Explanatory statement
accompanying
Modification Declaration No 26
Superannuation Industry (Supervision) Act 1993
Authority
1. This explanatory statement is issued by the Australian Prudential Regulation Authority (APRA).
The instrument to which this explanatory statement relates
2. This explanatory statement relates to Modification Declaration No 26 (MD 26), made by APRA under section 332 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) on 22XX July 2005.
3. MD 26 modifies regulation 5.08 of the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations), which deals with minimum benefits.
APRA’s authority to make MD 26
4. Section 332 of the SIS Act provides that the Regulator (which includes APRA[1]) may, in writing, declare that a modifiable provision of the SIS Act is to have effect, in relation to a particular person or class of persons, as if it were modified as specified in the declaration. The modifiable provisions[2] include the operating standards for superannuation entities[3] made under Part 3 of the SIS Act which are contained in the SIS Regulations.
5. Regulation 5.08 is an operating standard made under Part 3 of the SIS Act and accordingly is a modifiable provision.
Purpose and scope of MD 26
6. Subregulation 5.08(1) of the SIS Regulations imposes restrictions on the treatment of members’ minimum benefits, preventing them from being divested from the member. Subregulation 5.08(2) excepts from those restrictions certain arrangements, designed to encourage employee retention or loyalty, which provide for members’ benefits derived from non-mandated employer contributions[4] to be forfeited, or divested, if the member concerned does not stay in the employer’s employment for a specified period (employee retention arrangements).
7. MD 26 makes changes to subregulation 5.08(2). The purpose of MD 26 is to clarify, and slightly expand the scope of, the exception applying to employee retention arrangements.adds a new subregulation 5.08(2A), as well as new subregulations 5.08(2B), (2C) and (2D), which are interpretation provisions. (These new provisions will be referred to as the new subregulation 5.08(2A), or the new subregulation 5.08(2B), and so on, as the case requires.)
8. The new subregulation 5.08(2A) grants similar, but somewhat more extensive, relief for employee retention arrangements to the relief granted by subregulation 5.08(2).
9. Note that there is a considerable degree of overlap between subregulation 5.08(2) and the new subregulation 5.08(2A) – hence, some employee retention arrangements will be covered by both the exception in subregulation 5.08(2) and the exception in the new subregulation 5.08(2A).
10. Note also that the exception in the new subregulation 5.08(2A) does not apply to employee retention arrangements that are effected by or through a self managed superannuation fund.[5]
Background
The Amending Regulations
118. New, stricter rules governing the treatment of minimum benefits were introduced into the SIS Regulations by the Superannuation Industry (Supervision) Amendment Regulations 2004 (No 2) (the Amending Regulations) in May 2004.
Making all of a member’s benefits in an accumulation fund minimum benefits
129. The Amending Regulations amended subregulation 5.04(2) with effect from 12 May 2004, so as to make all of a member’s benefits in an accumulation fund, including benefits financed by non-mandated employer contributions, minimum benefits and accordingly subject to the restrictions relating to the treatment of minimum benefits specified in regulation 5.08.[6]
Subregulation 5.08(1)
130. Subregulation 5.08(1) requires a member’s minimum benefits to be maintained in a superannuation fund until cashed, rolled over or transferred for the member’s benefit. Thus, the effect of subregulation 5.08(1) is that minimum benefits are (to use the traditional term) “vested” in the member; they cannot be forfeited or divested from the member and reallocated to other members of the fund.
The original subregulation 5.08(2)
141. The Amending Regulations also inserted subregulation 5.08(2) (the original subregulation 5.08(2)) to provide an exception to the prohibition on the divesting of minimum benefits in subregulation 5.08(1), for certain employee retention arrangements. The effect of the original subregulation 5.08(2) is that the prohibition on divestment in subregulation 5.08(1) does not apply to a member’s minimum benefits derived from non-mandated employer contributions that are divested from the a member pursuant to a written agreement between the member and the member’s employer which makes the member’s entitlement to the amount conditional on the member remaining in the employer’s employment for a specified minimum period and which was entered into before the commencement of the Amending Regulations on 12 May 2004.
152. In effect, the original subregulation 5.08(2) “grandfathers” employee retention arrangements of the kind just described which have been in force in relation to the member concerned since before 12 May 2004.
Some terminology used in this explanatory statement
163. In this explanatory statement, following the terminology used in MD 26:
- provisions in an agreement between a member and an employer (or, as will be discussed below, in governing rules or an industrial award or a certified industrial agreement) which make the member’s entitlement to benefits stemming from non-mandated employer contributions contingent on the member having completed a minimum period of employment (or fund membership) are called minimum service provisions;
- the condition which forms part of minimum service provisions which stipulates that the member has to complete a minimum period of employment (or fund membership) is called a minimum service requirement;
- a member who fails to satisfy the minimum service requirement and consequently loses their entitlement to their benefits stemming from non-mandated employer contributions is called a forfeited member.;
- the event, involving cessation of employment (or fund membership) prior to meeting the minimum service requirement, which results in the loss of the member’s entitlement, is called the forfeiting event.
Summary of the modifications made by MD 26
Introductory
174. The following is a summary of the modifications made by MD 26 to regulation 5.08. Note that the summary does not purport to paraphrase or describe the modifications in detail – it therefore cannot be relied on as a substitute for the actual text of MD 26.
185. MD 26 omits the original subregulation 5.08(2) and substitutesadds a the new subregulation 5.08(2A) to the SIS Regulations, immediately after subregulation 5.08(2), as well as adding new subregulations 5.08(2BA), (2C) and (2D), and (2B), which contain definitions relevant to the new subregulation 5.08(2A). (These new provisions will be referred to as the new subregulation 5.08(2), the new subregulation 5.08(2A), the new subregulation 5.08(2B), and the new subregulation 5.08(2C), respectively.)
196. MD 26 makes three substantive changes toexpands the scope of the exception in the original subregulation 5.08(2) in three ways, as outlined below.
The grandfathering now extends to minimum service provisions contained in governing rules, an award or a certified agreement
2017. First, instead of requiring the minimum service provisions to be set out in an agreement between the member and their employer (which is what the original subregulation 5.08(2) doesdid), under the new subregulation 5.08(2A) they can be set out either in such an agreement or in the fund’s governing rules or in an award or certified agreement covering the member.[7]
2118. This change is necessary because minimum service provisions can be contained in funds’ governing rules and in awards or certified agreements, and not just in the employment contract or some other contract between the member and their employer. They can also be contained in more than one of these documents at any one time (that is, some of the provisions might be in one document while the remainder might be in another document). For example, an employee’s employment conditions may be covered by a certified agreement that specifies the fund to which the employer will contribute, while the minimum service requirement will more likely be found in the fund’s governing rules. MD 26 therefore in effect extends the exception in subregulation 5.08(2) to minimum service provisions that are contained in any of these types of documents.
The grandfathering now extends to minimum service provisions the terms of which change during the period after 12 May 2004, or which are set out in different documents at different times during that period
1922. Second, the original subregulation 5.08(2) only grandfathered grandfathers minimum service provisions if those provisions were set out in an agreement between the member and the employer that had been entered into before 12 May 2004. This did does not adequately cater for situations where the member hasd been subject to minimum service provisions during the period after 12 May 2004, but where those provisions had have undergone some changes, or had have been set out in different documents (whether in an agreement between the member and the employer, governing rules, or an award or certified agreement) at different times during that period. The new subregulation 5.08(2A) caters for these situations.[8]
2023. Thus, the new subregulation 5.08(2A) now grandfathers minimum service provisions despite their having undergone some changes, or having been imposed by different documents, since 12 May 2004, subject, however, to the caveat that they must not have become more restrictive or disadvantageous for the member since that date.[9] For example, if the minimum service provisions that apply to the member on 12 May 2004 stipulate a minimum service period of ten years, then if those provisions are subsequently replaced by new provisions which stipulate a minimum service period of twelve years, the new provisions will not be grandfathered by the new subregulation 5.08(2A). On the other hand, the new or changed minimum service provisions may be improved in the member’s favour.
2124. This change reflects the recognition that the minimum service provisions in force on 12 May 2004 may be changed or replaced after that date. This may occur, for example, where an award or certified agreement that contains minimum service provisions expires after 12 May 2004 and is replaced by a new award or certified agreement. In this event, as noted in paragraph 2320 above, the replacement minimum service provisions must not be any more restrictive than those previously in force.
25. Another example is where, as at 12 May 2004, the forfeited member belonged not to the forfeiting fund but to another regulated superannuation fund (which will be referred to in this explanatory statement as a previous fund) in which he or she was subject to minimum service provisions, and where the member is later transferred to another fund (the forfeiting fund) where other minimum service provisions apply to the member (which may be similar or identical to the minimum service provisions which applied when the member was in the previous fund). Here too, as noted in paragraph 23 above, the minimum service provisions which apply to the member in the forfeiting fund must not be any more restrictive than those which applied in the previous fund.
26. Note that, just as the forfeiting fund must not be a self managed superannuation fund,[10] the previous fund must not have been a self managed superannuation fund either.[11]
27. Furthermore, the forfeited member must not have had a defined benefit interest in the previous fund.[12] In effect, this means that while in the previous fund the member has to have been an accumulation member, in the sense that their (future) benefit entitlements provided by that fund have to have consisted exclusively of accumulation benefits. This requirement reflects the fact that, under both subregulation 5.08(2) and the new subregulation 5.08(2A), the fund in which the forfeiture of the member’s benefits in accordance with the minimum service provisions takes place (the forfeiting fund) has to be an accumulation fund. The intent is that only accumulation benefits, not defined benefits, can be forfeited in accordance with minimum service provisions.
The grandfathering now extends to minimum service provisions which allow the member to have been an employee of their current employer’s predecessor or related company for the minimum service period, or to have been a member of another fund to which their current employer or its predecessor or related company contributed for the minimum service period
282. Third, the original subregulation 5.08(2) only grandfathered grandfathers minimum service provisions which made make the member’s entitlement to the minimum benefits concerned conditional on the member having been an employee of the employer for a specified minimum period. The new subregulation 5.08(2A) extends the exemption to minimum service provisions which make the member’s entitlement conditional on the member having been, for a specified minimum period, any of the following:
- an employee (or a particular class or category of employee) of the employer, or of a predecessor of the employer who previously carried on the employer’s business, or of a related body corporate of the employer; or
- a member (or a particular class or category of member) of another superannuation fund (other than a self managed superannuation fund) to which contributions were made for their benefit by the member’s current employer, or by a predecessor of the current employer who previously carried on that employer’s business, or by a related body corporate of the current employer.[13]
293. This change is needed because some employee retention arrangements stipulate a minimum period of employment with a corporate group rather than just with a single employer. The change also caters for employee retention arrangements which work by stipulating a minimum period of fund membership rather than a minimum period of employment.
Some specific matters to note about the modifications
30. The new subregulation 5.08(2A) does not apply to self managed superannuation funds.[14] That is, members’ minimum benefits in self managed superannuation funds cannot be forfeited pursuant to the new subregulation 5.08(2A). However, subregulation 5.08(2) applies to all accumulation funds, including accumulation funds that are self managed superannuation funds. In short, self managed superannuation funds cannot take advantage of the new subregulation 5.08(2A), they can only take advantage of subregulation 5.08(2) (if they are an accumulation fund and satisfy all the other requirements in subregulation 5.08(2)).
31. Also, as noted in paragraph 26 above, any previous fund (to which the forfeited member belonged during any part of the period from 12 May 2004, in which they were subject to predecessor minimum service provisions) also must not have been a self managed superannuation fund.
3224. The grandfathering of minimum service provisions under MD 26 is limited to bona fide employee retention arrangements which were clearly set out in contractual arrangements, governing rules, or awards or certified agreements, that were in place prior to 12 May 2004. Note that the grandfathering does not not extend to a member who was not covered by the arrangements prior to 12 May 2004 – it does not apply to new employees who commence employment after 12 May 2004. These employees cannot have any part of their minimum benefits divested under minimum service provisions.
3325. Another matter to note is that MD 26 does not provide any relief in respect of discretionary vesting arrangements, for example, in relation to an ad hoc bonus or ex gratia payment: see condition 8 in the new subregulation 5.08(2A) and condition 2 in the new subregulation 5.08(2CA), which says that the minimum service provisions require (rather than merely permit) the employer to make non-mandated employer contributions. In other words, the new subregulation 5.08(2A) does not permit the divesting of benefits stemming from non-mandated employer contributions where those contributions were made to the fund on a discretionary basis, rather than because the agreement between the member and the employer, or the governing rules, or the award or certified agreement (as the case may be) required them to be made to the fund.
3426. Finally, note that unallocated reserves of a fund are not taken to be members’ minimum benefits for the purposes of regulation 5.08 (whether in its original or modified form). References to “a member’s benefits” appear in a number of other provisions of Part 5 of the SIS Regulations, including in regulations 5.02 and 5.03. It is implicit in those provisions that until amounts from the reserve are credited to a member’s account in the fund, they do not constitute part of a member’s benefits.
Relief may also be granted to individual funds by means of exemptions
3527. Note that, in addition to the class relief granted by MD 26, APRA may consider granting an exemption under section 328 of the SIS Act to the trustee of an individual fund, where APRA is satisfied that the circumstances warrant an exemption. Such exemptions may be granted subject to conditions specified in the instrument of exemption. A request for exemption must be made by the trustee in writing to APRA.
Consultation
3628. Section 17 of the Legislative Instruments Act 2003 (the Legislative Instruments Act) imposes consultation obligations on the makers of legislative instruments. APRA undertook the following consultation before making MD 26.
3729. In October 2004, APRA distributed by email a draft modification declaration and accompanying explanatory statement to organisations representing trustees of regulated superannuation funds. The draft modification declaration granted relief in respect of employee retention arrangements substantially along the lines of the relief granted by MD 26. Most responses noted that employee retention arrangements are generally found in a wider array of documents than allowed for in the original subregulation 5.08(2). They also noted that the original subregulation 5.08(2) did not cater for situations where the minimum service provisions had changed since the commencement date of 12 May 2004 because business or fund restructures had taken place, or where the minimum service provisions had been made more favourable to the members since 12 May 2004. These concerns are addressed in MD 26. Some other suggestions, such as extending relief to enable minimum service provisions to apply to new employees engaged after 12 May 2004, were not able to be implemented as they were outside the objectives of the Amending Regulations.
Date of effect of MD 26
3830. MD 26 provides, in item 2, that it is taken to have commenced on 12 May 2004 (which is when the original subregulation 5.08(2) commenced).
3931. By virtue of subsection 12(2) of the Legislative Instruments Act, a legislative instrument cannot take effect before it is registered under that Act if it affects the rights of any person as at the date of registration so as to disadvantage the person, or if it imposes liabilities on a person in respect of anything done or omitted to be done before the date of registration. MD 26 does not do either of these things, but is purely beneficial in that it expands the relief granted by the original subregulation 5.08(2). Hence, it is not precluded by subsection 12(2) of the Legislative Instruments Act from taking effect retrospectively, from 12 May 2004.
[1] Regulator is defined in subsection 10(1) of the SIS Act. APRA can exercise the modification power in the present case by virtue of subsection 6(2B).
[2] Modifiable provisions is defined in section 327 of the SIS Act.
[3] A superannuation entity is a regulated superannuation fund, an approved deposit fund or a pooled superannuation trust: definition of superannuation entity in subsection 10(1) of the SIS Act.
[4] Non-mandated employer contributions means employer contributions other than mandated employer contributions as defined in subregulation 5.01(1) of the SIS Regulations. (Mandated employer contributions are, basically, contributions that are mandated under the Superannuation Guarantee Charge Act 1992.)
[5] Self managed superannuation fund is defined in section 17A of the SIS Act. Basically, a self managed superannuation fund is a regulated superannuation fund with fewer than five members, all the members of which participate in the management of the fund, no member of which is an employee of another member unless they are relatives, and no trustee of which receives any remuneration.
[6] The Amending Regulations also made complementary amendments to Part 7 of the SIS Regulations to ensure that all contributions to a regulated superannuation fund are allocated to a member within a specified timeframe.
[7] See paragraphs (a) to (d) of condition 2 in the new subregulation 5.08(2A) and paragraphs (a) to (d) of condition 1 in the new subregulation 5.08(2CB).
[8] See paragraph (b) of condition 5(b) in the new subregulation 5.08(2A).
[9] See condition 6 in the new subregulation 5.08(2A). and the definition of predecessor minimum service provisions in the new subregulation 5.08(2C).
[10] See the opening words of the new subregulation 5.08(2A).
[11] See paragraph (b) of condition 1 in the new subregulation 5.08(2A), paragraph (a) of condition 1 and paragraph (e) of condition 3 in the new subregulation 5.08(2C), and paragraph (b) of the definition of predecessor minimum service provisions in the new subregulation 5.08(2D).
[12] See paragraph (b) of condition 1 in the new subregulation 5.08(2A). Defined benefit interest is defined in regulation 1.03AA of the SIS Regulations. Basically, it means an entitlement to benefits which are wholly or partly defined benefits (as opposed to accumulation benefits).
[13] See paragraphs (a) to (e) of condition 3 in the new subregulation 5.08(2CB).
[14] See the opening words of the new subregulation 5.08(2A).