The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (Bill) passed both houses of Parliament on the 18th of February and now awaits Royal Assent.
Amongst its proposed amendments to superannuation law is the introduction of a fee cap of no more than 3% of the total combined amount of certain fees and costs charged (fee cap) to low balance members. This article will briefly examine the fee cap and its ramifications for superannuation fund trustees.
How will the cap work - what are the main points to focus on?
When does it start?
Most trustees will need to identify low balance member accounts (i.e. those valued at less than $6000) as of 30 June 2020, in order to calculate whether a refund of fees and costs in excess of the fee cap are required.
If a member exits a fund during the 2020 financial year (or subsequent financial years), the calculation will take effect as of the date the member exits.
Member's account balance
Central to the fee cap calculation is the concept of a "member's account balance." However, neither the Bill nor its explanatory memorandum defines this term. SIS does not define the term "member's account balance", either.
However, SIS refers to the term in the MySuper fees and charges rules (MySuper fee rules); in that context, a member's account balance appears to be the one transactional account, in respect of that member, from which fees and costs are debited (i.e. what is shown on a member's periodic statement as being the opening and closing balance of the account).
SIS, section 108A defines the term "superannuation account" as a record of the member's benefits, in relation to a superannuation entity in which the member has an interest, which is recorded separately:
(a) from other benefits of the member in relation to the entity (if any); and
(b) from other benefits of any other member in relation to the entity.
SIS, section 108A requires trustees to identify and merge a member's accounts within the one fund, if the member has multiple accounts (so that the member is not exposed to a doubling up of fees). So, in effect, a member should only ever have one superannuation account in the one fund; it could be argued that it means one accumulation and one pension account.
On a preliminary reading of the Bill, it would seem that a "member's account balance" would be a single account, equating with SIS, section 108A's purpose and the MySuper fee rules. However, the complication that arises is that the Bill's explanatory memorandum states:
"[A] member who has more than one account in a fund may have a total combined superannuation savings in that fund greater than $6,000. However, if the balance of a particular account is less than $6,000, the administration fees, investment fees and prescribed costs that can be charged for that account will be capped and will be calculated based on the amount in that account."
Directly below that explanation, the following example is used:
"Cecilia holds two accounts with Glenbrook Super fund: a choice accumulation account with a balance of $150,000 and a MySuper account with a balance of $3,000. The total administration and investment fees, and prescribed costs that could be charged to the MySuper account would be capped and calculated with reference to the amount held in that account."
This example suggests that either each investment option a member is invested in (in the one fund) constitutes a separate account, or each of an interest in any number of choice products and a MySuper product will constitute two separate accounts, for the purposes of this new law.
This seems odd, especially as the MySuper fee rules clearly imply that a member's account balance may pay out fees and charges applicable to a member's interest in a MySuper product, to the extent that a percentage of the member's account balance relates to that interest.
There is no requirement that a member, invested in MySuper and choice products, must have separate account balances.
Further, the new fee cap rules fail to detail how a trustee refunds any amounts to a member's account balance, assuming that it comprises a different balance for the member's choice and MySuper interests.
Adding to the ambiguity, the fee cap rules introduce the fee cap equation which reads, as follows:
'Fee cap percentage X Member's account balance for the product on the last day of the year'
What becomes apparent is that the account balance appears to be in respect of the relevant product (which, when read throughout SIS, clearly implies a MySuper or choice product and not a financial product - being a superannuation interest, under the Corporations Act), because otherwise there is no requirement to include the words "for the product" in the fee cap equation.
This issue requires clarification, and it may be that further guidance is issued or amendments made, because if trustees and their administrators are required to split member account balances in order to comply, this will create considerable compliance efforts.
Is the cap set at 3%?
The proposed Treasury Laws Amendment (Protecting Your Superannuation Package) Regulations 2019 (Draft Regulations) set the cap at 3%. However, the Bill clearly states that the cap can be set at no more than 3%. In other words, it is possible that this cap could be lowered.
What fees and costs?
The Bill makes it clear that the fee cap applies to administration fees and investment fees, and that regulations may include indirect costs.
The draft regulations include indirect costs, with reference to the Corporations Act's (and therefore the Corporations Regulations) periodic statement requirements, as amounts that are caught within the cap.
On one hand, this makes sense, because SIS and the Corporation Regulations define "investment fees" and "administration fees" differently and any confusion over what is in or out of an investment or administration fee requires clarification.
If indirect costs were excluded from the calculation, trustees could potentially cherry pick costs out of their investment and administration fees and refer to these as indirect costs, therefore quarantining some costs from the fee cap calculation.
However, on the other hand, I think it makes sense to exclude indirect costs from the fee cap because, when it comes to third party fees and costs (such as performance fees due to a fund manager outperforming), it does seem unfair that low balance members avoid these even though they still receive the performance benefit, especially if it means that the remainder of a fund's membership has to pay or cover these retrospective costs in some manner.
Trustees must identify low balance member accounts annually as well as upon a member's exit, and the fee cap calculation is subject to pro-rating for members who initially join a fund after the first day of a financial year and those who exit before the last day of a financial year.
Following this calculation, an amount must be refunded if the value of that member's total combined amount of capped fees and costs exceeds 3% of the member's account balance.
The refund must be made within three months of the end of the financial year (i.e. September 30, for most funds), back into the member's account.
What we might find is that some funds move away from a flat (administration) fee structure to more asset-based fee structures.
The argument against (or the difficulty in trustees justifying) having an asset-based administration fee is that the value of a member's account balance should not necessarily give rise to any administrative complexity; however it is clear that many funds charge asset-based administration fees.
Further, trustees entering into successor fund transfers might need to incorporate the fee cap requirements into their commercial due diligence in order to determine potential refund liabilities arising from successor fund transfers that have a June 30 transfer date.
However, for the time being, funds should seek to determine how the fee cap rules will apply to members invested in both choice and MySuper products, and if it is that the fee cap is calculated on balances invested in certain products within a fund, whether these rules are open for abuse by members (such as SMSF members who may join a fund in order to take advantage of group insurance cover and split their interest across two or three different investment options).