While 2003 was a challenging superannuation year for most funds and employers alike, 2004 will herald in some important changes for HR professionals. Ross Clare provides an overview of these changes and offers some tips on how to best prepare for them
While 2003 was a challenging superannuation year for most funds and employers alike, 2004 will herald in some important changes for HR professionals. Ross Clare provides an overview of these changes and offers some tips on how to best prepare for them
The past few years have not been easy ones for many superannuation fund members, and employer sponsors of funds and superannuation funds themselves have faced a few challenges themselves. In particular, low or even negative investment returns following the retreat in Australian and international share prices were not a comfortable experience for fund members with accumulation accounts, and for those employers still offering defined benefit schemes. Individuals do not like to see their account balance go backwards, and employers do not like to have to top up a superannuation scheme with additional contributions in order to ensure that obligations to members are fully covered.
There has also been a range of legislative and regulatory changes and proposals impacting on, or potentially impacting on, employers and funds. The changes most relevant to HR professionals relate to how and when the compulsory superannuation guarantee contributions need to be paid, and the need for individuals to be licensed if they provide financial product advice of any kind.
The Financial Services Reform Act has introduced the requirement for all individuals providing financial advice to be licensed (by 11 March 2004). This could include advice about, say, investment choice or level of salary sacrifice. This represents an additional burden on corporate funds, and a legal barrier to some staff in HR departments who may have in the past provided some limited advice to employees.
Over the past few years a number of corporations have decided to move away from having a corporate fund, and to outsource the company superannuation requirements to a master trust or industry fund. Others are contemplating such a shift. However, even where such changes have been made, employers continue to have responsibilities in regard to superannuation. This includes monitoring whether the outsourced arrangements are working in the manner contemplated and hopefully contracted for.
Investment returns
In the 2003 calendar year the average industry fund recorded around a 10 per cent annual investment return for a balanced investment option (a mix of shares, property and bonds), with the average master trust with a similar investment portfolio just a little below this at around 7 per cent. A number of factors contributed to this difference in return, including differences in the proportion of assets invested in particular types of investments and differences in costs. Going forward, this differential in investment returns may or may not continue, depending on developments in particular investment markets amongst other things.
Investment returns have been relatively good over the past 10 months or so, but the low and even negative returns in the previous year or two are still taking some time to be washed out from longer term investment returns. For instance, over a three-year period investment returns tend to fall between 0 and 5 per cent per year, and over a five-year period average returns tended to fall between 4 and 6 per cent a year. This is still a little below the 7 or 8 per cent annual return that usually can be expected over the longer term.
Whether through apathy or a sophisticated understanding of financial markets (the former in most cases), superannuation fund members have generally stuck with a balanced investment option over the past few years. A few fund members have switched to more conservative, capital protected options, but just as many have switched to options with greater exposure to growth assets such as shares. Sometimes decisions are linked to age of the fund member and how long until their retirement, and sometimes not.
What is right for an individual depends on their individual circumstances and attitude to risk amongst other matters. A HR professional might have a view on what is an appropriate choice for an individual, but they should not provide any such advice unless they have completed appropriate training, have been licensed by the Australian Securities and Investments Commission (ASIC), have appropriate professional indemnity insurance in place, and go through a properly documented fact finding and advice process with the individual. There are unlikely to be many, if any, HR professionals who manage to satisfy these various tests. Avoiding giving personal financial advice is really the only option.
Avoiding giving financial advice
ASIC has indicated that you need to take into account the overall impression created by a communication, and all the surrounding circumstances in which it is provided, to determine whether it constitutes financial product advice. A communication is more likely to be regarded as financial advice if the provider is remunerated by the client or otherwise stands to benefit depending on the decisions made by a client. On the other hand, if a communication does not involve a recommendation or statement of opinion in that it consists only of factual information, then it will not constitute financial product advice.
However, regardless whether a person is paid, advice can only be provided when the individual is appropriately licensed to do so. Where a HR professional can run foul of the rules is if they provide advice or a recommendation in relation to whether an employee should buy, sell or hold a particular financial product, or whether to make additional payments or contributions. Decisions made by members about investment strategies or options are also covered by the rules. The bottom line is to take care. If an employee seeks financial advice from the human resources department, they should be clearly told that this cannot be provided and that professional, licensed advice should be sought.
Quarterly superannuation contributions
Changes to the Super Guarantee (SG) legislation and regulations that came into effect on 1 July 2003 mean that employers have to pay employees’ SG contributions on at least a quarterly basis. Along with the new quarterly payment requirement, employers also have to provide written advice to each employee within 30 days of each contribution being made, otherwise penalties may apply.
So what do employers have to do to comply? Employers need to report contributions that they have actually made, not contributions they intend to make. This means that reporting on a payslip the amount of a contribution to be made in the next few days would not meet the obligations of the law. However, if the SG contribution were made the day before the payslip was distributed then reporting this amount would comply (provided that the other reporting requirements were met).
In order to comply employers must report:
• The amount of the contribution
• The name of the superannuation fund or Retirement Savings Account (RSA) provider to which the contribution is made
• The account number of the fund member if this is known.
The ATO has also indicated that the report to employees should provide the name by which the super fund or provider is normally known, and if possible include its contact phone number, so that employees have the option of confirming for themselves that contributions have been made.
According to ATO guidelines, the report can be in the form of:
• A letter to the employee signed and dated by the employer
• An email communication (10 per cent of employees already receive their pay details by email)
• Notification on the employee payslip
• Copy of a receipt for contributions from the superannuation provider (this is likely to be viable only for relatively small employers).
Employers need to have a mailing address for each employee, otherwise it would be difficult to provide a report to employees who have left the organisation prior to a contribution being made.
Choice of fund
The Coalition’s pre-election promises included the implementation of employee choice of superannuation fund.
Various Bills seeking to implement this have been before the Parliament, but choice of fund does not appear imminent. The Superannuation Legislation Amendment (Choice of Superannuation funds) Bill 2002 was reintroduced into Parliament in July 2002. This version of choice was subject to an inquiry by the Senate Select Committee on Superannuation, which tabled its report in November 2002. The committee members split along party lines as to whether the Bill should be passed. However, the committee did issue a unanimous report that identified numerous issues that government needed to address to provide for the successful implementation of choice. The Democrats added that in addition to satisfactory resolution of payment of death benefits to same-sex partners, the government would need to satisfactorily address the disclosure of fees and charges, provide community-based consumer education and possibly exclude defined benefit funds, before support for choice would be granted.
As part of the 25 May 2003 ‘Revitalising Superannuation’ statement released by Senator Helen Coonan, further government amendments to choice were proposed. These include leaving the default fund selection to the employer, capping employer non-compliance penalties and simplifying the way in which choice is offered.
Amendments to this effect are yet to be considered by the Senate. With an apparent lack of Labor and Democrat support for choice as currently proposed, early passage through the Senate still remains highly unlikely.
Managing your outsourced superannuation
The following tips for making outsourcing work better and ensuring provider accountability are useful:
• Use the policy committee if one has been put in place – it must be more than a rubber stamp for what the master trust or industry fund wants to do.
• Value independent advice – Introduce genuinely independent superannuation expertise onto the policy committee.
• Recheck the outsourcing decision – Revisit and analyse the outsourcing solution from time to time, include compliance with contractual commitments in regard to services to members and the fees charged to members relative to other funds. In regard to this latter point, this need not involve the expense of formally going to the market, as there are other ways to obtain an up-to-date reassessment of a provider’s competitiveness.
