Superannuation Update April 2009

General update

Parliamentary update

• The Federal Government’s economic stimulus package of Bills received Royal Assent on 18 February 2009. The new Acts are:
  • Appropriation (Nation Building and Jobs) Act (No 1) 2008–2009¹
  • Appropriation (Nation Building and Jobs) Act (No 2) 2008–2009²
  • Commonwealth Inscribed Stock Amendment Act 2009³
  • Household Stimulus Package Act (No 2) 2009⁴
  • Tax Bonus for Working Australians Act (No 2) 2009⁵, and
  • Tax Bonus for Working Australians (Consequential Amendments) Act (No 2) 2009⁶.
    
• The Corporations Amendment (No. 1) Act 2009⁷ received Royal Assent on 25 February 2009. The new Act provides a ‘mechanism in the Corporations Act 2001 (Cth) (Corporations Act) … for recognising, in Australia, the disqualifications from managing corporations that occur in foreign jurisdictions’. The Corporations Amendment Regulations 2009 (No. 2)⁸ were registered on 30 March 2009 and prescribe New Zealand as a foreign jurisdiction.
• On Monday 16 March 2009, Senator Nick Sherry, Minister for Superannuation and Corporate Law, announced promulgation of Superannuation Industry (Supervision) Amendment Regulations 2009 (No. 2)⁹ which introduce the reduction in the ‘minimum payment amounts for account-based, allocated and market-linked (term allocated) pensions by 50 per cent for 2008–09’. This is temporary relief due to the fall in equity values as a result of the global financial crisis. Minister Nick Sherry has stated the ‘release of these regulations removes 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’.¹⁰
• The Corporations Amendment Regulations 2009 (No 3)¹¹ were registered on 30 March 2009 and require trustees of regulated superannuation funds (other than SMSFs) to include ‘a statement of long-term average returns of the investment options, sub-plan or the whole of the superannuation fund in the superannuation fund member’s periodic statement’. See the item further in this update for more details regarding the changes in disclosure of long-term returns.
• The Tax Laws Amendment (2009 Measures No 1) Bill 2009¹² received Royal Assent on 26 March 2009. Schedule 2 of the Bill ‘amends various Acts as a result of the payment of temporary residents’ unclaimed superannuation to the Australian Government and to improve the administration of the broader unclaimed money regime’. Schedule 3 to the Bill amends ‘relevant legislation to give effect to measures, announced in the 2008–09 Budget, to amend income tests across the tax and transfer systems’.
• The Tax Laws Amendment (2008 Measures No. 6) Bill received Royal Assent on 26 March 2009. Minister Nick Sherry welcomed the ‘successful passage through Parliament of the Tax Laws Amendment (2008 Measures No. 6) Bill which includes amendments to improve the operation of the Superannuation Guarantee late payment offset … [to] ensure that an employer will only be able to use the offset if they make SG contributions before they are assessed with the superannuation guarantee charge liability’.¹³

Update on short selling

ASIC has announced that it will ‘keep the ban on covered short selling of financial securities in place until 31 May 2009 but will keep this position under review’. According to the media release, ‘[i]n making its judgement to again extend the ban, ASIC weighed up the continued volatility in global financial markets and potential damage from aggressive or predatory practices from short selling against the possible loss of some market efficiency or price discovery. ASIC has decided to continue with its cautious approach and keep the ban in place; its judgement continues to be that any possible loss of market efficiency or price discovery as the result of the continuation of the ban is justified given the current market circumstances’.¹⁴

AML/CTF

AUSTRAC has released a new regulatory guide. We refer you to Chapter 11 of the AUSTRAC Regulatory Guide for a useful overview of the AML/CTF requirements for superannuation funds. Further, it includes some information about ‘risk indicators’ for superannuation funds, two brief case studies and some FAQs.¹⁵

Conflicts of interest

APRA has released the Draft Prudential Practice Guide¹⁶ (draft guide), SPG 521: Conflicts of interest, and a discussion paper¹⁷ for public comment. Comments on the draft guide are due by 30 April 2009.

The draft guide provides ‘practical guidance’ for trustees regarding conflicts of interest in order to comply with their obligations under the Superannuation Industry (Supervision) Act 1993 (Cth) pertaining to their Risk Management Strategy and a Risk Management Plan and the fit and proper operating standard.

The draft guide adds to APRA’s existing Superannuation Guidance Note SGN 110.1 Fit and Proper, Superannuation Guidance Note 120.1 Risk Management and Superannuation Guidance Note SGN 130.1 Outsourcing. Further, according to the media release¹⁸, the draft guide complements ASIC’s Regulatory Guide 181 Licensing: Managing conflicts of interest¹⁹ on dealing with conflicts of interest ‘by focussing on the governance of the RSE licensee, including those that do not hold an AFSL’. 

The draft guide states that a conflict of interest may be actual or potential and may arise where the trustee has a duty to act in the best interests of the fund’s beneficiaries but also has a personal interest or competing fiduciary duty which ‘impairs or interferes with, or could be reasonably seen to impair or interfere with, the fiduciary’s ability to exercise independent judgment in the best interests of his beneficiary’.

One potential cause for industry concern results from APRA’s position on conflicts of interest resulting from outsourcing to service providers within the same corporate group as the trustee. In most cases, the trust deed of a retail superannuation fund which is operated within a corporate group will include deed provisions sanctioning or requiring the use of related parties’ services or products. Under general law, such trust deed provisions relieve the trustee from considering conflicts of interest which result from using the related party products and services.

APRA states in the draft guide that the position with regard to conflicts of interest is not so ‘straightforward, because the provisions of the trust deed and the disclosure do not release the trustee from its obligation to manage and monitor the outsourced arrangement, which should comply with the outsourcing standard in SIS Regulation 4.16’:

There may be circumstances where such arrangements may not be in the best interests of members and beneficiaries. If, in such circumstances, the trustee has power to initiate an amendment to the deed, the trustee will need to consider exercising it with a view to widening the choice of investments or service providers, especially recognising the potential for circumstances to diverge from those pertaining at the time the governing rules were written or last amended. If not, it may be appropriate for the trustee to approach the Court, for example for an order conferring power to invest in a wider range of products.

SIS Regulation 4.16 requires material outsourcing agreements be in writing and address all prescribed matters. Conflicts of interest are not included expressly in the prescribed matters under SIS Regulation 4.16 or addressed in Superannuation Guidance Note SGN 130.1 Outsourcing.

Disclosure of long-term returns

Minister Nick Sherry recently announced changes to disclosure requirements which will affect superannuation fund trustees (other than SMSF trustees). In summary, the changes relate to:

• the reporting of long-term returns in individual member statements, and
• the delivery of a fund’s annual report.

On 30 March 2009, the Corporations Amendment Regulations 2009 (No. 3) (Amending Regulations) were registered to give effect to these changes. The changes commence on 1 July 2009 and apply in respect of individual member statements (including exit statements) and fund annual reports issued on or after that date.

Reporting of long-term returns

Superannuation fund trustees are currently required to include long-term returns for a five-year period in the fund annual report. From 1 July 2009, this requirement will be replaced by an obligation to include this information in individual member statements issued on or after 1 July 2009. Further, the obligation to report on long-term returns has been extended to also require reporting of returns for a 10-year period. However, the requirement to report returns over a 10-year period does not commence until 1 July 2010.

The changes will be implemented in two phases to give the superannuation industry time to adjust to the new requirements.

1 July 2009–30 June 2010

The key changes to the content requirements for individual member statements issued during this period can be summarised as follows:

• a statement of long-term returns for the period of five years ending at the end of the last financial year or reporting period before the provision of the periodic statement (including an exit statement) must be included either in the member’s statement or as an insert to the statement
• the long-term returns of either the specific investment option the member is invested in at the end of the reporting period or the sub-plan (or, if none, the fund) must be provided
• there must be a clear statement to the effect that the long-term returns are not the returns on the member’s investment, and
• if a trustee uses the insert option and provides long-term returns for the member’s investment option but the insert also includes the long-term returns for other investment options, the insert must clearly state which option the member is invested in.

From 1 July 2010

From 1 July 2010 the reporting obligations with respect to long-term returns are as follows:

• long-term returns must be provided for a five-year period as well as a 10-year period
• the long-term returns must be included in the member statement, ie, they cannot be provided by way of an insert to the member statement
• if a member is invested in a specific investment option at the end of the reporting period, then the trustee has no choice but to provide the long-term returns for that investment option. Only where a member is not invested in an investment option can the long-term returns for the sub-plan or, if none, the fund be provided, and
• inclusion of a clear statement to the effect that the long-term returns are not the returns on the member’s investment.

General

The following general requirements apply in respect of both phases of implementation:

• the Amending Regulations specifically provide that the ‘clear, concise and effective’ requirement applies to the reporting of long-term returns
• if an investment option, sub-plan or fund has not been in operation for the required reporting period (ie, five years or 10 years), then returns must be provided for the period of operation together with the date of inception
• for long-term returns which are included in the member statement (which will always be the case from 1 July 2010), the returns must be located near the statement of the rate of any earnings allocated during the reporting period, and
• to avoid unnecessary duplication, there will no longer be a requirement to include long-term returns over a five-year period in the fund’s annual report.

Implications

• Clearly the new disclosure requirements will, in most cases, necessitate system changes, some before 1 July 2009.
• The superannuation industry lobbied strongly that it would take some time to make the systems changes required to comply with the new disclosure requirements. However, this was unsuccessful.
• Accordingly, from 1 July 2009, for example, the new disclosure requirements will apply to members exiting the fund after that date (although, as noted above, for the year ending 30 June 2010, only the fund’s five-year earning rate is required to be provided (rather than investment returns for a member’s individual investment option(s) and this can be done by way of insert).
• If a trustee is not able to comply with the new requirements from 1 July 2009, it may be faced with the possibility of having to provide exiting members with an exit statement without the additional information when the member leaves the fund and then issuing a new member exit statement which includes the new information required within six months of the member’s exit date. This duplication could be costly.
• There may be an interpretational issue as to what the Amending Regulations mean by the period during which an investment option has been in operation. For example, if a fund has always had a balanced investment option, but the fund decides to change the relevant asset mix percentages from 60/40 to 65/35, that may constitute a new investment option.

Electronic delivery of an annual report now possible

The Amending Regulations also provide further relief for trustees in relation to the provision of the fund annual report. If certain requirements are met, a trustee can make the annual report available on its website as the default method of delivery of the annual report.

The key requirements are as follows:

• For the first financial year that the trustee decides to make the annual report available on its website in reliance on the Amending Regulations (ie, regardless of whether the trustee has made the annual report available on its website before the Amending Regulations commenced), the trustee must notify each member in one document:
  • that the annual report is available on the website
  • how to access the website, and
  • that the member may elect to have a hard copy, or electronic copy if it is available, of the annual report sent to them free of charge.
• If a member elects to receive a hard or electronic copy of the annual report, the trustee must continue to comply with that election for subsequent years until the member notifies the trustee otherwise.
• Each year, the trustee must notify all members that have not elected to receive a hard or electronic copy of the annual report that the annual report is available on the website and explain how to access the website.
• The trustee must ensure that the annual report is readily accessible from the website.

The business of being a trustee – an update on directors’ liability

Potential personal liability for directors of trustee companies continues to be the subject of industry discussion. There is an ongoing balancing act between the need to encourage appropriate people to continue to act as superannuation fund trustee directors and the need to hold trustee directors personally liable for inappropriate acts.

Recently, these issues have again come to the forefront of industry debate as a consequence of the following two developments:

• The results of the Federal Treasury Survey of Company Directors were released on 18 December 2008.²⁰ The survey was conducted by Treasury in conjunction with the Australian Institute of Company Directors. 65 per cent of the respondents to this survey stated that they occasionally were overly cautious in business decision making as a result of the risk of personal liability.
• The Council of Australian Governments (COAG) has agreed to work towards increased harmonisation of the laws relating to company director liability.²¹

COAG has referred the following principles to the Ministerial Council for Corporations for its views on reforming Commonwealth, state and territory laws:

• liability for contravention of statutory requirements should be imposed on the company in the first instance
• personal criminal liability of a corporate officer for the company’s misconduct should be limited to situations where the officer encourages or assists the commission of the offence (this is the equivalent to the common law concept of  accessorial liability), and
• a new form of ‘deemed’ liability could be introduced for exceptional circumstances.

On 17 April 2009, Minister Nick Sherry announced an audit of all Commonwealth laws which involve company director liability against the COAG principles.

There are other calls for the ‘business judgment’ defence to be extended to business and commercial judgments for assistance in breaches relating to the duty of care and diligence, particularly in the context of the continuous disclosure requirements.

Personal liability can arise for trustee directors in several ways, including the following:

• The courts have traditionally not imposed a direct fiduciary relationship between an individual trustee director and members of a superannuation fund. However, under the Barnes v Addy (1874) 9 Ch App 244 principles, an individual director can be personally liable for knowingly or recklessly assisting in a breach of trust by the trustee company. This position is furthered by the operation of the Criminal Code which extends liability to a person involved in a contravention.
• Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) section 52(8) extends the operation of the SIS Act covenants to directors personally. Section 52(8) requires a director of a trustee company to ‘exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee’ carries out the covenants. Clearly this section expands the potential for a director of a trustee company to incur personal liability. A beneficiary of a superannuation fund who suffers loss resulting from a breach of the covenants could seek to recover the loss from the trustee and those directors who have failed to exercise ‘the degree of care and diligence that a reasonable person in the position of director of the trustee would exercise in the trustee’s circumstances’.
• Similarly, under the Corporations Act, a director of a trustee company may be personally liable for certain prohibited conduct or misleading or deceptive conduct in relation to financial products or financial services.
• Further, civil fines and penalties are imposed by many pieces of legislation, including, the SIS Act and the Corporations Act. Insurance policies have generally been broadened in recent years to cover a wider range of civil fines and penalties but most policies do not cover all fines and monetary penalties. The Australian Institute of Company Directors has indicated that ‘there are more than 600 state laws that impose personal liability‘.
• APRA and ASIC both have the power to seek disqualification of individual directors who have contravened their statutory obligations.

The practical application of these issues is evidenced by the 23 April 2009 New South Wales Supreme Court finding that certain former directors and executives of James Hardie breached their duties under the Corporations Act by making misleading statements to the market.

Freehills update

• Michael Vrisakis’ article ‘Payout can rob Peter to pay Paul’ was published in The Australian Financial Review on 25 March 2009. In the article, he observed ‘[m]ore often than not, to pay out an investor holding illiquid investments means you are cashing in liquid investments belonging to other investors—in effect robbing Peter to pay Paul’.
• Michael also has an article on prioritisation of a trustee’s right to payment in an illiquid investment cycle in the April 2009 Australian Superannuation Law Bulletin (Volume 20 No 8).
• Natalie Gullifer has an article in the April 2009 Australian Superannuation Law Bulletin (Volume 20 No 8) on the impact of new Fair Work legislation and the AIRC award modernisation project on superannuation.
• On 7 May 2009, the Melbourne Superannuation group will hold a lunchtime seminar for clients on ‘managing risk’. The seminar will address the management of outsourced processes and functions as well as issues regarding professional liability insurance. Please call the Melbourne Superannuation group on 03 9288 1527 if you are interested in attending and have not received an invitation.

Endnotes

1. Appropriation (Nation Building and Jobs) Act (No. 1) 2008-2009
2. Appropriation (Nation Building and Jobs) Act (No. 2) 2008-2009
3. Commonwealth Inscribed Stock Amendment Act 2009
4. Household Stimulus Package Act (No. 2) 2009
5. Tax Bonus for Working Australians Act (No. 2) 2009
6. Tax Bonus for Working Australians (Consequential Amendments) Act (No. 2) 2009
7. Corporations Amendment (No. 1) Act 2009
8. Corporations Amendment Regulations 2009 (No. 2)
9. Superannuation Industry (Supervision) Amendment Regulations 2009 (No. 2)
10. Media Release, ‘Regulations Released for Pension Drawdown Measure to Benefit Retirees’, 16 March 2009
11. Corporations Amendment Regulations 2009 (No. 3)
12. Tax Laws Amendment (2009 Measures No. 1) Bill 2009
13. Media Release, ‘Amendments to Improve Superannuation Guarantee Late Payment Offset’, 13 March 2009
14. MR09-36 ‘ASIC extends ban on covered short selling of financial securities’, 5 March 2009
15. Chapter 11, AUSTRAC Regulatory Guide
16. Draft Practice Guide, SPG-521 Conflicts of Interest
17. Discussion Paper, ‘Management of conflicts of interest – RSE licensees’
18. Media Release, ‘APRA consults on conflicts of interest guide for super funds’, 3 April 2009
19. ASIC’s Regulatory Guide 181 Licensing: Managing conflicts of interest
20. Survey of Company Directors
21. Council of Australian Governments’ Meeting, 29 November 2008

More information

For information regarding possible implications for your business, contact a member of the Superannuation team.