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Choice of Fund - What It Means to You

Currently, most employers choose the fund into which they pay their employees' superannuation contributions. However, after years of lobbying, legislation has finally been passed to allow employees to decide who manages their superannuation.

Who will benefit?

Proponents of superannuation choice argue the changes will promote competition and efficiency within the superannuation industry, leading to improved returns and lower fees and charges for all superannuation fund members.

Superannuation choice will particularly appeal to part-time workers and to people who have several jobs, as they will be able to direct all their superannuation contributions into one superannuation fund. This will not only reduce the incidence of ''lost'' superannuation accounts, but such employees will be able to avoid paying multiple superannuation fees and charges, improving their superannuation balance.

In addition, people who have substantial superannuation account balances and who have been thinking about establishing a self-managed superannuation fund may also take advantage of the changes to direct employer contributions into their own fund.

However, not all employees will have superannuation choice under the changes. Employees who will not be entitled to choose their own superannuation fund are:

• public sector employees;
• those employed under state industrial awards or workplace agreements that stipulate the superannuation fund into which contributions are paid (this is especially relevant to Queensland employers); and
• some defined benefit fund members.

Which funds can employees choose from?

Employees can only choose from ''eligible choice funds''. To qualify as an eligible choice fund, the fund or Retirement Savings Account must be:

• a complying fund: these are funds that comply with all legislative and prudential requirements or whose non-compliance is disregarded by the regulators. Complying funds are entitled to concessional tax treatment; and
• a fund into which the employer can make contributions on behalf of the employee: this means an employee cannot choose a fund that is closed to new members or only accepts contributions from a certain class of member to which the employee does not belong, such as industry funds.

If the employer is unsure as to whether the employees chosen fund is an eligible choice fund, they can ask the employee to provide a statement from the funds trustee confirming the fund is complying and is not prevented from accepting contributions from an employer-sponsor.

What do employers have to do?

Employers must provide their employees with a ''standard choice form'' before 29 July 2005.

The standard choice form will be available from the Australian Taxation Office and provides employees with certain details, including:

• a statement informing the employee that they may choose an eligible choice fund as their chosen fund;
• the date on which the standard choice form was provided and the date by which the employee must make a choice;
• the name of the fund into which the employer will make superannuation contributions if the employee fails to make a choice; and
• other information that will be required under regulations. Employers will also be required to provide employees with a standard choice form within 28 days of:
• an employee commencing employment after 1 July 2005;
• an employee requesting a standard choice form, unless the employee has made such a request within the past 12 months; and
• the employer becoming aware that the chosen fund has ceased to be an eligible choice fund.

If an employee fails to choose a fund within 28 days of receiving a standard choice form, or if the employee chooses a fund that does not accept contributions from the employer, then the employer can select the eligible choice fund into which they direct the employees superannuation contributions to satisfy the Choice of Fund requirements. If this occurs, employers may select a new fund or choose the existing company fund as the eligible choice fund, but they must ensure the chosen fund offers life insurance. They must also provide all employees with a Product Disclosure Statement for the fund. Employers who fail to satisfy the new Choice of Fund requirements will face an increase in their superannuation guarantee liability for the quarter. Under the Choice of Fund reforms employers are protected from liability to compensate employees for loss or damage that may occur when complying with the requirements. Therefore, if a chosen fund performs badly, the employer is not liable to compensate the employee. The new requirements mean employers must familiarise themselves with the changes, make contributions to a greater number of funds than currently, keep additional records to track employee choices, and incur some costs in selecting a default fund. Employers who do not wish to take on the additional administrative costs may choose to outsource the administration of their superannuation obligations or form an industrial agreement with employees.

What do employees have to do?

Employees who are eligible to choose their own superannuation fund must make a choice in writing within 28 days of receiving a standard choice form from their employer. A choice made after the 28-day timeframe is not effective unless the employer accepts it. Employers may also request that employees provide them with a written statement that sets out certain information regarding their chosen fund, such as contact details, the employees account details, membership number and any other prescribed information. Employees must provide this statement within 28 days, otherwise the employer can direct the employees superannuation contributions into a superannuation fund of their own choice to satisfy the Choice of Fund requirements. This information will be available from the funds trustees. An employees chosen fund will become their choice fund within two months of the selection being made, or earlier if the employer chooses.

Death benefits

Employees should also be aware that, as part of the Choice of Fund changes, the range of people who are eligible to receive superannuation death benefits has been expanded.

Death benefit payments to the deceased employees dependants are exempt from tax if they fall within the pension Reasonable Benefit Limit of the deceased, which is $1,238,440 for 2004/05. Previously, the term ''dependant'' only included a spouse and minor children. However, under superannuation choice, the definition has been expanded to mean a spouse, child or any person with whom the employee has an interdependency relationship. An interdependency relationship exists if the two people have a close personal relationship, live together, and provide financial and domestic support and personal care. Indicators of a close personal relationship include the duration of the relationship, the degree of mutual commitment to a shared life, and the reputation of the relationship. Such a relationship also exists where there is a close personal relationship but the other criteria are not satisfied due to physical, intellectual or psychiatric disability. The new definition now includes relationships such as same-sex couples who reside together and are interdependent, people with a disability who may live in an institution but are nevertheless interdependent on the deceased, elderly sisters who reside together and are interdependent, and an adult child who resides with and cares for an elderly parent.

Choosing a superannuation fund

While most employees will welcome superannuation choice, it is important to be aware of the issues and implications of choosing a new fund. Over the next few months it is likely that fund managers will begin promoting the features and benefits of their superannuation funds. However, it is important for fund members to carefully consider any choices, as a bad choice can have a large impact on your retirement savings. At times, it may be beneficial to remain with the existing fund. It is important to ensure that employees make an educated choice if they are considering switching funds. The government will implement an education campaign and has legislated some consumer protection in the form of prohibiting superannuation funds from offering inducements to employers on the condition that employees join the fund. To ensure employees are fully aware of their choices, it is advisable they get the advice of a qualified superannuation professional. For more details, contact your adviser.

IMPORTANT NOTE:

The information provided should not form the sole basis for any action that you take. It is important to first discuss your specific circumstances with your financial Adviser.

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