Proposal
The Government welcomes comments on whether members must approve the giving of benefits to related parties by the superannuation fund trustee.
Views from the consultation process
With only a few exceptions, submissions did not support the proposal to require members to approve the giving of benefits to related parties.
Some submissions (ASFA, the Industry Funds Forum, the Corporate Superannuation Association) opposed adopting the relevant provisions of the Corporations Act, arguing that the existing protections provided in the SIS Act are stronger. A number of submissions questioned the proposal on the grounds of practicality, indicating that it would be virtually impossible to get member approval for the giving of benefits to related parties, especially for larger funds. Clear disclosure to members was suggested as a better alternative.
Other submissions also indicated that the proposal would only be appropriate if the trustee intended to purchase new in-house assets that are not listed investments. Concerns were also raised in relation to multi-employer funds, where equity investments in those employers are managed at arm's length.
Related party transactions were also raised in the focus group discussions on a possible prudential standard to be developed on investment rules.
One participant indicated that it would be necessary to avoid duplication of current requirements in accounting standards which deal with related parties.
The Small Independent Superannuation Funds Association also expressed a concern that while the SWG had indicated an intention to exempt SMSFs from the other proposals, it was not clear whether it was intended that this proposal also apply to SMSFs.
Participants generally supported the view that the current grandfathering period for funds other than SMSFs could be reduced, particularly for standard employer-sponsored funds.
Consideration of the proposal
There are a number of different kinds of related party transactions that can arise in relation to superannuation, including dealings with members, investments in assets of the employer and transactions with service providers who are related to the trustees of the fund. The SIS Act includes a number of provisions dealing with the first two kinds of related party transactions (the in-house asset rules), designed to limit the risks associated with superannuation fund investments, and to ensure that superannuation savings are preserved for retirement purposes.
Substantial amendments were made to the in-house asset rules with the passage of the Superannuation Legislation Amendment Act (No. 4) 1999, which came into effect on 23 December 1999. In summary, the amendments widened the application of the in-house asset restrictions to related parties of a fund, and included, as in-house assets, investments in a related trust and any assets subject to a lease or a lease arrangement with a related party.
An in-house asset of a fund is:
- a loan to, or investment in, a related party of the fund; or
- an investment in a related trust of the fund; or
- an asset of the fund subject to a lease arrangement between the trustee of the fund and a related party.
The amount of in-house assets that a fund may have is generally limited to five per cent of the market value of a fund's assets.
Significant grandfathering provisions were attached to these requirements. Transitional provisions allow fund investments or leases in place at 11 August 1999, and that were not in-house assets at the time, to continue without being subject to the new rules. While the permitted level of in-house assets generally remains capped at five per cent of fund assets, the transitional rules allow additional investments in existing related party assets to be made until 30 June 2009 in certain limited circumstances. Some of the concerns that have been raised in relation to in-house assets have arisen as a result of this grandfathering.
Recommendation 24
The SWG recommends that the Government consider reducing the length of time that grandfathering arrangements contained in Part 8 of the SIS Act apply for all funds other than SMSFs.
The SWG accepts that there is not a compelling case to change the existing in-house asset provisions. However, the SWG considers that the level of disclosure of in-house assets, including whether funds have any assets/liabilities that are covered by the grandfathering regime, is not sufficient. Public offer superannuation funds are required to provide prospective members with information before the individual becomes a member. Other funds must give members information within three months of the person becoming a member. Following the FSRA, this information will be required to be given in a Product Disclosure Statement (PDS). The SWG considers that it would be appropriate for trustees to disclose in the PDS any in-house assets held by the fund.
Recommendation 25
The SWG recommends that trustees be required to disclose in their PDS any in-house assets held by the fund.
Further, the current provisions do not address other related party transactions, including related service provider arrangements. While the SWG agrees that member approval for such transactions is unlikely to be practical, it believes that there should be some disclosure to members of any such transactions that are entered into on non-arm's length terms. Trustees could be required to include in the PDS any associations that they have with service providers and then disclose as a significant event any non-arm's length transactions that they have entered into with such service providers. This could be achieved by expanding the definition of 'significant event' in the on-going disclosure requirements included in the Corporations Act by the FSRA.
Recommendation 26
The SWG recommends that trustees be required to disclose non-investment transactions entered into with related parties.