Despite superannuation changes, one tax loophole remains

From The Conversation.

The Howard government, when flush with revenue, made a bad tax decisions which continue to haunt current policy makers. It removed the tax on the retirement phase of superannuation, this has been partly resolved by current government’s recent changes. But the Howard government also replaced the full taxation of real capital gains with concessional treatment of capital gains (only 50% of gains taxed). This remains as a tax avoidance loophole which both parties acknowledge but are reluctant to act upon.

The reason is straightforward. Assets put into superannuation in the accumulation phase and held until the retirement phase, can then be sold with no, or minimal, capital gains tax payable. This a major incentive to put assets into super and hold them until the retirement phase.

Without further changes to superannuation taxation, this is simply going to worsen the social problem of the well-off adopting tax minimisation strategies by piling as many assets into super as possible. Remember, it will still be possible to contribute up to A$100,000 per annum as non-concessional contributions.

Consequently, the well-off could easily build up a pool of assets of several million dollars or more, which when sold in retirement will still get very, very, favourable capital gains tax treatment under super.

If superannuation assets in retirement are under the A$1.6 million cap, no tax will be payable on capital gains from sales of assets. If assets are above the cap, the tax rate applied to capital gains is 10%.

For example, an asset costing $100,000 and held for 15 years, increasing in price at an average of 7% per annum would be sold for $276,000. If in super, tax payable would be $17,600. If outside of super, on the top marginal tax rate (including levies) of 49%, the tax payable would be $43,096.

If the concession on capital gains tax was reduced (without addressing the concessionary rate in super), the incentive would be even bigger. For example, if the concession was reduced to 25%, tax payable on the capital gain outside of super would be $64,644, an even larger gap to the tax payable in super of $17,600.

Putting $100,000 per annum into super for 15 years with an average 7% capital gain per annum generates a portfolio worth $2.7 million. The capital gains tax savings on this being in super, rather than outside, are more than $1 million!

So, what are the consequences if a brave government elects to reduce the concession applied to capital gains tax? If they make no changes to super tax arrangements there are at least two likely consequences.

First, there is increased incentive for individuals to set up self managed super funds to exploit these tax arbitrage or minimisation loopholes.

Second, despite taxation of earnings on retirement income balances over the A$1.6 million cap, maximising non-concessional contributions into self managed super funds will remain attractive, to take advantage of the difference in capital gains tax rates on assets inside versus outside super – to the detriment of future government budgets.

The consequences for self managed super funds incentives to borrow (via non-recourse arrangements involving trusts) to purchase assets such as property are unclear. As described on one adviser’s website:

Such borrowing will enable trustees to acquire assets over and above the assets that can be obtained from contributions. The caps on contributions can therefore be “overcome” by such borrowings.

However, it is doubtful that there are tax arbitrage benefits from using leverage to purchase assets via super (because higher marginal tax rates mean higher tax deductions for interest on borrowings outside of super).

For reasons of social equity, any general changes to the capital gains tax rate will also need to address capital gains tax within super. Admittedly there is already a lower concession in the case of super (two-thirds of gains are taxed versus one-half).

But that means taxing capital gains in super at only a 10% rate, leaving strong incentives to thwart higher capital gains tax by locating assets within super. Failing to reduce the capital gains tax concession in super would be likely to undo a substantial part of the effectiveness of any general changes the government has already made.

Author: Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

Home Deposits Unwelcome in Super

From The Financial Standard.

Superannuation industry groups are warning the federal government to keep Australia’s $2 trillion retirement savings system away from addressing the nation’s housing affordability problems.

Earlier this week Federal Treasurer Scott Morrison said the government is likely to address housing affordability in its May Budget, and there have been several suggestions about how to deliver the best outcome.

New South Wales Minister for Planning and Housing, Anthony Roberts, recently mentioned the idea of unlocking superannuation for first home deposits.

Industry Super Australia believes the idea is bad policy as it could reduce retirement savings and drive up housing prices while doing nothing to address supply.

ISA chief economist Stephen Anthony said: “In the housing affordability debate, the focus should be on land release, regulation and tax subsidies that fuel investment in existing property rather than new buildings. Allowing first home buyers early access to their super will set back a retirement income system that is still struggling to fully deliver.”

Anthony also said the proposal is inconsistent with the federal government’s objective of super, being “to provide income in retirement to substitute or supplement the age pension.”

The Australian Institute of Superannuation Trustees (AIST) also warned against using superannuation to tackle the nation’s housing affordability challenge.

“The superannuation industry shares concerns about housing affordability for the young but superannuation is not the silver bullet,” AIST chief executive Tom Garcia said.

“Superannuation is about saving for retirement. It’s not a savings pool to be used for any other purpose as the government has made clear in its own proposed objective for super.”

Morrison said in a radio interview with Ray Hadley that he’s had good discussions with senior NSW government ministers about housing affordability issues for a long time.

“It is a big challenge particularly for people here in Sydney and particularly people down in Melbourne. Whether it is in Queensland or other places, particularly South East Queensland there are real challenges there. We want to look at ways that we can improve that situation. It is not just for people who are looking to buy their first home,” Morrison said.

SMSF contribution levels almost triple in response to super changes becoming law

AMP says SMSF trustees looking to make the most of the current rules have significantly increased contributions, according to the latest SuperConcepts SMSF Investment Patterns Survey.

In the December 2016 quarter contribution levels almost tripled, increasing by 181 per cent from $3,040 in the September quarter to $8,550.

 

The rise in contributions follows the Government’s confirmation that the proposed Super changes will come into effect on July 1 2017.

SuperConcepts Executive Manager Technical & Strategic Solutions Phil La Greca said the findings were not surprising and he anticipated contribution levels would continue to increase during the next two quarters due to the brief window of time to make large non-concessional contributions until 30 June 2017.

“The current non-concessional amounts apply for the remainder of this financial year and investors are taking advantage of the limited time available to them. We expect a continued uplift in the level of nonconcessional contributions in the lead up to July 1,” said Mr La Greca.

The current $180,000 after-tax contributions cap, and the three year $540,000 bring-forward rule remain until 30 June 2017.

Cash levels were also up in Q4 (from 18.1 per cent in the September quarter to 18.4 per cent in the December quarter).

Mr La Greca said it was likely the increased cash levels were related to the higher contribution levels being received.

The trend to invest through the use of exchange-traded funds (ETFs) continued to grow, with ETFs representing four per cent of all assets during the December quarter. ETFs were mostly used in the International Equity Sector, which represented 16.7 per cent of all international equity holdings.

The trend to use a limited recourse borrowing arrangement for property continued. The overall allocation to property loans increased to 81 per cent in the December quarter, up from 75 per cent the previous quarter. Meanwhile the number of financial asset loans decreased from 25 per cent to 19 per cent.

“The ATO’s safe harbour guidelines on related party loans explains the continued drop in the number of financial asset loans,” said Mr La Greca.

The quarterly SuperConcepts SMSF Investment Patterns Survey covers approximately 2,800 funds, a sample of SMSFs administered by Multiport (part of the SuperConcepts group) and the investments they held at 31 December 2016. The assets of the funds surveyed represent approximately $3.2 billion.

About SuperConcepts<
SuperConcepts is a leading provider of self-managed superannuation fund (SMSF) administration, software and education services to SMSF trustees, accountants and financial advisers, servicing more than 55,000 funds. SuperConcepts comprises a number of sub-brands including AMP SMSF, Ascend, Cavendish, Multiport, Justsuper, SuperConcepts, SuperIQ, superMate, yourSMSF and a part ownership of Class Ltd. Find out more at www.superconcepts.com.au.

 

Pension age rises will mean later super access

From The NewDaily.

The age at which you can receive the age pension is on the rise, up to 65.5 from July 1 and it could be as high as 70 within two decades.

There’s a big unanswered question related to that which the politicians don’t seem to want to touch; will that push up the superannuation preservation age?

The pension age will move to 67 by 2023 under a measure introduced by Labor back in 2009. The government has it slated to move to 70 by 2035 although PM Turnbull and Social Services minister Christian Porter side stepped the issue when Labor brought it up in parliament this week.

Labor, for the record, opposes the move and has done so since it was first introduced.

The measure was originally recommended to start in 2053 by the Abbott Government’s Audit Committee chaired by Tony Shepherd. But the Abbott budget in 2014 brought this back to 2035.

But even if the move to 70 were to come off the agenda in the medium term, there is still currently a mismatch between the age you can take super and the age you get the pension.

A few years ago you could take your super at 55. Now it’s 56 and it is moving  towards  60, a point it will reach for those born from mid 1964 in 2021.

Supernatants are getting older. Source: ATO
Supernatants are getting older. Source: ATO

The point of raising the preservation age was to keep it within five years of the pension age. Allowing the gap to widen would “encourage people to take their super, spend it and live off the pension,” said Ian Yates, CEO of lobby group Council on the Ageing.

Robert Curley, a director of Association of Independent Retirees, said his organisation would support a move. “The super preservation age should be maintained at five years below the pension age.”

But some take a much harder line than this. Brendan Coates, a researcher with the Grattan Institute, told The New Daily that he “supports an increase in both the pension age and the super preservation age to 70.”

“It would help reduce the budget deficit and increase GDP quite significantly.”

Mr Coates said research done by Grattan in 2012 had shown that those two measures would “cut the budget deficit by $12 billion in today’s dollars and increase GDP by at least 2 per cent”.

The economic benefit would come from “pushing people to work for longer”, Mr Coates said. The budget benefits would come from lower pension payments and higher taxes on super savings.

Of course not everyone takes what many would see as such a hard line approach. Mr Curley said “if you take the preservation age to 67 or 70 it negates the idea of super”.

“There needs to be a reasonable period for people to access and enjoy their superannuation.” Keeping too big a gap between preservation and pension age would also negate the idea of super by encouraging people to spend it early, he said.

Mr Coates said any increase in both benchmarks would have to be done gradually and adequate arrangements put in place to allow older people who could no longer work to be get the disability pension (which pays the same as the age pension).

“Otherwise there would be be a risk that people who couldn’t work any more would be forced onto Newstart [unemployment benefits],” Mr Coates said.

A spokesman for Labor’s superannuation shadow minister
Katy Gallagher said the opposition “did not have a view” on raising the preservation age. Financial Services Minister Kelly O’Dwyer did not respond to questions on the issue from The New Daily.

Mr Yates said resources would have to be put in place to help older people transition to new roles and jobs that matched their capabilities if working lives were to be extended to 70.

“If people are working longer we can’t expect them to have the same career path from 25 to 70.”

Extending working lives is a big issue through the OECD. As the following chart shows, Australia currently sits around the average of its peers.

OECD retirement ages in 2014. Source: OECD
OECD retirement ages in 2014. Source: OECD

Canadian Prime Minister Justin Trudeau was elected on a platform of reversing a retirement age rise from 65 to 67. But recently an economic advisory committee recommended a rise and measures to encourage people to work beyond 70.

Do Investment Property Investors Also Use SMSF’s?

We recently featured our analysis of Portfolio Property Investors, using data from our household surveys. We were subsequently asked whether we could cross correlate property investors and SMSF using our survey data. So today we discuss the relationship between property investors and SMSF.  We were particularly interest in those who hold investment property OUTSIDE a SMSF.

To do this we ran a primary filter across our data to identity households who where property investors, and then looked at what proportion of these property investors also ran a SMSF. We thought this would be interesting, because both investment mechanisms are tax efficient investment options.  Do households use both? If so, which ones?

We found on average, around 13% of property investors also have a self managed super fund (SMSF). Households in the ACT were most likely to be running both systems (17%), followed by NSW (14%) and VIC (12.8%).

Older households working full time were more likely to have both an SMSF and Investment Property, but we also noted a small number of younger households were also using both tax shelters.

We found a significant correlation between income bands and use of SMSF among investment property holders (this does not tell you about the relative number of households across the income bands, just their relative mix). Up to 30% of higher income banded households have both a SMSF and Investment Property.

Finally, we look across our master household segments. These segments are the most powerful way to understand how different household groups are behaving.  The most affluent groups tend to hold both investment property and SMSF – for example, 30% of the Exclusive Professional segment has both.  Less affluent households were much less likely to run a a SMSF.

This shows that more affluent households are more able and willing to use both investment tax shelter structures. It also shows that any review of the use of negative gearing, investment properties and the like, needs to be looked at in the context of overall tax planning. Given the new limits on superannuation withdrawals, we expect to see a further rotation towards investment property, which as we already explained has a remarkable array of tax breaks and incentives. We expect the number of Portfolio Property Investors to continue to rise whilst the current generous settings exist.

One in two Australian households expected to be retire ready

Fifty-three per cent of Australian households are expected to have enough for a comfortable retirement from their combined superannuation savings, personal assets and the Age Pension, according to the latest CommBank Retire Ready Index released today.

When the Age Pension is removed, the number of households that can afford a comfortable retirement reduces to 17 per cent, and to just six per cent when the calculations are based on superannuation only.

Linda Elkins, Executive General Manager Advice, Commonwealth Bank said: “The good news is that many Australians who may not currently be on track for a comfortable retirement are very close. A little bit of planning could see them reach the comfortable level.”

CommBank commissioned Rice Warner to prepare the report, which shows that many Australians are close to achieving the comfortable retirement standard defined by the Association of Superannuation Funds of Australia (ASFA). The report shows that while 53 per cent of Australian households are on track, a further 18 per cent are projected have 80 to 99 per cent of what they will need.

The overall results are mixed across cohorts and age groups, and highlight the growing importance of superannuation in helping Australians achieve a comfortable retirement.

Millennials will need to save harder for retirement than other cohorts due to their longer life expectancies. Superannuation will play an important role and will comprise, on average, 78 per cent of retirement assets for 25 year-olds working today.

“The CommBank Retire Ready Index shows how important superannuation will be for the long term financial well-being of young Australians. Many people do not become engaged with superannuation until later in their working lives, but taking a keener interest in superannuation now, consolidating accounts into one super fund and contributing a little more each week can help younger Australians stay on track for a comfortable retirement,” Ms Elkins said.

In the 60-64 year-old age group, couples are expected to be better off than singles but will have reduced retire readiness as they have not received the long term benefits of compulsory Superannuation Guarantee contributions. On the other hand, younger age groups are expected to have less in assets at retirement outside of superannuation when compared with their older counterparts.

“The report also shows that more men than women are retire ready. Women have longer life expectancies, and therefore need more assets to maintain a comfortable level of retirement. Women also generally have lower retirement savings due to career breaks during their child bearing years and lower average income levels throughout their working lives.”

Ms Elkins also said: “People who are approaching retirement could give their savings a boost by taking advantage of the current superannuation contribution caps before they are reduced on 1 July.”

“It is important that people of all ages understand how much they will need to save now to secure their financial futures.”

“To help Australians see how on track they are for a comfortable retirement, CommBank has developed a retirement calculator. This is a good first step to see how retire ready you are and is a useful resource to help you get on track to reach your goals for a comfortable retirement,” she said.

Pooled funds beat SMSFs for all but the wealthiest

From The NewDaily.

Most self-managed superannuation fund owners would have made more money investing in industry super funds in the seven years to 2015, according to a new report from the University of Adelaide’s International Centre for Financial Services.

Analysis by The New Daily based on figures produced for the review, which looked at SMSF’s in four bands of value from under $200,000 to over $1 million, found that over the seven years to June 2015 only the largest of SMSFs outperformed pooled funds.

Source:ICFS and Chant West

The top performing SMSF category, those with over $1 million in their fund, averaged 6.8 per cent returns in the seven years to 2015 while the next best performer, industry funds, averaged 6.2 per cent and retail funds

Small SMSFs with less than $200,000 invested on average lost 5.2 per cent a year over the seven years, something their owners would not have been happy with.

The two mid-tier levels of SMSFs both outperformed retail funds, which scored 3.4 per cent but came in behind industry funds, which racked up an annual return average of 6.4 per cent over the seven years. The average for all SMSF’s in the survey was 3.7 per cent over seven years.

Super changes to knock SMSFs from their perch

The performance outcomes reflect the makeup of different fund types. Retail funds with their high equity ratings outperform in years where the share market is strong and underperform, sometimes dramatically, when equities slump.

The hare and the tortoise

Industry funds, with their larger exposure to direct property, infrastructure and private equity, are steadier performers than retail funds, enabling them to perform better over time. Larger SMSF’s were less volatile than retail funds, probably reflecting their higher propensity to invest in property.

Steady progress wins out. Photo: GettySteady progress wins out. Photo: Getty

The costs of running SMSF’s hit hard at the performance of smaller funds. Expenses for the smallest funds were as high as 6.8 per cent of fund value while for the largest they were as little as 0.6 per cent and averaged 0.9 per cent. These expenses include accountancy, legal costs and investment advice.

Figures for pooled funds provided by SuperRatings show that Fee Quartiles for pooled funds range from 0.76 per cent to 1.26 per cent for funds over $500,000 and 0.9 per cent and 1.5 per cent for $50,000 funds. Industry funds tend to be at the lower of these ranges with retail funds at the upper end although for-profit My Super funds are also at the lower range.

You need big bucks for an SMSF

David Simon, principal of advisory house Integral Private Wealth, told The New Daily that while it was arguable that SMSF’s could be viable with balances of $250,000 “they’d generally need to be between $400,000 and $500,000 to be properly diversified and make use of the extra investment choice that SMSFs offer.”

Industry and retail funds increasingly offer members the capacity to invest in individual stocks, term deposits and sector specific funds so “the attractiveness bar that SMSF’s have to get over is higher than before,” Mr Simon said.

Professor Ralf Zurbrugg of the University of Adelaide, an author of the report, said while benefits of  size for SMSFs faded quickly once balances reached $500,000. “Above that level performance [resulting from lower running costs] saw only marginal improvement,” he said.

Mr Simon said SMSF’s with smaller balances could be viable to “fill particular trustee needs. For example where a small business person may want to put a part of their work building into their super fund so they pay rent to their fund not a landlord”.

The latest superannuation statistics published by the Australian Prudential Regulation Authority this week show that super balances have grown slightly to $2.1 trillion with SMSF’s accounting for 29.5 per cent of assets.

Super Grew in the year to June. Source: APRASuper Grew in the year to June. Source: APRA

However SMSF’s remain a bastion of super privilege with their 1 million members having average balances of $572,000 while the 11.1 million industry super fund members have average balances of $39,000. The 12 million retail fund members have average balances of $42,000 while 3.5 million public sector fund members have average balances of $150,000.

The New Daily is owned by industry super funds

Bank platforms ‘squeezing’ fund managers

From InvestorDaily.

Too much fund manager value is being “eaten up” by the high administration service fees of the major platforms, argues the ASX.

Speaking to InvestorDaily, ASX senior manager for investment products Andrew Campion said the investment management value chain should be more aligned with the people who actually generate wealth for investors – fund managers.

“We feel that presently too much value is eaten up by administration services. It’s not the actual person or firm that’s generating wealth for the end client,” Mr Campion said.

“If you squeeze the fund manager they just have less money to spend on research and less money to incentivise their staff,” he said.

This conviction is reflected in the relatively low fee ASX charges fund managers for inclusion on the mFund settlement service: 1.4 basis points (bps), or 0.014 per cent.

“If you look on a PDS for a fund manager and you see their expense ratio is 70 bps, 1 per cent or 1.2 per cent – they might be getting far less when they’re on a platform. Sometimes less than half as much,” Mr Campion said.

Sometimes a fund manager using larger platforms can be “squeezed” down to a fee of as low as 15 basis points “even though their direct retail fee structure is 70-80 bps or 1 per cent”.

“When we talk to managers, they’re staggered that they get to keep all of their fees,” Mr Campion said.

“We don’t feel like having a website that you can log into and have statements generated should cost 100 bps.”

There are now 170 products available on the mFund settlement service, with total funds under management (FUM) amounting to $250 million (up from $110 million 12 months earlier).

The ASX recently received approval from ASIC to include longer-form PDS products on mFund, in addition to shorter-form PDS products.

Longer-form PDS products, which include hedge funds, make up 20 per cent of the approximately $300 billion Australian retail fund management sector and are likely to be attractive to the mostly self-directed investors who use mFund, Mr Campion said.

“Although it’s only 20 per cent of the overall pie, we think as these funds come onto the platform it will be much more than 20 per cent of the mFund business,” he said.

Of the total $250 million in FUM on mFund, 40 per cent of it is self-directed and 60 per cent comes through advised channels, Mr Campion said.

Eighty per cent of the users of mFund are SMSFs, he added.

When Size Matters: $200,000 threshold key to SMSF performance

AMP says large SMSFs perform better than small SMSFs because they are more diversified, operate more effectively and have longer experience in the sector.

This is according to new joint research from SuperConcepts and the University of Adelaide’s International Centre for Financial Services.

Released today, the new research report –When size matters: A closer look at SMSF performance – looks at fund characteristics that contribute to superior performance of SMSFs.

SuperConcepts General Manager of Technical Services and Education, Peter Burgess, said the research revealed when a fund reaches a balance of $200,000, the benefits of investment diversification start to kick in.

“Our research shows size matters with large SMSFs performing better than small ones. Performance, diversification and expense ratios continue to improve as a fund increases in size,” said Mr Burgess.

Professor Ralf-Yves Zurbrugg from the University of Adelaide said there is a “double whammy” for those SMSFs with balances under $200,000.

“These funds not only have much larger expense ratios compared to larger funds, but they also lose out due to their inability to achieve adequate levels of investment diversification,” said Professor Zurbrugg.

Large funds are more efficient in their operation, in terms of the direct expenses involved in managing an SMSF. When a fund reaches $550,000 under management, its expense ratio dips below two per cent and diversification and performance is comparable to the largest funds.

When size matters: A closer look at SMSF performance is the first in a series of reports to be released by the SMSF Centre of Excellence which aims to examine the relationship between fund activity and performance, diversification and performance, and the relationship between trustees seeking advice andperformance.

Using data from over 20,000 SMSFs from 2008/09 until 2014/15, the report examines how fund size affects performance as well as other fund characteristics including investment diversification and expense ratios. SMSFs in the data set have outsourced their administration, and possibly other aspects of their operation to an external party.

 

NAB commissions independent Assurance Review of its superannuation business

NAB says its superannuation trustee, NULIS, has commissioned an independent Assurance Review into its superannuation business. ASIC also made a release.

This follows an agreement with the corporate regulator, the Australian Securities and Investments Commission (ASIC), that the Review will be the subject of additional conditions on the Trustee’s licence.

NAB has worked cooperatively with ASIC throughout this process, with a combined focus on doing the right thing by our customers.

Acting Executive General Manager, Wealth Products, Garry Mulcahy said: “We support the Assurance Review as it will give our customers further confidence in the systems and processes supporting our superannuation business, following a period of significant transformation.

“Over the past five years, we’ve made substantial changes to upgrade and simplify our superannuation business to better serve our customers’ needs.

“We’ve merged five of our super funds to create Australia’s largest retail super fund, the MLC Super Fund, with $70 billion funds under management, and we’ve also implemented significant regulatory change, including Future of Financial Advice (FoFA) reforms and Stronger Super.

“We have improved our structure that will allow us to continue to innovate. The Review will provide independent assurance that our fund governance is delivering for our customers,” Mr Mulcahy said.

External consultants, KPMG, will conduct the Review with the first report to be provided to ASIC and the Trustee by July 2017.

We have also updated the details of the remediation program for corporate superannuation customers in relation to Plan Service Fees, previously announced on the 27 October 2016. NAB confirms a total of $34.7 million will be paid to approximately 220,000 customer accounts, with the average compensation amount per customer account expected to be approximately $150.

In addition, we have identified ten customers in the MasterKey Business Super and Masterkey Personal Super products that were impacted when we upgraded their life insurance benefits in 2013. While approximately 400,000 customers were provided access to improved life insurance through this 2013 change, 10 customers had claims incorrectly declined and we’ve paid $1.8 million in additional insurance benefits to these customers.

Mr Mulcahy said that our focus has been to do the right thing by our customers.

“Our intention with the proactive restructuring of our corporate super products and the upgrade of insurance products was to do the right thing by our customers, and we did provide equivalent or better outcomes for customers. However, we didn’t execute the change well and we’re sorry to those customers affected,” Mr Mulcahy said.

About the Assurance Review program

The Assurance Review program is an in depth review into the superannuation business. The Review is intended to provide assurance on the continued fairness and efficiency of key aspects of the superannuation business.

The scope of the Assurance Review will include:

  • risk management procedures;
  • process for implementing product changes, disclosure and reporting to members, and

procedures for managing conflicts of interest within NAB’s superannuation business, including the assessment of related party service providers.

Here is what ASIC said:

ASIC has imposed additional licence conditions on the Australian financial services (AFS) licence of NAB’s superannuation trustee, NULIS Nominees (Australia) Limited (NULIS), following breakdowns in internal procedures.

The conditions require NULIS to engage an ASIC-approved independent expert to assess and report on the adequacy of its compliance and risk management practices for its retail and wrap superannuation funds. NULIS has agreed to the conditions, and KPMG has been appointed as the independent expert.

The conditions were imposed on NULIS following ASIC’s enquiries into a breach reports lodged by NAB’s wealth entities. The breaches involved a breakdown in risk management and communication procedures following the transfer in 2012 and 2013 of all members in a number of products to MLC MasterKey Business Super (MKBS) and MLC MasterKey Personal Super (MKPS), as well as changes made to the death and total and permanent disablement (TPD) insurance of MKBS and MKPS members. Approximately 400,000 members were impacted by the insurance changes.

System breakdowns included:

  • inadequate disclosure of insurance changes to members;
  • inadequate training for staff, and
  • insurance policies not being updated.

As a result of the breakdowns, incorrect death and TPD insurance tests were applied to MKBS and MKPS members between May 2013 and July 2015.

NAB’s wealth entities have identified that 10 members’ insurance claims were incorrectly assessed with approximately $1.6 million in members’ claims underpaid or declined. NAB has compensated affected members a total of $1.8 million, including interest.

In addition, NAB’s wealth entities identified that over 220,000 member accounts were incorrectly charged planned service fees (PSFs) of approximately $34.7 million between September 2012 and October 2016 in the MKPS and MKBS products. Fund members were charged PSFs for the provision of general advice in circumstances where no plan adviser had been appointed to provide such advice. ASIC’s report Financial advice: Fees for no service issued in October 2016 (Rep 499) included part of this amount in the estimates of compensation to be paid to consumers for such failures. Since the release of that report, NAB has confirmed that it will compensate these fund members for the incorrect charge and have also confirmed the compensation to be paid. ASIC’s inquiries into the PSF breaches are continuing.

The independent expert’s review will consider, among other things NULIS’:

  • risk management procedures;
  • process for implementing product changes, disclosure and reporting to members, and
  • procedures for managing conflicts of interest within NAB’s superannuation business, including the assessment of related party service providers.

The independent expert will report to ASIC and NULIS and provide recommendations as to any steps that should be taken by NULIS to ensure that its procedures are adequate.  NULIS is also required, under the licence conditions, to inform ASIC of any recommendations that it does not propose to implement and provide reasons.

ASIC Commissioner Peter Kell said, “The additional conditions imposed on NULIS’ AFS licence reflect ASIC’s priority of improving compliance and disclosure standards in the superannuation industry, including vertically integrated financial services licensees.”

ASIC acknowledges the cooperative approach taken by NAB and NULIS in this matter.

Background

On 1 July 2016, NAB restructured its superannuation business by transferring five superannuation funds (including the MKBS and MKPS products) into the MLC Super Fund. NULIS also became the trustee of the transferred funds.

ASIC is focussed on ensuring that AFS licensees maintain appropriate risk and compliance management frameworks. The handling of conflicts of interest within the financial services industry is an area of concern to ASIC and ASIC recently undertook a review of the practices of major industry participants in the funds management area. A summary of our findings appears in ASIC Report REP 474 Culture, conduct and conflicts in vertically integrated businesses in the funds management industry.