This article was written by David Galloway a lawyer and superannuation executive
Trustees of MySuper Products have been handed a nasty surprise by the Victorian Government that could put most in breach of their MySuper Authorisation.
Part 2 of the Duties Act 2000 (Vic) has become big news in superannuation because sections 176 to 196 impose what amounts to a new tax of 10 per cent on TPD premiums for new group insurance policies, new members receiving TPD cover and increases in cover for existing members resident in Victoria.
Since most group insurance policies already incur duty in New South Wales or Queensland, this is a case of double taxation. But that’s not the problem.
The problem is that section 29VC(1) of the SIS Act requires trustees of MySuper products to charge insurance fees (including premiums) to members on a basis no higher than cost recovery.
But because the new Victorian duty is charged monthly in arrears based on activity, it’s imposable for trustees to calculate insurance rate tables in advance on a cost recovery basis.
What’s more, schedule 10 of the Corporations Regulations requires insurance premiums to be shown in PDSs, so if accurate cost recovery premium tables can’t be calculated then no PDSs can be issued, default members can’t join a super fund and employers will be forced into breaching superannuation guarantee obligations.
Issuing frequent PDSs is no solution due to the high cost of producing PDSs and 1017B notices to explain fee increases.
To complicate matters, it’s doubtful that separate insurance rates can be charged to Victorian residents and, if not, premiums will have to rise for all members resulting in clear overcharging no matter how often PDSs are reissued.
Regulators really should act on this problem sooner rather than later. The neatest solution is to exercise regulation making power under s29VC(2) to create a safe haven where overcharging of insurance fees is a result of a genuine attempt to fund payment of a tax or duty, proving any over charged amount is returned to the benefit of members of the MySuper product. But other fixes are also possible.
In the meantime, trustees can take comfort from the fact that the new duty will raise liabilities slowly, unless they change insurance policies. If possible trustees should also consider:
- Not changing insurers in the short term;
- Not issuing new PDSs until a workable solution is apparent;
- Asking their insurer to absorb the new duty for the first 6 months or making arrangements to fund the liability from reserves unit a practical solution is in place;
- How this affects SPS 250 compliance (is it practical to ever change insurers?); and
- How to amend APRA reporting systems to ensure premiums paid to insurers include the new duty.
David Galloway is an in-house lawyer and superannuation executive