2018 Federal Budget

2018 Federal Budget Review:

The 2018 Federal Budget has quite a number of items that look to have impacts on Superannuation administrative processes, systems or implications for product design. There are a couple of items that will require extensive clarification from the ATO to allow Trustees and system administrators to make decisions on the appropriate response.

The headline items included that are have potential impacts to superannuation administration are:

  • Opt-In rules for insurance on members aged under 25, or low balances or inactive accounts.
  • Cap on fees at 3% of members account where balance is under $6,000.
  • Ban on Exit Fees for all accounts
  • Relaxation of the work test for members aged 65-74
  • Transfer of all inactive accounts below $6,000 to the ATO
  • Requirement for Trustees to formulate a Retirement Income Strategy for members.
  • Clarification of treatment of TTR pensions when they have converted to standard pensioners with a reversionary

There were other announcements that impacted Superannuation that are not considered to have system impacts (such as increases in SMSF Trustee size or increases in the APRA levy). Further details on those can be found in the ASFA Budget Summary.

Interesting policy announcements not to be included were;

  • changes to the timetable of future SG increases,
  • extending SG to dependent contractors in the gig economy,
  • removing the $450 minimum SG threshold,
  • changes to the gaining early access to superannuation benefits.

Bravura’s initial assessment of the measures which could impact superannuation administration systems are noted below.  We will need to wait for the measures to be passed into legislation and guidance from the regulator on their proposed implementation. We will continue to engage with customers though the normal channels as details are clarified.

Opt-In Provisions for Group Insurance for Selected Member Groups

The Government is proposing that some of the insurance changes that had been ratified under the voluntary Insurance Code of Practice will now be legislated and required earlier than proposed under the code. The goal is to protect account balances from erosion via insurance premiums that a member is either of unaware of, or doesn’t need.

There are 3 rules to be applied:

  1. Members with low balances of less than $6,000: Trustees will need to communicate with their members to confirm that they wish to retain their insurance (Opt In) by 1 July 2019, otherwise they will have their cover switched off.
  2. Accounts for New member under age 25: Default insurance is to be Opt-In for members aged under 25. (Consideration will need to be given to what happens when members turn 25).
  3. Members whose accounts have not received contributions in 13 months and are inactive: There will be notification requirements of the changes to existing members. These may turn out to be similar to those proposed by the ISWG Voluntary Code (i.e. after 6 months, 9 months and 13 months). These changes will take effect on 1 July 2019. Existing superannuation members will have 14 months to decide whether they will opt-in to their existing cover or switch it off.

Comment

Most of these changes have already been considered as part of the enhanced Insurance Lapsing functionality introduced in the Australian Release 8.3. (refer to AUCR-248. Lapse rules can be set for members with a minimum balance or inactivity on their account.

It is expected that restrictions on default cover for members aged under 25 can be accommodated via configuration of insurance tables. The exact nature of this configuration will be dependent on how Trustees wish to deal with members default insurance when they attain age 25.
Further analysis is required to assess what is required of business processes to:

  • Identify default cover;
  • Trigger default cover on a member’s 25th birthday;
  • Manage members aged under 25 who want to Opt-In to the default level of cover;
  • Manage inactive or low account balance members who wish to Opt-In to their insurance.

Banning Exit Fees from all Super Accounts:

From July 1 2019, there will be a ban on exit fees on all Superannuation accounts.

Clarification is required as to whether this ban includes exit fees on both partial and full withdrawals

Comment

Sonata allows for fee configuration via expense maintenance function. Trustees can make changes to the fees to be charged as part of their product maintenance.

Bravura consultant assistance may be required to configure the change in fees from the date required.

Passive Fees Capped at 3%

An annual cap for accounts of 3% with a balance below $6,000. Definition of what is to be included as a Passive fee are yet to be clarified. We expect it to be defined as both direct fees such as administration fees, and indirect costs such as investment fees in the unit price. We anticipate fees related to a service requested by a member are not included (such as investment choice, financial planning, family law splits).

Comment

This item is potentially complex to administer. Consultation with clients will be required to define a common approach on account balance calculation, which fees are included, where investment fees will be sourced from, and whether this is applied as a fee cap or as an annual rebate.

While this is similar in some ways to previous Member Protection functionality, there is added complexity that needs to be accommodated.

Consolidation of Small and Inactive accounts

From 1 July 2019 Trustees will be required to transfer all inactive superannuation accounts with balances below $6000 to the ATO. The ATO will then identify the active superannuation account and forward the inactive account proceeds to the active account.

Currently this transfer is required for members who have been inactive and noted as “lost”.

Comment

Potential changes to the definition of inactive for members and a change to the members identified for inclusion in the LMR process.

There should be no change to the recent implementation of USM bulk exits and payments via Superstream.

Funds may start to receive rollovers in from the ATO, if they hold the member’s active account. Sonata and Babel can handle G2B transfers.

Retirement Covenant

There will be an amendment to the SIS Act to introduce a retirement covenant that requires super trustees to formulate a retirement income strategy for fund members. Trustees will be required to offer CIPRs, but it will not be compulsory for members to invest in one.

There will also be a requirement for providers of retirement income products to report simplified standardised metrics in PDSs to assist consumer decision making.

The Government will release a position paper for consultation shortly outlining the proposed approach to the covenant.

There is no commencement date yet for either of these measures.

To encourage the take up of longevity products the pension means test rules will be amended from 1 July 2019.

New means test rules will apply to pooled income streams from 1 July 2019. The rules will assess a fixed 60 per cent of all pooled lifetime product payments as income.

60 per cent of the purchase price of the product will be assessed as assets until the age of 84 years, or a minimum of 5 years, and then 30 per cent for the rest of the person’s life.

Comment

Bravura will consult with clients to understand each Trustees strategy for the provision of CIPR style solutions for their members. Sonata is well placed to support customers in the delivery of their new CIPR offerings.

Work Test Exemption for Recent Retirees:

From 1 July 2019, members aged 65 to 74 with a total superannuation balance below $300,000 will be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test.

Total Superannuation balance is calculated at 1 July after the year that they last met the work test. Once eligible there is no requirement to remain under the $300,000 balance cap.

Members can access both the concessional and non-concessional caps.

Comment

Sonata currently has a soft warning to validate whether a member has met the work test when receiving voluntary contributions for members aged 65-74.

An administrator can currently choose to process past the warning and receive the work test confirmation at a later date.

A similar business process can be put in place to allow for these contributions.

Clarification of treatment of TTR pensions when they have converted to standard pensioners with a reversionary

Legislation will be updated to make the rules consistent for the reversion of standard pensions and the reversion of standard pensions that had started as a Transition to Retirement Pension.

Under the current law, if the recipient of a reversionary ex TTR pension dies, the pension can only revert to a dependent beneficiary if the beneficiary satisfies one of the relevant conditions of release.

The changes ensure that reversionary TTR’s can always be paid to a reversionary beneficiary, irrespective of whether they have satisfied a condition of release

Comment

Clarification to a previously inconsistent treatment – no system impact expected.

Summing Up:

The review of these budget changes indicates that there are several items that need further investigation by Bravura in consultation with our clients to understand a practical implementation of these measures, agree a standard operational model and whether any system changes are required.

The changes to insurance were already starting to be considered, and have probably been simplified by the fact that Trustees are expected to have the same rules. Bravura has already initiated one forum on the Insurance Code of Practice changes. We will contact clients again shortly for an update on how these legislated changes will impact their insurance offerings.

The cap on fees is one item where more detail is required on how it is expected to be implemented, both from the regulator and from Trustees. Once more detail is available, Bravura will initiate a discussion with the wider client community.

Bravura will continue to monitor for further detail on the other items and make available any additional information that clarifies Sonata requirements via our Australian Super Working Group and Australian Legislation and Regulation Wiki Page.

However, should there be any queries in the mean-time please don’t hesitate to contact either your Service Delivery Manager, or:

Scott Kendall – Sonata Product Manager Superannuation and Retirement
skendall@bravurasolutions.com
0452 006 283

Sam Finucan – Product Consultant – Legislative
sfinucan@brauvrasolutions.com
0439 482 903

Michelle Lusty – Global Head of Product Wealth Management
mlusty@bravurasolutions.com
0431149829