We are pleased to provide our comments on the MySuper Consultation Package May 2012.

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1 Mercer (Australia) Pty Ltd ABN Exhibition Street Melbourne Vic 3000 GPO Box 9946 Melbourne Vic Fax john.ward@mercer.com General Manager, Policy Development Policy, Research and Statistics GPO Box 9836 SYDNEY NSW 2001 superannuation.policy@apra.gov.au Subject: MySuper authorisation and transition standard Dear Mr Grummitt We are pleased to provide our comments on the MySuper Consultation Package May Who is Mercer? Mercer is a leading global provider of consulting, outsourcing and investment services, with more than 25,000 institutional clients worldwide. Mercer consultants help employers design and manage health, retirement and other benefits, and optimise human capital. Mercer also provides customised administration, technology and total benefits outsourcing solutions to a large number of employer clients and superannuation funds (including industry funds, master trusts and employer sponsored superannuation funds). Mercer's outsourcing business has $55 billion in funds under administration locally, provides services to 1.3 million super fund members and 15,000 private clients and is part of a global consulting, outsourcing and investments firm which operates in 43 countries. We operate our own master trust the Mercer Super Trust in Australia which has approximately 260 participating employers, 240,000 members and more than $15 billion in assets under management. Mercer s investment services include global leadership in investment consulting and multi-manager investment management. We also provide personal financial advisory services for individuals including Self Managed Superannuation Funds.

2 Page 2 Major issues General We believe that the consultation package (including the draft Prudential Standard SPS 410) highlights the difficulties many trustees will have in complying with the Government s proposed MySuper implementation timetable. After serious consideration of the package, our conclusion is that unless the date of 1 October 2013 by which employers must make default contributions to a fund offering a MySuper product is deferred, it is likely that many superannuation fund members, employers and RSE licensees will be adversely affected by the short timelines. We recognise that this date is not under APRA s direct control, but suggest that it is a critical factor for a smooth transition to MySuper. We note the final transition standard will not be available until September Therefore RSE licensees will need to rely heavily on the draft Standard if they are to include a transition policy in their draft application for MySuper approval submitted in Q As noted later in this submission, we consider the draft Standard needs further clarification in numerous instances. It also appears difficult to prepare a suitable policy when the trustee does not know the final details of their own MySuper product and potential impediments that might arise to transferring members accrued default amounts. These issues, which are also related to the tight timelines, will result in inefficiencies and higher costs for RSE licensees which are likely to be passed on to members as higher fees. We also note the enabling legislation has not yet been passed and even this week the Government proposed significant amendments to Tranche 1 which could severely impact the approach some trustees were planning to adopt. Further, the Bills released to date are unclear in some parts. In particular the use of the term MySuper product continues to confuse the industry as Treasury are indicating it is not a product. Fee rules for members who have both a MySuper and a Choice investment in the one fund also remain unclear. The existing Bills are also internally inconsistent. For example Section 29TC(1)(b) appears to indicate the same insurance provisions must apply to all members of a MySuper whereas the exposure draft and related material for Tranche 3 indicates that different levels of insurance can be provided within a MySuper. This lack of consistency and clarity is inevitably delaying progress in the development of responses to the MySuper reforms by RSE licensees as it is difficult to plan when the legislation has not been finalised. The lack of time between the release of the final transition standard (as well as other standards and legislation) may result in a reduced use of the draft approval process. This is likely to lead to more pressure on APRA when approving final applications (as well as slowing the approval process down). Delays in the approval process may result in employers having to change default funds (higher costs for employers) and members having accounts in multiple funds (higher costs for members). These will be inappropriate outcomes and work against the aims of MySuper.

3 Page 3 The requirement to give members at least three months notice of significant events (para 16 of the draft Standard) means such notification will need to be issued several weeks before 1 July 2013 to allow time for the transfers to occur, if it is to be completed before 1 October Yet the required notice cannot be given until approval for the MySuper product has been obtained. Thus, in may cases, the notice requirements will mean many members will have two accounts in their existing fund for a period, increasing costs and creating confusion. SPS 410 Recommendation: Whilst we understand the MySuper timetable has not been set by APRA, we recommend the date by which employers must make default contributions to a MySuper product should be deferred until at least 1 July We consider there are numerous issues in the draft Standard requiring greater clarification or modification to make them practical and thereby provide a better outcome for all stakeholders. The Appendix to this letter considers these issues in detail. In particular, APRA appears to have understated the extent to which the MySuper requirements will disadvantage some members. Recommendation: The draft Standard needs to be modified to provide greater clarification in several areas and to make the requirements more practical, particularly in respect of members who may be adversely affected. Discussion paper We are concerned with proposed requirements to provide details of accrued default amounts on periodic statements (ie member statements). This will make the statements more complex and detract from their main purpose. The transfer of accrued default amounts will not always be a straightforward issue and appropriate communication needs to be prepared to properly explain what is to occur. It will generally be preferable to issue this as a separate communication to members. Recommendation: Proposals to require the reporting of the accrued default amounts on member periodic statements should not proceed. The manner of communicating the transfer of accrued default amounts should be left to the RSE licensee to determine, taking into account the particular circumstances. (This would include but not be restricted to disclosure on periodic statements.)

4 Page 4 Other legislative issues Definition of accrued default amount: The definition of accrued default amount is too wide. In particular, we consider it should exclude account balances in the default investment option, where the relevant member also has money in other investment options. The fact that such members have made a choice in respect of some of their investments is an objective indication they have made a deliberate choice to retain some of their investments in the default option. Recommendation: The definition of accrued default amount needs to be narrowed. We recognise that this recommendation requires legislative change and thereby goes beyond APRA s direct responsibilities. Funds not offering a MySuper We note Section 29WA (Tranche 1 of the legislation) requires a trustee to allocate all contributions to a MySuper product if the trustee has not received an election in writing that the contribution is to be paid into a specified choice product. This applies to all contributions including contributions where an employee has specifically chosen that fund through the Choice of Fund process. This requirement also applies to contributions which may have no connection with employment. This provision is of particular concern to funds which do not intend offering a MySuper product. We are aware of several funds who are seriously considering this direction. Whilst members of such funds (other than default members) have specifically chosen the fund, they may not have actively chosen their investment option (i.e. preferring to accept the default option). If this section is not amended, it is likely employers and employees will be adversely impacted. For example, employers are obliged to pay SG contributions to a member s chosen fund. If the fund determines it cannot accept the contribution (as it does not have a MySuper product), presumably the contribution will need to be returned. At least in some cases this will result in the employer being unable to satisfy its SG obligations and incurring an SG Charge through no fault of its own. Employees will also be adversely affected as they will end up with accounts in more than one fund and multiple fees etc. Recommendation: Section 29WA needs to be amended to exclude funds which do not offer a MySuper product. At the very least, it needs to exempt contributions for members who joined the fund at their choice rather than by default. Similarly provisions need to be amended to avoid the mandatory transfer to another fund of account balances where the member did not join as a default member. Alternatively, APRA needs to indicate they will be prepared to consider exemptions from the contribution allocation and mandatory transfer requirements in respect of members who did not join as default members.

5 Page 5 Our more detailed analysis of SPS 410 is set out in the Appendix. Please contact the writer on if you have any queries on our submission. Yours sincerely John Ward Manager, Research and Information J:\Library\R&I\JDW\2012\06 June 2012\Submission on transition standard final.doc

6 Page 6 APPENDIX Detailed analysis of SPS 410 Paragraph 4 Clarification is required in a number of areas: An RSE licensee that meets the criteria outlined in this paragraph must comply only with paragraphs 5, 6, 7, 8(d) and 10.. Issue 1: The use of the term must comply only could be interpreted to mean the licensee cannot comply with other paragraphs (ie the licensee would be unable to provide members with three months notice and an option to not be transferred to the MySuper product.) Confirmation is required to indicate an RSE licensee who meets the criteria can (but is not required) to also comply with other paragraphs in the Standard. Issue 2: In many cases, we expect the specified requirements will be satisfied in respect of some but not all members. Confirmation is required, in respect of members for whom the criteria are met to indicate, the licensee only needs to comply with paragraphs 5, 6, 7, 8(d) and 10. Issue 3: In some cases the insurance benefits associated with the MySuper product may be no less than the member s current insurance. However, at some future date, or age, the insurance benefits may be less. Confirmation is required to indicate the licensee must comply with all paragraphs of the Standard where the member s future insurance may reduce. Alternatively, specify that the comparison occurs at the time of transfer and not at a later date. Issue 4: Currently a member has no insurance (either because they opted out or declined to take up insurance). However, there is no change in premium rates from those currently applying to fund members and the rates which will be charged to MySuper members. It is unclear whether the Standard is referring to premium rates or the actual dollar premiums charged to a member s account. Confirmation is required to indicate the licensee must comply with all paragraphs of the Standard if the member s dollar premium is increased through an increase in cover even though the premium rates remain unchanged.

7 Page 7 Issue 5: For some members, we expect the specified requirements will be satisfied in the short but not the longer term (eg, reduced administration fees might currently apply in respect of a member s account balance in excess of a specified dollar limit. The member s current account balance is less than this limit but will at some stage exceed it. Under the MySuper product, the reduction in administration fees will not be allowed). Confirmation is required to indicate the licensee must comply with all paragraphs of the Standard where the administration fees applicable to the member may increase in future. Alternatively, specify that the comparison occurs at the time of transfer and not at a later date. Issue 6: Some funds may have an existing default investment option as well as having other options which could include accrued default amounts. For example, this could arise where there have been successor fund transfers from several funds. The transferring members could have been defaulted into another investment option which better matched the default option in the previous fund. Whilst it appears account balances for such members would also be considered to be accrued default amounts, this should be clarified. This situation requires very clear communication to members as the fund will be moving from having several default options to a single MySuper. Issue 7: Paragraph 4 refers to a specified MySuper product. However this is not defined. Whilst paragraph 12 requires the determination of a suitable MySuper product, we note, subject to satisfying the specified requirements in paragraph 4, the RSE does not have to comply with paragraph 12. Clarification is required on the meaning of specified MySuper product and how this relates to paragraph 12. Issue 8: We note insurance is generally not related to an investment option it is generally independent of the investment option but rather depends on the member s category of membership. Likewise, administration fees are generally not related to an investment option but to the member s overall membership of the fund. Paragraphs 4(b) and 4(c) need to be re-worded to apply a more general focus to insurance and fees as these items are not necessarily limited to the existing default investment option.

8 Page 8 Paragraphs 5 and 6 RSE licensees must determine the number of affected members and the aggregate of accrued default amounts, by no later than 31 March 2013 and at least quarterly thereafter. Licensees must also report these details as at the end of each quarter, to APRA. Issue 9: The words in paragraph 5 imply the Licensee must determine the relevant requirements no later than 31 March However, it will generally be impossible to determine the relevant numbers applicable at 31 March (or at the end of any other quarter) until, at the earliest, several days after the relevant quarter end. Clarification is required to confirm the determination is to be made as at the end of each quarter and may therefore be determined after the end of the quarter. Issue 10: The Standard provides no indication of the time frame in which such reporting must occur. Clarification is required on the timing. Issue 11: We note there is likely to be considerable work involved in determining which members may have accrued default amounts in addition to the quarterly reporting costs. The value of quarterly reporting and the need for reporting as early as 31 March 2013 is unclear, given the costs involved. We therefore consider reporting should be annual and should not commence before at least 30 September 2013 (ie when the new requirement concerning contributions commences). Paragraphs 7 to 11 Issue 12: The draft Standard requires a detailed transition plan. This must be attached to any application for a MySuper authority. Yet any transition plan can only be hypothetical as at the time of preparing the plan, the RSE licensee will not know: Whether its own application for a MySuper will be approved Details of other MySuper products as these will not be known until sometime after 1 July 2013 Hence, in some cases, it will be difficult (if not impossible) to determine any impediments to the transfer of members accrued default amounts. Further it will be difficult to determine how any such unknown impediments will be resolved.

9 Page 9 The requirement to have a transition plan should not apply before 1 July 2013 at the earliest. Further, it may not be practical for some funds to develop a detailed plan until APRA approval has been given. Issue 13: Paragraph 8(b) of the draft standard assumes it will be possible to resolve impediments. This is an unrealistic assumption unless it is accepted members may be worse off if they are transferred but can opt out of the transfer if they wish. We expect there will be many individual cases where it will not be in a member s interest to have their accrued default amounts transferred to a MySuper product. For instance, the fees in the MySuper product may be higher than in the member s current account. (A common example would be in relation to a member with a large account balance where the fees on assets in excess of a specified threshold are lower than the standard fee.) In such cases, even the mandatory allocation of default contributions will not be in the member s best interests. The Standard or relevant guidance should include statements indicating the provision of an opt-out option is one way to resolve the impediments. Paragraphs 12 to 15 A MySuper is considered to be suitable if it satisfies the various points in paragraph 13. Issue 14: The MySuper product must be one to which the RSE licensee is legally able to transfer the member s accrued default amount. Where the MySuper amount is in another fund, this may be difficult to satisfy without the member s consent or the transfer being set up as a successor fund transfer. At least in some cases, a successor fund transfer may not be possible or may be very expensive to achieve where the number of members involved is small. Provision needs to be made to broaden the range of circumstances in which an RSE licensee can legally transfer accrued default amounts to another or alternatively, not require transfer with appropriate communication to members.

10 Page 10 Issue 15: The RSE licensee must have formed the view that movement of the member s accrued default amount to that MySuper product promotes the financial interests of the member or class of members. For individual members, the RSE licensee might conclude the transfer would not promote the member s financial interests (e.g. as it would result in an increase in fees). On the other hand, it may promote the interests of the class of members more generally. In other cases, the MySuper product may be no different to the members existing product. Again it is difficult for an RSE licensee to have formed the view the transfer will promote the members financial interests. Clarification is required to explain the considerations an RSE licensee must make in determining whether the MySuper product promotes the financial interests of the member or class of members where the financial interests of some or all members of the class may not be promoted. Paragraphs 16 to 17 These paragraphs highlight the difficulties the industry will face due to the Government s proposed timing of the introduction of MySuper. An ideal scenario would be for members existing default accounts to be consolidated with a MySuper account by the date employers are required to make contributions to a fund offering a MySuper. Issue 16: An RSE licensee must give members at least three months notice of Adverse events. This would include any change in investment option, increase in fees, increase in insurance premiums or reduction in insurance cover. In order to provide the required notice, and allow time to process the transfers after the notice period has expired, will require APRA approval of the fund s MySuper well before 1 July For many funds, this may be unlikely. As a result, it will be necessary for many funds to effectively separate existing default accounts from the MySuper account initially. This will be inefficient and result in higher costs. The date from which employers need to make default contributions to a fund offering a MySuper should be deferred until at least 1 July Such a delay will ensure a much better transition outcome.

11 Page 11 Issue 17: Paragraph 16 prohibits the transfer of a member s accrued default amount until at least three months have elapsed from the date the significant event notification was given. Paragraph 17 requires the transfer of accrued default amounts within 120 days of the significant event notification. It is unclear why one requirement refers to months and the other to days. Both requirements should be referred to in months. Issue 18: There is little time between the expiry of the three month period and the expiry of the 120 day period to determine which members have opted out of the transfer and which members have (by their silence) opted in to the transfer, and transfer the account balances. Further, such a restriction unduly limits the trustee from providing early notification of the transfer. In other words, the 120 day transfer requirement means trustees effectively cannot provide the notice to members more than 120 days before the proposed transfer date. Trustees should be able to specify an appropriate date on which the transfer will occur provided that this is on or before 1 July 2017.