NEW SUPERANNUATION FUND CHOICE RULES

From 1st July 2005 , most employers will be required to offer a choice of superannuation funds to their employees in relation to the payment of the super guarantee contributions.  To assist you in preparing for this we have compiled a quick summary of the facts known to date, a suggested implementation timetable, and some concerns raised by various institutional bodies.

Are all employees eligible to choose?

No.  Some employees will not be eligible for a choice of fund and this will depend on a variety of factors including the nature of their current superannuation arrangements, the award or workplace agreement they work under or other relevant circumstances.  The following employees may not be eligible to make a choice:-

• Persons employed under an appropriate Authorised Workplace Agreement or similarly certified agreement.  These agreements usually stipulate where the contributions must be directed and will overrule the new choice rules.
• Employees who are members of defined benefit funds. 
• Members of unfunded superannuation schemes such as some Government superannuation schemes.
• Members of Commonwealth Government Schemes. 
• Special funds where contributions are prescribed by law. 
• Persons employed under certain state awards. 

It is crucial that employers investigate the circumstances of their employees and establish whether they need to provide a choice to them.  This should occur well before July 2005.  More information about these exemptions can be obtained by contacting our office.  Alternatively, the following websites may be of assistance:-

            www.wagenet.gov.au/

            www.nia.gov.au/

What choices must be offered?

If the choice rules apply, employees can select the employer’s default fund (assuming there is one), or provide details of their own fund.  If an alternative is selected, proof that it is a complying fund must be provided to the employer.  Where the fund is a Self Managed Superannuation Fund (“SMSF”), confirmation of its compliance from the ATO will be required.  Where the employee chooses their own fund, they should seek their own investment advice from a licensed investment advisor first.

The difficulty with this legislation is that each employee may choose a different fund, which could result in a bureaucratic nightmare for the employer.  If there are 100 employees, the employer may be remitting to 100 different funds.  The employer should plan accordingly, and needs to consider:-

• Does the accounting / payroll system have the ability to deal with a different fund for each employee?
• The employer will need to carefully check the forms and where appropriate the various funds compliance certificates submitted by employees.
• Where an entitlement to notify employees of these contributions still exists (under an award or workplace agreement), this requirement will also need to be met.
• A database of information will need to be verified and maintained, and under the privacy rules, this additional information will need to be carefully recorded and safeguarded.  All documents, choice forms etc. will need to be kept for five years.

Do employers need to offer a default fund choice?

In many cases a default fund will already exist and this will be the fund stipulated under that award, eg where Federal Awards apply.  In other cases, employers may have their own employee fund in place and this may suffice as the default fund provided the regulation requirements are met.  Where a default fund already exists, we recommend that employers verify it complies with the additional requirements stipulated. 

It is not compulsory for employers to offer a default fund.  However it is strongly recommended that they do so.  If they fail to offer a default fund and the employee fails to choose a fund of their own within the prescribed period, the employer will technically be in breach of the superannuation guarantee legislation as they will not have a fund to remit contributions to as required by law.  The requirement that the contributions are paid to a fund within 28 days of the end of the quarter is and will remain in place.

Additional requirements for default funds under the draft regulations

The draft choice of superannuation fund regulations and a draft standard choice of fund form have been released.  With the employee’s right to choose their own super fund coming into effect from 1st July 2005 these regulations are designed to put in place basic requirements and safeguards such as providing the minimum level of death cover insurance.  Depending on the age of the employee some life insurance coverage may be required to be offered by the default fund.

Some funds require the employer to become a “participating employer”, and remit contributions more frequently than quarterly.  The default fund will not be able to impose such obligations on employers.  In fact, any attempt to impose these obligations may void the fund from being eligible to be a default fund.

 
Do you already meet the choice of fund rules?

Some employers may already meet the choice of fund requirements if they contribute under:-

• The Superannuation (Productivity Benefit) Act 1988.
• Certain employment agreements made under the Employee Relations Act 1992 of Victoria .
• Australian Workplace Agreements (AWA) or certified agreements made under the Workplace Agreements Act 1996 or Industrial Relations Act 1988.
• State industrial awards.
• The Commonwealth Superannuation Scheme ( CSS ) or Public Sector Superannuation ( PSS )
• A law of the Commonwealth, State or Territory as prescribed in the regulations.

In addition, some employers may voluntarily meet the choice of superannuation rules.  Voluntary compliance may not relieve these employers of this new regime’s additional requirements.  However, there is a two year transitional period in which these employers may continue with their current arrangements and may not be required to offer the choices set out in these new provisions.  It should be noted however that some experts are concerned that not all AWAs and certified agreements are exempt, and calls for clarification have been made.

When must employees be offered a choice of fund?

For all existing eligible employees, the standard choice form must be provided on or after the 1st July 2005 and before the 29th July 2005 .  Eligible employees commencing on or after the 1st July 2005 must be provided with a choice within 28 days of their commencement.  Employers will then have 2 months in which to action the employee’s choice upon receipt of the completed form.  Employees can select to remain with the existing, or move to a new complying fund.  If no selection is made, contributions will be remitted to the default fund listed on the form.  Employees can change funds annually therefore employers are required to re-offer the choice every year.  Employees can vary their choice of funds more frequently if the employer permits.  There is a belief that choice forms may not be legitimate if lodged prior to the 1st July 2005 therefore it may be prudent to ensure all existing employees submit their forms after that date.

What is the penalty for not offering a choice?

Failing to offer a choice may result in the employer paying the Super Guarantee Charge capped to a maximum of $500 plus any superannuation guarantee levy shortfall actually arising.  These penalties are non-deductible.

Furthermore, as this obligation is legally required, employers cannot charge a fee to employees for providing the choice.

Format of the choice form

Whilst a draft choice of fund form has been released, it is only a suggested format and may change before the 1st July 2005 .  In addition, employers will need to amend the draft in any event to tailor it to their own circumstances.  We can assist you in this process.

The draft standard choice form can be accessed from:-

http://www.treasury.gov.au/documents/947/RTF/04%20SCF%20form.rtf

More information and outstanding issues

It should be remembered that whilst the legislation has been passed, the regulations are still in draft and some amendments to the legislation have already been promised to correct some minor problems and issues.  We strongly recommend that employers monitor the situation between now and the 1st July 2005 whilst gearing up for these arrangements.

Further information on the choice rules can be accessed from:-

http://www.treasury.gov.au/contentitem.asp?NavId=021&ContentID=947

Employers should also keep in mind that there are still some unresolved issues in relation to this new regime and it is hoped that these will be sorted out before the 1st July 2005 .

Timetable for gearing up for these changes

Clearly there is a fair bit involved in getting ready for these choice rules.  We recommend that you put in place an action plan to ensure that you are ready to offer these choices, where appropriate, to your employees.  The following timetable is recommended:-

MARCH TO MAY	IDENTIFY IF AND WHO THE CHOICE RULES APPLY TO Review all of your employment arrangements to establish:- Do you need to offer a choice to some or all of your employees? Are you currently offering a choice of funds to your employees? Do you currently have a suitable default fund? What actions are required to make the current fund a suitable default fund? Should you consider establishing a default fund?
MARCH TO MAY	CAN YOUR SYSTEMS COPE WITH THE CHOICE RULES Review your payroll and administration systems to ensure it can cope with the necessary administration.  Issues include:- Is the current software suitable? If not, can it be modified or upgraded in time? Are current staffing levels suitable for the gearing up of these choice requirements? Do we need to employ more temporary or permanent staff? Will we be able to process all of the choice forms?
MARCH TO MAY	STAFF & EMPLOYEE EDUCATION You will need to inform all affected employees of the new rules and how they will operate.  This will include:- Advising staff affected by the new rules of their options and what they should do to prepare for the choice. Advising employees unaffected by the new rules and why they are unaffected. Training the staff who will be involved in administering the new rules so they can deal with the administration and employee queries.
JUNE	GEARING UP FOR THE CHOICE You should fine tune the administration procedures for offering the choice including:- Checking all the regulatory requirements have been met. Drafting and approving choice forms Testing software and procedures Ensuring the default fund meets all the requirements
JULY	OFFERING THE CHOICE You will need to distribute the forms to eligible employees and provide them with guidance in relation to their choices.  You will need to ensure that your induction procedures for new employees include provision of the choice form where appropriate.
JULY TO SEPTEMBER	PROCESSING THE CHOICES This will include several steps including:- Advising deadlines as to when forms must be returned for the choice to be effective for the first quarter. Confirming that chosen funds are complying by reviewing the necessary information Confirming with employees that a valid choice is made or requesting additional information as appropriate Implementing the choices into your administration and payroll systems
OCTOBER OR WITHIN 2 MONTHS OF RECEIPT OF FORM	ARRANGING SUPERANNUATION CONTRIBUTION PAYMENTS This final step will occur within 28 days of the end of the first quarter and quarterly thereafter.  Whilst reporting of contributions may no longer be required, reporting of contributions to the trustee of the fund will be required.  It may also be prudent to inform employees of contributions made and fund details to avoid errors or problems where the employee changes funds without advising the employer.

Issues for employees

These new choice rules should be considered very carefully.  Employees should always obtain investment advice from a licensed investment advisor before proceeding with making the choice or changing their choice of fund subsequently.  Different funds charge different fees for looking after the investments of fund members.  There may be entrance and exit fees as well as on-going fees.  The level of fees may have a significant impact on the level of retirement savings available to the employees upon their retirement.

Different funds have different investment strategies and risk versus return strategies.  Employees should always obtain investment advice from a licensed investment advisor before proceeding with making the choice or changing their choice of fund subsequently.  Different funds charge different fees for looking after the investments of fund members.  There may be entrance and exit fees as well as on-going fees.  The level of fees may have a significant impact on the level of retirement savings available to the employees upon their retirement.

Different funds have different investment strategies and risk versus return strategies.  By accepting a default fund and not making an alternative choice, employees should remember that they are still making a choice and cannot hold the employer responsible for the performance of the fund.