Portability of Superannuation Benefits

The portability legislation, which commenced on 1 July 2004, requires trustees of most superannuation funds to allow members to transfer part or all of their accrued entitlement out of a fund in certain circumstances. Recent changes to this legislation, which took effect from 1 July 2005, mean that portability will now be available to many more members than under the original rules.
 

Whilst the implementation of Fund Choice is primarily an employer issue, the revised portability conditions raise a number of significant issues for trustees, as well as the employer.
 

A key provision of the original portability arrangements was that it would only be available where there were no employer contributions to the member’s account for at least the previous six months. The legislation has been amended to remove this restriction so that portability has been extended to effectively cover all members of most superannuation funds, including those members for whom employer superannuation contributions are still being paid.
 

The main provisions of the revised portability legislation are:
 

• portability is not required for unfunded public sector funds, self managed superannuation funds, defined benefit interests where the member is still an employee of the contributing employer or benefits that are being paid as a pension (other than an allocated pension);
   
• where portability applies, on receiving a written request from the member, a trustee must transfer the amount (up to the withdrawal benefit) specified by the member to a fund nominated by the member.  The transfer must be made as soon as practical but, in any case, within 90 days;
    
• trustees can limit the number of transfers for a member in any 12 month period and can refuse transfer requests if the amount remaining in the member’s account would become less than $5,000 (unless the whole balance is being withdrawn).
   

In conjunction with the Choice legislation, the portability legislation enables members to transfer their accrued entitlement to the fund that has been chosen for future employer contributions. 
 

However, the removal of the requirement relating to the receipt of employer contributions effectively means that many more employees have some Form of Choice, including those who are otherwise exempt under the Choice legislation. That is, employees who are exempt from Choice now have the option of exercising “choice” in relation to their accrued benefits. Such an outcome may lead to inconsistencies and/or additional costs as members will be able to select a fund for their accrued benefits, even if they cannot do so for their future SG contributions.
 

Where an employee’s membership of a fund will continue (say with future SG contributions), the transfer of the full balance may have significant impact on the member’s on-going entitlements, such as insurance. Hence, before requesting a transfer of the full account, members should ensure that they have enough information to make an informed decision. Clear communication to members will be necessary in these circumstances.
 

Trustees will need to respond to the new portability provisions with a comprehensive and consistent approach. Some action items are outlined above to the right.

Mercer is currently developing responses to these issues.