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From 1 July 2008, ‘ordinary time earnings’ (OTE) will become the notional earnings base for all employees for superannuation guarantee purposes. At present, some employers are able to use a ‘grandfathered’ notional earnings base which is less than OTE for some or all of their employees.
OTE has a special meaning under the Superannuation Guarantee (Administration) Act 1992 (SG Act) and relevant ATO rulings and, generally, means all cash compensation received by an employee.
If an employer is currently using a grandfathered earnings base for its employees, the employer’s SG Act obligations in respect of those employees will increase from 1 July 2008.
- For accumulation-style members, this is likely to result in higher contributions.
- For a defined benefit fund, the actuary’s benefit certificate will continue to be used to determine whether there is a ‘shortfall’ in respect of employees for SG Act purposes. Of course, reliance on the actuary’s certificate is only possible if the certificate is based on accurate information which means that the certificates will have to be re-issued on the basis of OTE if another earning base is presently being used. As with accumulation members, this could result in higher employer contributions being required. We understand that the Australian Institute of Actuaries is working with government to iron out the details of the new SG Act regulations which will be relevant to the issuance of the new benefit certificates.
- Trustees of defined benefit funds will also want to ensure that the change to OTE does not affect the fund’s funding position. The trustee may also need to obtain actuarial advice on this issue.
SIS Regulation 7.04 regulates when a superannuation fund can accept contributions.
From 1 July 2007, regulation 7.04 was amended as part of the ‘Better Super’ reforms to prohibit a regulated superannuation fund from accepting any member contributions if the fund has not been quoted the member’s tax file number (TFN). If a regulated superannuation fund receives such contributions, the contributions are required to be returned within 30 days of the trustee becoming aware that no TFN is held for that member.
On 31 July 2007, as a result of industry concerns, the Australian Prudential Regulation Authority (APRA) released Superannuation Industry (Supervision) Modification Declaration No 2 of 2007. The Modification Declaration provides registrable superannuation entity (RSE) licensees with relief from the obligation to return contributions within 30 days if:
- the member’s only interest in the fund is a ‘risk insurance interest’ (basically, death or total and permanent disablement insurance), and
- the member’s TFN is quoted by 31 December 2007.
This modification gives a trustee a further opportunity to obtain a member’s TFN before the contribution has to be returned.
If the member’s TFN is not quoted by 31 December 2007, the contributions will then need to be returned.
The Australian Securities and Investments Commission (ASIC) issued a Consultation Paper on 23 July 2007 seeking the views of Australian financial services licensees regarding ASIC’s proposals for administration of the new compensation requirements under the Corporations Act. The Consultation Paper states that the primary way for licensees to comply with the new compensation requirements (which were dealt with in our July 2007 update) will be to have adequate professional indemnity insurance (PI insurance) and that it will be the responsibility of each licensee to determine what is ‘adequate’ in their circumstances in respect of:
- the amount of cover
- the scope of the cover
- whether any terms and conditions of the cover undermine the overall effect.
The Consultation Paper details when ASIC will not regard the PI insurance as adequate and in which circumstances ASIC will approve alternative arrangements. The Paper notes that ASIC may allow some ‘very highly capitalised financial service providers’ to self-insure.
Comments on the proposed policy are requested by 14 September 2007.
Recently, the New South Wales Supreme Court (court) delivered what is likely to be the last of its decisions in the Sayseng v Kellogg series of cases (Sayseng cases). Together with other recent decisions, the Sayseng cases demonstrate that trustees and insurers need to tread carefully when determining claims for total and permanent disablement (TPD) benefits.
First decision
The first decision involved an application by Mr Sayseng to set aside the decisions of the trustee of the Kellogg Retirement Fund (Trustee) and of the insurer, Hannover Life Re of Australasia (Hannover). The Trustee and Hannover rejected his earlier application for a TPD benefit.
The court (constituted by Justice Bryson) held that the Trustee’s decision was reasonably open to it and, therefore, not improper. However, the court held that Hannover’s decision was vitiated because it failed to seek Mr Sayseng’s responses to certain adverse medical reports.
Accordingly, the court declared Hannover’s decision void. It then directed a new trial so as to determine for itself whether Mr Sayseng was TPD as defined in the relevant insurance policy.
Incidentally (but nonetheless importantly), the court held that Mr Sayseng had standing to bring his claim directly against Hannover—even though he was not party to the relevant insurance policy.
Second decision
Hannover appealed Justice Bryson’s decision to the Appeal Court. On 23 June 2005 the Appeal Court dismissed the appeal.
The Appeal Court took Justice Bryson’s decision one step further. Not only did it hold that Mr Sayseng had standing to bring his claim directly against Hannover, the Appeal Court held that Hannover owed him a direct obligation of good faith and fair dealing.
Third decision
Following the second decision, the matter was remitted to the court for determination in accordance with Justice Bryson’s earlier direction. This time, the matter was heard by Justice Nicholson.
On 8 June 2007, Justice Nicholson held that, on the weight of the evidence, Mr Sayseng’s condition rendered him TPD as defined in the policy. Accordingly, he ordered that the TPD benefit in respect of Mr Sayseng be paid by Hannover to the Trustee (together with interest).
Fourth decision
The fourth (and presumably, final) decision was delivered on 8 August 2007, again by Justice Nicholson.
The main issue for determination was the date from which, under the Insurance Contracts Act 1984, Hannover had to pay interest on the TPD benefit. The court held that the relevant date occurred some eight years earlier when Hannover was presented with a substantial body of information concerning Mr Sayseng’s claim which, in the court’s view, must have advanced Hannover’s investigation of the claim. At that time, Hannover had in its possession the member’s claim, the member’s statement and at least one medical report from the member.
It should be noted that the relevant date preceded (by some months) the dates at which Hannover obtained its own medical reports.
Conclusion
Along with recent court decisions in other similar cases (see Dumitrov v SC Johnson and Oberlechner v Watson Wyatt), the Sayseng cases show that the court is willing to intervene where the court feels that TPD claims have not been considered properly.
In light of these decisions, insurers should reassess their decision-making processes in order to ensure that they consider TPD claims correctly (for example, insurers must consider the correct question, have due regard to the interests of the claimants and act reasonably).
If an insurer does not act appropriately in considering a TPD claim, the insurer risks having a Court determine the claim for a TPD benefit.
Trustees of superannuation funds should also be aware of their obligation to act in the best interests of members by ensuring that their fund’s insurer properly considers any claim.
On 24 August 2007 the ‘incorporation by reference’ amendments to the Corporations Regulations became effective. Significantly, new Regulation 7.9.15DA was added.
This measure is an attempt to reduce the length of the disclosure documents which must be provided for financial products. It is the impact that the new Regulations will have on product disclosure statements (PDS) which will be of particular interest to super fund trustees.
Incorporation by reference permits certain information to be incorporated in a PDS by:
- referring to that information
- providing sufficient details about the information to enable the member (or potential member):
- to identify (by a unique identifier) where the statement or information can be found, and
- to decide whether to read the information, and
- informing that person that a copy of the information may be obtained from the trustee on request, at no charge.
In practice, we believe that this measure will prove to be an important concession to financial product providers.
There are also concessions made with respect to Statements of Advice in the context of financial product advice.
The much anticipated (and debated) section 1012IA of the Corporations Act commenced on 1 July 2007, but will not fully operate in respect of existing products until 1 July 2008 unless a new PDS is prepared for the product before that date. Nonetheless, a trustee must continue to ensure that the fund’s current PDS (and any other disclosure material which specifies an underlying accessible financial product (AFP)) includes information about how a member can obtain a copy of the PDS for each AFP.
Section 1012IA is designed to ensure that members are given enough information about AFPs to help them make an informed assessment of the investment strategies offered by the super fund. In essence, this requires trustees to provide members with information equivalent to that which the member would receive if the member invested directly in the AFP.
We are still analysing the relationship between section 1012IA and the new incorporation by reference provisions. We will have more on this aspect in the next Update.
Natalie Gullifer’s views on super disclosure overall were detailed in The Sydney Morning Herald over 1–2 September
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.