Loopholes in Cooper Legislation

“...more than 18 million superannuation accounts with over $225 billion in assets are unnecessary, and could potentially be consolidated into other accounts.”

If you were trekking in Nepal for most of 2010, or if you don’t live and breathe superannuation like some of us, you may not be aware that the lack of a unique member identifier which could be used to verify a person’s identity as a superannuation fund member, link their superannuation accounts with contributions made for them, or identify multiple accounts held by the same person, is a significant cost to, and administrative inefficiency in, the super industry. This is because multiple superannuation accounts may be established for the same person, in the same fund and in different superannuation funds. Members may be unaware that this has occurred.

Research by Rice Warner  reveals that more than 18 million superannuation accounts with over $225 billion in assets are unnecessary, and could potentially be consolidated into other accounts. The fees and administration costs associated with these accounts is in the range of $2-3 billion a year. 

Eventually, if a fund loses contact with a member, that person’s account will become ‘lost’. According to the Minister for Financial Services and Superannuation, Bill Shorten, this applies to one for every two working Australians.  

The Cooper Report recommendation 9.11 proposed the extended use of tax file numbers (TFNs) to permit superannuation trustees, and their agents, to: ‘Use TFNs as a primary search key to link contributions and rollovers with member accounts; seek confirmation from the ATO in relation to each new member that the quoted TFN is correct; …and exchange the TFN with other trustees to identify accounts in multiple funds held by the same individual, and hence permit the trustee of the fund to which contributions are being made to invite the member to initiate consolidation of the accounts.’

The Government responded to the Cooper recommendations in December 2010, in its Stronger Super paper in which it supported the Cooper TFN recommendation. It also introduced legislation in March 2011 to permit the use of TFNs as a primary search key.

The proposed implementation date for the new legislation of 1 July 2011 makes the TFN implementation the highest priority in the implementation of the Stronger Super document. At the date of publication the legislation had not been passed. The legislation is limited in its operation authorising a superannuation trustee to use TFNs which have been quoted to the superannuation fund to locate member records in that fund. It is not until a date yet to be proclaimed that legislation enabling the consolidation of member accounts will come into effect.

It is disappointing that after so much discussion and many submissions in relation to this issue, more could not be achieved in this first stage. It may be that the Government is showing caution, given its precarious position in the lower house.

To start with, the explanatory information and Bill Shorten’s press release implied that the TFN would be the primary identifier of member accounts. The draft legislation makes it clear that a TFN may be used as an identifier if a beneficiary quotes his or her TFN to a superannuation trustee. Since 2007, when an employee provides their TFN to their employer, the employer is required to provide the employee’s TFN to the employee’s superannuation fund and the employee is deemed to have quoted their TFN.

However, this law will not make the quotation of a TFN a requirement, and the right of a person to choose not to quote his or her TFN will remain unchanged. This is consistent with long held concerns in relation to privacy, but it means that the TFN initiative is not a complete ‘silver bullet’ solution to multiple account holdings and lost members.

The superannuation guarantee legislation could be amended to require employers to provide minimum complete information, including a member’s TFN, as a condition of making a valid superannuation contribution, or to prohibit a complying superannuation fund from accepting any contribution which is not accompanied by minimum complete information (again including a TFN). Without additional pressure to always provide TFNs it is difficult to see that the current position will improve quickly. Nevertheless, as technology supported interfaces between employers and funds (and the use of clearing houses) increases, it may become more likely that funds will reject contributions that do not meet their data standards. Mandatory minimum industry data standards are still on the drawing board, and were recommended by Cooper (recommendation 9.1). Nevertheless they will not be considered at this time, as part of the TFN initiative.

Fund administrators

The Cooper recommendation was that the superannuation trustee or its agent could use the TFN for the requisite purpose.

Unfortunately, proposed section 299LA only refers to the trustee. Significantly, the most likely user of this information, the fund administrator, is not expressly referred to. While it is arguable that an agent of the trustee will be within the scope of the legislation, it would have been preferable for the legislation expressly to authorise fund administrators and to deal with any likely contractual issues up front.

Validity of Tax File Numbers

Using a TFN as an identifier presupposes that a TFN is valid, and actually belongs to the super fund member who quotes it. Super funds and administrators now use an algorithm to test a TFN, and invalid numbers can be identified. However they cannot test that it belongs to a particular member, and rely on advice from the ATO for this purpose. The ATO may not provide that verification for many months. The superannuation industry has also questioned whether sufficient ATO resources will be available to support the TFN initiative. For example, should the superannuation trustee’s use of TFNs as a locator highlight that some fraudulent use of a TFN has been undertaken it will be important that the ATO can investigate this immediately. The Government has provided assurances that adequate resources will be available.

Real time online TFN verification, like the service which is provided for verification of an Australian Business Number is being sought by various industry groups; at this time the ATO has not publicly announced plans to provide it.

Consolidation of multiple accounts

Proposed section 299LA is intended to facilitate the location and consolidation of multiple accounts in the same superannuation fund, and also in multiple funds. However the wording is curious. For example it only refers to ‘locate’ and ‘to facilitate the consolidation’ rather than empowering the trustee ‘to consolidate’ and ‘to correct or adjust’ fund records. It refers only to ‘amounts’, rather than including other information which may require correction or updating such as a member’s name and address. It also refers to amounts held for the ‘benefit of persons’. Presumably, what is intended is the location of accounts held for the benefit of the same person, being the beneficiary.

The consolidation process needs to be implemented in a way that recognises the potential for loss of insurance cover or other services and protection from consolidation into high-fee superannuation products. Accordingly, safeguards on the arrangements for consolidation of accounts needs to be carefully considered, to ensure that a member is not disadvantaged where, for example, a member may have made a conscious decision to retain a second superannuation account in another fund in order to retain certain insurance, a particular investment option or other services.

The draft legislation is subject to conditions contained in regulations which are yet to be made. The regulations will most likely address the issue of member disadvantage and of member consent, as well as the rules for the disclosure of TFNs between funds − although there are no safeguards in the draft legislation so far. However, the Government’s response to the Cooper recommendation indicates that it is alive to the issues that automatic consolidation of member accounts raises, and intends that members will be able to opt-out of any automatic consolidation.

Next steps

Until the legislation is passed and regulations promulgated we can only take an educated guess on the specific merger processes which may be required for members with duplicate superannuation accounts. While the superannuation industry generally agrees that the proposal can be implemented effectively and will save costs, it will require the introduction of some new technology and revision to existing processes. Maintaining privacy will remain essential. Trustees and administrators will need to ensure that their systems can ‘hide’ the TFN information if required and that an appropriate audit trail can verify who has accessed TFN information. Privacy policies and procedures will require updating, as will disclosure documents. It may eventuate that the consolidation process between funds will utilise administration staff whose roles are separate
from usual fund administration.

Superannuation trustees should understand whether the data they receive from employers who contribute to their fund would meet a minimum data standard, or whether a simpler contribution form or online tool or training would help to achieve this. Administrators and trustees will need to reassess whether their existing contracts can deal adequately with consolidating duplicate fund accounts, or whether a variation to administration agreements
will be required.

Henry Davis York has made a submission to Treasury on the exposure draft of the legislation.