superannuation members, allowing members to be notified sooner if they are in an underperforming superannuation product.
2.155 Finally, while the committee notes the Treasurer's advice that guidance on the intended operation of the annual performance testing scheme will be provided in the explanatory statement to the regulations, it is unclear to the committee why such information cannot also be included in the explanatory memorandum to the bill. The committee considers that it is important for this information to be available to parliamentarians currently considering the bill to enable them to properly consider the appropriateness of inserting provisions into the law which will allow the regulations to set out the requirements for the annual performance test. In addition, the committee notes that these explanatory materials are an important point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation. As such, the committee considers that it is inappropriate for details in relation to the operation of the proposed annual performance test to be set out in promotional materials,[56] but not in explanatory materials tabled in the Parliament.
2.156 The committee requests that an addendum to the explanatory memorandum containing the key information provided by the Treasurer be tabled in the Parliament as soon as practicable, noting the importance of these explanatory materials as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).
2.157 In light of the information provided in relation to the matters to be included in delegated legislation and potential retrospective application of the annual performance tests, the committee makes no further comment on these matters.
2.158 The committee draws its scrutiny concerns in relation to the inclusion of specific information about the intended operation of the annual performance testing scheme in the explanatory memorandum to the bill to the attention of senators and leaves to the Senate as a whole the appropriateness of including this information in promotional materials and explanatory statements to the relevant regulations, rather than in the explanatory memorandum to the bill.
2.159 The committee also draws these matters to the attention of the Senate Standing Committee for the Scrutiny of Delegated Legislation.
2.160 In Scrutiny Digest 4 of 2021 the committee requested the Treasurer's advice as to:
• why it is considered necessary and appropriate to leave the following significant matters to delegated legislation:
• record keeping standards that must be complied with by trustees of superannuation entities;
• additional requirements in relation to the 'best financial interests' duty that must be complied with by trustees and directors of trustee companies; and
• prohibited payments or investments;
• whether the bill can be amended to include at least high-level guidance regarding these matters on the face of the primary legislation; and
• whether specific consultation obligations (beyond those in the Legislation Act 2003) could be included in the bill (with compliance with such obligations a condition of the validity of regulations made under paragraphs 52(2)(c) and 52A(2)(c) and proposed subsection 117A(1)).[58]
Treasurer's response
2.161 The Treasurer advised:
Schedule 3 to the Bill does not delegate the specification of record keeping standards to delegated legislation. This is already a feature of the existing law. Existing sections 31, 32 and 33 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) expressly authorise regulations to prescribe record keeping standards that must be compiled with by trustees and directors of trustee companies. This allows the regulations to establish record keeping obligations that trustees must already comply with under the existing law. This is part of a broader framework already set out in the SIS Act outlining which matters can be prescribed in operating standards made via regulations (see paragraphs 31(2)(a) to (u), 32(2)(a) to (n) and 33(aa) to (k) of the SIS Act).
The Bill does not seek to vary those matters (record keeping or otherwise) that can be prescribed via operating standards. The Bill only creates a strict liability offence for these record keeping requirements to enhance and expand the enforcement and compliance options available to the regulators. The strict liability offence is designed to apply to any offence of this kind that may arise under the existing law. The explanatory memorandum explains why it is considered appropriate to apply strict liability to this kind of offence.
Schedule 3 to the Bill seeks to ensure that trustee actions are in the best financial interests of members. Regulating superannuation entities and their actions is important to protect the retirement savings of Australians.
The record keeping standards, additional requirements in relation to the 'best financial interests' duty, and the prohibition of certain payments ·or investments target the application of the legislative regime so that it focuses on the kinds of trustee actions where risks are likely to arise while minimising impact for areas of lower risk. As industry practices may change over time, the record keeping standards, additional requirements and the kinds of prohibited payments or investments may also need to change to reflect this.
Allowing the regulations to prescribe additional requirements in relation to the 'best financial interests' duty and to prohibit certain payments or investments will provide the Government with the necessary flexibility to make timely amendments. This essential flexibility to adapt to changing risks is best achieved by placing the detail. in the regulations which may be amended more quickly than primary legislation. In line with usual government processes, the regulations regarding these matters will be open to stakeholder input during consultations and remain subject to parliamentary scrutiny through the usual tabling and disallowance process.
It is unlikely that any person will be adversely affected by this approach. The regulations cannot apply retrospectively to disadvantage a person. The intention is to address circumstances where there is a heightened risk of trustees avoiding their obligations under the best financial interests duty. This approach ensures the additional requirements and the prohibition on particular kinds of payments or investments can be designed to target circumstances where trustee behaviour that is not in members' best financial interests has. been identified, and can begin to apply in a timely manner after the regulations are made. This approach is designed to allow timely future refinements to ensure that the circumstances that trigger additional requirements and the scope of prohibited payments and investments are defined correctly, providing certainty for. industry over time.
The high level guidance is provided in the explanatory memorandum to the Bill and further guidance will be provided in the explanatory statement to any regulations made. For the same reason that these matters need to be included in the regulations (flexibility to be promptly amended in response to evolving industry practices), the primary legislation should not excessively constrain the scope of these matters that may be prescribed by the regulations.
The Legislation Act 2003 includes a requirement to consult before making any legislative instruments to ensure that proposed instruments are appropriate and reasonably practicable to undertake. Consultation should ensure that persons likely to be affected by the proposed instrument have an adequate opportunity to comment; and that persons with expertise in the relevant field or representative bodies of persons likely affected by the proposed instrument are invited to make submissions. In line with such usual government processes, any proposed regulations regarding the matters outlined above will be open to stakeholder input during consultations and remain subject to parliamentary scrutiny through the usual tabling and disallowance process.
Committee comment
2.162 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that the specification of record keeping standards is a feature of the existing law, and that the bill only creates a strict liability offence for the record keeping requirements to enhance and expand the enforcement and compliance options already available to regulators. While noting this advice, and the explanation provided in the explanatory memorandum in relation to the application of this strict liability offence, the committee's concerns with respect to the imposition of a strict liability offence in this instance are heightened because matters that are central to the commission of the offence are included in delegated legislation. From a scrutiny perspective, the committee expects that the explanatory material to a bill that takes this approach will provide a clear justification both for the imposition of strict liability, and why it is appropriate that elements of the strict liability offence are set out in delegated legislation.
2.163 The committee also notes the Treasurer's advice that the record keeping standards, additional requirements in relation to the 'best financial interests' duty, and the prohibition of certain payments or investments are intended to target the application of the legislative regime so that it focuses on the kinds of trustee actions where risks are likely to arise while also minimising impact for areas of lower risk. The Treasurer advised that including these matters in regulations provides flexibility to make timely amendments to reflect changes in industry practices in these areas. In this respect, the committee reiterates its consistent scrutiny view that a desire for administrative flexibility will not generally be accepted as a sufficient justification, of itself, for leaving significant matters to delegated legislation.
2.164 The Treasurer further advised that the desire for flexibility was also the reason that the primary legislation should not excessively constrain the scope of the matters that may be prescribed by the regulations. The committee remains concerned, however, that including prohibited payments, prohibited investments and additional requirements in relation to the 'best financial interests' duty in the regulations without also including guidance on the face of primary legislation, provides considerably broad discretion to the executive to determine the scope and content of the 'best financial interests' duty, and to dictate which payments or investments are permitted to be made by trustees. The committee's concerns in this regard are heightened by the significant civil and criminal consequences that flow from the breach of the 'best financial interests' duty. In this regard, the committee also notes that the explanatory material does not demonstrate that this approach is consistent with the advice set out in the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, which states:
The content of an offence set out in an Act or regulation should be clear from the offence provision itself, although the offence may rely on the Act or regulation, or another instrument, to define terms used or give context to the offence. The content of the offence should not be provided in another instrument unless there is a demonstrated need to do so.[59]
2.165 Finally, while noting the Treasurer's advice that delegated legislation made under provisions in the bill would be subject to consultation requirements in the Legislation Act 2003, the committee's scrutiny view is that these requirements may not be sufficient to ensure that fulsome consultation takes place in the absence of specific consultation requirements. This is because the Legislation Act 2003 provides that consultation may not be undertaken if the instrument-maker considers that consultation is unnecessary or inappropriate, and the fact that consultation has not occurred will not affect the validity of the regulations.[60]
2.166 The committee draws its scrutiny concerns to the attention of senators and leaves to the Senate as a whole the appropriateness of leaving the following significant matters to delegated legislation:
• record keeping standards, where failure to comply with the standards will be a strict liability offence;
• additional requirements in relation to the 'best financial interests' duty that must be complied with by trustees and directors of trustee companies; and
• prohibited payments or investments.
2.167 The committee also draws this matter to the attention of the Senate Standing Committee for the Scrutiny of Delegated Legislation.
[48] Schedule 1, item 18; Schedule 2, item 9; Schedule 3, items 6, 10 and 14. The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(iv).
[49] Senate Scrutiny of Bills Committee, Scrutiny Digest 4 of 2021, pp. 10–11.
[50] The Treasurer responded to the committee's comments in a letter dated 25 March 2021. A copy of the letter is available on the committee's website: see correspondence relating to Scrutiny Digest 6 of 2021 available at: www.aph.gov.au/senate_scrutiny_digest.
[51] Schedule 1, item 18; Schedule 2, item 9; Schedule 3, items 6, 10 and 14. The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(iv).
[52] Section 60B.
[53] Section 60D.
[54] Subsection 60F(4).
[55] Senate Scrutiny of Bills Committee, Scrutiny Digest 4 of 2021, pp. 11–14.
[56] Treasury, Your Future, Your Super: Reforms to make your super work harder for you, October 2020, pp. 22–24, available at https://treasury.gov.au/sites/default/files/2020-10/p2020-super_0.pdf.
[57] Schedule 1, item 18; Schedule 2, item 9; Schedule 3, items 6, 10 and 14. The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(iv).
[58] Senate Scrutiny of Bills Committee, Scrutiny Digest 4 of 2021, pp. 14–16.
[59] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, pp. 26.
[60] See, Legislation Act 2003, subsection 17(1) and section 19.
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