Contributed by Luke Hooper, Partner, Superannuation and Funds Management, Holding Redlich
In this article, we provide a high-level overview as to what superannuation payments/claims could conceivably arise under COVID-19, or how certain payments may change. Very little law, apart from some Government announcements, changes. However, given the likelihood of significant and wide-reaching economic and financial uncertainty and the impact on employment as well as the obvious health impacts associated with COVID-19, many trustees will have (high volume) payment claims high up on what may be a very long list of priorities.
In all cases, various security and compliance requirements need to be met and it is likely that trustees are equipped and experienced to deal with these, as a result of the 2008 Global Financial Crisis (the GFC). One obvious point to make, though, is that trustees should consider disclosing any taxation implications to members seeking to make any form of withdrawal.
1. Government response — withdrawal of up to $20,000
The Government has just announced that certain individuals will be able to apply online through myGov to access up to $10,000 of their superannuation before 1 July 2020. They will also be able to access up to a further $10,000 from 1 July 2020 for approximately three months.
There are eligibility criteria. However, this is a matter between the member and the Government — trustees are not required to determine eligibility. Once the ATO has processed a member’s application, it will issue both the member and the trustee with a determination, which will advise the trustee to release payment.
It goes without saying that a trustee needs to review and satisfy itself that is has received all correct documentation.
The Government announced that it will halve the minimum superannuation income stream drawdown requirements over the 2019/2020 and 2020/2021 financial years. Trustees will remember that this strategy was utilised during the GFC and we assume they would be prepared as how to administer this. Clearly trustees should notify pension members of this change.
Requests by preservation-aged members to enter into transition to retirement income streams could increase as more senior members of the workforce take what may be enforced (or otherwise may decide to) reduced hours of work that may require them to seek to supplement their incomes.
3. Termination of employment
It is unfortunately very clear that termination of employment will occur, and some sectors may be particularly hit by this more than others (or certain sectors that are hit are likely to expose some funds to more potential claims than others).
In some cases, termination of employment may lead to a member deciding that they have retired. Retirement is taken to occur:
- • in the case of a member aged preservation age to 59 years — if:
- – his/her gainful employment arrangement has come to an end, and
- – the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis, or
- • in the case of a member aged 60 years or above — his/her gainful employment arrangement has come to an end, and either:
- – the member attained that age on or before the ending of the employment, or
- – the trustee is reasonably satisfied that the member intends never to again become gainfully employed, either on a full-time or a part-time basis.
In these cases, trustees need to protect themselves by ensuring they have robust processes in place in order to satisfy themselves that members from these cohorts have had their employment terminated and that there is no intention ever to seek employment for at least 10 hours per week. Having advised on both sides, this may be an avenue that many in this cohort of members take, as that intention is taken at a certain point in time — intentions change.
For those who are below preservation age, the options are minimal. However, one condition of release that arises is where a member’s gainful employment with a standard employer-sponsor (ie a participating employer) is terminated and that member has less than $200 in preserved benefits.
There may be very low take-up of this — but it would be remiss not to point it out. One of the issues to consider here is “is the member’s employer a participating employer of this fund?” I have been involved in unravelling that in respect of a franchisee (in respect of an insurance claim) and sometimes the answer may seem at odds with what may have been expected.
Further, certain preserved and all restricted non-preserved benefits can be released where a member’s gainful employment has been terminated and the member’s employer-sponsor (does not have to be a participating employer) or an associate contributed to that particular fund.
In both of the above cases, there is no requirement for trustees to satisfy themselves that the member has no intention of ever seeking employment again.
4. Turning 65
It may be that very little turns to this, or that current trends of those aged 65 years and above are either seeking lump sums, converting to pension income stream payments, or continuing to work and contribute changes significantly due to the COVID-19.
The cynic in us says that rollovers will likely go to self-managed superannuation funds as members take the view that losses are somehow the superannuation industry’s fault — yes, we do understand the irony, but it comes from experience.
The key issues will be rollover timeframes and security protocols.
6. Death and terminal illness claims
Sadly, it seems that this goes without saying. The key exposure consideration will be claims and disputes by beneficiaries and potentially in respect of any pandemic exclusions in the group life insurance policy.
7. Total and permanent disability (TPD) claims/permanent incapacity/temporary incapacity
It is clear that TPD claims/permanent incapacity/temporary incapacity claims are likely to increase, whether these be legitimate or false. The type of exposure to trustees is likely to be one they are used to with the key difference being the volume of these may grow significantly.
8. Severe financial hardship
If the trustee is satisfied that:
- • based on written evidence provided by at least one Commonwealth department or responsible agency, the member has received Commonwealth income support payments for a continuous period of 26 weeks and was in receipt of payments of that kind on the date of the written evidence, and
- • the member is unable to meet reasonable and immediate family living expenses, it may (for each 12 month period) pay a single lump sum of between $1,000 and $10,000 (except if the amount of the person’s preserved benefits and restricted non-preserved benefits is less than that amount) and not more than $10,000. Please note that this evidence is of no effect if it is dated more than 21 days before the date of the member’s application.
If the member has reached preservation age plus 39 weeks and the trustee is satisfied:
- • based on written evidence provided by at least one Commonwealth department or responsible agency – that the member received Commonwealth income support payments for a cumulative period of 39 weeks after reaching preservation age, and
- • that the member was not gainfully employed on at least a part-time basis on the date of the application for cashing of his/her preserved benefits, or restricted non-preserved benefits, the trustee may pay out an amount subject to no cashing restrictions.
9. Compassionate grounds
The Department of Human Services may determine that an amount may be released from a specified fund in order to pay or meet expenses related to:
- • medical treatment or medical transport for the member or a dependant
- • the payment on a loan, to prevent:
- – foreclosure of a mortgage on the member’s principal place of residence, and
- – exercise by the mortgagee of an express, or statutory, power of sale over the member’s principal place of residence.
- • to modify the member’s principal place of residence, or vehicle, to accommodate the special needs of the member, or a dependant, arising from severe disability
- • to pay for expenses associated with the member’s palliative care, in the case of impending death, or
- • to pay for expenses associated with a dependant’s palliative care, in the case of impending death, death, funeral or burial.
It is the Department of Human Services, and not the trustee, who makes a decision on whether a payment on compassionate grounds is to be made. However, it goes without saying that a trustee needs to review and satisfy itself that is has received all the correct documentation.
10. Departing Australia superannuation payments (DASP)
Temporary residents that have departed Australia and have had their visas cease to be of effect may request trustees to cash their benefits within 28 days of request, if:
- • the cashing amount is less than $5,000, the trustee must receive evidence demonstrating that the member was a temporary resident and the temporary visa has ceased to be in effect along with a copy of the member’s passport demonstrating that the member left Australia, or
- • the member is cashing in a larger amount, the trustee must be satisfied, based on a written statement from the Department of Immigration that the member was a temporary resident, the temporary visa has ceased to be in effect, and that the member left Australia.
With borders closing, this may not seem to be such an exposure, but this will be an option available for temporary residents who have already departed (or who depart before the closing of a border).
11. KiwiSaver transfers
This may be an option for New Zealand residents who have headed back home across the ditch.
12. Voluntary contributions clawback
It is foreseeable that a member may seek a clawback of voluntary contributions made. Trustees need to be mindful of what circumstances permit a return of mistaken contributions (in other words the mistake of law versus mistake of fact rules).
13. Unclaimed money legislation
Dependent upon how the market goes, we could see more low balance accounts than what may have been anticipated over the next year or so. We may also see more of those accounts become inactive (it does take 16 months to be inactive, but it seems natural that there may be a spike over the next few quarters).
Inactive low-balance accounts will need to be transferred to the ATO, bi-annually.
Depending upon how long society and the economy is in limbo, expect more lost accounts. It will be interesting to see if claims on what could be unclaimed money accounts increases.
14. Protecting Your Superannuation Package (PYSP) exit fees and fee refunds
Assuming account balances devalue, trustees may find that the PYSP fee cap rules impact a wider membership. However, it may be that the absence of performance fees payable to some investment or fund managers may mean that investment costs are reduced.
It is our view that s 99G of the SIS Act currently reads to only require trustees to refund excess amounts to current members and not exiting members. Amendments proposed by the Treasury Laws Amendment (2019 Measures No 3) Bill 2019 (which is yet to be passed) and the explanatory memorandum to that Bill support that view. If the Bill is passed before 30 June 2020, trustees will also need to refund exiting members.
15. Any other condition under s 62(1)(b)(v) of the SIS Act
It is possible that the APRA may provide such other ancillary benefits that superannuation funds are maintained for and on what terms. This differs to the Government’s proposals which are to be legislated.
16. First Home Super Saver Scheme refunds
Withdrawals are subject to Government determination. It is unlikely that a member could seek to withdrawal amounts other than for the purchase of a first home.
What is happening is unprecedented in living memory and great pressure will be placed in trustees and their funds’ systems. Clearly, all of the above are subject to rules contained in the trustee’s governing documents including, but not limited to, the fund’s trust deed, any defined benefit fund funding and solvency rules, the risk management framework (having regard to cash flow and liquidity requirements, and unit pricing along with the volume of withdrawal requests that may arise), any administration agreement, the fund’s liquidity management plan, and the fund’s group insurance policies.