Your Future, Your Super reforms – are you ready?
With only one month to go before the Government’s Your Future, Your Super (YFYS) reform package is to take effect, the question is – is the industry ready? Is your organisation ready?
The YFYS reform package, announced in the 2020-21 Federal Budget, is designed to ensure the superannuation system delivers better outcomes for members. The draft legislation and explanatory material consultation process concluded on 24 December 2020, with draft regulations and associated measures released for consultation on 28 April 2021.
The proposed changes are yet to pass the Senate, with further changes and deferred implementation dates still possible. Nonetheless, super funds have been working in the background to readily prepare for the new requirements by 1 July 2021. The date is fast approaching, which is why it’s essential for super funds to monitor the legislative changes and adjust their implementation plans accordingly as further details are confirmed.
To help super fund trustees prepare their organisations for the reforms, this blog covers a summary of the reforms, key timelines, and the expected strategic, operational, and risk and compliance impacts.
Purpose of the YFYS reforms
Changes under YFYS are intended to empower consumers in their selection of super funds and to determine whether their superannuation is working for them.
The reform package seeks to address the following findings from the most recent Productivity Commission review into superannuation and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:
Unintended multiple accounts causing unnecessary fees and insurance premiums because of people changing jobs and not actively deciding to maintain a single super account.
Australians paying too much for their superannuation due to poor competition between default super products, complexities of the system and lack of simple and clear information for members to select the most appropriate product.
Members placed in underperforming super products due to the design of default arrangements.
Funds lack accountability to their members for their conduct and the outcomes they deliver and there is inadequate transparency on how funds are spending members’ money.
Though the reforms come with good intentions, many in the industry comment on whether the package will adequately achieve its objectives and there is speculation about potential unintended consequences for members. Despite the unintended consequences which may arise, the principles and intent of the reforms are a step in the right direction for the Australian superannuation system.
Summary of the YFYS reforms
The proposed legislation for the YFYS reforms implements three key changes to the superannuation system.
1. Stapling of funds
Under the reforms, an employee’s current super fund membership will follow them (a ‘stapled fund’) to a new employer. This policy measure aims to reduce multiple accounts. In practice, employers will be required to locate a new employee’s existing fund and make contributions to that fund on behalf of the employee.
2. Super fund performance assessment
YFYS requires annual performance testing of MySuper products (and certain other products identified in the regulations), with assessment results reported publicly on APRA’s website.
Concerns have been expressed around the current construction of the annual performance test, with a focus on the effectiveness of the implementation of the disclosed asset allocation, notwithstanding the appropriateness of the asset allocation, the relativities of the asset allocation to that of other products, or the associated member outcomes. No doubt these issues will be considered as part of the pending Senate hearing and ongoing reviews of the effectiveness of the annual performance test.
If a product fails the assessment, trustees will be required to notify members/beneficiaries who hold the product within 28 days of receiving notification from APRA. If a product fails the performance assessment in two consecutive years, the trustee can no longer accept new beneficiaries into that product or restrict existing members from leaving under legacy default arrangements.
To help members compare the performance of MySuper products, the Government proposes to make this information more accessible by introducing an interactive, online YourSuper comparison tool.
3. ‘Best financial interests’ test for superannuation trustees
The proposed legislative change also requires an update to the current law (sections 52 and 52A of the SIS Act) which currently requires superannuation trustees to make decisions for members in line with a ‘best interests’ test. The update requires trustees to instead focus on the ‘best financial interests’ of members when making fund-related decisions, including investments and expenditures. However, the proposed ministerial power to overrule trustee decisions has been removed as part of the amended bill passing through the House of Representatives on 3 June 2021.
The pending ‘best financial interests’ duty has since been supplemented with the draft Treasury Laws Amendment (Your Future, Your Super - Improving Accountability and Member Outcomes) Regulations to focus on trustee accountability through portfolio holdings disclosure, information for annual members’ meetings and restrictions on the use of goods or services to influence employers.
Timelines for your calendar
The YFYS reforms are expected to take effect from 1 July 2021, which is approaching quickly, and should already be marked in super fund trustee calendars. The annual performance test will start on or after 1 July 2021 for MySuper products and on or after 1 July 2022 for other specified super products.
Impact of the YFYS reforms
There are several strategic impacts of the reforms that superannuation trustees will need to consider, particularly in relation to the stapling of funds. As a result of this measure, member demographics of super funds may change dramatically going forward, as the super fund remains stapled to the employee for life without an active decision to choose another super fund. This is likely to impact the suitability of product offerings and insurance strategies for the fund’s membership base.
Further, membership growth is likely to slow for some funds, causing a reduction in the scale benefits many funds are currently pursuing due to regulatory pressures. This is especially likely for funds reliant on employer relationships and default arrangements to grow their memberships. Funds will need to focus on member engagement and encouraging members to make an active choice to remain in or join the fund. We expect this to also be a driver for further industry consolidation, as funds seek inorganic growth through mergers.
Increased transparency around super fund performance is expected to also fuel an increased focus on super fund investment strategies to generate more competitive investment returns for members. Underperforming funds that were previously able to fly under the radar, relying on default fund arrangements, will no longer be able to do so.
From a day-to-day perspective, the increased transparency requirements are expected to have the greatest operational impacts for super fund trustees. To meet the ‘best financial interests’ test, trustees are to focus on members’ financial interests in relation to not only strategic decisions and discretionary expenses, but also the day-to-day operational expenses incurred by the fund. Trustees will need to develop effective mechanisms to proactively monitor daily fund expenses and their approach to related decision-making. There will also be a significant operational impact associated with oversighting implementation of the stapling provisions, oversighting the activities of employers and data provided to the trustee/fund administrator in this regard.
The impacts of the reforms also extend beyond super fund trustees to employers. The requirement for employers to obtain information about their new employee’s existing super fund is expected to create an additional administrative burden for both employers and super funds. The industry is currently exploring options for technology solutions to improve access to such information and enable compliance with the new requirements.
Risk and compliance impacts
As previously mentioned, the stapling of funds is likely to have notable strategic impacts for funds, but it also presents a key risk – substantive decline in new membership growth. The severity of this risk is subject to the nature of the fund and its historical new member profile and should be considered as part of risk assessments conducted throughout the implementation of regulatory change.
As funds adjust their member acquisition campaigns in response to the risk of decline in new membership growth, there is also the added risk of non-compliance with existing marketing, disclosure, distribution, and financial advice obligations. Trustees will need to comprehensively review their risk and compliance obligations to ensure strategies used as part of the implementation of the YFYS regime do not cause non-compliance with other current obligations.
An area with heightened risk and compliance implications under the reforms is the trustee accountability requirements stated in the Treasury Laws Amendment (Your Future, Your Super - Improving Accountability and Member Outcomes) Regulations. To meet the ‘best financial interest’ duty, trustees need robust quantitative and qualitative evidence to support their expenditures and will need to review current decision-making processes to comply.
There is also the broader risk of non-compliance with the new requirements under the YFYS regime. For example, in relation to ‘best financial interests’, two new offences are introduced:
A strict liability offence if a trustee breaches an operating standard that relates to a record-keeping obligation; and
An offence if a director was in a position to influence the conduct of the trustee and failed to take all reasonable steps to prevent the trustee from breaching an operating standard that relates to a record-keeping obligation.
How Hall Advisory can help
The YFYS reforms require significant changes for superannuation trustees from strategic, operational and risk and compliance perspectives.
At Hall Advisory, we offer a range of services to help businesses implement regulatory change effectively. These include:
Facilitation of strategic workshops and updates of strategic business plans
Product benchmarking and performance testing, member outcomes assessments and business performance reviews
Facilitation of risk workshops and updates of risk documentation
Design and implementation of regulatory change programs and compliance frameworks
Development and facilitation of compliance training
Independent review of the adequacy of operational systems and controls
Contact us today and let’s start with a confidential, no-obligation conversation about how we can support you with our services.