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Focus: Superannuation – October 2004

Choice of funds legislation: what it means for trustees and employers

In brief: Employers and trustees of superannuation funds should make themselves aware of new superannuation legislation requirements, which aim to enable employees to choose the fund to which their employer is to make their compulsory contributions. Senior Associate Lois Dannecker reports.

The legislation's aim

The purpose of the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 (the Act), which amends the Superannuation Guarantee (Administration) Act (SGA Act) and related legislation, is to enable employees to require their employer to make their compulsory superannuation guarantee contributions to the employee's chosen fund, but it must also be an eligible choice fund for the employer. 

The Act has evolved, over the eight years since choice of funds legislation was first introduced into Parliament, into a much simpler form of its predecessors. In order to avoid penalties, employers should ensure that they are aware of their new obligations under the Act, which will commence on 1 July 2005.

Employee's chosen fund

Under the Act, contributions by employers for their employees must be made to a 'chosen fund'. Employees must give their employer a written notice if they want a fund to be their chosen fund. Two months after the employee gives this notice, the fund becomes the chosen fund and contributions must then begin to be made to the fund. The employer can choose to make contributions to the fund from an earlier time after the notice is given. There is no time limit within which an employee must choose a fund after they have received a standard choice form.

Eligible choice fund for an employer

An employer is only obliged to make contributions to an employee's chosen fund if it is an eligible choice fund for the employer. It will be an eligible choice fund for the employer if:

  • it is a complying superannuation fund;
  • it is a Retirement Savings Account (RSA); or
  • it is a superannuation fund that is conclusively presumed to be a complying superannuation fund under the SGA Act because the employer has obtained a written statement from the fund trustee to that effect.

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When can an employer refuse to accept a chosen fund?

An employer may refuse to accept a fund chosen by an employee if:

  • the employee does not provide, with the written notice of their chosen fund, a written statement of:
    • contact details for the fund;
    • other information to be prescribed by regulations; and
    • written evidence that the fund will accept contributions made by the employer for the benefit of the employee (this could be evidence of an account number); or
  • the employee has chosen another fund within the previous 12 months.
Employers to provide standard choice form

To enable employees to give their employer written notice of their chosen fund, the employer must give a standard choice form to an employee:

  • before 29 July 2005, if the employee is in its employment on 1 July 2005;
  • after 1 July 2005:
    • within 28 days of the employee first commencing employment;
    • within 28 days of the employee giving them a written request to do so, but not if the employee has been given a standard choice form within the previous 12 months;
    • within 28 days of the employer becoming aware that there ceases to be a chosen fund for the employee because either:
      • the employer becomes unable to contribute to the fund; or
      • the fund ceases to be an eligible choice fund.
    • if the employer is making contributions to a default fund because the employee has not made a valid choice or has not made any choice, and the employer changes the default fund to which it makes contributions for the employee, the employer must give the employee a standard choice form within 28 days after the change.

An employer may also give a standard choice form to an employee at any time.

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When a standard choice form is not required to be given

An employer is not required under the Act to give an employee a standard choice form if:

  • the employee has already given the employer written notice that the employee wants a fund to be a chosen fund;
  • the employer is deemed under the Act to be making contributions for the benefit of the employee in compliance with the choice of fund requirements. This is the case where:
    • contributions are made under, or according to, an Australian Workplace Agreement, or a certified agreement under the Workplace Relations Act 1996, or a certified agreement under the Industrial Relations Act 1988;
    • contributions are made under, or according to, an employment agreement that was in force under the Employee Relations Act 1992 (Vic) and which continues to be in operation under the Workplace Relations Act 1996;
    • contributions, or a part of the contributions, are made under, or according to, a State award (for example, if the award requires contributions of less than 9 per cent, as required under the SGA Act, all employer contributions may be made to the fund specified in the award);
    • contributions are made under a law of the Commonwealth, of a State or of a Territory and the law is prescribed under regulations to be made under the Act.

Therefore, an employee to whom any of the above applies does not have the right to make a choice of fund under the Act.

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No choice for defined benefit members if benefits cannot be reduced

In addition to the above situations, a fund cannot become a chosen fund for an employee, and therefore the employer is not obliged to make contributions for the employee to that fund, where:

  • immediately before the employee gave notice of the selected fund to the employer, the employee was a defined benefit member of a defined benefit superannuation fund; and
  • most importantly, even if the selected fund became the employee's chosen fund, on retirement, resignation or retrenchment, the employee would nevertheless remain entitled to be paid the same amount from the defined benefit fund as they would if the employer was not obliged to make contributions to the selected fund.

Employers who currently contribute to a defined benefit fund should therefore ascertain whether the trust deed and fund rules allow the benefits of a defined benefit member to be reduced in circumstances where the employer becomes obliged to make contributions to another fund for the member. It is only if benefits cannot be reduced in those circumstances that the employer is not obliged to make contributions to the fund selected by the employee.

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Will members of defined benefit funds in surplus have choice?

The Act effectively exempts an employer from the choice of fund requirements by not imposing any penalty on employers for contributions for an employee if:

  • the employee is a defined benefit member of a defined benefit fund immediately before 1 July 2005 and has not ceased to be a member before the start of a quarter; and
  • an actuary has certified:
    • that the employer is not required to make contributions for the quarter and there has been such a certificate since 1 July 2005;
    • no earlier than 15 months before the end of the quarter that, from 1 July 2005 until the end of the quarter, the assets of the fund are, and will be, equal to or greater than 110 per cent of the greater of the fund's vested benefits liabilities and the fund's accrued actuarial liabilities.

Notwithstanding that there is no penalty under the Act for an employer who provides benefits for an employee in these circumstances, it seems that the employer will be obliged to provide the employee with a standard choice form. It is possible that regulations will prescribe information to be given to the employee in the standard choice form where the fund is in surplus as described above.

An employer in the above circumstances will be required to comply with the choice of fund requirements for new employees from 1 July 2005 and for members of a defined benefit fund when the fund's surplus is below the minimum described above.

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Standard choice form

A standard choice form must be in writing and:

  • tell the employee that they may choose any fund that is an employer's eligible choice fund as their chosen fund;
  • name the default fund to which the employer will contribute if the employee does not make a choice;
  • if the employee is a member of a defined benefits fund, contain information to be prescribed by the regulations; and
  • contain other information to be prescribed by regulations that the employee should consider before making a choice.

Regulations may require additional information to be made available to employees, as well as where and when such information is to be made available.

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Federal awards

The Act makes unenforceable a requirement in a Federal award that an employer make contributions for an employee to a particular fund to the extent that the employer instead makes contributions to another fund chosen by the employee. If an employee who is covered by a Federal award requiring contributions to be made to a particular fund either makes a choice that is not a valid choice or does not make any choice, then the employer must continue to make contributions according to the award.

Default funds

If an employee (who is not covered by a Federal award as referred to above) either makes a choice that is not a valid choice or does not make any choice, then the employer can make contributions for the employee to any eligible choice fund that complies with the minimum insurance requirements for death benefits to be prescribed under regulations.

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Employers can retain lower notional earnings base

Compliance with the choice of fund requirements could mean that an employer must contribute to a choice fund that specifies a higher notional earnings base for the calculation of contributions than the fund to which contributions are currently made for an employee. In those circumstances, the employer would have a higher cost in meeting their contribution obligation under the SGA Act. To prevent this occurring, an employer is able to use the existing notional earnings base for an employee where it is reasonable to assume that, if the choice of fund requirements did not apply, the employer would instead have contributed to another fund under which the existing notional earnings base applies.

Protection for employers

Under the Act, an employer is not liable to compensate any person for loss or damage arising from anything done by the employer in complying with the choice of fund requirements. This protection does not extend to anything done by an employer that is not undertaken in complying with those requirements.

Penalties for employers for non-compliance

An employer who does not make superannuation guarantee contributions to an employee's chosen fund may be liable to a penalty based on the contributions it makes to a fund other than the employee's chosen fund. As discussed above, this penalty does not apply to an employer for an existing employee for whom defined benefits are provided by a fund that satisfies minimum surplus requirements.

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Inducements by fund trustees prohibited

Trustees of superannuation funds and their associates will be prohibited under the Superannuation Industry (Supervision) Act from:

  • offering inducements to an employer for one or more of its employees to become members of a fund; and
  • refusing to supply services or give discounts to an employer because one of more of its employees have not applied to be members of a fund.

A person who suffers loss because of this prohibited conduct can recover the amount of the loss from the offending trustee or associate.

The future

We will provide you with further information regarding the choice of funds requirements when it is revealed in the regulations. In the meantime, employers should consider the procedures to be put in place to ensure compliance with these new requirements.

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For further information, please contact:

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