Australian Superannuation and the challenges ahead
The superannuation industry has faced some immense challenges in light of the COVID-19 pandemic, such as dealing with the fallout – immediate and long term – of the Government’s announced changes to superannuation settings as part of its economic response to the pandemic. Virtually all aspects of a superannuation fund’s operations will be impacted.
The Federal Government’s changes to superannuation and the impact on funds
As part of its COVID-19 financial assistance response, the Government will:
- temporarily relax the rules for the early release of superannuation on compassionate grounds
- temporarily reduce the superannuation minimum drawdown rates and the deeming rates for social security payments.
Temporary early release
The Coronavirus Economic Response Package Omnibus Bill 2020 was fast tracked through parliament and passed on 23 March 2020. The package, which is now obtained Royal Assent, will make amendments to the SIS Regulations to allow members to access up to $20,000 of their superannuation savings on compassionate grounds as two tax-free lump sums. Separate applications must be made for access of up to $10,000 in the 2019-20 financial year and a further amount up to $10,000 in 2020-21. One application can be made per financial year.
To be eligible, members must:
- be unemployed
- be eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance
or on or after 1 January 2020:
- have been made redundant;
- have had their working hours reduced by 20% or more (including to zero); or
- be sole traders whose business has been suspended or has suffered a reduction in turnover of 20% or more.
Individuals will be able to self-certify to the ATO (via myGov) that they meet the eligibility criteria and trustees will have no role in assessing the claim. Once applications have been reviewed by the ATO, the ATO will have the power to issue a determination to the member and superannuation fund as to how much can be released.
Following the receipt of an ATO determination, trustees will be required to pay benefits as soon as practicable, without requiring any additional application from members.
Interests in defined benefit arrangements are exempted from the new rules (although trustees of such arrangements can develop arrangements to provide early release in accordance with the new rules if they wish to do so).
This extended early release option will be available for a period of six months following the amendments coming into effect (currently expected to be mid-April), meaning members will have had approximately three months following 1 July to make their 2020-21 application. However, as the Explanatory Memorandum explains, the Government may make additional amendments to the SIS Regulations to extend the measure beyond this.
Reduction in minimum drawdown rates for account-based pensions
Under the rules applying to account-based pensions, a minimum payment must be made from a pension or annuity product at least annually, which is determined by age and the value of the account balance at 1 July of each year. In a bid to help pension and annuity account balances recover from capital losses associated with the economic shock stemming from the crisis, the minimum drawdown rates for retirees will be halved for the 2019-20 and 2020-21 income years, meaning pensioners will be entitled to keep more money in the superannuation environment if they wish to do so.
Social Security deeming rates
A reduction to the social security deeming rates has also been announced in recognition of the impact that a low interest rate environment has on an individual’s expected savings income. From 1 May 2020, the upper deeming rate is 2.25% and the lower deeming rate is 0.25%, which the Government expects will mean an average increase of $105 to the Age Pension for the 565,000 people receiving it in the full tax year following the change.
Immediate considerations for trustees
The early release measure has been widely publicised in the media and forms a crucial part of the Government’s financial assistance response. AFCA has already announced it will modify its approach to dispute resolution to take the COVID-19 measures into account and trustees should be keen to ensure that they (and their administrators) are prepared to handle both the significant number of member enquires that we expect will arise following these announcements and the withdrawal process.
Quick and clear messaging to members will go a long way to helping manage the situation. Fund websites should be updated as soon as possible with information about the new rules, its implications and links to the myGov website outlining how members can sign up to myGov (if they have not done so already) in preparation for when the changes take effect. Information should also be published about the reduction in minimum drawdown rates where relevant, so that members can make a choice as to whether they wish to make changes to their drawdown amounts.
To ensure that the new operational requirement is met (i.e. that the benefit is paid as soon as practicable once an ATO declaration has been received), trustees should consider now how they will confirm member identities and bank account details before payments are made. Paying benefits by way of cheque should be the option of last resort in the current climate as this typically requires members to physically visit a bank branch.
Trustees should keep in mind that (subject to fund rules) the usual compassionate payment and financial hardship rules still apply and, sadly, an increase in applications for these payments is expected (with the potential for some members who meet the compassionate payment or financial hardship conditions, to be able to access their superannuation accounts under both the COVID-19 early release measure and the usual financial hardship rules).
A watching brief should also be kept on a possible increase in the number of low-balance accounts arising as a consequence of market movements or withdrawals, and trustees should ensure that their processes for transferring accounts to the ATO and applying fee caps under the PYS legislation remain robust.
Funds that believe the impact of the Government’s new measures (or the crisis more broadly) may result in a material change to fees and costs (including buy/sell spreads) will need to be conscious of the disclosure and notice implications of any such changes.
Lastly, there will be an important role for financial advice in supporting members who are considering whether to access their superannuation early (and take other steps such as moving investment options). Trustees should give thought to what steps they can take in either providing that advice (where they hold the appropriate authorisations to do so and have appropriate protections in place) or facilitating members’ access to advice.
What will be the impact on superannuation fund investments?
A flight to liquidity
We see the need for liquidity as being driven by a range of interconnected factors, including:
- Decreased contributions from members (driven by a rise in unemployment and underemployment);
- Increased outflows from the new compassionate release rules (see above);
- Managing foreign currency hedging programs (including necessary liquidity to respond to any margin call requirements); and
- Members shifting into cash or defensive investment options.
Source: Raj Chawla at Superannuationtransfer.com