The joys of ambiguity – Improving Accountability and member Outcomes in Superannuation

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By Luke Hooper, Special Counsel

Introduction

No doubt most superannuation fund trustees have or are turning their minds to the annual outcomes assessment requirements under the Treasury Laws (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 (Cth) (Member Outcomes Act).

I do not intend to discuss the intricacies of the outcomes assessment requirements but, instead, I wish to focus on some key terms used in those parts of the law that we need to understand in order to ensure that trustees and directors meet their obligations. Those terms are:

  • MySuper product;
  • choice product; and
  • comparable choice products.

The reason for doing this is very simple; it is because the key question that arises in the annual outcomes assessment requirements is ‘where do investment options fit into these requirements?’ This is because the term “investment option” is used in SIS, the SIS Regulations and the Corporations Act, and sometimes is explicitly or implicitly distinguished from the term “choice product” and the term “choice product” has a different meaning under the Protecting Your Superannuation Package (PYSP) and Putting Members’ Interests First (PMIF) legislation.

Trustees need to expend significant resources in order to comply with the annual outcomes assessment requirements and how they do that will depend upon what is being assessed. How trustees will endeavour to meet these requirements will differ, depending upon whether “choice product” means “each individual choice investment option” or “the amalgam of all the choice investment options”.

How important are these terms?

The Member Outcomes Act requires trustees to determine, annually:

‘for each MySuper product and choice product offered by the entity, whether the financial interests of the beneficiaries… are being promoted by the trustee having regard to… a comparison of the MySuper product with other MySuper products offered by other regulated superannuation funds…. and a comparison of the choice product with the comparable choice products in relation to the choice product…’

Logic dictates that the trustee of Very Big Fund A needs to compare its MySuper product with the MySuper products offered by Very Big Funds B, C and probably D. Given that most funds have one MySuper product, it is pretty tempting not to take this analysis any further – it seems pretty straight forward. However, if we start thinking about the SIS definition of “MySuper product” and how the term may be used in the vernacular, is it ever possible that we use other similar or interchangeable words that actually have materially different legal meanings? And if so, can this infiltrate the drafting of new legislation to create ambiguities? I think so and I think this impacts the choice product side of the annual outcomes assessment requirements that could potentially lead to uncertainty as to what is being compared to what.

How are these terms defined?

SIS defines “MySuper product” as follows:

‘A class of beneficial interest in a regulated superannuation fund is a MySuper product if an RSE licensee is authorised under section 29T to offer that class of beneficial interest in the fund as a MySuper product.’

SIS defines a “choice product” as follows:

‘A class of beneficial interest in a regulated superannuation fund is a choice product unless: (a) all the members of the fund who hold that class of beneficial interest in the fund are defined benefit members; or (b) that class of beneficial interest in the fund is a MySuper product’.

Finally, SIS (as amended by the Member Outcomes Act) defines “comparable choice products” as follows:

‘… in relation to a choice product, means a class of choice product specified in regulations made for the purposes of this definition that the choice product is to be compared with..

These regulations are yet to be made.

What do the terms mean, and why is this an issue?

There is nothing to suggest that SIS defines “MySuper product” to mean that it is a solitary investment option – it is merely a class of superannuation interest. However, SIS, sections 29TA and 29TB allow trustees to have more than one MySuper product and SIS, section 29T refers to this as ‘another class of beneficial interest in the fund as a MySuper product’. Therefore, it is unclear if this definition is meant to imply an investment option, given the default investment nature of MySuper and that these specific rules enable what appears to be distinct classes of members to be invested in separate MySuper products (e.g. large employer MySuper products). On the whole this question has not needed to be asked because most trustees have offered a single MySuper investment option (and therefore the need to distinguish between MySuper as a class of beneficial interest and MySuper as the default investment option has never really mattered).

However, the SIS definition of “choice product” is clearly problematic, given that most trustees offer more than one choice investment option.

I don’t think this has really posed much of a problem over the past 6 years (since Stronger Super came in). However, thanks to PYSP and PMIF the definition was placed under the microscope as these new laws were introduced and, in doing so, they incorporated these terms that had a different purpose under Stronger Super. The analysis identified complexities because, depending upon what these terms meant it would result in substantially different rights and obligations (and costs) for members and trustees under PYSP and PMIF. The question that arose was whether a “choice product” meant each separate choice investment option or the collection of choice investment options that a member may be invested in. Under PYSP our view was and still is (and it seems that most of the Superannuation Industry has the same view) that a “choice product” is the aggregation of a member’s interests in one or more investment options held within a superannuation account (that should be the same under PMIF). APRA has noted that the Government will seek to amend SIS to clarify this (but noting that the draft Treasury Laws Amendment (Measures for a later sitting) Bill 2019: miscellaneous amendments does not pick this up).

For obvious reasons, it is critical that everyone is on the same page, when it comes to understanding what a choice product is – whether it is the aggregate of a member’s choice investment options in the fund or whether it is each choice investment option.

I believe that the Member Outcomes Act intends that each investment option offered by a trustee is compared; the most obvious indicators of this are found in SIS, section 52(10A) which requires the comparison to consider the fees and costs that effect returns, the actual returns, and the level of investment risk. That clearly suggests that the term “choice product” has the same meaning as “(choice) investment option”. SIS, section 52(11) strengthens that view, by requiring trustees to assess the ‘investment strategy for the product, including the level of investment risk and the return target’; but again it uses ambiguous language (i.e. “product”) and also requires trustees to assess ‘whether the options… offered under the product are appropriate…’. Clouding this further is that the pre-existing SIS investment covenant refers to the whole of the entity and each investment option – it is pretty clear under that covenant what is being asked of trustees. The annual outcomes assessment requirements fall within the SIS, section 52 covenants, so it is fair to ask why the same or similar language was not adopted.

The Explanatory Memoranda to the Member Outcomes Bill state that:

‘Choice products do not have the same defined features as MySuper products…. For example, MySuper products have a single investment strategy that applies to all members (except MySuper lifecycle investment products) which differs from choice products which offer a whole range of investment choices.’

This suggests that the term “choice product” comprises the amalgam of all choice investment options, but what is required is that each investment option is individually compared.

I don’t think that it is intended that a trustee groups its cash investment option with a SRM of 1, its SRI option, and its high growth/high risk option into the one basket under the Member Outcomes Act. This would simply lead to a blending of the fees and costs paid, and the risks, and returns of all those options (imagine a fund with multiple mixed and asset-specific investment options); I don’t know what kind of analysis could be made from that.

Unfortunately, because of the terms used in the Member Outcomes Act (and how they are applied throughout SIS, the SIS Regulations and the Corporations Act in different contexts), I think that there is a mismatch between the Member Outcomes Act’s intent and the language used. If we adopt the approach to the Member Outcomes Act as we did for PYSP/PMIF it would lead to the view that trustees are not comparing individual choice investment options. However, if we adopt the approach that the intent behind the term “choice product” differs to how we interpreted it for PYSP/PMIF (so that what appears to be the intent of the Member Outcomes Act is followed – i.e. each investment option is compared), have we got it wrong on PYSP and PMIF? Words can have different meanings in different contexts and this creates great risks when the same words are used in the one piece of legislation but have different meanings depending on what part of the legislation you happen to be reading.

I think greater clarity must be provided and it must be provided in the legislation; 2019 has been the year in which great uncertainty and angst around the term “choice product” has arisen and I doubt that this will ease in the short term.

What leads to the view that a “choice product” is not an “investment option”?

Here’s my thinking (in a relatively succinct manner):

  • SIS and the SIS Regulations use the terms “choice product” (as introduced by the Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2012) and “investment option” in provisions made prior to, and at the same time as the introduction of the term “choice product”. However these terms do not appear to be used interchangeably in the legislation (though this may not be the case in the Explanatory Memoranda to the 2012 legislation);
  • what is really telling is that the SIS transfer of accrued default amount rules explicitly refer to amounts held by members in ‘an investment option within a choice product in the fund’ whilst other Stronger Super rules refer to the (undefined) term “investment option”;
  • the member directions rules refer to the right of members to change an “investment option” and not a product.

It is worth noting that Blue J, in Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121 referenced the fact that SIS, section 58 refers to investment options being within a choice product;

  • the product dashboard rules, under the Corporations Act also refer to ‘each investment option offered within the choice product’; and
  • APRA’s Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515) states that trustees must document their methodology applied in undertaking the annual outcomes assessment, including how the trustee ‘has determined the products it will use for the purposes of comparing its MySuper or choice product’. APRA then requires trustees to use the methodology set out in APRA Reporting Standards SRS 702.0 Investment Performance and Reporting Standard SRS 700.0 Product Dashboard (SRS 700.0).
    SRS 700.0 relates to MySuper products, only. However, APRA also discloses its proposed draft version that relates to both MySuper products and “each qualifying choice investment option before cross-referring to the Corporations Act 1017BA definition of “choice product” which again incorporates the SIS definition, whilst clearly stating that a choice product includes choice investment options.

    Further, APRA’s Prudential Practice Guide SPG 515 Strategic and Business Planning seems to differentiate a product from an investment option by stating ‘… an RSE licensee should give due consideration to whether any specific member cohort outcomes are appropriate, reflecting the different products and options that are made available to various groups of members and the demographic or other characteristics of these member cohorts.’ This provides some ambiguity – it may be that the term “product” refers to a retirement versus an accumulation product.

    At best, we cannot rely upon APRA’s guidance or rules in its standards to come to a determination of what a “choice product” is. But SIS, the SIS Regulations and the Corporations Act seem quite explicit in differentiating investment options from “choice products”.

In other words, when we consider how the term “investment option” is used throughout the relevant legislation and standards, an investment option does not appear to be the same thing as a choice product; it is merely a highly variable component of a choice product – if we considered a furniture analogy, a choice product is the chest, the investment options are the drawers.

What is needed?

This part is easy to ask for but may be more difficult to deliver; ; express statements (preferably in SIS) or amendments need to be made so that trustees can understand what exactly is required. Potentially an amendment to SPS 515 could be made to clarify whether or not trustees must compare each choice investment option.

For further information, please do not hesitate to contact us.

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