2017 a year of reform and change

This was a year dominated by change for the superannuation industry, with the slew of regulatory reforms implemented or proposed and major mergers and acquisitions across the sector creating waves for the wider sector, writes Hannah Wootton.

As 2017 ends, superannuation fund managers may be relieved to shut the door on 12 months dominated by legislative reform implementation, proposals of regulatory changes, and significant mergers within the industry.

With the range of new regulations that came into effect on 1 July 2017, member contributions, death benefits, and self-managed superannuation fund (SMSF) event reporting all became more tightly regulated.

The amount of benefits a retiree can enjoy in their tax-free retirement pension were also limited, with the introduction of a $1.6 million transfer balance cap (TBC).

The landscape of the industry has also changed, with a series of large and small funds declaring their intention to either merge with, or acquire, other funds. 

 

Policy and regulation

Implementing and adapting to legislative reforms continues to be the dominant focus in the superannuation industry at the half way point of the 2017-2018 financial year, as the biggest changes to super rules in 10 years came into effect on 1 July.

 

Contribution limits

Both concessional and non-concessional contribution limits for SMSFs were reduced on 1 July 2017. 

Pre-tax contributions were reduced by up to $10,000 depending on the members’ age, while caps on after-tax contributions went from $180,000 to $100,000.

The concessional cap would also now increase in increments of $2,500 going forward (not $5,000 as prior to 1 July 2017), which would mean the non-concessional cap would only increase in increments of $10,000 rather than $30,000, as it is four times the concessional contributions cap for the year. 

While the existing bring-forward rule was not changed, its cap was reduced to $300,000 to reflect the reduction in non-concessional contributions.

The number of years which contributions can be brought forward was also limited for individuals with total super balances between $1.4 million and $1.6 million.

Commonwealth Bank of Australia (CBA), head of SMSF customers, Marcus Evans flagged this as one of the most significant reforms of the year, and said it will make it hard to achieve large balances.

Evans also said that this was particularly concerning for fund members over the age of 50 with low balances.

New reforms would also prevent people from making large contributions later in life, as per previous strategy. Evans said investors would now need to maximise contributions throughout the accumulation phase.

Going into the new year, trustees should review their contribution strategies to ensure that they are still on track to meet their retirement goals in light of the changes wrought by the reforms.

 

Transfer balance caps

A new TBC on the amount of benefits an individual can transfer from the accumulation phase to support the retirement phase income streams would also be imposed. This would work as an attempt to limit the amount of benefits a member is eligible to receive from the tax-free retirement phase.

The $1.6 million TBC implemented on 1 July 2017 is set to be indexed periodically in $100,000 increments in line with Consumer Price Index (CPI). Indexation would be dictated by available cap space, so those who exceed or meet their cap would not be entitled to indexation.

Evans said that the cap would likely lead to more retirement savings being held outside super.

 

Death benefits

Also under new provisions, a pension received on the death of a spouse may cause SMSF members to exceed their TBC. Assets supporting the pension of the deceased now also count toward the surviving spouse’s TBC. Excess above that TBC as a result of a spouse or partner’s death can no longer be automatically transferred into an accumulation fund.

Under the new rules, the excess that must instead be paid out as a lump sum could see the $1.6 million cap breached.

SMSF Association head of technical, Peter Hogan warned that many SMSF members and advisers had not sought adequate advice regarding these death benefits changes, which also reinforced Evans’ view that expert advice would be necessary.

“It is an outcome of the superannuation regime that has received little attention and the Association is concerned that many SMSF members and their advisers are ‘blissfully ignorant’ of the impact of these changes regarding the payment of death benefit,” Hogan said.

Evans cautioned that without appropriate advice, members could be forced to move money outside of the superannuation environment later.

“The payment and taxation of death benefits has always been a complex area and it has now become more complex. Expert advice is important,” he said.

 

SMSF event reporting

The Australian Taxation Office (ATO) compromised on regulatory changes on SMSF event reporting, following pressure from SMSF groups.

Criticism from within the SMSF industry saw the proposal’s implementation delayed until 1 July 2018 and its contents watered down.

The ATO initially planned to introduce rigid requirements on SMSFs to report relevant TBC events.

Under their proposal, SMSFs with one member having $1 million or more in super and receiving a pension from those assets would have had to report to the ATO 28 days after each quarter on any TBC events.

TBC events included commencing a pension or commuting some or all of a pension.

The ATO compromised to only require quarterly reporting on SMSFs for prescribed events thereafter.

The new reporting requirements would also only apply to SMSF members with a total superannuation balance (across all funds of which they are a member) greater than $1 million.

The Self-Managed Independent Superannuation Funds Association was notably critical of the original proposal.

The organisation said that the blanket reporting approach originally set to be imposed “would have imposed unnecessary and costly compliance pressure on all SMSFs.”

They welcomed the compromise, and said: “The ATO’s final position on event-based reporting is both welcome and a reflection of the industry and regulator collaborating to achieve a sensible outcome.”

Evans warned that the 2017 regulations would still have significant effects going into 2018.

He pointed to the fact that funds over $1 million in the pension phases will be required to report more under the Transfer Balance Account Reporting regime from 1 July 2018.

 

Proposed reforms

Superannuation proposals currently before Parliament and the implementation of changes planned for 2018 suggested that the New Year would not bring respite from regulatory change for the industry.

On governance level, the superannuation industry has expressed consternation toward the proposed one-stop-shop dispute resolution body, the Australian Financial Complaints Authority (AFCA), which would replace the Superannuation Complaints Tribunal (SCT).

Both the Association of Superannuation Funds Australia and the Australian Institute of Superannuation Trustees have argued that the SCT is a superior dispute resolution mechanism compared to the AFCA.

The Federal Budget however, confirmed that despite opposition the Coalition is committed to proceeding with the AFCA.

On 14 September 2017, the Federal Government introduced a bill to reform super fund board member requirements, which was before the Senate at the time of writing.

The proposed changes include a mandation for one-third independent directors on boards and an independent chair. Should funds not have a majority of independent directors on their boards, they would be required to explain moving forward.

In response to these proposals, Industry Super Australia (ISA) has accused the Government of ‘waging an ideological war’ on trade unions and industry funds.

Rather that responding to the superannuation industry’s issues, ISA said: “The Government has resorted to dog-whistling about the role of unions on trustee boards.”

Minister for Revenue and Financial Services, Kelly O’Dwyer said that the reforms were not targeted towards unions and industry super funds.

 

Mergers and acquisitions

The year has seen many significant mergers and acquisitions across the superannuation space, as a series of funds either merged or announced their intention to do so.

Last year closed with the announcement of Mercer’s high-profile acquisition of the New South Wales Government-owned superannuation firm Pillar Administration in December 2016, a deal which made Mercer the second-biggest entity in the Australian superannuation space, behind the Link-owned Australian Administration Services. Link, in turn acquired Superpartners last year.

Rio Tinto Staff Superannuation and Equip led the charge this year with a 1 July merger following the announcement of an intention to merge in January.

Commenting on the merger, both funds pointed to the need for greater scale and resources to continue investing in strong products and services, while having to keep fees and costs as low as possible as major drivers.

“The expectations of members and employers are now much greater than ever before and have moved beyond meeting the traditional needs for strong investment returns, good governance, risk management and compliance,” said Equip Super chair, Andrew Fairley. 

“They now extend to on-demand access to support and advice across multiple channels, including digital and they expect those services to be tailored to their individual needs.”

The much-anticipated merger of the Retirement Benefits Fund and Tasplan in Tasmania occurred on 1 April, following the announcement of intention in 2015.

Under the unification, Tasplan became the default fund for Tasmanian state service employees with the merged funds now accounting for 165,000 members and around $6.5 billion funds under management (FUM).

Tasplan’s merger with Quadrant at the end of 2015 had also been touted as a move that that would help grow the financial services industry in Tasmania, and be competitive in the super industry in the long-term.

Kinetic and Sunsuper’s merger eight months ago in April has now also produced a combined fund with more than $45 billion FUM and around 1.3 million members. Both funds emphasised the benefits to economies of scale and the delivery of products and services to members arising from the merger.

“A successful merger will drive future efficiencies, promote a stronger competitive position in the market, and ultimately generate greater value for the combined member and employer base,” said Sunsuper chair, Ben Swan.

In October, Equity Trustees and Aon entered into a $5.2 billion partnership which would see the Aon Master Trust and the Executive Superannuation Fund merge.

The two funds also cited benefits to costs and offerings for members as incentives for the agreement.

“The increased breadth and depth of the fund means we will be positioned to offer even greater advantages for our members, including lower costs and increased buying power to provide superior investment options,” said Aon Hewitt Pacific chief executive officer, Steven Gaffney.

In perhaps the biggest move of the year, ANZ sold its super business to IOOF Holdings in October, with the latter picking up OnePath Pensions and Investments and aligned dealer groups businesses for a price of $975 million.

Under the agreement, IOOF is bound to a 20-year strategic partnership to distribute wealth management products through ANZ. This reflects a shift from ANZ to distributing superannuation products rather than providing advice.

“By partnering with IOOF, we are able to create greater value for our shareholders while also providing our customers with access to quality wealth products,” said ANZ Wealth Australia group executive, Alexis George of the merger. 

She also said that separating the insurance and super businesses will allow ANZ to offer better services in the former.

“Separating the super business from the insurance business will take some time, but once that happens it means we’ve got a clear life insurance business and that gives us much more opportunities than we’ve got today,” George said.

 

2018 Outlook

The trend of fund mergers is set to continue into 2018, with actuarial consultancy and research house Rice Warner reporting in November this year that there is a high likelihood of further merger moves as the number of not-for-profit (NFP) funds with less than $2 billion in funds under management would likely result in more funds looking to balance costs.

The research house’s analysis showed that there were currently 79 NFP funds with less than $2 billion FUM. Rice Warner said the higher operational costs and thinner resources for these funds meant a new growth strategy would be needed to remain viable in the future.

Rice Warner has also predicted a 60 per cent reduction in funds in this decade as a consequence.

“That will still give us 44 not for profit funds and a smaller number of retail funds,” it said. 

“In the latter case, the number of funds is partly a reflection of legacy products and we can expect that many will merge under the same corporate trustee.”