FS Super Volume 12 Issue 01

Volume 12 Issue 01

SUPER IMPACT Robert Fowler, 2019 SelectingSuper Industry Service Award winner

The fairness doctrine Michael Vrisakis

Superannuation is for spending Nick Callil

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Contents

www.fssuper.com.au Volume 12 Issue 01 | 2020

1

COVER STORY

SUPER IMPACT Robert Fowler

18 NEWS HIGHLIGHTS

FEATURES

APRA RELEASES MYSUPER HEAT MAP

6

The prudential regulator has finally published its long-awaited heat map for MySuper products.

NEW SUPER FUND TARGETS MILLENNIALS

7

Dial down the fiduciary climate emergency Alex Dunnin

05

A new sub-plan of Aracon Super has officially launched, marketed to millennials with a PDS revealing relatively high fees, expensive insurance and big ambitions.

CBUS ENTERS CORPORATE SUPER

9

Cbus officially launched its Cbus Corporate Super product for those who wish to join the fund via their employer.

INDUSTRY SPLIT OVER SUPER FEE HIKE

Featurette 2019 ASFA Conference

14

11

A new fee introduced by Australia’s largest superannuation fund has divided the sector, with many questioning its legitimacy.

ACADEMICS PROTEST UNISUPER INVESTMENTS

12

UniSuper is again facing criticism over its continued investment in fossil fuels, this time directly from its members.

RETIREMENT REVIEW GOES OFF THE RAILS

13

Superannuation experts are concerned the retirement income review may be getting out of hand.

FS Super

Outlook 2020 vision

16

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

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Contents

www.fssuper.com.au Volume 12 Issue 01 | 2020

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Published by a Rainmaker Information company.

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A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Harrison Worley harrison.worley@financialstandard.com.au Graphic Design & Production Samantha Sherry samantha.sherry@financialstandard.com.au Shauna Milani shauna.milani@financialstandard.com.au Technical Services Elizabeth Thomas elizabeth.thomas@financialstandard.com.au Advertising Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media & Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Director of Research & Compliance Alex Dunnin alex.dunnin@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

FS Super

The Journal of Superannuation Management ISSN 1833-9573

08 09

10 12

News

APRA RELEASES MYSUPER HEAT MAP MYSUPER HEAT MAP LAUDS INDUSTRY FUNDS SUPER FUND IN GENDER PAY GAFFE News

NEW SUPER FUND TARGETS MILLENNIALS AUSTRALIANSUPER UPS ADMIN FEES MERGER NOT SET IN STONE News

ISA SLAMS ANU RESEARCH AS SG DEBATE REARS ITS HEAD AGAIN AMP TO CULL SUPER TRUSTEE, FIVE FUNDS SUPER FUND REBRANDS News

CBUS ENTERS CORPORATE SUPER AMP GIVEN THE BOOT BY AFL ZENITH ENTERS SUPERANNUATION News

JANA DRAGGED INTO REST LEGAL STOUSH GROW SUPER SIGNS FIRST ADMIN CLIENT FRYDENBERG TAKES RC SUPER ADVICE News

ACADEMICS PROTEST UNISUPER INVESTMENTS RETAIL FUND SWAPS OUT K2 SUPER FUND OF THE YEAR NAMED

All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Super are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rawinmaker Information company.

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White papers

www.fssuper.com.au Volume 12 Issue 01 | 2020

WHITE PAPERS

26

Administration & Management

$1.6 MILLION TRANSFER BALANCE CAP REVISITED

By Kimberley Noah, William Fettes, DBA Lawyers

Now that the transfer balance cap has been law for some time, this paper looks at key aspects of the measure to help clarify how the rules operate for advisers and SMSF trustees.

30

Administration & Management

LIMITED RECOURSE BORROWING ARRANGEMENTS

By Allison Murphy, William Fettes, DBA Lawyers

As second-tier LRBA lenders take the place of the first-tier lenders no longer offering LRBAs to purchasers of residential property, this paper examines common pitfalls of the reshaped market.

34

Administration & Management

UNLISTED SMSF ASSETS COULD MEAN A QUALIFIED AUDIT

By Marjon Muizer, SuperConcepts

At tax time, no SMSF wants a qualified audit. Yet the chance is higher if you hold unlisted assets, particularly unlisted trusts and companies, plus any loans you’ve made.

38

Administration & Management

WHO GETS THE SUPERANNUATION DEATH BENEFIT

By Selwyn Black, Carroll & O’Dea Lawyers

It is estimated that at the age of retirement, the average Australian will have over $200,000 in super. The question of who gets that super on death is important for two key reasons

48

Investment

INVESTING IN NON-GEARED UNIT TRUSTS

By Nicholas Ali, SuperConcepts

An alternative to an SMSF establishing a limited recourse borrowing arrangement is for the fund to invest in a unit trust. This paper takes a look at the advantages of doing so.

52

Retirement

Ethics & Governance

THE FAIRNESS DOCTRINE

By Michael Vrisakis, Herbert Smith Freehills The implications of the recent Full Federal Court decision in the case between ASIC and Westpac are far-reaching for the financial services industry.

DEFERRED LIFETIME ANNUITIES

By Andrew Lowe, Challenger

The government’s ‘Innovative Superannuation Income Streams’ regulations have allowed for the development of new categories of retirement income.

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Retirement

SUPERANNUATION IS FOR SPENDING

By Nick Callil, Willis Towers Watson

While we wait for the actual objective of super to be determined and legislated, it should not be contentious to assert that super savings accumulated during working years should be spent down.

42 62

Technology

MANAGING YOUR INFORMATION ASSETS

By Philip Catania, Coors Chambers Westgarth

With the frequency and seriousness of data breaches continuing to set new records each year, regulators have begun laying down the law when it comes to data management.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

Welcome note

www.fssuper.com.au Volume 12 Issue 01 | 2020

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Alex Dunnin executive director, research & compliance Rainmaker Information

Dial down the fiduciary climate emergency limate emergency. Bushfire crisis. Whatever buzz C word a superannuation fiduciary wants to use to galvanise their trustee board into ‘climate action’, they need to calm down, slow down.

It is not their job to fix climate change, and in any case, they won’t and they can’t. Not any more than they can fix societal problems like gender and social inequity, stop domestic violence or sponsor the magic bullet nation building infrastructure project that will rescue Australia from itself.

Fiduciaries who think this is their job should either run for parliament, get a job at the CSIRO or start a special purpose investment vehicle.

The job of superannuation fiduciaries is instead to identify financial risks and take them into account when designing, constructing, implementing and monitoring their investment strategies and portfolios. Risks associated with changing climate are of course part of this risk matrix.

But the risk list also includes capital market risks, regulatory risks, technology risks, and geopolitical risks, among others. The tricky aspect to this is that the complete list is impossible to write down because no one knows them all or what it will include next year or the year after.

This is why trustee boards are made up of fiduciaries in the first place, not technical experts. Wise, multidisciplined, prudential fund overseers each with a singleminded focus on protecting and indeed maximizing the best interests of their fund members.

Being ideologically driven is not part of this mission description, irrespective of what it is and how noble the trustee believes their intentions to be.

Setting the parameters for all this is of course the sole purpose test: everything the fund does must be focused on providing their members with retirement benefits. That is, it’s a financial constraint. Do anything that takes potential retirement benefits away from your members and you breach it.

FS Super

This doesn’t mean funds can’t invest in ways to promote societal benefits. It just can’t be the primary focus.

Maximising retirement benefits should be.

These constraining rules don’t apply if a fund trustee or executive is running their own money or running non-superannuation money sourced for this purpose.

But being a superannuation fiduciary is different because of its bigger responsibilities.

So when a super fund is lambasted in the mainstream media by an activist political group for having coal companies in their portfolio we need to put this criticism into perspective. It’s activist politics designed to provoke. Super fund fiduciaries responsible for running portfolios with tens of billions of dollars in investments in them meanwhile should be savvy enough to handle these political attacks.

This means that when we judge a super fund’s so-called climate policy credentials, we do not judge them against a pure ideological philosophical benchmark, but against a multi-layered mix of parameters that includes investment outcomes. Let’s not forget that a super fund can’t be a good climate change fighting fund if it’s not a good super fund.

Funds of course need to be good corporate citizens that invest in ways that protect the long term best interests of their members. And if they claim climate change or broader ESG credentials they will be called out if they don’t live up to their rhetoric.

But the primary criteria on which they be judged will always be returns, fees, insurance value, governance, communications and operations. fs

The quote

Fiduciaries who think this is their job should either run for parliament, get a job at the CSIRO or start a special purpose investment vehicle.

Alex Dunnin executive director, research & compliance Rainmaker Information

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News

www.fssuper.com.au Volume 12 Issue 01 | 2020

APRA releases MySuper heat map Harrison Worley

T Fund's pay gap gaffe Elizabeth McArthur

An ethical super fund has published all the work it does internally to promote gender equality, admitting its own gender pay gap grew in favour of men.

Future Super, which has about $350 million of members’ money, began reviewing its gender pay gap, equality and diversity in April 2018 and has now made the results public.

The fund had a target to reduce its gender pay gap by 5% in 2019, but instead the gap grew in favour of men from 12% to 17%.

Future Super attributed the gap to recruitment in the second half of 2019 and hiring women in junior positions.

“In attempting to address the gender disparity across the organisation, we focused our hiring efforts on bringing women into the business (in May 2019 only 35% of our staff were female,

by December 2019 this figure had increased to 44%),” the fund said.

“These women hires were at the junior core level, which disproportionately impacted the organisational pay gap.”

At the senior management level, Future Super has a gender pay gap favouring men of 28.9%. ” "One outlier salary heavily distorts the pay gap figure at this level, due to the small size of the team (seven people),” the fund said. To redress the imbalance, staff earing under $80,000 are paid an additional 1% super. fs

The numbers

15

Just 15 of the 96 MySuper products were given the all-clear by APRA.

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he prudential regulator has finally published its long-awaited heat map for MySuper products, with deputy chair Helen Rowell saying it’s likely many in the industry will feel uncomfortable.

APRA released the first iteration of its MySuper heat map in December, which uses a graduating colour scheme to demonstrate the performance of MySuper products across fees and costs, investment performance, and the sustainability of member outcomes.

According to Rowell, the move intends to address Australia’s “underperforming tail” of superannuation products. As such, the regulator had already begun to contact those trustees most poorly represented by the heat map upon its release, seeking to understand how they will improve member outcomes.

“Since releasing an information paper and sample heat map last month, APRA has engaged with industry to ensure trustees understand the heat map, and how they should use it to improve member outcomes,” Rowell said.

“In particular, we directly contacted the trustees of the worst performing products and asked them to provide or update action plans outlining how they will address identified weaknesses. If they are unable to make substantial improvements in good time, we will consider other options, including pressuring them to consider a merger or exit the industry.

“However, no-one should be complacent. We expect all trustees to use the heatmap to reflect on the drivers of their current performance, and identify where they can do better.”

APRA said an information paper accompanying the release of the heat map showed some of the highlights discovered by the regulator from the data, including that on some occasions products with higher fees have been able to perform well on a net return basis, despite higher fees generally being correlated with lower net returns.

The regulator also found more single strategy products outperform the investment benchmarks than lifecycle product stages. fs

MySuper heat map lauds industry superannuation funds Harrison Worley

Industry super funds fared best in APRA’s first MySuper heat map, forming the majority of products given the all clear by the regulator.

APRA’s MySuper heat map demonstrates the lead large industry super funds have over their retail counterparts when it comes to member outcomes.

Just 15 of the 96 MySuper products managed to score white cells across all categories of performance.

Of those products, 12 are offered by industry super funds. The remaining three are all corporate superannuation products offered by AMP, with Brookfield Australia MySuper, Macquarie Group MySuper and Woolworths Group

MySuper all performing above benchmark across investment performance, fees and costs and the sustainability of member outcomes.

AMIST, Energy Super, First State Super, HESTA, Media Super, MTAA Super, QSuper, Sunsuper, Equipsuper, UniSuper, Cbus and Vision Super were given clear ratings across all categories.

Noticeably, the $167 billion AustralianSuper – the nation’s largest fund – suffered a blemish, with the regulator giving the industry fund a yellow rating for the $2.25 weekly administration fee it charges to members. For those with account balances of $10,000 or less,the fee equates to 1.17% of their balance each year. fs

FS Super

News

www.fssuper.com.au Volume 12 Issue 01 | 2020

New super fund targets millennials

Merger not set in stone QSuper has confirmed its proposed partnership with Sunsuper may not result in a traditional merger.

Appearing before the House of Representatives Standing Committee on Economics in November, QSuper chief executive Michael Pennisi fielded questions from Committee chair and Liberal MP Tim Wilson over the potential arrangement between the two Queensland funds.

Asked if QSuper was strictly seeking a merger with its Queensland counterpart, Pennisi was non-committal, and said the term he used to describe the potential relationship – a partnership – could result in a number of different outcomes.

“That could mean a merger, or it could mean some other arrangement,” Pennisi said.

Wilson asked if an arrangement could amount to the two super funds pooling member savings to achieve scale benefits, and Pennisi replied it was one among a series of options available to the funds.

“Or joining together for operational efficiencies. There is a broad spectrum,” Pennisi said.

“We are in preliminary discussions at the moment, they’re at the very high level, and the fundamental question that our board – and I’m sure the Sunsuper board is going to have to be satisfied by - is whether this thing [a partnership between the two funds] is the best thing for our members?” fs

FS Super

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Elizabeth McArthur

A The quote

It’s our generation’s turn to shape the world.

newly launched sub-plan of Aracon Super has officially launched, marketed to millennials with a PDS revealing relatively high fees, expensive insurance and big ambitions.

Elevate Super launched in January, after Financial Standard revealed its plans a week earlier.

The group insurer for the fund is Hannover Re and the fund managers mandated so far are Nanuk Asset Management and Alphinity. Aracon Superannuation is the trustee.

Rainmaker analysis of the Elevate product disclosure statement indicated product fees and total expense ratio (TER) are above the Rainmaker benchmark of 1.19% on a $50,000 balance for a personal product.

“This is a personal product, not a MySuper product. Elevate needs to raise FUM and revenue very quickly to survive a competitive landscape,” Rainmaker head of research Jason Ross said.

“With the regulator’s rhetoric focusing on less funds in the marketplace rather than more funds, it is a brave

time to launch a new personal product.”

Elevate is offering two investment options – Elevate Balanced and Elevate Growth. There is no MySuper option.

The balanced option charges an administration fee of 0.81% per annum plus $93.60 per annum.

For comparison, fellow start-up super fund Spaceship has an admin fee of $78 per annum plus 0.795%.

Elevate Balanced (TER 1.49%) and Elevate Growth (TER 1.58%) are a bit more expensive than the average of all super products (TER 1.11%) but compare favourably to the average of all products in the personal retail super space (TER 1.63%).

Elevate is targeting socially-aware millennials with its pitch.

“Australians, particularly younger Australians, tend to view super as an unimportant and ineffective asset,” Kwan said in a press release.

“It is not currently mandatory for Australian super funds to provide enough detail to know whether the investment of your super aligns with your core values.” fs

AustralianSuper ups admin fees Jamie Williamsony

AustralianSuper will introduce a new fee for MySuper members from April 2020 to offset the impact of the Protecting Your Super changes.

Effective April 1, AustralianSuper’s members will start paying the ‘Administration fee – Protecting Your Super’ fee; a variable fee based on a member’s account balance, up to a maximum of 0.04%.

On a balance of $50,000 the fee equates to $25 a year. The new fee brings total annual fees and costs payable on a $50,000 balance to $437.

It will not apply to Choice Income or Transition to Retirement Income accounts.

The fee is in addition to the fund’s existing administration fee of $2.25 per

week and investment fee of 0.60%, and will be deducted from investment returns daily before returns are added to member accounts.

From April 1 to June 30 this year, AustralianSuper will charge members the total annual amount for the new fee before charging it over a full financial year from July 1.

With the PYS legislation seeing fees and costs incurred by members with less than $6000 in retirement savings capped at 3%, the new fee is necessary to cover the shortfall, AustralianSuper said.

“This reduces the funds available to cover administration costs, products and services for all members. The new fee will be used to cover this gap in the most sustainable way,” the fund said. fs

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News

www.fssuper.com.au Volume 12 Issue 01 | 2020

Super fund rebrands

ISA slams ANU as SG debate rears its head again

Jamie Williamson

Harrison Worley

Following numerous cases of mistaken identity, a $2 billion industry superannuation fund has rebranded.

EISS Super, or the Electricity Industry Superannuation Scheme, has changed its name to ElectricSuper.

“We’re still the same fund, offering great service to our members, low fees, and competitive investment returns – it’s just our name that’s new!” the site reads.

While a rebranding often tends to come as part of a wider strategic plan, this is not the case for the super fund, with the decision to change its name actually more out of necessity.

Speaking to Financial Standard, ElectricSuper chief executive Nic Szuster said the fund has struggled for years, being frequently confused with the other EISS Super – the Energy Industry Superannuation Scheme.

“We would receive calls each week from members of the other fund and it would take some time for us to realise that there had been a mix up,” Szuster said.

It wasn’t a major issue, with the fund only receiving two or three of these calls each week. However, the problem was exacerbated last year when Mercer, ElectricSuper’s administrator, won the mandate to provide admin services to the other fund too in late 2018.

“That made things much more difficult,” Szuster said.

The fund took it as an opportunity to freshen up its image, launching a new website in late 2019 with “a bit more contemporary branding”.

ElectricSuper was formed when the Electricity Trust of South Australia (ETSA) was privatised in 1999. It is home to about 3000 members. fs

T

The quote

ISA says that it is so limited that no meaningful conclusions could be drawn from it.

he peak body for industry superannuation has forcefully rebuked new research from the Australian National University which questions raising the superannuation guarantee to 12% as scheduled.

Industry Super Australia has launched a scathing attack on research undertaken by the ANU - and included as part of the university’s submission to the government’s retirement income review - which claims the appropriate level of SG can “differ substantially across members”.

In the new paper - The ‘Right’ Level for the Superannuation Guarantee: A Straightforward Issue by No Means – ANU academics Gaurav Khemka, Yifu Tang and Geoff Warren examined how different levels of SG impact on the welfare of individual Australians under current super, tax and pension eligibility rules.

According to the research, the optimal SG varies “substantially” depending on a members’ income and the objective of the saving mechanism, with no “one-size-fits-all” answer to a problem which has plagued the industry for as long as it’s existed.

“A single SG rate is a blunt instrument being applied against a

background of significant member heterogeneity, along with a marked sensitivity to assumptions,” ANU’s research claims.

Perhaps most responsible for riling ISA is the research’s claim that the case for increasing the SG to 12% is tenuous unless the government adopts a stance that the primary aim of the increase was to replace the age pension where possible.

“We are wary over the use of the SG to facilitate self-insurance against risks, noting that this could lead to over-saving with its own issues and costs,” the researchers said.

"Further, our analysis does not account for assets outside of superannuation that could significantly lower the required SG for some members.

The industry super lobby fired back, poking holes in the methodology of ANU’s work and claiming study came to “dangerous conclusions based on flawed assumptions”.

While it recognised ANU’s researchers had already noted the scope of their analysis was limited, ISA upped the ante.

“ISA says that it is so limited that no meaningful conclusions could be drawn from it,” an ISA media release read. fs

AMP to cull super trustee, five funds Harrison Worley

Francesco De Ferrari’s long touted shake-up of AMP’s wealth management business is starting to take shape, with the firm just months away from culling a superannuation trustee and five super funds.

Responding to a question on notice from its November appearance before the House of Representatives Standing Committee on Economics, AMP revealed its simplified wealth management arm will see it aim to close superannuation trustee AMP Superannuation Limited (ASL) and five of its seven super funds by June 30.

Following the change, AMP will retain just two super funds: a master trust called Super Direction

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Fund (SDF), and its Wealth Fund, with NM Super acting as the trustee for both.

Part of the change will involve NM Super investing directly in superannuation assets, a shift from previous AMP practice whereby the firm’s super trustees invested in life-backed insurance policies issued by AMP Life.

According to AMP, NM Super will take a “more active role” under the new model, which will see the trustee directly engage its investment manager (AMP Capital), custodian (BNP Paribas), and related party service provider (AWM Services).

Meanwhile, AWM’s involvement with the trustee is set to extend to administration, product development and related services. fs

FS Super

News

www.fssuper.com.au Volume 12 Issue 01 | 2020

Zenith enters super

Cbus enters corporate super Jamie Williamson

C

Eliza Bavin

Zenith Investment Partners has made a $12 million acquisition to support its push into the super sector.

Zenith has entered into an agreement to purchase the Chant West superannuation and consultancy business, supporting the growth ambitions of both businesses.

David Wright, chief executive of Zenith said he was very pleased to welcome the Chant West team and client capabilities into the Zenith business.

“This is a logical fit for our growth plans to better serve an expanded client base with unbiased research, consultancy and online tools, especially at a time when the broader super, pension and advice markets are undergoing considerable change and further evolving how they serve their clients and members,” Wright said.

Chant West chief executive Brendan Burwood endorsed the deal, saying he believes the business is well aligned with Zenith’s corporate values and ambitions.

“Chant West has been serving super and pension funds, employers and financial advisers for over two decades with unbiased research, memberfocused consultancy services and user-friendly tools, all aimed at supporting the personal wealth goals of a growing number of Australians,” he said.

The combined business will employ more than 70 staff and have an office location in both Sydney and Melbourne.

Zenith said its combined client base will include a number of Australia’s largest super, pension and advice companies, along with smaller, boutique providers located across the country.

The transaction will take place by way of an asset sale for a $12 million consideration and is expected to complete by April 2020. fs

FS Super

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The numbers

0.65%

The annual investment fee Cbus will charge corporate super members.

bus officially launched its Cbus Corporate Super product for those who wish to join the fund via their employer.

The product is available to any employer with a minimum of 50 eligible employees. If the number of employees who are members of Cbus Corporate Super drops below 30 insured members, the employer and employees will be transferred into Cbus Industry Super.

The new offering will see a member defaulted into Cbus’ Growth MySuper option, if they don’t choose otherwise, but includes the benefit of automatic tailored insurance dependent on the member’s job.

Cbus Corporate Super members can choose from three occupation categories to suit the risks of their job.

Members are defaulted into the “light manual” category which is intended for those workers who are sometimes onsite, like a site supervisor or project manager.

There is also a “professional” category for accountants, architects, HR man-

agers and lawyers, and a “non-manual” category for bookkeepers, quantity surveyors and payroll administrators.

Existing Cbus members who choose to move into the Corporate Super option who already have insurance cover will automatically receive the cover they are eligible for and fixed cover equal to any additional death or TPD cover they already held. They will also be entitled to automatic income protection cover where applicable.

Again similar to the MySuper offering, according to the PDS, most members are eligible for insurance though there are some caveats.

For instances, those aged 65-69 years of age there is no automatic cover for those who are not existing Cbus members. Members can apply for death and TPD but not IP insurance, and any cover received is fixed and reduces by 20% year on year.

The PDS states that those in the Corporate Super offering will pay 0.65% a year in investment fees, $1.50 a week for administration and an annual trustee operating cost of 0.19%. fs

AMP given the boot by AFL Kanika Sood

AMP has been replaced as the default superannuation fund for the Australian Football League’s players and employees after 20 years.

From February 28 Hostplus became the AFL’s default fund of choice.

AMP won the mandate in 1999, providing superannuation for both players and other employees. It provided financial advice through Shadforth Financial Group.

The AFL fund had $145 million in assets at June end, according to APRA statistics.

Hostplus’s MySuper option has better performance and is cheaper than AMP Signature Super’s MySuper option.

AMP Signature Super uses lifestage MySuper which costs a member in their 40s with a $50,000 balance about $600 per year.

Hostplus’s single strategy MySuper costs about $533 per annum for a $50,000 balance.

In terms of performance, Hostplus is currently the fourth-best performer in MySuper league tables (returning 10.3% p.a. over a three year basis), according to Rainmaker data.

AMP SignatureSuper is 39th with 8.7% p.a. returns on a three-year basis.

Last year, AMP lost the mandate for Australia Post’s default superannuation fund.

AMP and Hostplus declined to comment. fs

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News

www.fssuper.com.au Volume 12 Issue 01 | 2020

JANA dragged into Rest legal stoush

Frydenberg takes RC super advice

Elizabeth McArthur

J

Harrison Worley

The federal government has released a tranche of draft legislation implementing much of the recommendations of the Royal Commission, including banning directors of RSEs to hold any other roles and prohibiting trustees from charging advice fees in MySuper products.

On the eve of the one-year anniversary of the release of Commissioner Kenneth Hayne’s final report, Treasurer Josh Frydengberg released draft legislation implementing several of the report’s recommendations, including many pertaining specifically to superannuation.

All told, the government took aim at 22 of Hayne’s recommendations, including prohibiting super trustees from having duties other than those arising from or in the course of the performance of their duties as a trustee of a super fund.

The government also moved to ban trustees from charging advice fees from MySuper products, and will meet Hayne’s recommendation to remove the capacity for trustees to charge advice fees from members unless certain conditions are satisfied.

Additionally, the government will ban the hawking of super products, formally adjust APRA and ASIC’s roles in relation to super and provide ASIC with joint responsibility for enforceable provisions in the SIS Act. “Through our actions today and over the past 12 months since the final report was released, the government has implemented 16 commitments, has legislation before parliament to implement another eight and has substantially progressed a further 35 which have been, or are currently being, consulted on ahead of their introduction,” Frydenberg said. fs

The numbers

22

The amount of Royal Commission recommendations addressed by the government in its latest tranche of legislation.

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ANA Investment Advisers may be forced to hand over key documents as part of Rest’s ongoing legal battle with member Mark McVeigh.

Final discovery orders were consented to by both Rest and McVeigh in late December last year.

Documents created by the investment committee or general manager of investments that evidence consideration of JANA building a capability to stress test portfolios for climate change risk in 2019 will have to be handed over.

Stress testing, assessing the potential impact of scenarios on a portfolio, is just one element of the information McVeigh wants his super fund to provide around its approach to climate change.

All drafts and versions of Rest’s climate change policy will be on the table.

Rest’s general manager investments Brendan Casey was named in the discovery orders along with chief investment officer George Zielinski.

The super fund will have to provide minutes from meetings and agendas to

prove the board and investment committee considered dealing with the climate change policy.

Rest will also be asked to prove it received advice and considered that advice in relation to changing policies in line with the Principles for Responsible Investment.

Climate change risk management appears to be a key element in the cast, with the court documents stating that Rest should provide: “Agendas, minutes of meetings and all documents placed before the Audit Risk Compliance Committee and board evidencing consideration of any amendments to the RMS relating to climate change.”

McVeigh’s legal team also want to see: “All board documents (agendas, minutes of meetings, documents placed before the Board) evidencing consideration of the climate change risk detailed at 4 and 5 of the Climate Change Policy and the maximum level of that risk that the Board is willing to operate within for material risks from 1 January 2017.” fs

Grow Super signs first super administration client Kanika Sood

Grow Super has signed its first client for its superannuation administration platform which is based on distributed ledger technology.

Startup superannuation fund GigSuper came onboard in late December, Grow Super deputy chief executive Adam Gee said.

Grow is also participating in tenders for several other super funds, Gee confirmed.

Grow Super’s new platform, which is called TINA, was announced in July last year. Gee, who was previously a partner at KPMG focused on superannuation, joined in April and was tasked with implementing Grow’s plans for the platform.

The admin platform is to become Grow Super’s primary business, putting

it in competition with administration giants Mercer and Link.

In December, Grow chief executive Josh Wilson told Financial Standard that the company was looking to divest its superannuation fund, and pivot its business towards providing admin services to other superannuation funds.

The admin platform will provide an outsourced solution for superannuation funds for functions such as APRA reporting, taxation, financial accounting and member and employer servicing, Wilson said at the time.

Also in December, the fund hired Qantas Super’s chief operating officer Peter Savage to head the new administration services business. fs

FS Super

News

www.fssuper.com.au Volume 12 Issue 01 | 2020

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Industry split over super fee hike A new fee introduced by Australia’s largest superannuation fund has divided the sector with many questioning its legitimacy. Elizabeth McArthur and Jamie Williamson write.

AustralianSuper notiIingnfiedaFebruary members it would be introducnew fee called ‘Administration fee - Protecting Your Super’.

From April this year, all accumulation members will pay up to 0.04% of their balance - in addition to the existing $2.25 admin fee - to offset the impact of the recent Protect Your Super (PSY) reforms, specifically the 3% fee cap applicable to balances of less than $6000.

It comes less than 12 months after the last increase to admin fees by the fund.

The new fee has been met with skepticism, with consumer groups, industry insiders and even government questioning the $177 billion fund’s move.

A spokesperson for Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume told FS Super the PYS fee cap would only hurt AustralianSuper for accounts with balances under $4000; the number of which has not been disclosed to Treasury.

In addition, the spokesperson said that AustralianSuper has been a net beneficiary of recent account reunification efforts by the ATO - also a part of the PYS changes.

Explaining the fee, AustralianSuper said the 3% cap on fees for members with a balance of less than $6000 “reduces the funds available to cover administration costs, products and services for all members”.

According to APRA statistics, in June 2019 AustralianSuper had 241,000 accounts with a balance of less than $1000. Half of all its accounts have less than $25,000.

Super Consumers Australia director Xavier O’Halloran labelled the justification for the fee underwhelming.

FS Super

“We understand they were one of the biggest beneficiaries of the consolidation reforms, with this inflow of funds it is unclear why they haven’t been able to find efficiencies to cover administration costs,” O’Halloran says.

“Calling this a ‘Protecting Your Super’ fee is brazen. If this represents the true cost of doing business, they shouldn’t be looking to shift blame onto important consumer protections for this added fee.”

A fee of this sort is not new. In 2018 Colonial First State introduced a ‘regulatory reform fee’ that amounted to an additional $102.50 per year for some members in its FirstWrap Personal Super product.

Rainmaker research shows that AustralianSuper’s overall fees remain comparatively low. In 2019 the fund ranked 14 of 99 MySuper offerings for cost to members on a $50,000 balance; a rank that doesn’t change with the added fee.

That said; analysis of super funds’ operating expenses shows scale doesn’t always necessarily equal efficiency.

APRA fund-level data shows AustralianSuper’s operating expense ratio (OER) is not dissimilar to that of several other — some far smaller — funds, despite its massive FUM. AustralianSuper has an OER of 0.2%, the same as Vision Super, AMP Superannuation Savings Trust and First State Super.

UniSuper is most efficient, with an OER of 0.1%. This is despite UniSuper having less than half the FUM of AustralianSuper.

It remains to be seen whether other funds will follow suit, however QSuper — the second largest fund by FUM and has an OER that is 0.02% higher than AustralianSuper’s — told FS Super it will not change its fees.

The quote

Calling this a ‘Protecting Your Super’ fee is brazen. If this represents the true cost of doing business, they shouldn’t be looking to shift blame onto important consumer protections for this added fee.

Xavier O’Halloran

“QSuper has cut admin fees three times in the past five years (0.22% to 0.16%) and we are not currently considering increasing admin fees,” a spokesperson said.

“Given QSuper’s fees, the PYS fee caps do not impact our members as the fees our members pay are well below the 3% cap imposed by the legislation.”

Association of Superannuation Funds of Australia chief executive Martin Fahy declined to comment specifically about the AustralianSuper fee hike but said regulatory changes can affect fund fees.

"This needs to be borne in mind as regulators implement their reform agenda," he said.

In January, AMP dumped a fee it introduced in 2013 to finance the implementation of the Stronger Super reforms. fs

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News

www.fssuper.com.au Volume 12 Issue 01 | 2020

Academics protest UniSuper investments Harrison Worley

U Super Fund of the Year named Eliza Bavin

Australia’s biggest super fund was crowned fund of the year for 2020 at Rainmaker’s SelectingSuper awards in Melbourne.

The $167 billion AustralianSuper took home the coveted title, as the fund continues to go from strength to strength.

Rainmaker executive director of research, Alex Dunnin said: “What makes AustralianSuper stand out from the crowd to be this year’s winner is not its size but that as it gets bigger it gets better.”

“It does this by not losing sight of its primary mission: delivering solid reliable investment returns after fees year after year and providing just the right type of extra features and services its growing number of members need.”

AustralianSuper was also named best in show for its flagship MySuper product.

“It is one of Australia’s most consistent investment performers too, ranking in the top 10 in three of the past five years. And when it wasn’t top 10 it only just missed out, ranking 16th in 2016 and 15th in 2015,” Dunnin said.

AvSuper won the members choice award for the third year in a row, with Rainmaker saying it signifies the funds ability to engage its members.

Hostplus took out the long term performance award and HESTA Core Pool won in the risk-adjusted performance category. fs

The quote

It is simply astounding we are having to go to such lengths to have our voices heard.

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niSuper is again facing criticism over its continued investment in fossil fuels, this time directly from its members.

Led by advocacy group Market Forces, university academics protested against what they described as UniSuper’s “continued funding of fossil fuel expansion”, in February.

Market Forces said the protest – organised to take place at a Universities Australia event sponsored by the fund in Canberra – is part of its ongoing campaign to “pressure UniSuper to align its investments with the Paris climate agreement.”

“UniSuper is the default superannuation fund for Australia’s academics, scientists, researchers and university employees. As such it should be at the vanguard of climate policy,” Market Forces said.

Noting the fund only discloses its top 20 Australian and international shareholdings, the group claimed “at least 10% of the fund’s Australian share holdings are in companies actively undermining the climate goals of the Paris agreement, including Woodside, Santos and APA”.

“UniSuper is responsible for the retirement savings of Australia’s leading scientists, academics and research-

ers, yet it is directly undermining our work and our future by driving climate change through its continued funding of fossil fuels,” ANU Research Fellow Florian Busch said.

Edith Cowan University lecturer Lucy Hopkins added the protestors “don’t want our retirement dollars fuelling the destruction of our planet”.

“It is simply astounding we are having to go to such lengths to have our voices heard,” Hopkins said.

“However, we will do what it takes to make sure our savings are invested in a safe and clean future.”

UniSuper has released a number of updates on its climate change policy, most recently in November of last year.

The fund said it encourages the companies it is invested in to meet the expectations of the Paris Agreement.

“We believe climate change and the transition to a low carbon economy will pose investment-related risks, which is why we've been identifying and considering these risks for over a decade as part of our investment management and decision making process,” a 2019 report said.

“We encourage the companies we invest in to set Paris Agreement aligned targets, which will decarbonise our investment portfolio over time.” fs

Retail fund swaps out K2 Kanika Sood

A retail superannuation fund has dropped a K2 Asset Management Aussie equities fund for another manager’s offering.

The K2 Australian Absolute Return Fund managed $46.8 million on behalf of AMP Superannuation Trust and other clients, at the time of termination.

AMP has picked a fund from Schroders as the replacement.

“Following an investment review of the K2 Australian Absolute Return investment option, the trustee determined that it was in the best interest of the members to terminate

the investment option, and switch members into Schroder Australian Equity investment option,” AMP told members in an October update.

The K2 fund’s assets dipped by more than $100 million in the year to June end when it had about $132 million in net assets, according to the FY19 annual report.

The year was marked with redemptions ($94.6 million) and low performance fees (just $5000 compared to $4.5 million for FY18). Separately, the firm’s head of distribution, Nicholas Allen, departed for listed property manager APN Group in October. fs

FS Super

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Retirement review goes off the rails Superannuation experts are concerned the retirement income review may be getting out of hand. Harrison Worley writes.

B

y the time the Retirement Income Review consultation window closed on February 3 – FS Super understands several late submissions will be accepted by the review secretariat – the submissions of University of Sydney research fellow Cameron Murray and the Australian National University had already stirred the super pot.

Murray’s submission suggests the super system be scrapped in favour of a more robust age pension, while ANU riled the industry super lobby by labelling the case for increasing the superannuation guarantee as “tenuous”.

University of New South Wales associate professor Anthony Asher says some submissions are missing the point of the review entirely.

“I haven’t looked at all of the submissions, but I do think the submissions in many cases have not addressed the fundamental questions that the review has asked,” Asher says.

“What are the principles? What is the place of the first, second, and third pillar? What is the role of government in the private sector? What’s the importance of adequacy, sustainability, equity? And people have jumped in; it seems to me too quickly.”

Asher says a fundamental fact the review should address is the extent to which retirement income is politically contested, noting sensible debates are hard to come by in an industry whose participants have a propensity to shout their arguments at one another.

“So how can we get a good system if we’re just shouting at each other?

I think that’s one of the things that hopefully will be recognised,” he says.

Weighing in, Grattan Institute program director Brendan Coates says it should come as no shock to see stakeholders nail their colours to the mast.

“I think the review was fairly clear that they’re not going to make policy FS Super

recommendations because that’s not their mandate,” he says.

“But I don’t think you should be surprised that stakeholders are using this as an opportunity to communicate to the government what they think the priority should be, because the government is ultimately the one that’s going to make decisions.”

Sitting among a raft of left-field ideas pitched to the secretariat is a proposal from BetaShares to install a universal pension funded in part by past and future superannuation contributions of members.

The new system would see members split their super savings into two pools – a defined benefit scheme and a defined contribution scheme, creating a hybrid system.

BetaShares senior investment specialist Roger Cohen pushes back on Asher’s claims, saying robust debates about the system’s future need to be played out publicly, warning of the possible pitfalls to be had if discussions about the fundamental architecture of the retirement system were conducted privately.

“I think it should all be out in public.

I think if it’s done behind closed doors you can end up with – as we have – an imperfect system,” he says.

“If you do it in public you get that debate and that contest of ideas where the bad ideas are knocked out and things that prevail are hopefully better for all stakeholders. I think there should be vigorous public debate.”

Murray, author of perhaps the most controversial submission to the review so far, says he struggled to garner support for his paper prior to the review’s announcement.

“It’s been an idea for a couple of years, and I’ve been trying to ask around and find various thinktanks and community groups who could

The quote

How can we get a good system if we’re just shouting at each other?

Anthony Asher

get behind a report arguing to scrap superannuation. Basically I couldn’t find one,” Murray says.

However, support for his proposal and other queries which ask tough questions about the future of super has ramped up on the back of the Grattan Institute’s ongoing campaign against raising the superannuation guarantee.

There is possibly no better economic policy to increase take home pay and economic activity, and improve the status of the tax system than unwinding superannuation, Murray argues.

“So, I just wanted to get out there and say it, and make people think about what the world would look like,” he says.

“I think we’ve mostly been constrained to ‘Which marginal tax rate should we change in the super system?’ rather than the big picture question of ‘Is it worth having at all?’”

The final report is due at the end of June. fs

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2019 ASFA Conference

www.fssuper.com.au Volume 12 Issue 01 | 2020

2019 ASFA Conference The 2019 Association of Super Funds of Australia conference in Melbourne had trustees and industry participants of all kinds completely covered. Harrison Worley writes.

A

SFA chief executive Martin Fahy01 used his opening speech to the association's 2019 conference to hit out against vocal critics of the super system.

Fahy took to the stage to call on the government and Treasury to release the Model of Australian Retirement Incomes and Assets - otherwise known as MARIA - into the public domain, and demanded its inclusion in the ongoing Retirement Income Review.

According to Fahy, the review is an opportunity for the superannuation industry to move beyond the “rhetorical hyperbole and dysfunctional narrative economics of retirement funding” which plagued public debate over the system throughout 2019.

“Thirty years on from its modest beginnings our superannuation system has become the target of a misleading and dangerous narrative that

seeks to present anecdote as data, internationally recognised success as a threat to the existing capital markets order and compulsion as a dangerous ideological plot to undermine western liberal democracy,” Fahy said.

“This combative narrative labels our system, unaffordable, failing lower income earners, inefficient, lacking transparency, and that it eats wage growth.

“At the most ludicrous level it suggests that in the worst-case retirement scenario you can eat your house, rely on a rental supplement, and that your grandparent’s retirement was good enough for them and its good enough for you. In summary we can’t afford your aspirations.”

The ASFA chief said that publishing MARIA – which can combine individual account balances, market re-

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

The quote

Thirty years on from its modest beginnings our superannuation system has become the target of a misleading and dangerous narrative.

Martin Fahy

turns and HILDA and other data to simulate retirement outcomes under different scenarios – could solve the likely outcomes of different contribution rates, fees and charges, real wage growth, CPI growth and other factors.

“Publication of the MARIA code would allow us to move beyond the fractious debate on adequacy and contribution rates and focus on the next chapter of our unfinished superannuation story,” he said.

“That chapter will see large pools of patient responsible pension capital that have the potential to address many of the pressing issues of our country.”

Fahy said that as those pools of capital grow, the super system was poised to take advantage of FS Super

2019 ASFA Conference

www.fssuper.com.au Volume 12 Issue 01 | 2020

01: Martin Fahy

02: Ian Silk

03: Jane Hume

chief executive ASFA

chief executive AustralianSuper

Senator and assistant minister for financial services, superannuation and financial technology

the opportunities that arise from the “creative destructive process at play”.

He warned against regulating “our way to better outcomes through an overly zealous focus on short-term investment performance,” and said to do so would likely ensure a net negative impact on the system’s performance.

“Finally, and perhaps most importantly as we face into the retirement incomes review, the system must be developed in an open and transparent manner,” Fahy said.

Without the release of the MARIA modelling, Fahy said the “contagious false narrative” would continue to take hold, and drag the system back.

“Along the way we will encounter headwinds and setbacks but we must stay the course with our aspirations and stare down those that would dismantle our superannuation system with outdated thinking,” he said.

Day two saw AustralianSuper chief executive Ian Silk02 predict a decline in the important of insurance in superannuation, including its ousting as a default portion of the system. Appearing as part of a panel discussion about the future of super, Silk promoted his belief that insurance premiums were increasing across the industry as more Australians claim on their cover and less of those claims get denied.

Silk said there had to be another way, because premiums could not continue to increase without detracting excessively from retirement savings.

“In 10 years’ time I would say it [insurance] possibly would be removed as being a default part of the system, but it’s likely to have a less important role to play in the superannuation industry,” Silk said.

The AustralianSuper boss said the issues of insurance in super were a problem of the industry’s making, notFS Super

15

ing the super and insurance sectors put themselves in the firing line without government or regulatory intervention.

“We’re in this situation where an objective critique would say, I think, the interaction of insurance in the superannuation industry is not working as well as it might,” Silk said.

“And so there have already been some legislative changes that have been introduced by the government to address that.

APRA executive general manager Suzanne Smith took her time before delegates to warn super funds to expect the pace of regulatory change to continue into 2020.

Using her speech to reflect on the changes experienced by the industry, Smith said 2019 had been a significant year for both super funds and the regulatory body.

“And there will be no let-up in our increasing expectation of trustees around the delivery of improved outcomes for members and importantly making good judgements around the risk return trade-offs.”

Meanwhile, Senator Jane Hume03 slammed the industry over the excuses used by super funds for not merging, saying there was simply no excuse when members’ best interests were at play.

The assistant minister for financial services, superannuation and financial technology slammed laggard super funds who offer a myriad of excuses for not merging, even when it might be in the best interests of members.

Hume said the regulator’s heat map would force trustee directors to “look each other squarely in the eye and ask ‘is our current business model really delivering the best outcomes for members?’”

“And if their fund is not delivering the best outcomes for members, or if it stands at increasing risk of not doing so,

The quote

The writing has been on the wall for a considerable period of time, and there has been endless industry chatter about mergers for many years.

Jane Hume

then it begs the question: should that fund merge?” Hume asked.

But the Senator said a long tail of underperforming funds - many of which are sub-scale still remain in the industry, and called on the trustees of such funds to consider “dispassionately” what the right thing to do is.

“This reality will come as no surprise to anyone in this room,” Hume said.

“The writing has been on the wall for a considerable period of time, and there has been endless industry chatter about mergers for many years. But despite this, there has in fact been relatively little action, particularly at that smaller end of the super spectrum.”

“It’s not the legislative framework, it’s not the tainted assets, it’s not tax, it’s not the regulator, it legally can’t be the shareholder that is the obstacle, and ethically, it can’t be the trustee directors,” Hume said.

“Which makes the lack of action by trustees something of a mystery.”

Hume said that between legislated changes and facilitation by regulators, the government had done its part in “greasing the skids for mergers”, and said it was time for trustees to step up.

“APRA is always open to assisting trustees in working through potential barriers they face when trying to merge,” Hume said.

“APRA can provide trustees with insights into how practical aspects of a merger may be achieved in cost effective manner. Now it’s over to industry, to do your part.” fs

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Outlook

www.fssuper.com.au Volume 12 Issue 01 | 2020

2020 vision Stepping out of a decade of stellar returns and unprecedented regulatory pressure, those in the super sector could be forgiven for imagining themselves at the centre of a soap opera. Harrison Worley writes. robing the state of the news media in P one of its classic sketches, ABC mock satirical interview series Clarke and Dawe once described the content that sits where the news used to as an “ongoing and permanent, continuous serial drama”.

And after suffering through numerous public relations disasters, seemingly never-ending legislative change and enough significant event notices to sink a battleship over the last 10 years, one can see how the dots might connect in the minds of those who’ve been through it all.

Even more so when you consider that for all the terrible lows in recent times, the sector has largely delivered on its main promise to customers: to build wealth.

But, just as it would seem the regulatory tide might be turning and calm was in the waters globally with Brexit beginning to appear less uncertain, it appears the scriptwriters have other ideas.

Intensifying the challenge Speaking with Financial Standard, JANA chief investment officer Steven Carew01 expects 2020 to be a more challenging year for investors than its predecessor.

According to Carew, the slowdown in economic growth over the last year, coupled with what appear to be high equity market valuations and the probability of a lack of support from monetary policy, will ensure equity returns remain constrained compared to their strong 2019 performance.

Carew believes the year ahead will see institutional investors continue to reach for yield base assets, particularly those in the unlisted space.

He also believes one of the strongest opportunities lies in active management, which the consultant expects to perform better as central bank influence on markets declines and growth stabilises at lower levels, creating

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

The quote

While the heat maps are a welcome initiative to drive up the standards and improve transparency in the superannuation system, we emphasise that the results need to be interpreted with caution.

Steven Carew

“more dispersion in the performance of individual assets”.

Shifting towards the outlook for JANA’s superannuation fund clients, Carew says the asset consultant will help its clients meet the requirements of APRA’s new Strategic Planning and Member Outcomes prudential standard, SPS515.

He says the impact of the new standard – when combined with the recent introduction of the prudential regulator’s controversial heat map for MySuper products – will see super funds reconsider the appropriateness of their product offerings, though he warns against overinterpreting the results.

“We believe that while the heat maps are a welcome initiative to drive up the standards and improve transparency in the FS Super

Outlook

www.fssuper.com.au Volume 12 Issue 01 | 2020

01: Steven Carew

02: Kim Bowater

chief investment officer JANA Investment Advisers

director of consulting Frontier Advisors

superannuation system, we emphasise that the results need to be interpreted with caution.”

Frontier Advisors director of consulting Kim Bowater02 agrees, saying “it’s early days” for the heat maps, making it difficult to understand their impact on the sector thus far.

“It may not necessarily change behaviour, but it also might because it is effectively a new benchmark that didn’t exist before,” Bowater says.

She adds the asset consultant’s view remains that superannuation is a long-term game.

“It’s about long-term investment strategies and you want to use your own competitive advantages to implement a really sophisticated investment strategy. So that’s got to be the main focus, the long-term outcomes for members,” Bowater says.

According to KPMG, the number one issue facing Australia’s business leaders in 2020 is digital transformation. For a superannuation industry struggling with the interconnectivity of new and legacy systems and a need to link with younger members, the point doesn’t need to be labored.

As such, QMV Legal partner Jonathan Steffanoni03 says the New Year will herald a “serious shift in the willingness of superannuation trustees to challenge existing operating models to better align with, and benefit from advances in information technology.”

He says the shift has been “particularly prevalent” in the fund administration function.

FS Super

The quote

The super system is still riddled with inefficiencies and hasn’t kept pace with the changing nature of work.

Sally Loane

“We’ve seen a genuine appetite to transition to operating models which are more flexible and modular, utilizing application programming interface (API) connectivity of data, Platform as a Service (PaaS), and decoupled customer service functionality” Steffanoni says.

“There is also a genuinely competitive market for administration technology and services which is likely to see opportunities for cost savings which can flow through to members and investors in the form of lower fees for trustees which undertake a competitive tender or similar process.”

The urge to merge Perhaps the most anticipated theme to colour the year will be the continued rationalisation of the nation’s super funds.

2019 saw a string of high profile mergers both succeed and fail, as funds attempted to ensure their survival by pairing away with likeminded counterparts amid APRA’s attempts to lift the sector’s performance in the wake of the Royal Commission.

According to Steffanoni, the trend will continue, with successor fund transfer (SFT) deals expected right across the scale gamut. Transactions such as that proposed by Sunsuper and QSuper - which the trustees of both funds continue to investigate are also in the offing, he says.

“We’re expecting to be busy in continuing to assist trustees with assessing the equivalency and best interests issues associated with SFT deals and transactions, while looking at ways in which operating models can be integrated in ways which capitalise on the scale efficiency opportunities arising from such a merger,” Steffanoni adds.

17

03: Jonathan Steffanoni

partner QMV Legal

Disruption Steffanoni expects the trajectory of 2019’s heavy regulatory change agenda to continue well into 2020, keeping the sector busy.

“We are expecting a large tranche of draft legislation and consultation resulting from the Hayne Royal Commission in January, which will require significant commitment of attention and resources of superannuation fund trustees,” Steffanoni says.

“Regulatory change management is becoming an increasingly important function for all financial institutions, and we’re working closely with clients to ensure that early planning and engagement put trustees in the best position possible to integrate the implementation of these changes alongside already busy agendas,” Steffanoni says.

Chief executive of the peak body for the financial services industry, the Financial Services Council’s Sally Loane, says the industry is living through a period of disruption, with the “dozens of levers” being applied by regulators, enforcement bodies, government and the courts significantly impacting the businesses of its members.

As a result, Loane says the FSC’s 2020 policy agenda is tightly focused, with default superannuation topping the list.

In the eyes of the FSC, it’s time for default super to meet the needs of all Australians. As such, the year ahead will see the organisation continue its efforts in urging the government and parliament to split super from the industrial relations system.

“The super system is still riddled with inefficiencies and hasn’t kept pace with the changing nature of work, including two million people working multiple jobs,” Loane says. fs

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Cover story

www.fssuper.com.au Volume 12 Issue 01 | 2020

SUPER IMPACT

Robert Fowler, 2019 SelectingSuper Industry Service Award winner

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FS Super

www.fssuper.com.au Volume 12 Issue 01 | 2020

Cover story

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Across a career spanning almost four decades, former HESTA chief investment officer Robert Fowler has proven that no matter where you’re from, you can make a super impact.

Harrison Worley writes.

K

eeping up with Robert Fowler as he rattles through his impressive list of career achievements is no easy feat.

It’s not because he isn’t warm or inviting, or easy to talk to. He’s all of those things.

And it’s certainly not that he’s boring (he’s quite the opposite, in fact).

Simply, it comes down to his ability to recall - with detail - seemingly every chapter of his storied 39-year career; a career that involved stints as an auditor, lecturer, equities dealer, portfolio manager, business development manager, chief investment officer, and more.

Over the course of a conversation with Fowler, it doesn’t take long to understand how he’s made such an impact on the superannuation industry, particularly at HESTA, where he led investments for more than 15 years.

FS Super

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Cover story

Reflecting on his career, Fowler points out the values which he would lean into so strongly during his years in the industry fund movement - such as fairness to others - were forged during his early years in Ballarat.

He notes the value of his church upbringing, which despite no longer being “a churchy person” has figured heavily in the make-up of the person he is today.

“My family was quite church oriented,” Fowler says.

“I think that’s probably where those strong ethics, and belief in fairness actually first came from.”

Fowler emphasises the importance of starting life in what was then - country Victoria.

“I’m from I’d say very much a working class family, and family was a very strong and important part about growing up,” he says.

While Fowler doesn’t feel those early experiences necessarily tell the story of the person who would go on to become the inaugural chief investment officer of an entity overseeing the retirement savings of more than 850,000 Australians, he does strike a line underneath one aspect of his childhood: the sacrifices made by his parents.

His father, for instance, ran his own wood and briquettes delivery business in addition to his day job, having left school at the age of 14 in favour of a full-time career.

“And so they [his parents] needed to bring up two kids and put us through university and those sorts of things back then,” he says.

This, Fowler says, taught him that people could be successful no matter their circumstances.

“I think that if anything came out of that it would be that it doesn’t matter where you come from, you can succeed if you put your mind to it and can better yourself from where you started as a kid,” he says.

“I think that probably came out of what my parents taught me as well.”

After making the switch from a technical high school to a regular high school - having realised he was “never going to make a living” using his hands - Fowler soon began to narrow his focus. He says his transition to a Bachelor of Commerce at the University of Ballarat was “natural”.

Fowler admits he was unsure of what he wanted to do upon completing his degree, except that it would involve numbers.

“I just went and studied the things that I enjoyed, and I think that’s fortuitous because I think everyone really should study and try to work in the things that they enjoy. That way you are far more likely to have a successful long-term career,” Fowler says.

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www.fssuper.com.au Volume 12 Issue 01 | 2020

An opportunity at Ernst & Whinney - part of the firm now known as EY - kicked off Fowler’s career, and saw him leave regional Victoria for the “big smoke”.

Three years in the firm’s audit unit failed to “light the fire”, so Fowler left - after exactly “three years and no days”, ensuring he picked up his chartered accountant certification - to take a role as a senior tutor in Gippsland.

“I was effectively recruited to that role by one of my former lecturers from Ballarat,” he says.

“We attended an alumni function and just got chatting. He had gone from Ballarat down to Gippsland, he was heading up their business school down there. I had always got along very well with him; I’d really enjoyed that part of my education.”

Fowler’s time at the university also saw him work as a lecturer, enjoying the experience of interacting with students; finding it “rewarding” to chart their growth over time.

Despite this, the stint only lasted a couple of years.

“Firstly, I actually did miss the big smoke,” he laughs.

“And secondly, I found that there was just so much internal politics and they had a pretty narrow view of the world from what I could tell and a lot of it wasn’t about the students, it was about themselves.”

Returning to Melbourne, Fowler spent a single year at Touche Ross - now Deloitte - in insolvency and receiverships. At the time, the division was suffering a lean patch, as the mid-80s boom took hold.

With little in the way of a workload, Fowler passed the time getting to know the stock market a little better.

“Basically anyone who didn’t get engaged in the stock market in the 80s must have been asleep just about,” he says.

Fortunately, Touche Ross’ office sat within the same building as the stock exchange, affording Fowler the opportunity to sneak away to watch the market move. The interest sparked during those sessions down at the exchange helps explain Fowler’s next move.

“I didn’t leave Touche Ross because I explicitly wanted to leave Touche Ross and got sick of insolvency or anything like that, I was actually just quite fortunate that a friend of a friend worked in Macquarie corporate advising,” he says.

A position had opened on the Melbourne dealing desk at Macquarie Equities.

“He said to me, ‘Look I think you’ll really enjoy the role and you’ll do really well,’ and so I applied and was successful in getting the role,” Fowler says.

Fowler joined the financial services giant in October 1987, “just in time for” the Black Monday/Tuesday crash.

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The quote

It doesn’t matter where you come from, you can succeed if you put your mind to it and can better yourself from where you started as a kid.

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“And that was a pretty amazing day. I remember I went down to the trading floor and watched it open - that was when you still had the open outcry trading floor - and it was so eerily quiet,” he says.

“There was a period of time - I don’t know how long it was, it was probably only five minutes but it seemed like an eon - before the first bid came in.

“It was for BHP shares, and it was at half the price that it had closed at the previous day.”

While a great experience, Fowler soon realised he wasn’t a trader. But he had forged a number of close relationships as a result of his love of research that would soon bear fruit.

He left Macquarie, heading to Suncorp which was undertaking a restructure of its equities team at the time, opening an opportunity for Fowler to join the firm as an Australian equity portfolio manager.

Fowler says Future Fund board of guardians founding member Susan Doyle - then Suncorp’s head of equities “fortunately saw it suitable” to appoint him.

“The interesting thing is it was actually a number of

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my former clients - who were heads of research - that were my referees for the role,” he says.

“And I’m sure that’s what helped get across the line.”

Fowler took the chance to make a fresh start in sunny Queensland, and turned his hand to the analysis of the resources sector. It was during this time that he got his taste for ESG. A visit to a West New Guinean Freeport copper mine in Irian Jaya exposed Fowler to the need to embed social issues into company valuations, as he observed the mine deploy soldiers and guards on its perimeter to deal with angry locals.

“I have to admit that thinking about the “S” side was very much about how it was going to affect the valuation of a company,” he says.

“There was a bit about integration to it, and less about doing what I would now do in saying to the company ‘What are you going to do to fix this problem? What are you going to do so that you actually do have good relationships with the locals and are benefiting them socially and not just using them?’”

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By 1996, Fowler had joined BT Funds Management in a business development role. The firm had a “top reputation” back then, but Fowler says this was largely down to a strong retail team, and not so much the institutional arm he was joining.

“They were nowhere near as successful,” he says.

“You could argue I didn’t do very good research. But I guess I was just captured by the reputation of the place.”

Still, his time at BT had a profound impact on the rest of his career.

At the time, asset consultants were advising super funds to reduce their investment in products such as BT’s multi-asset fund, and instead invest in Best of Breed. Fowler’s role was to convince clients not to do so.

As the only member of the team with asset management experience, he found himself facing up to some of the firm’s “largest and most technically challenging clients”, which included the Seafarers Retirement Fund, his first interaction with an industry fund.

“Up until then I’d very much been on the dark side,” he says.

“My dealings with the Seafarers was an absolute revelation to me.

The trustees at Seafarers were just so sharp, and on the ball, and clearly they were very focused on the outcome for their members.

“And I’ve got to juxtapose that with, in most cases, the pretty sleepy approach of the trustees of corporate defined benefit funds.”

He says there was “no point trying to spin” the Seafarers.

If something didn’t go well, you told them it and you told them why…

I realised that was how you earned your client’s loyalty.

“You’d just get cut down in flames. If something didn’t go well, you told them it and you told them why. And do you know what? I realised that was how you earned your client’s loyalty. And I think that’s also how I really got to respect them,” Fowler says.

“It really just opened my eyes to the real purpose, core, and nature of the industry funds.”

According to Fowler, BT’s portfolio managers made an “illtimed” move from deep value investing to enthusiastically embracing tech stocks.

“Just in time for the 2000 tech bubble to burst,” he says.

As the disaster unfolded, Fowler says he could no longer defend the fund manager and so he left.

He joined Portfolio Partners in 2000 in a three-year stint that he describes as “part chief investment officer” and “part relationship manager with the investment consultants”.

Alongside ex-BT colleague and Portfolio Partners chief executive Craig Bingham, he went about rebuilding the formerly successful boutique spin-out.

When Bingham - his hand forced by the financial difficulties facing global insurance giants (the firm was owned by Aviva) - needed to swing the axe in the name of cost savings in 2003, Fowler was the “high-cost head” on the chopping block.

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But far removed from how redundancies are perhaps normally perceived, Fowler says the move was positive.

“It’s actually what led me to HESTA,” he says.

He recalls that just prior to joining HESTA, a number of industry funds had begun seeking heads of investments.

“Fortuitously, at the same time as I got made redundant at Portfolio Partners, I was aware that there was a role going at STA. I think just about the same time, my predecessor at HESTA had resigned, and so they were just starting that process as well,” he says.

“And so the opportunity came up at HESTA just at the right time when I was in a position to say ‘That is the path I want to go down.’”

Initially Fowler says the team he joined was heavily reliant on consulting, so much so that he would humorously refer to the fund as “Fiona Trafford-Walker Implemented Consulting”.

“The board had only ever done one thing against Fiona’s advice, and recognised a little while later that they should have taken her advice. So they learned from that and stuck with it,” he says.

Fowler believes his history with ESG was important in securing the role.

“Frankly, it was pretty rare; I think it’s fair to say. And it was very consistent with what HESTA was already doing,” he says.

“Particularly on the governance side, they saw it as being really important.”

Taking a look at the employer representatives on the fund’s board at the time, Fowler recalls that all of the private hospital representatives - of which there were many at the fund - came from church-backed hospital groups. When added to the union and community services representatives also on the board, the fund had a “real synergy” around ESG, he explains.

Under his stewardship of the fund’s investment capabilities, HESTA signed on to the UN Principles of Responsible Investment in 2006, and implemented greater screening and governance practices a year later.

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Tobacco was the first to go, with the fund deciding that engagement with tobacco companies was not useful.

From 2013 Fowler was elevated to chief investment officer. He describes his time at HESTA as an “evolution”.

“Every second year it felt like a new job,” he says.

He says that with the investment team having grown to 10 people by then, and with a greater focus on internal investment management each year, his title change just made sense.

“Debbie [Blakey] just said to me one day, ‘Look, you’re doing all these things now, I think you probably should be termed a CIO as well.’ I said ‘Okay, thanks!’

And that’s how it came about,” he recalls.

After four years, he transitioned to an executive role focused on investment execution. A 2017 “deep dive review” to plan for the fund’s next decade recommended HESTA grow its investment capability to continue delivering positive returns for members as its scale increased.

Fowler says he realised pulling it off would require a leader with different capabilities, particularly around the “quantitative side of managing money”.

“I’m very much more a fundamental qualitative person,” he says.

But Fowler could continue to make a valuable contribution, so stayed on to lead investment operations and the fund’s ESG team.

However, soon after, he admits to having“pre-retirement envy”.

“After two years, I decided that I was ready for semiretirement,” he says.

Now, the 2019 SelectingSuper Industry Service Award winner is focused on staying connected to investing by focusing on what will make an impact.

He spends some of his time as an adviser to The Constellation Project, which aims to create a mechanism to assist large institutions to invest at scale to find a way to provide housing for the homeless.

Even in retirement, he’s still making a super impact. fs

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Administration & Management:

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$1.6 million transfer balance cap revisited

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By Kimberley Noah and William Fettes, DBA Lawyers

Limited recourse borrowing arrangements

By Allison Murphy and William Fettes, DBA Lawyers

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Unlisted SMSF assets could mean a qualified audit

By Marjon Muizer, SuperConcepts

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Who gets the superannuation death benefit?

By Selwyn Black, Carroll & O’Dea Lawyers

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The introduction of the $1.6 million transfer balance cap has added significant complexity to an already complex system. This paper clarifies how the rules operate for advisers and SMSF trustees.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

The $1.6 million transfer balance cap revisited How the rules operate: for advisers and SMSF trustees

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Kimberley Noah and William Fettes

he $1.6 million transfer balance cap (TBC) imposes a limit on the total amount that a fund member can transfer into an exempt (retirement phase) pension.

The TBC was introduced with effect from July 1 2017 with the intention of making the tax concessions in superannuation more sustainable by limiting the extent to which large account balance holders can take advantage of the earnings tax exemption that applies to retirement phase pension interests. However, the introduction of the TBC has added significant complexity to what is already a complex system.

Now that the TBC has been law for some time, this paper looks at key aspects of the measure to help clarify how the rules operate for advisers and SMSF (self-managed super fund) trustees.

All section references are to the Income Tax Assessment Act 1997.

NB: This paper does not cover the topic of the total superannuation balance, which operates in a different manner to the TBC.

Balance cap versus transfer cap?

When the TBC measure was first introduced on July 1 2017, it was effectively imposed as a ‘balance cap’ on existing pensions in retire-

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ment phase. Accordingly, individuals with retirement phase pensions in place immediately prior to this date were subject to TBC testing in respect of their actual pension balances on June 30 2017. Therefore, fund members with larger account balances were required to (partially or fully) commute one or more of their pensions prior to July 1 2017 to ensure they stayed within the cap.

However, for present purposes, the TBC measure functions as a cap on transfers. Therefore, it is generally only when a pension is commenced (or when a transition-to-retirement income stream (TRIS) enters retirement phase) that the net market value of the pension interest is tested against a person’s personal cap. This effectively means that changes to existing (retirement phase) pension balances over time (including overall growth or losses) are generally ignored for TBC purposes.

What is the cap that applies?

It is important to note that the general TBC is an indexed general threshold that is never directly applied to individual taxpayers. Thus, a person can only ever have an excess arise under the TBC rules in relation to their ‘personal TBC’.

A superannuation fund member will commence having a personal TBC on the first day that they start to receive a retirement phase

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pension (eg. when they first commence an account-based pension). At that point in time (ie. the day they first start to be a retirement phase recipient), the person’s personal TBC comes into existence based on the general TBC for the relevant financial year.

For example, if a fund member commences a retirement phase pension for the first time in, say, the 2022 financial year, and the general TBC at that time happens to be $1.7 million (ie. due to indexation), their personal TBC will be $1.7 million.

The transfer balance account Usage of a member’s personal TBC is tracked through their transfer balance account (TBA). The TBA functions as a kind of ledger to record (for tax law purposes) amounts that are transferred to or from retirement phase for a particular taxpayer.

The net balance of a taxpayer’s TBA is known as their ‘transfer balance’ and is determined by calculating the value of all relevant credit events minus the value of all debit events. In simple terms, a taxpayer’s transfer balance reflects how much cap space has been used up in their personal TBC, including in relation to determining an excess transfer balance on a given day. Note that an individual can have a negative transfer balance where applicable debits (eg. from a commutation of a pension) exceed their credits.

Importantly, credit and debit amounts are fixed at the time they are recorded in the TBA (ie. based on the net market value of the assets at that time) and do not reflect changes over time in underlying asset values, outgoings or allocation of returns. The implications of this are that any net earnings or growth on the assets supporting the pensions are not counted towards an individual’s personal TBC.

Transfer balance credits The following items count as credits towards an individual’s TBA (s 294-25):

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• the value of all retirement phase pensions that were in place just before July 1 2017 • the value of any retirement phase pension(s) commenced on or after July 1 2017 • the value of a TRIS interest at the time it enters retirement phase pursuant to s 307-80 (eg. when the member attains age 65 or satisfies another relevant condition of release with a nil cashing restriction and notifies the trustee of this fact) • where a reversionary beneficiary receives an automatically reversionary pension because of the death of the primary pensioner, the reversionary beneficiary will receive a credit equal to the value of the pension interest (including a TRIS) at the time of the death (note that the credit will only arise 12 months after the deceased’s date of death) • notional earnings that accrue on excess transfer balance amounts • payments made by a superannuation provider under a limited recourse borrowing arrangement that was entered into after July 1 2017 where the payment results in an increase in the value of a pension interest (ie. by shifting value from an accumulation interest) in an SMSF. Note that s 294-25 also provides for new credits to be prescribed for in the regulations.

(The ‘value’ referred to above is generally the net market value of the assets at that time, eg. the value of the net assets applied towards the commencement of a pension in retirement phase.)

Transfer balance debits The following items count as a debit to an individual’s TBA (s 294-80): • A partial or full commutation of a retirement phase pension. Note that when a commutation occurs, the debit value is generally equal to the amount commuted (ie. the value of the amount transferred out of retire-

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Kimberley Noah, DBA Lawyers Kimberley Noah is a lawyer at leading SMSF law firm DBA Lawyers where her work focuses on complex SMSF structures, SMSF residency issues and compliance advice.

William Fettes, DBA Lawyers William Fettes is a senior associate at DBA Lawyers where his work focuses on superannuation law compliance, succession planning and taxation in an SMSF context.

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ment phase). Note that ordinary pension payments do not count as debits.

• The failure to pay the required pension minimum amount in respect of a retirement phase pension. Where this occurs, the SMSF trustee is taken to have not paid the relevant pension during the financial year and a debit arises in the individual’s TBA at the time the pension stops being in the retirement phase with the debit value being equal to the value of the pension interest just before the stop time. Typically this form of debit occurs at the end of the financial year, unless the failure arises upon a pension being fully commuted where the pro-rated pension minimum was not paid, in which case it occurs at the time the full commutation occurs.

• Where an excess transfer balance arises and the fund member does not have sufficient (retirement phase) pension balance available to commute and resolve the excess, the Australian Tax Office (ATO) will generally notify the member in writing that they have a ‘non-commutable excess transfer balance’. In this situation, a debit for any remaining excess transfer balance identified in the notice arises to the member’s TBA at the time that the notice is issued.

• Where a family law payment split is applied to divide a pension between a member spouse and a non-member spouse, this would typically only apply to certain unfunded public sector superannuation funds. (Typically family law payment splits in relation to most superannuation funds, including SMSFs, will arise on a commutation of a retirement phase pension by a member spouse.)

• Certain events that reduce a member’s superannuation balance (eg. fraud or dishonesty where an individual has been convicted of an offence or a claw back of super contributions under bankruptcy law) can also give rise to a debit. In these circumstances, an affected in dividual will typically need to apply to the ATO for relief so their TBA is debited to restore their transfer balance: refer to s 294-85.

• Structured settlements (ie. payments for personal injury that

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qualify under s 292-95) contributed to a superannuation fund under the specific rules will cause a debit to the member’s TBA. Note that s 294-80 also provides for new debits to be prescribed for in the regulations.

As the full or partial commutation of a pension will create a debit for the market value of the commuted amount, individuals with pension balances that have experienced significant growth since the relevant pension was commenced may have debit value that exceeds all relevant credits to their TBA. Accordingly, this can give rise to a negative transfer balance. The practical effect of this is that the individual’s personal TBC is effectively increased as any new credits to their TBA will be reduced or offset by the negative balance, enabling a larger retirement phase pension to be commenced.

Withdrawals above the minimum annual pension amount As partial and full commutations give rise to a debit to a member’s TBA, it is generally preferable that pension payments above the required minimum annual amount calculated under schedule 7 of the Superannuation Industry (Supervision) Regulations 1994 are planned in advance. In particular, where a payment above a member’s minimum annual pension amount is planned, the member should consider: • making the payment from the member’s accumulation interest; or • partially commuting the relevant pension and withdrawing the commuted amount as a lump sum, provided the relevant amount compromises unrestricted nonpreserved benefits.

If the latter option is taken, a debit will arise to the member’s TBA and this will restore the member’s transfer balance. In contrast, if pension payments are withdrawn above the annual minimum pension amount, no debit will arise and the member’s pension account balance will be reduced. This will result in the member’s lifetime personal TBC being effectively eroded.

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Excess transfer balance earnings Where an individual is in excess of their TBC, they will be deemed to derive notional earnings on the relevant excess amount which is subject to excess transfer balance tax payable by the member personally. Notional earnings accrue on a member’s excess transfer balance based on the general interest charge (currently 7.98%).

These notional earnings compound daily — ie. each day the notional earnings are calculated and credited to the member’s TBA, so that the notional earnings for any particular day will be calculated on the member’s excess transfer balance for the prior day.

This process effectively continues until the ATO issues an excess transfer balance determination, or the member ceases to have an excess transfer balance (ie. whichever is earlier).

Members who exceed their personal TBC are required to commute their pension (in full or in part) back to accumulation phase to minimise any excess transfer balance tax.

Where an individual does not remove the excess amount in time, the ATO has the ability to issue an excess transfer balance determination. Broadly, this determination advises the individual of their excess transfer balance, and specifies the amount to be removed (ie. the crystallised reduction amount).

Additionally, the determination is made with a default commutation notice that specifies the relevant fund and the relevant income stream from which the excess must be removed within 60 days.

An individual may notify the ATO, changing their determination to commute a different pension or pensions.

Excess transfer balance tax Once the excess amount and excess transfer balance earnings have been removed from retirement phase, the ATO will calculate the amount of excess transfer balance tax a person must pay. Broadly this tax is based on: Note that notional earning on the excess transfer balance accrue until the excess position is fully rectified. In contrast, the amount of notional earnings credited to the member’s TBA is generally locked in (ie. based on an ATO determination).

The excess transfer balance tax (ie. the tax rate on notional earnings) is 15% for excess transfer balances for first-time offenders.

An excess transfer balance tax rate of 30% applies for subsequent breaches (see s 5 of the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016). This tax is a personal liability of the relevant member.

Conclusions

The TBC measures enacted with effect from mid-2017 place an important restriction on how much fund members can transfer into a retirement phase pension. Accordingly, these measures have an impact on how exempt income is treated in an SMSF. Indeed, understanding how these measures operate is critical when considering tax-effective retirement planning. fs

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. When will an individual have a personal TBC? a) When the fund is in accumulation phase b) When they receive a retirement phase pension c) The first day the superannuation account opened d) All of the above 2. Which of the following items count as a credit towards an individual’s TBA? a) The value of all retirement phase pensions that were in place before 1 July 2017 b) The value of all retirement phase pensions that were in place on or after 1 July 2017 c) The value of a TRIS at the time it enters retirement phase d) All of the above 3. Which of the following items count as a debit towards an individual’s TBA? a) Only a full commutation of a retirement phase pension b) Only a partial commutation of a retirement phase pension c) Both a partial or full commutation of a retirement phase pension d) None of the above 4. How long is an individual given to remove their TBC excess? a) 30 days b) 60 days c) 120 days d) 180 days 5. Notional earnings on the excess transfer balance accrue until partially rectified as per an ATO sliding threshold. a) True b) False 6. Debits to a TBA reduce the transfer balance and decrease the available cap space. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Significant changes in the LRBA market has, in some cases, left SMSF trustees in an uncertain position regarding the requirements that apply to LRBA acquisitions. This paper looks at some of the common LRBA pitfalls to be avoided.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Limited recourse borrowing arrangements LRBAs—current tips and traps

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Allison Murphy and William Fettes

Bare trusts—what’s in a name?

he limited recourse borrowing arrangement (LRBA) lending market has undergone a significant shift in recent years, with most first-tier bank lenders withdrawing their LRBA offerings for purchasers of residential property. As a result, several smaller second-tier lenders have emerged to fill the void created by the departure of the big banks.

One of the under-appreciated consequences of this change is that borrowers have needed to adapt to the processes and documentation requirements introduced by the new breed of second-tier LRBA lenders. This is broadly because a number of the conventions and practices that were previously accepted by the big banks no longer apply. In many cases, this state of affairs has left self-managed superannuation fund (SMSF) trustees in an uncertain position regarding the requirements that apply to LRBA acquisitions.

In light of the new lending market, this paper examines the following common LRBAs pitfalls: • the question of whether or not to name the bare trust • how the deposit should be paid • guarantee and indemnity agreements

One of the key legal requirements for LRBA investments is that the asset being acquired must be held on trust by a bare trustee/custodian for the benefit of the SMSF trustee under s 67A of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).

In the past, there was some debate about whether or not a name should be given to the bare trust required as part of such an arrangement. Subject to any requirements that were imposed by the lender or the jurisdiction of the property being acquired, this argument was commonly settled by the tax considerations that weighed in favour of creating a transparent bare trust.

In particular, it was considered preferable not to name the LRBA bare trust to reinforce the fact that the bare trust should effectively be ignored for tax purposes. Having a named bare trust could raise the question of whether the bare trustee should be lodging tax returns separately and in addition to the SMSF trustee. In that case, the tax (including CGT) treatment of the LRBA would need to be carefully considered where the property was ultimately transferred from the bare trustee to the SMSF trustee.

To overcome this issue, it was generally recommended that the bare trust not be named unless:

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• there was a jurisdictional reason to name the bare trust (eg. in Queensland a trust relationship can be registered on title); or • the SMSF trustee was required to utilise the lender’s own bare trustee and bare trust product, in which case, the option not to name the trust is unavailable.

The introduction of ss 235-820(2) and 235-840 of the Income Tax Assessment Act 1997 in 2015 (with retroactive effect from 24 September 2007) helped to address the abovementioned tax concerns. These provisions broadly provide that: An act done in relation to an instalment trust asset of an instalment trust by the trustee of the trust is treated as if the act has been done by the investor (instead of the trustee). Example: a trustee disposes of an asset—any capital gain or loss is made by the investor, not the trustee.

The consequence of these provisions is that the LRBA bare trust is considered a transparent investment vehicle for tax purposes (ie. SMSF trustee is identified as the relevant taxpayer). Accordingly, the historical tax reasons for not naming a bare trust no longer apply.

Indeed, in light of the new lending environment and to ensure that the conveyancing process runs smoothly, we now recommend that SMSF trustees/members consider naming the bare trust as a matter of course.

Broadly, we are aware that a number of second tier lenders are now requiring SMSF trustees to have a named bare trust regardless of where the property is located. Imposing

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this condition on property purchases outside of Queensland is a departure from the prior established practice, and many advisers and SMSF trustees have been caught unaware by this new requirement. In many cases, SMSF trustees and advisers who have not arranged for a named bare trust have faced additional hurdles and costs. Thus, having a named bare trust in place from the outset can potentially prevent numerous headaches and problems in the new lending environment.

Of course, property law and stamp duty consequences remain a critical consideration for LRBA purchases.

Before entering into a contract of sale (‘the contract’), SMSF trustees should ensure that they have regard to the jurisdiction of the property being purchased, including the following aspects: • whether or not to name the bare trust • the timing sequence of when the bare trust deed and contract must be executed • how the purchaser is described in the contract • whether the purchaser can nominate an additional or substitute purchaser • whether the beneficial owner of the property is to be registered on title • the transactions eligibility for relevant stamp duty concessions or exemptions.

Naturally, property and stamp duty laws vary across each jurisdiction and expert advice should be obtained at the pre-contractual stage of the purchase. Further, SMSF trustees looking to enter into an LRBA investment should have an upfront discussion with their lender regarding their LRBA lending requirements.

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Allison Murphy, DBA Lawyers Allison Murphy is a lawyer at SMSF law firm DBA Lawyers, where her work focuses on complex SMSF documentation and advice.

William Fettes, DBA Lawyers William Fettes is a senior associate at DBA Lawyers where his work focuses on superannuation law compliance, succession planning and taxation in an SMSF context.

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Who pays the deposit?

The deposit for an LRBA investment should always be paid from the SMSF’s bank account with clear evidence of this being retained.

This is important to ensure a smooth lending approval process and conveyance, and to help ensure the SMSF’s eligibility for any stamp duty concessions or exemptions.

In a typical LRBA, there are likely to be two relevant (dutiable) transfers over the lifetime of the asset, assuming that the asset is not sold: • the initial purchase of the property (eg. from a third party vendor); and • the transfer of the property from the bare trustee to the SMSF trustee once the loan is fully repaid.

Each jurisdiction provides different stamp duty concessions and exemptions in relation to the above transactions. This paper focuses on the second transaction and how the deposit affects the SMSF’s eligibility for duty concessions/exemption.

In Victoria, s 34 of the Duties Act 2001 (Vic) provides a stamp duty exemption for a dutiable transaction from an apparent purchaser (the bare trustee) to the real purchaser (the SMSF trustee) when the real purchaser has paid the full purchase price for the property. If the relevant deposit is paid by an entity that is not the SMSF trustee, this duty exemption may be unavailable to the SMSF. This is because the SMSF trustee might not be able to show that it was the real purchaser because it did not pay the deposit. Similar issues can arise in other jurisdictions.

Providing a guarantee Under s 67A of the SIS Act, the LRBA lender’s recourse against the borrower must be limited to the single acquirable asset that is held on trust by the custodian/bare trustee. In the event of default on the loan, there is a greater risk that the lender may not be able to recover the full loan amount (plus any applicable costs), eg. due to a decline in the property’s value.

To mitigate this risk, lenders often require a guarantee and indemnity to be provided by the individual SMSF trustees/members.

If this is the case, the parties providing the guarantee and indemnity will need to turn their mind to the taxation and compliance risks associated with such guarantee and indemnity agreements as these agreements can be quite problematic if exercised by the lender against the guarantor.

For example, if a related party pays out a lender in respect of a guarantee and indemnity agreement tied to an LRBA and the related party releases or does not pursue the SMSF trustee for payment, the ATO views this as a contribution to the SMSF. This is because the SMSF’s liability to a third party is extinguished, thereby increasing the capital of the SMSF (see Taxation Ruling TR 2010/1). Accordingly, guarantee and indemnity agreements can give rise to contribution risk when exercised by the guarantor.

There are also questions regarding whether guarantees can give rise to non-arm’s length income, eg. where the SMSF trustees/members have not been remunerated on an arm’s length basis for providing the guarantee (which is not common practice).

In particular, the terms and conditions of the guarantee and indemnity agreement must be carefully considered before being entered into.

Generally the agreement is drafted to provide the lender (as guarantee)

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with greater options to recover any outstanding loan debt against the assets of the SMSF trustees/members outside of their SMSF. To facilitate this, we are aware of numerous guarantee and indemnity agreements which seek to include a mechanism for the lender to recover against: • assets held by the SMSF trustees/members personally; and • assets held (indirectly) by the members in interposed entities.

This mechanism requires the SMSF trustees/members to provide the guarantee and indemnity in their personal capacity and as trustee of any trust, including any deceased estate, discretionary/ unit/fixed or other trust.

This kind of clause is problematic, and SMSF trustees/members should generally not execute such guarantee and indemnity agreements without obtaining expert advice.

This mechanism could be problematic for the following reasons: • If the guarantor is an individual trustee of their SMSF, the recourse of the lender could include other fund assets (as an SMSF is a special type of trust) contrary to the requirements of s 67A of the SIS Act. • If the guarantor is an individual trustee of a non-geared unit trust and the SMSF is a unitholder in this unit trust, the SMSF’s unit holdings in the unit trust could become in-house assets due to the guarantee potentially triggering reg 13.22D of the Superannuation Industry (Supervision) Regulations 1994 (eg. if the assets of the unit trust become subject to a charge).

Due to the above, it is recommended that caution be exercised before entering into any LRBA-related guarantee and indemnity agreements.

Accordingly, advisers who are involved with LRBA matters where guarantee and indemnity issues arise should strongly encourage all relevant parties to obtain expert advice from a law firm. Naturally, advisers who provide advice on the legal aspects of these arrangements will be exposed to risk of unqualified legal practice and other potential claims.

Conclusion While the emergence of numerous second-tier lenders for LRBA loans has created welcome opportunities for SMSF trustees, it must be borne in mind that it has also exacerbated the risks that may arise.

As outlined above, many of the new lenders have processes and protocols that differ from previously established practice with the major banks, and the documents in use (e.g. guarantee documentation) may not always be appropriately drafted from a superannuation law perspective.

LRBAs involve significant complexity, with numerous regulatory and tax risks that must be navigated. Accordingly, it is strongly recommended that SMSF trustees and members should seek expert financial, legal and property law advice before proceeding with any LRBA transaction. fs

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Before entering into a contract of sale, SMSF trustees should ensure that they consider which of the following? a) How the purchaser is described in the contract b) The timing of when the bare trust deed and contract must be executed c) Whether the beneficial owner of the property is to be registered on title d) All of the above 2. Which of the following statements is accurate? a) The historical tax reasons for not naming a bare trust still apply b) The historical tax reasons for not naming a bare trust will apply until 2024 c) The historical tax reasons for not naming a bare trust no longer apply d) None of the above 3. What reason is cited for the significant shift in the LRBA lending market in recent years? a) Most first-tier bank lenders have withdrawn their LRBA offerings b) A majority of first and second-tier bank lenders have withdrawn their LRBA offerings c) Many second-tier bank lenders have withdrawn their LRBA offerings d) Many more first-tier bank lenders are now offering LRBAs 4. Which of the following statements reflects the commentary in regard to LRBA purchases? a) Stamp duty considerations are no longer a critical consideration b) Stamp duty considerations remain a critical consideration c) Stamp duty considerations are subject to ongoing debate d) None of the above 5. The authors recommend that SMSF trustees/members consider naming the bare trust as a matter of course. a) True b) False 6. Recent trends indicate that more and more first-tier bank lenders are offering LRBAs. a) True

b) False

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Unlisted assets are now considered high-risk from an audit point of view, with the ATO expecting an increase in breaches being reported. Advisers and SMSF trustees need to understand how to make sure that the assets of the fund are valued correctly.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Unlisted SMSF assets could mean a qualified audit What happens when the love has gone?

A Marjon Muizer

t tax time, no SMSF (self-managed super fund) wants a qualified audit. Yet the chance is higher if you hold unlisted assets, particularly unlisted trusts and companies, plus any loans you’ve made.

These assets will invite more scrutiny, and don’t be surprised if your auditor seeks more information about them. Recent court decisions have held auditors liable for not investigating the recoverability of investments and determining the appropriate market value. Unlisted investments are now considered high-risk from an audit point of view and the Australian Taxation Office (ATO) is expecting an increase in breaches being reported. So you need to be prepared.

As a trustee of your SMSF, don’t think you’re off the hook either as you have a legal obligation to provide information requested by the auditor, otherwise you could face penalties. In some instances, information gathering can be difficult as the underlying investments of the trust or company may not be valued on the same basis as required by the SIS Act and regulations. This may result in an audit

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qualification as well as an Audit Contravention Report (ACR) being sent to the ATO.

What’s the issue?

Each year your SMSF is required to be audited by a registered SMSF auditor for purposes of the Superannuation Industry (Supervision) Act 1993. As part of the audit, accounts must be prepared for the fund using the market value of assets. The ATO has published guidelines on how assets are to be valued for purposes of the superannuation and tax laws.

For each fund investment, the fund’s auditor will risk-assess the evidence available and whether it is appropriate and reliable. This may include obtaining independent third-party verification directly from the company, trust or individual in which the fund has made the investment or loan.

The level of evidence required to substantiate the investment may depend on the proportion of the fund that has been allocated to make the investment or loan. For example, the auditor may require a greater level of confidence to confirm whether a loan or investment of

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$500,000 is recoverable compared to a similar loan with an outstanding balance of $20,000.

Who does the valuation?

As a trustee of your SMSF, it is your responsibility to make sure the assets of the fund are valued correctly.

The role of the auditor is not to do the valuation but to review the evidence available that the value recorded in fund accounts is reasonable.

A guide for valuing unlisted assets If your SMSF has investments in unlisted companies or trusts, here is a guide to help you meet audit requirements where the market value of assets is not readily available, which is often the case.

Unlisted trusts and companies

From an audit perspective the value of assets recorded in the fund accounts of unlisted trusts and companies can be unreliable. There may be no requirement to have the assets valued at market value or that the financial statements are independently audited.

When risk assessing the evidence concerning the fund’s investment or loan, your fund’s auditor would look for: • audited financial statements of the unlisted trust or company • financial statements including evidence that underlying assets are valued at market value • independent valuations of the underlying assets of the trust or company • a share/unit price based on recent sales or purchases between unrelated parties • written verification from a director or trustee of the trust

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or company who is not a related party of the SMSF. On the other end of the spectrum, an auditor would usually seek further information from you to substantiate the investment where: • the trust or company provided unaudited financial statements with no evidence of the underlying assets being at market value • the fund trustees have provided their assessment of the underlying asset of the unlisted investment • written verification has been provided from the trustee or director of the trust or company who is a related party of the fund.

Scenario 1

Preet and Olivia have an SMSF with a balance of $300,000.

They have invested $240,000 in the ‘Hope street investment trust’. The trust was established two years ago and has 18 different unit holders. It acquired a vacant block of land and, after obtaining council approval, organised construction of an apartment building. It is expected that the building will be completed in six to eight months.

The trustees of ‘Hope street investment trust’ have provided financial statements of the trust to Preet and Olivia which show the land valued at the original purchase price two years ago.

The SMSF auditor will need to assess if the SMSF financials show the units at market value. There is no record of recent sales of the units available and there is no evidence as to what the building could be sold for if it was placed on the market. In addition, the auditor is not able to determine if the unit trust has enough cash to complete construction of the building.

Based on the circumstances, the auditor is not able to confirm the market value of the units with adequate cer-

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Marjon Muizer, SuperConcepts Marjon Muizer is manager technical support and training, SuperConcepts.

Her primary role is to manage SuperConcepts internal technical training program and provide technical support to trustees and advisers. Marjon is a CPA and SMSF Specialist Auditor with over 14 years’ experience working in SMSF administration, technical and compliance roles.

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tainty. The auditor would be required to issue a qualified opinion in relation to the market value of the units.

Two years later, the building is completed and an independent valuation is obtained confirming the apartment block is worth $16 million dollars. The financials of the Hope street investment trust show that the only other asset besides the building is $2 million in cash.

The trustees revalue the units from the original purchase price.

They calculate the market value by dividing the total assets of the unit trust by the total number of units issued by the trust. They supply the auditor with a copy of the financials of unit trust and valuation. This would normally be sufficient for the auditor to verify the market value of the units.

Scenario 2

Frank is an employee at a start-up focusing on renewable energy. The company has grown to 60 employees over the past three years and Frank believes that the company has a bright future ahead. The company offers employees to acquire shares in the business. Frank participates in the employee share purchase plan and buys $50,000 worth of shares in the name of his SMSF in late April.

The company issued a prospectus as part of the share purchase plan which was available to all employees. As the shares were purchased by the SMSF at market value in April, the auditor is likely to consider this as adequate evidence to support the 30 June market value for that financial year.

One year later, Frank maintains the value of $50,000 in the financial statements of the SMSF. Frank obtains a copy of the financial statements of the company. The company is a small business and does not require their financials to be independently audited. No recent share sales or purchases have occurred.

Even though the auditor did not qualify the prior year audit, the auditor will likely qualify the audit for the subsequent year as there is insufficient information to confirm the market value of the shares.

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Loans to an unrelated trust or company If your SMSF makes a loan to an unrelated trust or company, or even to an unrelated individual, there are things to be aware of. The loan agreement needs to specify the terms and conditions of the loan including how the interest rate is determined, whether the loan is secured or unsecured and the term of the loan. The fund’s auditor will be interested in the purpose of the loan and the business of the borrower.

Recoverability of the loan will have an influence on its market value. Evidence could include: • whether repayments have been made as required by the loan agreement • details on the financial position of the borrower confirming the ability to repay the loan (e.g. net asset position, sources of cash) • details and value of security held as collateral for the loan (if applicable).

On the other hand, unsatisfactory evidence, likely to invite greater audit scrutiny, would include statements made by the fund trustees or the borrower that provides an assessment of the recoverability of the loan. The evidence needs to go further than that.

A copy of the loan agreement and evidence that interest has been paid on the loan merely establishes that the loan exists. But it doesn’t provide enough evidence of the loan’s value, whether it is recoverable and the borrower’s financial position concerning future repayments.

Scenario 3

Liz’s friend Anthony is an experienced property developer. Her SMSF has lent $300k to Anthony for a period of two years; the SMSF receives a monthly interest payment of 8% per annum on the loan amount. Liz believes this is a secure investment, providing her fund with a good return. Since the commencement of the loan, Anthony has always paid the monthly interest on time.

The loan agreement notes that the security for the loan is a ‘mortgage and caveat over the property 1 Riverview Road in Sydney’, which is Anthony’s home. The property is worth about $1.5 million. The SMSF

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financials show the loan at $300k on the balance sheet. The auditor obtains a title search for the property, which confirms that there is a registered charge against the property by the SMSF trustee company.

The fund auditor will normally accept that the loan is valued at the correct market value in this scenario. If Anthony will default on the loan, Liz would be able to take possession of his home and recoup her loan investment. If on the other hand the SMSF trustee company hadn’t registered a charge over the property, the auditor would have had to qualify the audit unless Anthony would have been able to demonstrate his assets less any liabilities exceed the loan value.

What does a qualified audit report mean?

Just because your SMSF has received a qualified audit report is not necessarily a reason to panic. An auditor may qualify the financial and compliance sections of the audit report where they have not been able to obtain enough and appropriate evidence concerning the investment.

The auditor will notify you as trustee of your SMSF and may also be required to notify the ATO if a reportable breach has occurred.

A qualified audit report does not necessarily mean that your SMSF is non-complying and that you are up for penalties. The auditor is required to lodge an ACR where a breach has occurred, may have occurred or where they cannot confirm with enough certainty if your fund has met an audit standard.

Both the auditor and the ATO will consider the circumstances case by case. The ATO may ask you to supply further information where the investment is material and there is an indication that the value used may not be an appropriate reflection of the market value.

Future proofing your unlisted assets It is always sensible to ensure that any investment undertaken by your SMSF is correctly documented, especially if the trust or company is unlisted or there is a loan to an unrelated party. As you can see, the auditor will be after adequate evidence to establish the existence of the investment and whether it is recoverable. If this information is not available, your SMSF may end up with a qualified opinion and an ACR sent to the ATO. fs

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. From an audit point of view, unlisted SMSF assets are considered to be: a) No more risky than any other asset b) High risk c) Low risk d) None of the above 2. Which of the following statements is accurate in relation to an SMSF audit? a) The role of the auditor is to review the valuation evidence b) The role of the auditor is to do the valuation c) Trustees are not legally obliged to provide information to the auditor d) All of the above 3. Who is responsible for making sure that the assets on an SMSF are valued correctly? a) The Australian Securities and Investments Commission b) SMSF industry associations c) The SMSF trustees d) The Australian Prudential Regulation Authority 4. How frequently is an SMSF required to be audited by a registered SMSF auditor? a) Annually b) Quarterly c) Every two years d) Whenever trustees determine the need for an audit 5. The chance of a qualified audit is higher if the SMSF holds unlisted assets. a) True b) False 6. The ATO is expecting a substantial decrease in breaches in regard to unlisted SMSF assets. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The distribution of superannuation death benefits is an important topic to consider for two main reasons: estate planning purposes; and to make, defend and resolve claims regarding superannuation.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Who gets the superannuation death benefit?

The distribution of superannuation death benefits

A Selwyn Black

considerable proportion of our wealth now sits in superannuation. It is estimated that at the age of retirement (age 60-64) the average Australian will have over $200,000 in their superannuation fund (ASFA, 2017).

Therefore, the question of who gets the superannuation on death (ie. death benefits) is an important topic to consider for two main reasons: • for estate planning • to make, defend and resolve claims regarding superannuation.

Who controls the distribution of death benefits?

Superannuation fund account holder

An individual superannuation fund member can best manage the future distribution of their super fund balance (and influence future disputes) through nominating beneficiaries via particular superannuation funds.

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The nomination process can vary between superannuation funds—some may have binding nominations and/or non-binding nominations. For valid binding nominations, the distributions will generally be set. For a valid non-binding nomination, while it will generally have first priority, the superannuation fund will in some trust deeds still have discretion. Therefore, the manner in which the super fund exercises its discretion may cause disappointments.

Overall, individuals planning their estate should ensure that their nominations are duly executed and regularly updated, to ensure they remain current and effective.

When planning their estates, individuals should also nominate where they wish the death benefits to go, through a valid will. This is important as it is not unusual for super funds to pay the benefits to executor or administrator under the last will. Also the fund may take into account the preferences expressed in a will.

The superannuation fund

The superannuation fund may have considerable discretion in dealing with the death benefits in the absence of a binding nomination.

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This varies considerably based on the particular method in the fund’s trust deed, for example: • some trust deeds require that the super fund must pay the death benefit first to a legal personal representative (LPR), and only absent an LPR can the death benefit be paid to dependants or any other person; and • others grant the super fund wide discretion to allocate the death benefit between an LPR and the dependants or any other person.

This process is variable and may cause disappointments or disputes among the surviving members.

(AFCA) received 200 death benefit distribution complaints in its first six months of operation. Competing claims often arise between surviving family members, de facto partners, and persons who lived in a mutually supportive household.

Who are legal personal representatives?

Super fund: internal review

A legal personal representative (LPR) can include, according to the context: • the executor of a will • administrator of the deceased estate • trustee of the estate of a person under a legal disability; and • a person who holds an enduring power of attorney granted by a person.

Dependants, commonly include (at the time of death): • the deceased’s spouse • the deceased’s child • individuals with an interdependency relationship with the deceased.

It is important to review the rules of the specific superannuation fund for the review procedure and requirements.

Often, claimants may have to present supporting documents demonstrating why they should be paid the death benefits or a greater proportion of the death benefits. They should request a review as soon as possible after being notified of a decision; as such requests are time-limited.

Resolving disputes What can you do if you disagree with the death benefit distribution?

There are increasing disputes over the ownership and distribution of the superannuation balance on death.

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What are the routes to resolution?

The starting point is to make a suitable claim on the superannuation fund trustee. If claimants are not satisfied with the decision that a super fund has made, the next step will be to urgently request that the trustee review the decision.

Complaints to the Australian Financial Complaints Authority

Claimants can lodge a complaint with the Australian Financial Complaints Authority (AFCA), which has taken over the role of the previous disputes resolution body (the Superannuation Complaints Tribunal).

AFCA will use a combination of dispute resolution strategies (both formal and informal) to help resolve the complaint, such as facilitated negotiations, conciliation, and AFCA determination.

Selwyn Black, Carroll & O’Dea Lawyers Selwyn Black leads the Business Lawyers Group at Carroll & O’Dea Lawyers. Selwyn has particular expertise in the establishment, sale and/or purchase and restructuring of companies, trusts and businesses.

His practice includes advising businesses and individuals on resolving a wide variety of challenges, and on steps to pre-empt legal problems.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which of the following applies where a binding death benefit nomination has not been made? a) Super funds have no discretion as to how they deal with death benefits b) Super funds may have considerable discretion in dealing with death benefits c) APRA has to make a determination as to whom will receive the benefits d) None of the above 2. Disputes over the distribution of death benefits can be referred to which of the following bodies?

a) The Australian Financial Complaints Authority b) The Australian Prudential Regulation Authority c) The Australian Competition and Consumer Commission d) The Financial Ombudsman Service

3. In relation to resolving disputes over death benefits, what is usually the starting point?

a) Make a suitable claim on the insurance company b) Lodge a complaint directly with the ATO c) Make a suitable claim on the super fund trustee d) Lodge a complaint with the relevant industry association

4. In the absence of a binding nomination, what usually determines how a super fund deals with death benefits?

a) The super fund’s outsourced administrator b) The super fund’s trust deed c) The fund’s APRA representative d) The super fund’s chief financial officer

5. It is not unusual for super funds to pay the death benefits to an executor or administrator under a valid Will. a) True

b) False

6. It is not unusual for super funds to pay the death benefits to an executor or administrator under a valid Will. a) True

b) False

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If AFCA is making a determination on a complaint, AFCA will consider specific circumstances by considering the specific trust fund rules, the purpose of death benefits, the range of financial reliance on the deceased just before death and the deceased’s wishes, which can include non-binding nominations and wills.

Court intervention

• Appealing an AFCA determination—if an individual is not satisfied with the AFCA determination, they can appeal the decision to the Federal Court within 28 days of receiving a copy of the determination.

• Probate or Letter of Administration and Family Provision • Grant or re-seal of probate: will and named executor.

• Letter of Administration: no will.

Strictly, the grant of probate or letters of administration only enables the person or persons appointed to deal for or give a receipt for property in the state where the grant is made, to receive funds from the superannuation fund on behalf of the estate.

For this purpose it is necessary to check which state the superannuation trustee is based in, since a grant or re-seal of probate or letters of administration may be required in that jurisdiction.

Obtaining a grant or re-seal of probate or letters of administration in the relevant jurisdiction may be important for superannuation, where there is no binding nomination or where the super fund trustee decides to pay the superannuation to the LPR. Note, however, that becoming executor or administrator can create conflicts of interest if (for example) it is desired to use that position to exercise discretion under a superannuation fund deed.

A family provision court claim should be carefully considered if other review mechanisms do not succeed or are not applicable, and you are not suitably provided for in the will having regard to special tests and criteria applicable in the state where the superannuation is held.

That location may be significant because the laws of that jurisdiction, including those allowing for family provision claims by other family members, de facto spouses and defendants, may then apply and allow the other persons (despite the terms of any will or the statutory order of payments where there is no will, for that jurisdiction), to make a ‘family provision’ claim.

This will be particularly significant if the superannuation trustee pays the death benefit to the LPR so that it becomes part of the estate.

There will also be circumstances where such claims can be made on the superannuation if it is part of ‘notional property’ for the purposes of the family provision laws.

There are time limits, with some limited grounds for extensions with court approval, for making a family provision claim, so legal advice should be sought promptly.

As with any other areas, there are specific rules and procedures applicable to different circumstances. fs Acknowledgement *The author acknowledges Yue Lucy Han, law graduate, as co-author of this paper.

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Ethics & Governance:

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The fairness doctrine

By Michael Vrisakis, Herbert Smith Freehills

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The implications of the recent Full Federal Court decision in ASIC v Westpac Securities are far-reaching for the financial services industry, particularly in relation to laws around the parameters of general and personal advice.

The Court’s findings on personal advice and advisers’ obligations are of particular note.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

The fairness doctrine To infinity and beyond: ASIC v Westpac case

T Michael Vrisakis

he implications of the recent Full Federal Court decision in ASIC v Westpac Securities Administration Limited [2019] FCAFC 187 (ASIC v Westpac) are far-reaching for the financial services industry.

The case is, of course, a significant development in the laws concerning the parameters of general advice and personal advice. However, the potential impact on the provision and regulation of financial services more broadly should be explored.

At its core, the judgment is a practical application of the ‘six norms of conduct’ set out by Commissioner Hayne in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. In particular, the principles of fairness and the provision of services that are ‘fit for purpose’ are reflected in the Full Court’s findings on personal advice and the obligation to act efficiently, honestly and fairly.

Ripple effect on financial services This concept of fairness is transforming the nature of compliance in financial services, with the potential to have a ripple effect on product design, distribution and disclosure. Of particular note is the statement by Allsop CJ in the judgment that: “The [efficiently, honestly and fairly] provision is part of the stat-

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ute’s legislative policy to require social and commercial norms or standards of behaviour to be adhered to.”

This observation demonstrates how the existing apparatus of financial services law in the Corporations Act 2001 (Corporations Act) can, and is likely to, evolve in line with ‘community expectations’.

In this way, the fairness doctrine could give rise to a two-pronged test in the provision of financial services: • is the conduct compliant with the specific legal obligations set out in legislation and the general law • is the conduct consistent with the standard of fairness in the circumstances?

The inter-relationship of these prongs is illustrated in the ASIC v Westpac decision. This paper looks at the particulars of that decision.

ASIC v Westpac appeal ASIC v Westpac is an appeal by ASIC to the Full Federal Court against Gleeson J’s finding at first instance in the Federal Court that personal advice was not given by representatives of Westpac Securities Administration Limited (Westpac).

During a Westpac marketing campaign, current members of superannuation funds of Westpac’s related party, BT Funds Management Limited (BT), were encouraged to rollover their other superannuation accounts into their existing BT account by accepting a free consolidation service provided by Westpac.

Gleeson J held that in the circumstances, Westpac’s conduct did

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not amount to the provision of personal advice under s 766B(3) of the Corporations Act and was general advice only. However, Gleeson J held that in giving general advice, Westpac failed to do all things necessary to ensure that it provided financial services efficiently, honestly and fairly as required under s 912A(1)(a) of the Corporations Act. The appeal involved: • an appeal by ASIC against Gleeson J’s decision on the provision of personal advice; and • a cross-appeal by Westpac against Gleeson J’s decision on the obligation to provide financial services efficiently, honestly and fairly.

In a unanimous decision (set out in three separate judgments), Allsop CJ and Jagot and O’Bryan JJ: • upheld ASIC’s appeal and determined that Westpac did provide personal advice in its campaign; and • dismissed Westpac’s cross-appeal on the obligation to provide financial services efficiently, honestly and fairly.

In doing so, the Full Court provided clarity on the parameters of general advice and personal advice, and the expectations around efficient, honest and fair conduct.

Personal advice at a macro level—the goalposts Under s 766B(3) of the Corporations Act, personal advice is financial product advice that is given or directed to a person in circumstances where: • the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (the ‘first limb’); or • a reasonable person might expect the provider to have considered one or more of those matters (the ‘second limb’).

The Full Court found that Westpac provided personal advice within the meaning of the second limb. In coming to this finding, Allsop CJ commented that: “This conclusion is neither forced nor technical. It reflects the substance of the human exchange.”

The following factors were noted: • Each telephone call contained an implied recommendation that the customer should accept the service to consolidate their superannuation into their BT account, which carried with it an implied statement of opinion that this step would meet and fulfil the concerns and objectives of the customer. Such objectives were enunciated on the call in answer to deliberate questions by the callers about paying too much in fees and enhancing manageability.

• Each call involved the representative getting the customer to make their decision on consolidation during the call (the ‘closing’ aspect). O’Bryan J observed that there is a material difference between influencing a person in respect of a decision and urging the person to make a particular decision. Where advice is merely a statement of opinion that is not also a recommendation, a reasonable person is less likely to expect the provider of the advice to have considered one or more of the person’s personal circumstances. However, if the

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advice conveys a recommendation, that expectation is more likely to arise.

• The customers might have expected that the advice was in their interests and with regard to their personal circumstances, given there was a pre-existing relationship between Westpac and the customer. Further, the call was positioned as a call to help the customer, rather than as a sales call.

• The customers may have further expected that the caller would have regard to their personal circumstances given the importance of superannuation as a subject. All three judges stated that it was material that the consolidation of a customer’s superannuation accounts is a significant financial decision.

Further, while the general advice warning prescribed under s 949A of the Corporations Act had been given by Westpac, Jagot and O’Bryan JJ discounted the effectiveness of the warning in this case because: • it was given at the beginning of the call, before the customer was asked about their objectives, financial situation and needs • the caller undermined the message conveyed by the warning during the call (by positioning the call as a call to assist the customer through consolidation, and by appearing to consider personal circumstances such as the customer’s objectives of saving fees and having better manageability of superannuation by consolidating accounts) • the general advice warning was not re-emphasised during the call.

Based on the above, the Court held that while it was not necessarily the case that the callers had taken the customer’s personal circumstances into account (ie. the first limb), a reasonable customer might have expected that the caller had done so under the second limb.

What these judicial observations mean in practice is that the goalposts for the application of the second limb of personal advice have shifted. Factors such as knowledge of the customer, the significance of the financial subject matter being discussed and taking the engagement with the customer through to a point of decision can increase the risk of the second limb being enlivened.

This narrows the sphere of operation for general advice.

Personal advice at a micro level—the elements What is a ‘recommendation or a statement of opinion’ in s 766B(1)?

Section 766B(1) of the Corporations Act provides that ‘financial product advice’ means a recommendation or a statement of opinion, or a report of either of those things, that is either intended to influence a person in making a decision in relation to a financial product or could reasonably be regarded as being intended to have such an influence.

On appeal, Westpac contended that the words ‘recommendation’ and ‘statement of opinion’ in s 766B(1)

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Michael Vrisakis, Herbert Smith Freehills Michael Vrisakis is a partner at Herbert Smith Freehills and a leading expert in financial services regulation.

Michael’s primary area of focus and expertise is on the regulation of retail financial services, including financial advice and distribution, insurance, superannuation, platforms, products, strategic regulatory advice and investigations.

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Ethics & Governance

required an advice aspect, and that something can only be a ‘recommendation’ or ‘statement of opinion’ for the purposes of the section if the recommendation or statement of opinion has the character of advice.

The Full Court rejected this submission. O’Bryan J stated: “The word ‘recommendation’ means to commend or urge a particular course of action. The word ‘opinion’ means the expression of a belief, view, estimation or judgment.”

Allsop CJ and Jagot J accepted that something could be ‘mere marketing’ or advertising material, or ‘mere puffery’, and would not amount to a recommendation or statement of opinion under s 766B(1). However, their Honours considered the distinction sought to be drawn by Westpac between ‘marketing’ and ‘advice’ was not appropriate for the purposes of determining whether a communication amounted to financial product advice. A communication could be both financial product advice and have a marketing or sales purpose.

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be a reasonable bystander imbued with knowledge of all relevant circumstances, and not just the knowledge that would have been known to a person in the shoes of the recipient of the advice.

This construction was overturned on appeal. The Full Court held that the ‘reasonable person’ in s 766B(3)(b) is a reasonable person in the position of the recipient of the advice who would not have knowledge of circumstances or matters extraneous to their interaction with the adviser.

Jagot J also observed that s 766B(3)(b) refers to what the reasonable person might expect, which is a lower standard than what the reasonable person would have expected. The standard is one of reasonable possibility, not reasonable probability.

What does ‘in circumstances where’ in s 766B(3)(b) mean?

As mentioned above, s 766B(3) provides that ‘personal advice’ is financial product advice that is given or directed to a person in circumstances where either: • the provider of the advice has considered one or more of the person’s objectives, financial situation and needs; or • a reasonable person might expect the provider to have considered one or more of those matters.

The Full Court held that the ordinary meaning of ‘considered’ in the context of s 766B(3) was to take into account, pay attention to or have regard to. This is a lower threshold than the test applied by Gleeson J at first instance, where Her Honour held that ‘considered’ required ‘an active intellectual process of evaluating or reflecting upon the subject matter of the advice’, in line with the meaning of the term in an administrative law context.

The Full Court held that the circumstances necessarily include the totality of the interactions with the customer and the context, and that it is not helpful to draw fine distinctions between ‘opinion’, ‘fact’, ‘statement of opinion’ and ‘statement of fact’. The pre-existing relationship between Westpac and the customer, and the overall tone of the call being one of assistance, were integral to the finding of personal advice.

Allsop CJ stated: “The task is to look at the communication or exchange, in its whole context, and assess whether some express or implied recommendation or statement of opinion is made. This is unlikely to be assisted by minute examination of parts of the text of a flowing, whole, engaged human conversation with all its implicit, as well as explicit, content. One can well understand that in some contexts mere statements of fact will not qualify as recommendations or statements of opinion. That is not, however, a conclusion that is to be drawn by an abstracted distinction between statements of fact and inference or by the deconstruction of text, but rather by looking at, or listening to, the whole of the communication or exchange, in its context.”

How is ‘one or more of the person’s objectives, financial situation and needs’ in s 766B(3) to be read?

Best interests duty reaffirmed as inputs based

The Full Court held that personal advice may be provided if the provider considers the person’s objectives, financial situation or needs and that there was no requirement to consider all three matters. Specifically: • Allsop CJ found that the phrase requires sufficient aspects of the objectives, the financial situation or needs of the person to be considered • Jagot J agreed with Gleeson J’s construction, that the phrase refers to ‘one or more of a person’s objectives; one or more aspects of the person’s financial situation or one or more of the person’s needs’ • O’Bryan J agreed with the effect of Gleeson J’s construction—the requirement is that the provider has considered to some extent one or more of the advice recipient’s objectives, financial situation or needs.

Allsop CJ observed that when a conversation only concerns a single issue, as was the case here in respect of the consolidation of multiple superannuation accounts, the objectives for the purposes of s 766B(3) are those relevant to that issue, which were in this case the saving on fees and better manageability of superannuation.

The Full Court reconfirmed the existing legal understanding of the best interests duty in s 961B of the Corporations Act. The best interests duty is not about whether the substance of advice is in the best interests of the customer. Rather, it is concerned with action and objective purpose. O’Bryan J noted: “In my view, textual and contextual considerations compel a conclusion that s 961B is not concerned with the question whether the substance of the advice is in the best interests of the client and, if it was necessary to refer to it, the relevant extrinsic materials confirm that conclusion. Rather, the section is concerned with the actions taken by the provider in the formulation of the advice and the objective purpose of the provider in taking those actions and giving the advice.”

This is an important recognition that the best interest duty does not require an adviser to achieve the best possible financial outcome for the customer, but is more concerned with due consideration of the client’s interests.

What constitutes ‘considered’ in s 766B(3)?

Who is the ‘reasonable person’ in s 766B(3)(b)?

Gleeson J at first instance had interpreted the ‘reasonable person’ to

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Efficiently, honestly and fairly Section 912A(1)(a) of the Corporations Act requires a financial services licensee to do all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly.

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In effect, the Full Court upheld the decision of Gleeson J at first instance that a general advice model for the consolidation of superannuation was not fit for purpose, as the decision to consolidate superannuation funds into one chosen fund is not a decision suitable for general advice that promotes a particular fund. Rather, the decision requires attention to the personal circumstances of a customer and the features of the multiple funds held by the customer.

The Full Court reserved its full consideration of the duty to act efficiently, honestly and fairly for an occasion in which the matter was in issue. However, O’Bryan J stated in obiter that: “It seems to me that the concepts of efficiently, honestly and fairly are not inherently in conflict with each other and that the ordinary meaning of the words used in s 912A(1)(a) is to impose three concurrent obligations on the financial services licensee: to ensure that the financial services are provided efficiently, and are provided honestly, and are provided fairly.”

Similarly, Allsop CJ stated that: “… if a body of deliberate and carefully planned conduct can be characterised as unfair, even if it cannot be described as dishonest, such may suffice for the proper characterisation to be made.”

Such an approach is somewhat of a departure from previous authority on the duty. In particular, Young J in Story v National Companies and Securities Commission (1988) 13 NSWLR 661 held that: “The group of words ‘efficiently, honestly and fairly’ must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty.”

These developments all point to a growing sense of the primacy and self-standing nature of the fairness obligation.

It is also important to bear in mind that these developments occur against the backdrop of existing obligations at common law and in equity which, in certain circumstances, may require an advice provider to take the personal circumstances of a customer into account. Section 960B of the Corporations Act states that the obligations imposed by Part 7.7A of the Act are in addition to any other obligations applicable under law.

In this regard, an advice provider may have a duty of care, skill and diligence and a duty of good faith that require the provider to consider a customer’s personal circumstances in particular contexts, such as where the customer engagement involves discussion of important financial subject matter.

Ongoing viability of general advice The ASIC v Westpac decision shows the relative ease with which a provider may transgress into personal advice territory. Relevant factors will include the subject matter of the conversation, the existing relationship with

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the customer and the encouragement to act (ie. an implied recommendation).

General advice continues to be a viable model for financial services licensees. However, the narrowing of the goalposts by ASIC v Westpac has increased the risk profile of general advice models.

The Full Court leaves open the possibility of general advice if the recommendation is framed generally. Allsop CJ states that: “One view of looking at the matter favourably to Westpac is that the whole circumstances should be characterised as if, after being told by the customer that she was concerned with fees eating away at her accounts and with having greater manageability, the caller said: ‘That is what many of our customers say. As a general proposition, consolidation can potentially save on fees and will generally enhance manageability. For those general reasons I recommend accepting our service’. If that is the correct characterisation of the exchange, it might be seen as a decision brought about by general advice without telling her that there are other important considerations that may bear on her prudent decision. On this view of the matter, the failure to say other things by way of caution (whilst perhaps being otherwise subject of criticism) would not transform the advice, being hitherto general in character, into personal advice.”

It follows that general advice is workable where: • the features of a product are not canvassed as addressing or fulfilling the needs or objectives of the particular customer • the content of the conversation is strictly limited in cases where there is a pre-existing customer relationship • a reasonable customer would have understood that they were only getting general advice, such as through re-emphasis of the general advice warning with a view to ensuring that such warning is not too remote • the subject matter is appropriate for general advice.

The more interaction between the advice provider and the customer and the greater the personal focus on the customer, the higher the risk that the engagement will trespass into personal advice. Ultimately, this will be a question of degree.

General advice will also continue to be a mechanism for distribution through digital channels (such as websites and generic calculators).

The fairness doctrine—beyond financial advice The Full Federal Court in ASIC v Westpac, through the obligation to act efficiently, honestly and fairly, effectively found that it was unfair to sell a financial product on a general advice model, where a customer decision could only prudently be made with knowledge and consideration of the customer’s personal circumstances.

This finding has the potential to impact the provision of financial services beyond the provision of financial advice.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which of the following statements is CORRECT in the context of the ASIC v Westpac appeal decision? a) ‘Recommendation’ means expressing a belief, view estimation or judgment b) A communication is either marketing or financial product advice, not both c) A recommendation or statement of opinion must have the character of advice d) None of the above 2. A key takeaway from ASIC v Westpac is: a) General advice is no longer a viable model for financial services b) The relative ease in which providers may transgress into personal advice c) The rigid demarcation between personal and general advice d) The failure to say other things by way of caution automatically make advice personal 3. The appeal decision held that the ordinary meaning of ‘considered’ in the Corporations Act meant: a) Evaluating two or more matters regarding a person’s financial situation b) Actively evaluating or reflecting upon the advice’s subject matter c) Taking into account or having regard to d) Limiting the provider-client conversation to one issue 4. The appeal decision reconfirmed the legal understanding that the best interests duty is about: a) The provider’s actions and objective purpose b) Whether the substance of the advice is in the client’s best interests c) Achieving the best financial outcome for the client as the primary goal d) The client’s actions and objective purpose 5.The appeal decision held the standard for a reasonable person’s expectations was reasonable probability, not reasonable possibility. a) True b) False

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In recent years, ASIC has added what it considers to be low value products to its enforcement priorities. This can be seen in its focus on add-on insurance products and consumer credit insurance. The Royal Commission similarly shone a spotlight onto the concept of ‘value’ for customers, with the Final Report containing the following characterisations and observations: • the characterisation of trail commission as ‘money for nothing’ • add-on and funeral insurance being of low value to customers • often, there is provision of services where the benefits are not commensurate with the costs of such services, such as advice services under ongoing fee arrangements • there is asymmetry of information and understanding on the value of complex financial products between customers and product issuers.

Commissioner Hayne also noted that certain insurance products yield high profits for the issuer, almost always because the claims ratio for the product is low.

This focus on value is given further regulatory teeth with the introduction of ASIC’s product intervention powers, which allow ASIC to intervene and take action where it considers financial and credit products have resulted in, or are likely to result in, significant consumer detriment. The application of this power has already been contemplated in the add-on insurance and short-term credit product spaces.

Similarly, the Australian Financial Complaints Authority (AFCA) adopts a fairness standard within its jurisdiction.

This trend towards a fairness standard can also be seen in recent reform proposals in New Zealand, with the government of New Zealand proposing the introduction of a new regime to govern conduct in the financial sector. A key aspect of the proposed reform is a new obligation to meet a fair treatment standard and treat customers fairly, driven by a government priority to better regulate conduct and culture in the New Zealand financial sector.

In Australia, the ASIC v Westpac decision imposes an additional overlay, with the courts demonstrating a willingness to enforce principles of fairness. However, this requires consideration of what the principle requires in terms of conduct and standards of behaviour from financial services licensees. Unlike the best interests duty discussed above, the fairness doctrine can be seen to be concerned not just with process, but also with customer outcomes. The ‘six norms of conduct’ set out by Commissioner Hayne go some way in setting out community expectations in this regard.

While the practical substance of the doctrine remains to be developed, it is clear that ASIC will continue to pursue its regulatory strategy and enforcement approach of placing principles of fairness front and centre. The Full Federal Court has given it the legal backing it needed to do so. fs

6. Determining whether advice is fit for purpose is a key tenet of the fairness doctrine a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Investment:

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Investing in a non-geared unit trust

By Nicholas Ali, SuperConcepts

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: As an alternative to establishing a limited recourse borrowing arrangement, SMSFs can invest in a unit trust, which offers an SMSF the advantage of purchasing an interest in real property. However, a key consideration for trustees is whether or not the unit trust is a ‘related trust’ of the SMSF, as this has implications in terms of in-house asset rules.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Investing in a non-geared unit trust Alternatives to SMSF borrowing

A Nicholas Ali

n alternative to a self-managed superannuation fund (an SMSF) establishing a limited recourse borrowing arrangement (LRBA) is for the fund to invest in a unit trust. An advantage of a fund investing in a unit trust is that it allows the resources of various entities (including related parties) to be utilised to acquire a property.

Investing in this way allows an SMSF to purchase an interest in real property (ie. by acquiring units in the trust) which it may not otherwise be able to do on its own. The other parties can also borrow to finance their purchase of units.

However, before an SMSF invests in a unit trust, a key question the fund must determine is whether or not the unit trust is a ‘related trust’ of the SMSF. If the unit trust is a ‘related trust’ it will be subject to the in-house asset rules unless an exception to the rules applies (e.g. the trust meets the ‘non-geared unit trust’ exception discussed below). In contrast, if the trust is ‘unrelated’ to the SMSF it will be excluded from the in-house asset rules.

Section 71(1) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) provides that an in-house asset of a superannuation fund is:

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“ … an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee and a related party of the fund.”

If a unit trust is a ‘related trust’ of a superannuation fund then any investment in the unit trust cannot exceed 5% of the market value of the assets of the fund, unless an exception applies (see below for the applicable exemptions).

An investment in a unit trust will be excluded from the in-house assets rules provided the conditions stipulated in SIS Regulation 13.22C are satisfied. These conditions are as follows: • the unit trust has no borrowings or loans • the unit trust does not have any investments that are interests in any other entity (including the standard employer-sponsor of the fund or an associate); hence, the unit trust is not permitted to buy shares in listed or unlisted companies or units in a unit trust (such as a widely held trust like a managed fund) • the unit trust does not have a charge (such as a mortgage or lien) over any of its assets • the unit trust does not own any assets that were acquired from a related party after 11 August 1999, or was previously owned by a related party (except business real property) of the fund

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• the unit trust has not entered into a lease agreement with a related party of the fund (unless the lease is legally binding and relates to business real property) • the unit trust has not entered into a loan, or provided a form of financial assistance, to a related party of the fund.

SIS Regulation 13.22D sets out the various events which affect whether the investment by an SMSF in a related non-geared unit trust continues to be excluded from the in-house asset rules. If any event in Regulation 13.22D is breached—such as an SMSF conducting a business, or the trustee of the unit trust allows a charge to be placed over an asset—the investment by the fund in the unit trust ceases to be covered by the exclusion from the in-house asset rules relating to non-geared unit trusts. Furthermore, any future investment by the SMSF in that trust can never again be excluded from the in-house asset rules. If the investment then is greater than 5% of the fund’s assets, the fund will need to divest itself of the investment.

Case study 1 Richard wishes to purchase the premises through which he runs his business. The premises are in an industrial estate worth $600,000. Richard’s SMSF—the ‘Richard Superannuation Fund’—has $300,000 to invest in the property, but Richard does not want his fund to enter into an LRBA to purchase the business premises.

As an alternative, Richard decides to use his principle place of residence worth $800,000 (which is unencumbered) as collateral for a loan of $300,000, which he onlends to his family trust (the Richard Family Trust). A unit trust is established, with Richard’s SMSF and his family trust each owning 50% of the units issued. The figure below illustrates the structure.

As discussed above, some trustees of SMSFs may be reluctant to enter an LRBA for several reasons. Therefore, the non-geared unit trust arrangement may be more attractive for funds that are able to invest jointly with other parties with capital to invest. Alternatively, Richard, his SMSF, and another party could buy units in the unit trust 25%, 50%, and 25% respectively, or some other unit-holding arrangement (ie. four parties owning 25% each, etc).

One of the great advantages of using a non-geared unit trust structure is the ability of the super fund to acquire units from other unitholders, even if they are a related party, without breaching the SIS Act or SIS Regulations.

This provides an option for SMSFs to gradually increase their stake in the unit trust as the fund balance grows, via contributions and rental income from the property.

That is, the fund is able to acquire units from a related party provided the units are acquired at market value and the non-geared unit trust continues to comply with the requirements in SIS Regulations 13.22C and 13.22D on a continuous basis.

The general prohibition regarding the acquisition of an asset from a related party (s 66 of the SIS Act) does not apply if the SMSF acquires the units from the related

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Figure 1. The SMSF can acquire further units from a family trust

Family Trust

SMSF 50%

Lender

50% Non-Geared Unit Trust

Property

party at market value, and the unit trust continually satisfies the conditions outlined above. It does not matter that the SMSF acquires existing units from a related party rather than new units being issued to the super fund; however, the fund can also acquire new units issued by the unit trust.

Case study 2 Assume the same situation as in Case Study 1, but we are now 10 years into the future. The unit trust has continually satisfied the non-geared unit trust rules and, although the unit trust is clearly a ‘related trust’, the investment by the fund is excluded from the in-house asset rules.

Over the last 10 years, the Richard Superannuation Fund has acquired units in the unit trust from the Richard Family Trust (commonly known as a ‘creeping acquisition’ strategy) at the rate of 5% of the units on issue (ie. the full 50% held by the Richard Family Trust). Furthermore, the units have been acquired at market value.

The Richard Family Trust, as it receives the consideration for the units, uses the proceeds to reduce the loan, with the surplus distributed to beneficiaries listed under the Richard Family Trust.

The structure is now as follows.

SMSF 100% Unit Trust

Property

Nicholas Ali, SuperConcepts Nicholas Ali is executive manager, SMSF Technical Support, with a focus on providing strategic advice to trustees and members of self-managed superannuation funds. He brings extensive knowledge and skill from 20 years’ experience in the financial services sector, including a background in financial planning and as a SPAA Specialist Adviser.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Under which of the following conditions can an investment in a unit trust be excluded from the in-house assets rules? a) The unit trust does not have a charge over any of its assets b) The unit trust has no borrowings or loans c) The unit trust has not entered into a loan to a related party of the fund d) All of the above 2. If the investment in a unit trust is greater than ___% of the fund’s assets, the fund will need to divest itself of the investment. a) 15% b) 10% c) 5% d) 25% 3. Which of the following statements is accurate in regard investing in a unit trust? a) If the trust is ‘unrelated’ to the SMSF it will be excluded from the in-house asset rules b) If the trust is ‘related’ to the SMSF it will be excluded from the in-house asset rules c) Whether or not the unit trust is ‘related’ to the SMSF is immaterial d) None of the above 4. Subject to conditions, investing in a non-geared unit trust can offer which of the following advantage? a) Potential eligibility for a tax deduction on the borrowing b) Potential for the unit trust to acquire land for development c) Concessional tax treatment of income re units held by the SMSF d) All of the above 5. A key question an SMSF must determine is whether or not the unit trust is a ‘related trust’ of the SMSF. a) True b) False 6. Investing in a non-geared unit trust allows an SMSF to purchase an asset it otherwise could not afford. a) True

b) False

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Trustees should, however, obtain advice as to whether any stamp duty applies on the transfer of units. Most jurisdictions have a land rich regime which charges duty on certain transfers of units within a private unit trust if certain thresholds are exceeded. In Victoria, the land rich provisions apply if landholdings are more than $1 million and the landholdings comprise 60% or more of the trust’s assets. In New South Wales these thresholds are $2 million and at least 60% of the value of all the trust’s assets. Trustees should therefore seek state or territory-specific advice on applicable land rich laws.

The SMSF can also reinvest any unpaid income (or capital) distributions owing from the non-geared unit trust into additional units in the trust. The Australian Tax Office’s (ATO) view in SMSFR 2008/D1 is that reinvestment of the unpaid trust distributions into additional units will be an investment for the purposes of the in-house asset rules in s 71(1). However, provided the units in the unit trust were acquired at market value and the trust continues to satisfy the requirements contained in SIS Regulations 13.22C and 13.22D, then the additional units will not be an in-house asset.

Re-investing income and capital entitlements back into the unit trust allows it to preserve working capital, and any income or capital distributed to the SMSF receives concessional tax treatment (ie. maximum of 15% tax on income or 10% capital gains tax (CGT) while in accumulation phase and nil while in the pension phase).

Advantages There are many advantages associated with the ungeared unit trust structure. Some of the more obvious advantages are listed below: • if a related party is borrowing to purchase units in the unit trust they may be eligible for a tax deduction on the borrowing—this may be at a marginal tax rate which is higher than the super fund tax rate of 15% (ie. the deduction applicable to a super fund undertaking an LRBA) • it allows an SMSF to purchase an asset that it otherwise could not afford • it allows for the transfer of ownership of units from a related party to an SMSF (this is problematic if a property is held with a related party as tenants-in-common) • concessional tax treatment will apply on the income and future capital gains on units held by an SMSF • if a creeping acquisition strategy is undertaken the SMSF could end up owning 100% of the units in the unit trust (if the property is then sold in the future when the fund is in pension phase, no CGT may be applicable) • the SMSF can sell units back to the related party once in pension phase (with no CGT applicable); this can assist in helping fund pension payments or estate planning purposes • potential for the unit trust to acquire land for development, which is now strictly prohibited under LRBAs. Specialist advice should always be sought before undertaking any SMSF strategies or implementing structures. Investors should consult an appropriately qualified and experienced adviser before committing to any SMSF strategy involving non-geared unit trusts. fs

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Retirement:

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Deferred lifetime annuities

By Andrew Lowe, Challenger

Superannuation is for spending

By Nick Callil, Willis Towers Watson

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CPD Read Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: There are various ways in which an adviser can incorporate a deferred lifetime annuity into an income stream strategy for clients, and recent changes to the social security means testing of lifetime income streams has provided certainty around the means test outcomes for lifetime income streams commenced on or after July 1 2019.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Deferred lifetime annuities An introduction

T Andrew Lowe

he introduction of the government’s ‘Innovative Superannuation Income Streams’ Regulations [Treasury Laws Amendment (Innovative Superannuation Income Streams) Regulations 2017] has, since July 1 2017, allowed for the development of new categories of retirement income streams to meet the needs of Australian retirees. These Regulations have allowed for the development of a variety of income streams, including deferred lifetime income streams, and deferred lifetime annuities (DLAs), which are available today as a result.

Recent changes to the social security means testing of lifetime income streams has provided certainty of social security means test outcomes for lifetime income streams (including innovative superannuation income streams) commenced on or after 1 July 2019.

A Challenger DLA The Challenger Guaranteed Annuity (Liquid Lifetime) Flexible Income (deferred payments) option is a DLA. It provides: • guaranteed income for life (irrespective of how long a client lives or how investment markets perform) after a deferral period of a client’s choosing • higher payments relative to a comparable immediate lifetime annuity

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• CPI indexation of payments (including during the deferral period)* • a death benefit where up to 100% of any investment amount paid to a client’s nominated beneficiaries or estate if they die early* • a withdrawal value for a period based on a client’s life expectancy* • the option to add a reversionary spouse with payments continuing for the longer life. *This feature can be removed by the client at time of investment in return for higher starting payments.

An investment in this option can only be made on or after age 60 with unrestricted non-preserved superannuation monies. Any spouse nominated as a reversionary must be aged at least 65 or older.

The deferral period must be in whole years, with a minimum deferral of one year. Payments must start no later than the investment anniversary after a client turns age 100 (or their spouse turns age 100 if they are older and they are nominated as a reversionary).

Figure 1 illustrates a Challenger DLA option with a five-year deferral period for a 65-year-old female client.

The effect of any deferral period on a fixed investment amount is to increase payments when they subsequently commence following the deferral period; the longer the deferral period, the higher the starting payments available. Table 1 illustrates the relationship between deferral period and payment amounts.

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A DLA in practice

Table 1. The relationship between deferral period and payment amounts Deferred commencement Age

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3 years

5 years

10 years

15 years

20 years

Age 65 male

$4,551

$5,278 (+16%)

$5,879 (+29%)

$7,950 (+75%)

$11,332 (+149%)

$17,642 (+288%)

Age 65 female

$4,296

$4,926 (+15%)

$5,440 (+27%)

$7,191 (+67%)

$9,971 (+132%)

$14,846 (+246%)

Age 75 male

$6,483

$8,169 (+26%)

$9,740 (+50%)

$15,873 (+145%)

$32,119 (+395%)

$89,472 (+1,280%)

Age 75 female

$5,977

$7,379 (+23%)

$8,654 (+45%)

$13,594 (+127%)

$25,065 (+319%)

$65,585 (+996%)

Source: Challenger Liquid Lifetime (flexible income option), $100,000 investment, monthly payments, CPI indexation, maximum voluntary withdrawal and death period. Challenger eQuote (July 30 2019).

Social security means testing of a DLA Where a DLA commences on or after July 1 2019, 60% of payments will be assessable under the income test.

This means that during the deferral period (where no payments are being made) nothing is assessable under the income test.

Under the assets test, 60% of any amount invested in a DLA will be assessed as an asset until age 84, or for a minimum of five years. After this, just 30% of the investment amount will be assessed as an asset.

These means test assessments, relative to other income streams or assets, mean that clients receiving a reduced Age Pension because of either the assets or income test, could immediately increase their Age Pension by investing part of their assets in a DLA.

There are many ways that advisers can incorporate a DLA into an income stream strategy for clients. The following application demonstrates the benefit of providing a guaranteed layer of income over and above the maximum rate of Age Pension, with either an immediate lifetime annuity or a DLA, to ensure that a client can always meet their essential income requirements in retirement.

Sally and Steve, both age 66, are a recently retired couple who own their own home. They have $300,000 each in accumulated superannuation assets, $50,000 in cash and term deposits they intend to maintain for a rainy day and $20,000 of non-financial assets.

With your advice, they have determined that they would like to spend $60,000 p.a. in retirement to provide what they consider to be a comfortable lifestyle (slightly less than the ASFA budget for a ‘comfortable’ lifestyle for a couple of $61,522 p.a., as at June 2019). Sally and Steve are a little less clear on what level of income they could ‘get by’ on if their retirement assets were depleted over time, but are very clear that the maximum rate of Age Pension alone would be insufficient to meet their need.

Figure 2 shows modelling from the Challenger Retirement Illustrator projecting retirement income outcomes if Sally and Steve were to roll their superannuation savings to account-based pensions (ABPs).

It can be seen that Sally and Steve meet their desired retirement income level through to age 94 when their ABPs are depleted (coincidentally, the point at which there is a 50% chance that one of them is still alive), but thereafter they are dependent on the Age Pension and a small amount of interest from their cash and term deposits.

Andrew Lowe, Challenger

Figure 1. DLA option with five-year deferral period for female client aged 65

Source: Challenger Guaranteed Annuity (Liquid Lifetime) Product Disclosure Statement.

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Andrew Lowe is Challenger’s head of technical services. Andrew and the tech team are responsible for the development and delivery of technical content, tools and advice for advisers. His areas of interest include pre- and post-retirement planning, superannuation (including SMSFs), aged care, life insurance and the regulatory environment for the provision of financial advice.

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Figure 2. Projected income from an ABP-only strategy

Source: Challenger Retirement Illustrator as at 9 August 2019. See appendix for assumptions.

Figure 3. Projected income from a strategy including 25% invested in an immediate lifetime annuity

Source: Challenger Retirement Illustrator as at August 9 2019. See appendix for assumptions.

Figure 3 shows modelled retirement income outcomes if Sally and Steve were to use 25% of their accumulated superannuation to invest in immediate lifetime annuities.

The retirement income outcomes illustrated in Figure 3 are interesting. It shows that when Sally and Steve’s ABPs are depleted, they have continuing income from the Age Pension, interest from their cash and term deposits, and $6,639 p.a. (in today’s dollars) from their immediate lifetime annuities sustaining a higher level of spending through their remaining retirement. It can be seen that the projected longevity of their ABPs has been extended because of the combination of higher income from the annuities relative to projected defensive returns and higher Age Pension payments (particularly early in retirement).

However, if Sally and Steve were to use 25% of their accumulated superannuation to invest in DLAs (in this case, each shown with fiveyear deferral periods), we would see the retirement income outcomes modelled in Figure 4.

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When Sally and Steve’s ABPs are depleted, they have continuing income from the Age Pension, interest from their cash and term deposits, and $8,500 p.a. (in today’s dollars) from their DLAs sustaining an even higher level of spending through their remaining retirement. The projected longevity of their ABPs has been extended further because of the combination of higher income from the DLAs relative to projected defensive returns and higher Age Pension payments (again, particularly early in retirement).

The difference in Age Pension payments between Sally and Steve investing via ABPs only, or with a 25% allocation to DLAs, is shown in Table 2.

While DLAs will not suit all clients, they can be an extremely useful additional retirement income stream. They provide guaranteed income for life (irrespective of how long a client lives or how investment markets perform) and flexibility to complement other sources of retirement income for clients. fs

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The quote

There are many ways that advisers can incorporate a DLA into an income stream strategy for clients.

Figure 4. Projected income from a strategy including 25% invested in a deferred (five-year) lifetime annuity

Source: Challenger Retirement Illustrator as at August 9 2019. See appendix for assumptions.

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Table 2. Challenger Retirement Illustrator (Sally and Steve)

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Appendix: assumptions used in Figures 2–4 and Table 2 • Centrelink rates and thresholds as at July 1 2019.

• Source is the Challenger Age Pension Illustrator as at 9 August 2019.

• Challenger Guaranteed Annuity (Liquid Lifetime) quote as at July 9 2019 and based on the flexible income option, monthly payments, CPI indexation, nil adviser fees and maximum withdrawal and death benefit periods, immediate and five-year deferral periods used.

• Assumes lifetime annuities form part of defensive assets. To maintain an overall asset allocation of 50/50 growth/defensive (including the allocation to the defensive lifetime annuity), the asset allocation of the ABPs has been adjusted accordingly.

• ABP growth assets return 7.70% p.a. and defensive assets, 3.70% p.a. before management fees of 0.80% and 0.60% respectively. In addition, platform fees are assumed to be 0.50%. Cash and term deposits return 4% p.a.

This information is current as at 1 August 2019 and is provided by the author on behalf of Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 for adviser use only. It is not intended to constitute legal, tax or financial product advice.

Any examples are for illustrative purposes only and are not a prediction or guarantee of any particular outcome.

Source: Challenger Retirement Illustrator as at 9 August 2019. See appendix for assumptions.

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Where a deferred lifetime annuity commences on or after July 1 2019, what portion of the payments will be assessed under the income test? a) 0% b) 60% c) 100% d) 30% 2. D uring the deferral period, what portion of income is assessable under the income test? a) 60% b) 30% c) nil d) 100% 3. Which of the following is accurate in regard to Challenger’s deferred lifetime annuity (DLA), as described in the article? a) The shorter the deferral period, the higher the starting payments available b) The longer the deferral period, the higher the starting payments available c) The longer the deferral period, the lower the starting payments available d) None of the above

4. Which of the following is accurate in regard to the assets test and deferred lifetime annuities (DLAs)? a) 60% of the amount invested in a DLA will be assessed as an asset until age 84 b) 100% of the amount invested in a DLA will be assessed as an asset until age 70 c) 30% of the amount invested in a DLA will be assessed as an asset until age 84 d) 60% of the amount invested in a DLA will be assessed as an asset until age 80

5. A deferred lifetime annuity can provide a guaranteed income for life, regardless of investment market performance. a) True b) False 6. A deferred lifetime annuity can provide a guaranteed income for life, irrespective of a client’s longevity. a) True b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The drawdown (or spending) phase of superannuation is ripe for greater attention and development by super funds.

This paper argues that more can be done—by funds and by the industry generally—to promote well-designed strategies that ensure the smooth drawdown of super savings during the retirement phase.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Superannuation is for spending

I Nick Callil

t is remarkable that, more than 25 years after the key planks of today’s superannuation system were put in place, we still have not defined the purpose of superannuation, despite recent (to date) unsuccessful attempts to legislate an objective.

Indeed, a better aim for our politicians might be to establish an objective for the overall retirement income system, encompassing age pension and related benefits, and compulsory and voluntary superannuation. Looking at the whole system, rather than just superannuation (or any other component) would help to promote better integration of the various components over time. Achieving an overall objective would allow more specific goals for the individual components, including superannuation, to be developed. We hope to see this matter addressed by the upcoming Retirement Incomes Review, announced by the Federal Treasurer in September.

In the meantime, it should not be contentious to assert that superannuation savings accumulated during working years should be spent down (ideally, as a regular income) in the years after employment ends. But too often even this limited purpose is not reflected in public discussion of superannuation and the retirement system.

Often there is an assumption (generally unspoken) that assets individuals have accumulated for retirement are not to be drawn down during the retirement years. Under this thinking, the amount taken

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into retirement acts as a ‘capital base’ to generate investment earnings which can be spent but otherwise should remain untouched.

This sort of thinking was evident in the public discussion of the impact on retirees of the policy taken by Labor to the May federal election to discontinue refunding of excess franking credits. It was clear that many retirees or their advisers considered their ‘retirement income’ to be the dividend stream (including franking credits) generated on their share portfolio. The same mindset also underpinned some of the commentary on deeming rates for age pension means testing before the announcement that these would be reduced from July 1 2019.

An unrealistic strategy We should be wary of allowing a ‘spend the income’ mindset in retirement to take root for a good reason—for most retirees, it is simply unrealistic. Living off the interest income from term deposits or the dividend income emanating from a share portfolio sounds attractive, but for most retirees (who have little in the way of income-producing assets outside superannuation) this sort of strategy is unlikely to produce an income that they might regard as adequate.

As shown in Table 1, to achieve an ‘ASFA Comfortable’ income a couple adopting a ‘spend the income’ strategy would need to have a retirement balance of $3.9 million if investing in term deposits, or a lower amount of around $1 million if invested in a higher yielding (but riskier) Australian share portfolio.

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Table 1. Achieving a target retirement level using a ‘spend the income’ strategy Required balance if invested in: Target retirement level (ASFA Comfortable)

Term deposit

Australian share portfolio

Single ($43,601)

$2,777,000

$703,000

Couple ($61,522)

$3,919,000

$992,000

Notes: 1. Term deposit rate: 1.57% p.a. (average of advertised rates for 12-month term deposit on $100,000+ for the four major banks in September 2019).

2. Dividend yield: 6.2% p.a. (average gross dividend yield on ASX200 over 12 months to September 2019, including franking credits).

Source: Willis Towers Watson, 2019.

Table 2. Median superannuation balances in retirement Age

Males

Females

65-69 years

$172,914

$165,857

70-74 years

$182,272

$170,885

75+ years

$132,324

$131,061

Source: ATO Taxation Statistics 2016-17.

These amounts are well above the median superannuation balances by Australians of retirement age, as shown in Table 2. For those hoping to achieve a reasonable income in the retirement years, this strategy makes sense only for the relatively wealthy few.

Minimum drawdown rules Of course, ‘spend the income’ is not generally a feasible strategy for retirees. The minimum drawdown rules (MDRs) that apply within the superannuation environment are designed to ensure account balances (including capital) are spent down over the pension phase.

While MDRs only specify a minimum amount to be drawn down, many funds still offer little guidance on drawdown strategy in retirement beyond disclosing the relevant percentages. Concern about regulatory constraints on providing advice and limited information about their retirees can constrain funds from offering more tailored drawdown guidance.

In the absence of such guidance, it is not surprising that many retirees commence drawing down their account at the MDR. Indeed, studies we have conducted of drawdown behaviour in funds show that a high proportion of members draw down at minimum rates throughout the pension phase, particularly for members with balances at or below the median.

While minimum drawdown throughout retirement

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may be an appropriate strategy for some retirees, it is reasonable to ask whether such a strategy is actually too conservative; deferring spending that could contribute to the quality of life in early retirement and increasing the chance of leaving unnecessarily large amounts behind on death.

Drawing down well While longevity protection solutions (more on these later) can address underspending more directly, it’s possible to improve things with careful design of the drawdown strategy used by members.

Consider the following three strategies to drawing down from an account-based pension: • in line with the MDRs (minimum drawdown strategy) • a constant drawdown each year, set at a level expected to last until age 90 (i.e. life expectancy plus three years) (constant drawdown strategy) • in line with a modified set of drawdown factors based on life expectancy at each age + three years, but with a limit on the amount by which the drawdown reduces over any year (LE+3 strategy).

Figure 1 illustrates the pattern of income expected to emerge under each strategy, though in reality the actual drawdown level will vary depending on actual returns rather than the constant return used in this illustration. We observe that an MDR strategy provides lower income early in retirement, but lasts longer than the other strategies.

While ensuring income is available in advanced old age is a desirable feature, many retirees may prefer strategies that bring more income forward to the earlier, more active years of retirement.

Of course, there is a trade-off here: a faster spending strategy means retirees can enjoy more of their savings, but equally increases the chance that they will be left without retirement assets if they live longer than expected.

Figure 1. Patterns of income under three drawdown strategies

Minimum Drawdown

LE+3

Constant Drawdown

Source: Willis Towers Watson, 2019.

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Figure 2. Likelihood of ‘ruin’ and ‘wastage’ under different drawdown strategies

Notes: 1. ‘Wastage’ defined as 50% or more of initial balance remaining on death.

2. 55% growth investment strategy: mean return 5.9% p.a. over retirement period.

3. Mortality ALT10-12 (males), with 25 year improvements.

Source: Willis Towers Watson, 2019.

Setting an appropriate drawdown strategy can be seen as an exercise in balancing two risks to the retiree—running out of money before death, or ‘ruin’, and leaving amounts behind on death that might be regarded as excessive, or ‘wastage’.

These risks are shown in Figure 2, for each of the three drawdown strategies considered.

A minimum drawdown strategy, while having a zero risk of ruin, arguably has an unacceptably high risk of

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wastage, whereas under a constant drawdown strategy, ruin risk becomes the concern—many funds would still baulk at endorsing a strategy with a one-third risk of running out before death. This suggests a middle ground, like the LE+3 strategy shown, can provide a better balance of these risks. Research we have conducted in this area shows that this strategy can be further improved by additional modifications to the drawdown algorithm (such as floors and ceilings to reduce large variations in year-on-year income).

Ultimately however, no spending strategy alone can ensure a stable income for life. Ideally, as well as developing a default spending policy for retirees, funds would offer a complementary longevity product (such as a deferred annuity) to provide ongoing income where a retiree outlives their savings.

But while those more complex products are in development, a well-designed drawdown strategy can yield significantly improved outcomes for those retirees who prefer to be directed by their fund and hence would otherwise be likely to simply draw down at the minimum rates.

What can be done?

The drawdown or spending phase is ripe for greater attention and development by funds. More can be done, by funds and the industry generally, to promote spending down of balances smoothly during the retirement phase. Some ideas are:

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Nick Callil, Willis Towers Watson Nick Callil is head of retirement solutions for Willis Towers Watson Australia.

He leads the firm’s research in the area of retirement strategy, and consults to superannuation funds, financial institutions and government bodies on retirement and accumulation phase design, default investment option strategy, longevity risk solutions and lifecycle design.

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A retirement income objective: As discussed above, developing an

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which of the following statements accurately reflect the author’s views? a) A sound spending strategy alone will ensure a stable income for life b) Ideally, funds would offer a longevity product to provide income if a retiree outlives their savings c) Adhering to the minimum drawdown amounts is always the best strategy for retirees d) None of the above 2. According to ATO data, what are the median super balances for men and women aged 65–69 years? a) About $180,000 for men; $170,000 for women b) Just over $300,000 for men; $200,000 for women c) $131,061 for women; $215,500 for men d) $165,857 for women; $172,914 for men 3. To achieve a ‘comfortable’ retirement, it is estimated that a couple would need a retirement balance of how much? a) $1.6 million if invested in term deposits; about half that if invested in higher-yielding shares b) About $700,000 if invested in higher yielding shares; $1.5 million if invested in term deposits c) $3.9 million if invested in term deposits; about $1 million if invested in higher-yielding shares d) About $800,000 if invested in higher-yielding shares; $2 million if invested in term deposits 4. According to the author, ideally, how should accumulated superannuation be used in retirement? a) It should be drawn down, ideally as a regular income b) It should be invested for estate planning purposes c) It should be withdrawn as a lump sum upon retirement d) It should be saved for potential aged care fees

objective for the whole retirement system, as well as for the superannuation component within it, is a worthwhile aim. Developing an objective with substance will be contentious, as industry stakeholders and participants will have differing views; for instance, should our system aim to deliver poverty alleviation, age pension supplementation or a standard of living defined by reference to working life earnings? However one aspect that should not be controversial is that retirement provision should be in income form, and that capital balances should be spent down over retirement. An objective which is framed clearly in income terms will strengthen this focus.

Retirement income estimates: Providing estimates of projected retirement income during the accumulation phase (particularly as members approach retirement) promotes the primary aim of superannuation as spending in retirement, and should be encouraged.

These estimates are currently provided by many funds but are not universal. Ideally, income estimates should be made mandatory, with some sensible limited exceptions at the fund and individual member level. The ASIC Class Order under which many funds currently provide such estimates could also be modified to allow potentially worthwhile extensions, such as showing the uncertainty associated with an income estimate. Better still, the Class Order relief framework (which presupposes income estimates are financial product advice—a questionable assumption) could be revisited altogether.

Careful use of the term ‘income’: Language matters. In communicating with retirees we often see ‘income’ used to denote both investment earnings (such as dividends, rent, interest etc.), and the income received from a fund during retirement phase. This dual usage can cause confusion and promote the ‘spend the earnings’ concept described above. It’s often better to use ‘drawdown’ or similar terms to refer to amounts paid to retirees in pension phase.

Well-designed drawdown rules: As discussed, while a conservative approach to spending down retirement accounts is appropriate in the absence of longevity protection, funds should review their default drawdown offerings to ensure they are not too conservative and do not promote inappropriately low spending by retirees.

Better retirement products: Ultimately, most retirees with meaningful balances will spend their savings more confidently earlier in retirement only if they are sufficiently comfortable that they will not run out of money in advanced old age. The continued development and promotion of longevity protection products that can provide this comfort remains a high priority for the industry. fs

5. The author states that the drawdown phase of superannuation is ready for greater attention and development by funds. a) True b) False 6. A clearly stated objective for the superannuation system has now been determined. . a) True

b) False

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Managing your information

assets: CPS 234 Information security

Philip Catania, Corrs Chambers Westgarth

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: APRA’s Prudential Standard CPS 234 Information Security signals the increasing scrutiny of the way in which financial institutions manage and protect the data they hold. APRAregulated entities need to understand their obligations, and this paper provides an overview of the key requirements of CPS 234.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Managing your information assets APRA’s Prudential Standard CPS 234 Information Security

W Philip Catania

ith the frequency and seriousness of data breaches continuing to set new records each year in Australia and across the world, Australian regulators have begun laying down the law when it comes to data management, cyber resilience and information security practices.

The Australian Prudential Regulation Authority (APRA) Prudential Standard CPS 234 Information Security, which commenced on July 1 2019, carries the force of law and establishes a host of information security requirements for authorised deposit-taking institutions such as banks and insurance providers (APRA entities). It signals APRA’s increasing scrutiny of the way financial institutions manage and protect the data they hold.

However, those organisations that ‘manage’ the ‘information assets’ of APRA entities—including providers of cloud based services,

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IT infrastructure providers, IT implementation and support providers, data hosters and managers and so on—are also impacted by CPS 234, and need to understand their obligations in full.

Below is a snapshot of what we’ve learned about CPS 234 in practice to date.

Key requirements under CPS 234 CPS 234 establishes various security requirements in respect of an APRA entity’s ‘information assets’—essentially any form of information technology, including software, hardware and data. This term is defined in much broader terms than ‘personal data’ or ‘personal information’ (which is used in privacy and data protection laws and only applies to natural persons). Information assets are not subject to a materiality limitation, therefore APRA entities must ensure that any steps taken to comply with CPS 234 account for all the different forms of information assets relating to their business.

The core requirements under CPS 234 fall into two distinct categories.

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Under the first set of requirements, APRA entities must establish the following information security practices: • Information security capability. The APRA entity must actively maintain an information security capability which enables the continued sound operation of the ADI. • Implementation of controls. The APRA entity must establish information security controls to protect the ADI’s information assets across their life-cycle.

• Testing control effectiveness. The APRA entity must establish systemic testing programs which are able to test the effectiveness of its information security controls.

• Incident management. The APRA entity must establish robust mechanisms and plans to detect and respond to information security incidents that could plausibly occur.

• Internal audit. The APRA entity must ensure that their internal audit activities include a review of the design and operating effectiveness of information security controls.

Sitting neatly beside this is the second set of core requirements—where a service provider manages the information assets of an APRA entity, the APRA entity must assess and review the adequacy of the service pro-

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vider’s information security practices in protecting those information assets.

Who ‘manages’ the information assets of an APRA entity?

If an organisation is providing software, hardware, data or any service relating to the software, hardware or data of an APRA entity, then there is a good chance that the organisation is a service provider that ‘manages’ the information assets of the APRA entity and will be caught by the operation of CPS 234.

Third party implications of CPS 234 Rolling down requirements

APRA entities’ responsibilities to comply with CPS 234 extend to all their information assets managed by third parties and entities that those third parties may sub-contract to. Therefore, in addition to setting out rights to review and assess, APRA entities will seek to roll down obligations for service providers to establish all of the above information security practices in respect of the particular information assets being managed by the service provider. In order to reduce the costs of compliance, service providers might need to consider categorising and segregating the assets it manages that belong to APRA entities from those that belong to other clients

Philip Catania, Corrs Chambers Westgarth Philip Catania is the partnerin-charge of the Melbourne office of law firm, Corrs Chambers Westgarth. He has qualifications in law and computer science and prior to joining the legal profession was a computer programmer with the Australian Antarctic Division.

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from other industries so that it can apply the relevant security practices selectively where required. This, we know, is often easier said than done.

Contractual considerations

APRA entities have until the earlier of the next contract renewal date or July 1 2020 to ensure that their arrangements with third party service providers comply with CPS 234. Existing contractual arrangements with service providers are being reviewed and amended to incorporate CPS 234 obligations. These new contractual revisions will need to be consistent with any existing clauses relating to privacy, security, confidentiality, enforcement and termination.

Flexibility in compliance measures

Contractual considerations are but one part of the ‘arrangements’ that must be adopted in order to comply with CPS 234 and are, on their own, certainly not enough to establish compliance. It is important to understand that CPS 234 does not set out specific requirements to establish any contractual measures when dealing with service providers (unlike CPS 231 Outsourcing, which sets out a list of prescribed contractual requirements when threshold issues are satisfied). In contrast, the requirements under CPS 234 are framed in broad high-level terms which provide relevant entities with the flexibility to adopt any measures that are appropriate or commensurate with the nature of the information assets.

APRA’s practice guide CPG 234

APRA has released a practice guide which provides examples of the types of information security practices that entities can adopt in complying with CPS 234. For example, the testing controls that might be established include:

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• appropriate blocking, filtering and monitoring of electronic transfer mechanisms • encryption and segregation of sensitive data sets • continually updating software security and ensuring it complies with the information security policy framework • establishing approval and verification processes whenever requests for access are made; and • maintaining physical and environmental controls such as fire suppressant systems.

Other key considerations for APRA entities and service providers Governance and responsibility for compliance

CPS 234 vests ultimate responsibility of an entity’s information security management with the Board of the APRA entity, whose roles and duties must be clearly defined. The Board will need to be ready to evidence any steps taken to comply with CPS 234, and to be aware of enforcement actions that could be taken in the event of non-compliance, both by APRA and by ASIC for breaches of directors’ duties relating to care, skill and diligence, which will now be framed by the obligations under CPS 234.

Synergies with CPS 231 Outsourcing

Where arrangements between APRA entities and service providers involve the outsourcing of a material business activity relating to the sharing or managing of information assets, both CPS 231 (relating to outsourcing) and CPS 234 will apply. Given that the obligations flowing from these dual regulations have a high degree of crossover (such as the requirements to undertake auditing and reporting procedures, maintain information security and specify ownership and control of data), there are synergies that may be exploited in

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the process of uplifting agreements and implementing procedures in accordance with APRA’s prudential standards.

CPD Questions

Notification requirements

APRA entities must notify APRA of any information security control weaknesses or information security inci dent that is material or has been notified to any other regulator (both Australian and foreign). Notification must be provided even where those information assets are being managed by third parties and, in the case of an information security incident, must be notified to APRA within 72 hours after the APRA entity becomes aware of the relevant incident or vulnerability; hence the obligations APRA entities place on service providers to notify them of such matters.

Extent of access to information security practices

Service providers should consider the extent to which they allow APRA entities to assess and review their information security practices. It is unclear what level of assessment and review will be required in order for APRA entities to satisfy their obligations under CPS 234. However, at a minimum, service providers can expect: • APRA entities to push for some level of on-site inspections of their service providers’ premises; and • a requirement for service providers to produce a regular services report that clearly explains the information security practices being implemented.

APRA’s ushering in of new information security practices for APRA entities and their service providers offers a glimpse into how Australian regulators will respond to the growing tsunami of data and information that businesses are accumulating. In the wake of stern admonishments under the Financial Services Royal Commission, APRA will look to rigidly enforce its new standard to stem the increasing flood of cyber risks posed by Big Data. Service providers to this industry need to be very aware of this. fs

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Earn CPD hours by completing this quiz via FS Aspire CPD 1. Which of the following are cited as ‘information assets’ under CPS 234? a) Any form of information technology b) Information hardware and software c) Data only d) All of the above 2. CPS 234 vests ultimate responsibility for an entity’s information security management with which of the following? a) Third-party service providers b) The board of the APRA entity c) APRA’s compliance officers d) The entity’s legal and compliance officer 3. Which of the following statements is accurate in regard to an APRA entity’s compliance with CPS 234? a) An entity’s compliance responsibilities extend to all assets managed by third parties b) An entity’s compliance responsibilities do not extend to any entities that a third party may subcontract to c) The entity’s compliance responsibilities do not extend to third parties d) An entity’s compliance responsibilities do not extend to subcontractors 4. Under APRA’s guidance to CPS 234, which of the following are cited as possible testing controls? a) Encryption and segregation of sensitive data sets b) Appropriate blocking and filtering of transfer mechanisms c) Approval and verification processes in relation to requests for access d) All of the above 5. A contractual arrangement is in itself enough to establish compliance with CPS 234. a) True b) False 6. Under CPS 234, ‘information assets’ refers only to personal data or personal information. a) True

b) False

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Alphinity 7 AMIST 6 AMP 6, 8, 9, 11, 12 APRA 6, 9, 10, 11 Aracon Superannuation 7 ASIC 10 Australian National University 8, 12, 13 Australian Tax Office 11 AustralianSuper 6, 7, 11, 12 AvSuper 12 BNP Paribas 8 Cbus 6, 9 EISS Super 8 ElectricSuper 8 Elevate Super 7 Equipsuper 6 First State Super 6, 11 Future Super 6 GigSuper 10 Grow Super 10 Hannover Re 7 HESTA 6, 12 Hostplus 9, 12 Industry Super Australia 8 JANA 10 K2 Asset Management 12 KPMG 10 Link Group 10 Macquarie Group 6 Media Super 6 Mercer 8, 10 MTAA Super 6 Nanuk Asset Management 7 NM Super 8 Qantas Super 10 QSuper 6, 7, 11 Rainmaker 7, 9, 11, 12 Rest 10, 12 Sunsuper 6, 7 Super Consumers Australia 11 UniSuper 6, 11, 12 Vision Super 6, 11

Administration & Management $1.6 million transfer balance cap revisited Limited recourse borrowing arrangements Unlisted SMSF assets could mean a qualified audit Who gets the superannuation death benefit?

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

26 30 34 38

Ethics & Governance The fairness doctrine

42

Investment Investing in non-geared unit trusts

48

Retirement Deferred lifetime annuities

52

Superannuation is for spending

57

Technology Managing your information assets

62

FS Super

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