SUPERANNUATION FUND TERMINATIONS: A REVI EW OF … · 2011-04-05 · endowment assurances to provide for their employees now use a master trust. 2.8 The increased regulation of superannuation

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IAAust Biennial Convention 2001

SUPERANNUATION FUND TERMINATIONS: A REVIEW OF

CURRENT ISSUES AND PRACTICE

David McNeice* BEc FIAA ABSTRACT During recent times many superannuation funds have been terminated due to three main forces: significant corporate merger and acquisition activity, conversion of some (typically smaller) independent corporate funds into multi-employer funds (master trusts and industry funds) and the rise of individualism and the associated trend towards defined contribution funds. In some cases of corporate acquisition, a full termination is not required but a partial termination is. This paper provides a review of practice in the area of fully or partially terminating superannuation funds. The issues that must be dealt with and the common means of doing so are discussed. The specifics of converting from defined benefit to defined contribution are considered. Finally, the paper assesses the conflicts that emerge. KEYWORDS Fund terminations, defined benefit conversions, successor fund transfers. TABLE OF CONTENTS

1. Introduction 2

2. Why do terminations occur? 3

3. Rules and Regulations 6

4. COMMON ISSUES FOR ALL FUNDS 8

5. The Specifics of Defined Benefit to Defined Contribution Conversions 13

6. Special issues 17

7. Conclusion 21

8. References 21

Appendix A: Extracts from typical superannuation fund trust deeds relating to transfers out and

terminations 22

Appendix B: Extracts from the Superannuation Industry (Supervision) Act 1993 Regulations26

Appendix C: Superannuation extracts from a typical agreement of sale of a business 35

Appendix D: Notes 37

* [email protected]

Superannuation fund terminations: a review of current issues and practice

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1. INTRODUCTION

1.1 In Australia, the retirement incomes of individuals are funded by way of the so-called three pillars:

• The old-age pension, paid for by general tax revenue and subject to means-testing;

• Compulsory superannuation benefits at the Superannuation Guaranteei level in respect of employees, paid for by employers, and

• Voluntary savings, paid for by individuals and some employers.

1.2 There will continue to be increasing pressure on the old-age pension due to an ageing population and the associated change in the dependency ratio, meaning that proportionately fewer tax payers are funding old-age pensions for more pensioners. The savings performance of Australians is perhaps not at the level that it used to be, and there may be substitution away from voluntary savings in favour of compulsory superannuation benefits as the effects of the Superannuation Guarantee become apparent.ii Thus, even though the total amount of superannuation benefits is increasing, the aggregate level of savings may not be.

1.3 Therefore, superannuation benefits are taking on increased importance. This paper is concerned with employees being provided with benefits in independent corporate superannuation funds. The assets being accumulated for each employee are likely to be critical to that person’s ability to finance their expected standard of living in retirement.

1.4 The recent past has seen many fund terminations and partial terminations. In a dynamic business environment, fund terminations are expected to continue as companies change shape, ownership and direction. Where employees are to be transferred from one fund to another at the instigation of the employer, how are the benefits of the employees affected? What issues emerge and how are they dealt with? What safeguards exist to protect the employees? How does the actuarial profession help employers, trustees and employees when such transactions occur?

1.5 The actuarial profession has a special role to play in balancing the needs of employers, trustees and employees to help ensure an equitable outcome so that society can maintain confidence in superannuation funds.


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2. WHY DO TERMINATIONS OCCUR?

Three current forces

2.1 Funds terminate for many different reasons. However, there have been three common forces

at work in recent times that have caused a significant number of full terminations and partial terminations. The three forces are discussed in this section. A partial termination occurs where a significant number of a fund’s members transfer out of the fund.

Corporate merger and acquisition activity 2.2 In recent years, many large corporations have sold, purchased or restructured their

businesses. Various economic catch-cries apply to different periods of time and the experience of the mid to late 1990s could be said to have been “focus on your core business”. This activity has led to many divestments (and associated investments). Some other corporate deals occurred due to an aggressive desire for growth. The financial and business implications of this activity are irrelevant for the purpose of this paper, but each transaction almost always changes the way in which superannuation benefits are provided for the employees involved.

2.3 The restructuring of a business can occur in two different ways. A subsidiary can be sold

“on-market”, where the controlling shareholder sells its holding either on the market publicly or through a negotiated sale. This change in ownership of the shares of the business does not necessarily create any special requirements to restructure the superannuation benefits of the employees. The employees remain employed by the same company and that company could continue to utilise the superannuation fund it had been using before the transaction, if the new owner agrees. However, the new owner could also wish to rationalise the funds in which its employees are being provided with superannuation benefits. For example, an acquisitive company could very quickly find its subsidiaries contributing to many different funds, all with different benefit designs, names and identities, administration arrangements, investment performance and so on. For any given level of contributions, employees with otherwise similar terms of employment could be provided with significantly different superannuation benefits.

2.4 In these situations the acquirer will often try to rationalise its funds to help ensure, to the

extent possible, that the employees in the corporate group are treated in a similar manner. It is also common that the acquirer will try to ensure that the corporate identity is consistently applied across all parts of its business. This may require that the employees all join the one fund with an identity clearly aligned with the corporation. Maintaining closed categories of membership with special terms of membership, benefits and contributions is a means of protecting pre-existing arrangements, if required.

2.5 The second type of restructure is the sale of a business and the assets associated with that

business. The vendor will want to ensure that the employees of the business are offered equivalent terms of employment with the purchaser for two reasons: firstly, to avoid the costs of redundancy and, secondly, to protect the economic welfare of the employees and their dependants. Superannuation forms a major part of the benefits of the employees to be protected and restructured.

Conversion of some (typically smaller) independent corporate funds into multi employer funds

2.6 The superannuation environment in Australia has endured many changes in regulatory

environment. The superannuation benefit has proven to be remarkably resilient, clearly indicating that there are strong business reasons to provide such benefits. However, the vehicles used to deliver the benefit have varied over time. Prior to the introduction of the Superannuation Guarantee requirements (as an extension of the 3% award superannuation of the mid 1980s) and when publicly funded social security benefits were subject to less stringent means testing, lower-paid employees of many smaller to medium sized companies were often not directly provided with employer-funded retirement benefits.


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Instead, it was commonly (but not universally) accepted that the Government would provide sufficient retirement income for these employees. The introduction of the Superannuation Guarantee has meant that all employees must be provided with a direct employer-funded benefit that meets or exceeds a prescribed minimum. This requirement has created a demand for a simple low cost means of compliance with the Superannuation Guarantee.

2.7 Master trust products allow employers to provide employees with a superannuation benefit

without the need to establish and maintain an independent fund. These products were typically developed and refined by life insurance companies although now a variety of financial institutions offer such products. Employers that would previously have used endowment assurances to provide for their employees now use a master trust.

2.8 The increased regulation of superannuation funds through, firstly, OSSAiii and secondly, SISiv, was a logical extension of the rise of compulsory superannuation. With the imposition of compulsory superannuation established by contributions in industrial awards and extended by the Superannuation Guarantee, the Government increased its supervision of funds with the aim of enhancing protection for benefits arising from the compulsory contributions. The increased regulation is often cited by smaller to medium sized employers as a reason for terminating an independent company fund in favour of an industry fund or master trustv.

Rise of individualism and the associated trend towards defined contribution funds 2.9 Many companies have stated policies that retirement benefits should be provided through a

defined contribution fund, where possible. Many employees, particularly at younger to middle ages, when given the choice of converting from a defined benefit fund to a defined contribution fund will willingly convert, even if there is no obvious incentive to do so. Different countries are at different stages in the gradual process of change away from defined benefit funds to defined contribution funds. In my view, we are experiencing this change for many reasons, such as:

• The view that superannuation is a contribution (i.e. deferred pay) rather than an end-of-service benefit. This is a natural consequence of legislation such as the Superannuation Guarantee (which is written in defined contribution terms) and SIS which focuses on the protection of accrued benefits as belonging to the member and imposes minimum funding requirements.

• The investment returns of world stock markets in the last 20 years or so relative to price and wage inflation has been exceptionally goodvi. This has resulted in large benefit increases for members in defined contribution funds relative to their peers in defined benefit funds and hence made defined contribution funds seem more attractive, where it is assumed that the past investment experience will continue into the future.

• The willingness of employers to transfer investment risk to the employees. The good investment performance in the recent past has meant that many employees willingly accept that transfer of risk.

• The further unbundling of services within defined contribution funds allowing members to choose their own investment strategy.

• The desire to package remuneration in flexible ways to take advantage of available tax concessions and better meet the needs of the individual employee.

• The introduction of compulsory equal representation (between the employer and member representatives) on the board of trustees. This has led to a reduction in employer control and therefore an increase in employer desire to limit liability to a defined rate of contribution.


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2.10 These factors have combined to increase the popularity of defined contribution funds relative

to defined benefit funds. This has led many employers that were providing defined benefits to begin converting to the provision of defined contributions. The method of converting can be chosen to allow the change to happen over a very long time or to encourage the change to happen more quickly by offering a generous incentive to encourage the employees to convert.

Outcomes 2.11 The outcomes of the above three forces at work involve a transfer of members from one fund

to another and/or the conversion of benefits from defined benefit form to defined contribution form. Many funds are then terminated completely, or reduced significantly in size.


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3. RULES AND REGULATIONS

3.1 Where a full or partial termination is to occur, there are rules and regulations to comply with, depending on the nature of the transaction.

Trust Deed or governing rules of the Terminating Fund 3.2 Appendix A includes extracts from the transfer out and termination clauses of trust deeds of

some corporate superannuation funds. The clauses are typical of corporate fund trust deeds. 3.3 The trust deed will generally give some guidance as to the amount to be transferred out in

respect of any given member. Common aspects of the trust deeds are that the employer must give approval to any amount in excess of a minimum amount (eg. the vested benefit or actuarial reserve) to be transferred. This is to prevent the trustee transferring out any “surplus” without the prior approval of the employer.

3.4 Trust deeds typically require the actuary of the fund to determine amounts such as “equitable

share”, “actuarial reserve” or “interest in the fund” as being the maximum amount to be transferred. These terms are not defined; instead, common actuarial practice would be relied upon to determine the values. Commonly, the actuary would determine a value of the accrued benefit, allowing for service completed to the date of calculation only, but allowing for future salary increases and discounting applying to the expected date of benefit payment.

3.5 There is scope for debate on the method of determining the value of accrued benefits.

Generally accumulation benefits will be valued as the face-value of the accumulated contributions. However, defined benefits are more complex to value and require assumptions for discount rates, salary inflation rates and rates of decrement.

3.6 Where the fund’s assets differ in value from the total value of accrued benefits, then the

question arises as to whether to distribute a share of such surplus or deficit to the members. There is no one clearly accepted response to this question. However, since the recent environment has been one of small surpluses, rather than deficits or large surpluses, the issue has not proven particularly problematic recently. This has not always been the case and there are still some funds with surplus issues to be resolved. In Garner (1986) and Solomon (1987) surpluses were a particular cause for concern. A typical approach in current practice has been not to include any share in surplus, unless the trust deed has specifically required it, or unless the employer specifically wants to share the surplus with the members.

3.7 Other trust deeds require the trustees to determine the amounts to be transferred, perhaps

after having sought the advice of the actuary, and without any need for employer approval. Superannuation law 3.8 The superannuation law, imposed through SIS, provides little guidance in terminations.

Extracts from SIS, as they relate to full terminations, are included in Appendix B. In the case of partial terminations, ie. significant transfers out of the fund, there is no specific section of SIS that is relevant. Instead, the benefits payable are governed by the normal rules relating to members leaving a fund.

Defined Benefit Funds 3.9 SIS does not provide much guidance to trustees of funds when considering how to allocate

assets on termination. The assets must firstly be used to meet the administration costs of winding up. Thereafter, it is essentially the minimum requisite benefit (MRB) that must be provided in respect of all members. Where a fund is technically insolventvii, the benefits of all members must be between 100% of the MRB and that MRB reduced in proportion to the fund’s deficit. SIS does not specify the allocation of assets in excess of the MRB.


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Defined Contribution Funds 3.10 Similarly, little guidance is given to trustees of defined contribution funds. After setting aside

assets to meet the expenses of wind up, then it is the guaranteed minimum benefits (the same as the MRB, in concept) of the members that must be allocated. SIS does not specify the allocation of assets in excess of the guaranteed minimum benefits.

Sale Agreement 3.11 This will apply in the case where a company is selling part of its business assets to a

purchaser, or selling an associated company. Extracts from a typical sale agreement as it relates to the superannuation benefits of the employees are included in Appendix C. This particular agreement requires that the Vendor’s actuary determine a transfer value to be paid in respect of each member, either to the fund of the member’s choice or in accordance with the “successor fund requirements”. It does not attempt to impose any method or basis of determination on the vendor’s actuary.

3.12 Sale agreements are generally effected by the two companies and have no legal application

to the trustee. If the sale agreement requires something different to what the trustee actually does, then the difference should be taken into account by the vendor and purchaser.

Meeting members’ reasonable benefit expectations 3.13 The fact that SIS requires only that members receive their MRB (reduced in proportion if the

fund is insolvent) is not unreasonable. After all, SIS was established shortly after the Government had introduced a compulsory minimum to the benefits to be provided and an important purpose of SIS was to help protect that minimum benefit. However, insolvency cannot be legislated against. Typically, corporate funds invest a significant portion of their assets in investments that, while they have higher expected relative returns, have an element of risk of loss of value attached. Consequently, these funds can become temporarily insolvent. SIS deals with this issue by requiring regular financial monitoring and reporting of financial positions and specifying actions to be taken if funds cannot maintain a level of solvency that meets or exceeds the MRB level. However, SIS also purports to protect members’ interests and there is possibly a mis-match between the protection actually afforded by SIS and that which members would expect.

3.14 Similarly, an agreement of sale between two companies does not have any power to affect

how the trustee of a vendor’s fund determines benefits, as the trustee is generally not a party to the sale agreement. Also, a significant degree of flexibility must be retained in a trust deed since the Trustee must protect the interests of all members, not just those transferring out.

3.15 How then, is the member of the superannuation fund, the employee who is accruing a

retirement benefit and being forcibly ejected from the fund, protected? How is the confidence of fund members to be retained when there is so little by way of legal requirements specifying how their benefits on transfer will be determined? It is here the actuary has a crucial role to play, through the position of adviser to companies and trustees. How actuaries fulfil this role depends on our responses to the issues in this paper.


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4. COMMON ISSUES FOR ALL FUNDS

4.1 This section considers some common issues that trustees and employers must deal with when terminating or rationalising funds.

Level and type of benefit in respect of future service for existing employees 4.2 SIS imposes no restriction in this case and does not attempt to protect the level of the benefit

in respect of future employment that applies for existing employees. Similarly, trust deeds of funds generally impose protections on accrued benefits only and do not usually attempt to prohibit amendments that reduce future service benefits. However, in the few cases where such restrictions do exist, there is typically another clause that the employer may use to effect a change (or reduction) in future service benefits, for example by winding up the existing fund and contributing to another fund.

4.3 Sometimes the change in benefit is clearly to the advantage or at least neutral to the

employee, for example, when transferring from a fully vested defined contribution arrangement to another where the rate of employer contribution is the same or higher. However, it is still necessary to consider the level of death and disability benefits, the allocation of costs of administration and insurance or self-insurance and investment options available to confirm that no employees are being made worse off.

4.4 Where employees have previously been accruing defined benefits and the employer wishes

to provide future service benefits in defined contribution form, the comparison of the two benefits becomes a matter requiring actuarial judgement.

4.5 Aside from any legal restrictions, for example in relation to employment law, most employers

will not want to disrupt or disadvantage their employees and so will often want to provide benefits that are at least no worse than before and possibly improved.

Treatment of the accrued benefit 4.6 The treatment of the accrued benefit creates an additional set of complications. Where the

benefit is changing from defined benefit form to defined contribution, it is possible to devise a method of conversion that protects the accrued benefit from any reduction at the time of conversion. However, from that point on, the converted value will be subject to investment returns, positive or negative, as distinct from increases through salary inflation. Thus, the benefit accrued to the date of conversion has its value inflated in the future using a different means of increase and therefore will be different in value, relative to what it would have been had no conversion occurred.

4.7 The basis used to convert from defined benefit to defined contribution format requires special

consideration. Firstly, the benefit that has accrued to date needs to be defined. This is not always a simple decision. Take, for example, benefits that accrue with a maximum period of service to count, or benefits with “cliff” vesting. Secondly, a value needs to be placed on the accrued benefit. This is a matter for actuarial judgement, discussed in the next section.

4.8 While it is very much simpler to transfer a benefit from one fund to another when the benefit

is already in defined contribution form and remaining that way, there are still similar issues to be considered. Vesting scales that apply to accumulated contributions in excess of the Superannuation Guarantee requirements will produce issues similar to those arising in defined benefit funds, that is, the determination of the value of the accrued benefit. Other issues that arise in defined contribution funds include the treatment of reserves, such as investment fluctuation reserves, forfeited benefit reserves, expense reserves etc.

Continuation of death and disablement benefits 4.9 Continuity in death or disablement benefit during the transition from one fund to another is

critical. Whether the fund insures externally or self-insures the risk, the issues are the similar. The employer will be concerned that employees remain covered for benefits at the same or improved level and under the same terms and conditions.


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The receiving fund (or insurer) will wish to ensure that the risk being taken on is subject to appropriate risk controls, such as limited anti-selection scope. Also, the receiving fund (or insurer) will wish to ensure that liability for any potential disablement claim arising from employees not at work on the day of the transfer remains with the first fund until such time as the employee returns to work.

The investment strategy 4.10 This aspect of a merger or termination is particularly important when changing from defined

benefit funds to defined contribution funds. Often, such a change is associated with the introduction or expansion of member investment choice.

Defined contribution to defined contribution 4.11 In this transaction, the nature of the liabilities is remaining unchanged. There is no reason to

interrupt the investment strategy simply because the fund being used to provide the retirement benefits is changing. It is desirable that the assets remain invested through the transaction, to the extent possible. It is also a practical solution to transfer ownership of assets from one fund to another, rather than liquidating and transferring cash.

4.12 If a change in investment strategy is to occur in the new fund, perhaps with member

investment choice, then it is critical that the transferring members be informed of how the change in investment strategy will be implemented. One way is to cash up all assets on the effective date of transfer and hold them in cash until paid to the new fund. This might be consistent with the fund’s normal benefit payment process. However, it does disrupt the investment’s strategic asset allocation. It is often preferable to keep the accrued benefit invested until payment, avoiding such disruption to the strategic asset allocation. Maintaining the asset allocation is critical for maximising long term expected investment returns.

Defined benefit to defined contribution 4.13 In this case the nature of the liabilities is changing. Unless the members are told otherwise,

the expectations of most would be that the accrued benefit, in defined benefit format, would be protected from investment market volatility until after it had been invested in the new fund. Once the sponsoring employer knows that the relevant members are transferring out, the liability being funded for becomes short-term. An appropriate response is to protect against short-term asset losses, by cashing up.

Costs 4.14 The cost of re-arranging and transitioning assets is significant and, although outside the

scope of this paper, it is worthwhile devising a strategy to re-arrange the assets in a cost efficient and tax efficient manner, while always minimising any mis-matching risks.

Surplus 4.15 During the course of the 1990s, many funds have seen a reduction in the significance of their

defined benefit liabilities. In addition, where many defined benefit funds were in surplusviii at the start of the 1990s, there were much fewer significant surpluses at the end of the 1990s. This reduction in excess assets has been achieved largely through benefit improvements and reduced employer rates of contribution. Benefit improvements have typically been implemented at younger ages and shorter durations of membership to comply with the requirements of the increasing Superannuation Guarantee. Reduced rates of employer contribution have occurred as companies have tried to improve the short-term return on shareholders’ equity and after realising that surplus assets can cause their own set of problems. Consequently, under current conditions, it is not often that an employer and trustee will be faced with any significant degree of surplus in the fund that is to be terminated. To this extent, the termination is made easier.


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Successor Fund Transfers 4.16 The SIS law permits trustees to transfer the benefits of members between funds without the

need to obtain member consent provided that the terms of the transfer satisfy the definition of a successor fund transfer. In addition, the Trust Deed of the transferring fund must permit the transfer. SIS defines a successor fund transfer as one where the trustees of both funds agree that the receiving fund will provide “equivalent rights” in respect of the benefits as the transferring fund. APRA circular I.C.2 gives some guidance as to what may constitute equivalent rights.

APRA Guidelines 4.17 In Circular I.C.2, APRA states that: “the member’s rights in respect of their benefits should be equal in value, measure, force and

effect to their rights in the original fund. Any judgement of whether rights are equivalent should not be assessed solely on an individual change to a specific right but on the equivalency of the bundle of rights provided to the member by each fund, although special consideration should be given to significant rights.”

The Circular goes on to suggest trustees consider at least:

• withdrawal benefits;

• the circumstances in which the member may become entitled to benefits and the method of calculating those benefits;

• preservation;

• the extent to which a member bears investment risk;

• the provision and conditions of insurance, and the method of calculating insurance benefits;

• the right to be credited with reserves that might arise from time to time;

• the basis upon which investment earnings are credited or debited to members;

• the basis of valuation of assets; and

• the conditions of release permitted under the governing rules of the fund.

Some of these issues were further discussed in APRA Circular I.C.4.

Practical uses 4.18 Defined benefit conversions to defined contribution form are not likely to satisfy the

“equivalent rights” test. Therefore, successor fund transfers are generally reserved for: (a) defined contribution to defined contribution funds, where any differences are easily

identified and can be shown to satisfy the successor fund transfer rules; and (b) defined benefit to defined benefit transfers where the benefits are replicated in the

new fund.

Assessment of the transfer 4.19 It is essential that no immediate benefit (ie on death or disablement and on voluntary leaving

service) reduce on transfer. In addition, it is arguable that the future service accrual of benefits must continue at a rate no less than that applying immediately prior to the transfer.


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4.20 In addition to the above, there are other aspects of the new fund compared to the old fund

that should be assessed:

• no increase in the compulsory rate of member contribution (if any) should be imposed;

• any special entitlements available after satisfying an eligibility requirement must be retained;

• there must be no changes in definitions, such as Total and Permanent Disablement and the salary definition, that would disadvantage the member; and

• where options are available to members, for example by way of member investment choice, a similar range of options should be provided in the new fund.

4.21 Other aspects of the transfer that need to be considered are expense rates, amendment

powers and wind-up provisions.

• Expense Rates Where a fund has no power under the Trust Deed to distribute expenses among the members and the employer has agreed to meet all expenses separately, but the receiving fund can and will distribute expenses among the members, then, other things being equal, the transfer would not represent a successor fund transfer. Much more common is that both funds have the power to distribute expenses among the members, but the expense rates will differ between funds. In practice, such a difference between expense rates is often ignored, provided the difference is relatively small. Where differences are significant, then there may need to be other benefit improvements to offset the increases in expenses. Actuarial judgement is required to make such assessments. • Amendment powers and wind-up provisions

The terms of these provisions should be similar. For example, under what circumstances can benefits be amended and at whose discretion? What restrictions on amendment are imposed? Are residual assets on wind-up distributed among the members or returned to the employer?

Where it is not possible to confirm that the terms of the transfer meet the successor fund

requirements, then member consent for transfer will be required. Communication with employees 4.22 Superannuation benefits can be complex. A well-designed fund that communicates poorly

with its members will not be appreciated. In situations of termination and partial termination, the communication programme is central to the overall success of the re-structure.

Successor fund transfers 4.23 These transfers are the easiest to communicate since the central message is “no change”.

However, the members will require sufficient evidence of that. A major re-structure often prompts many members to review carefully their benefits, perhaps for the first time, and hence there is a need to re-communicate the nature of the benefits.

Transfers where member consent is required 4.24 Defined contribution to defined contribution These re-structures can be very similar to successor fund transfers. The fact that member

consent is required means that the benefits are changing in some way, or, the fund’s trust deed does not permit transfer without consent. In these cases, the communication will need to include details of any changes in benefits.


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4.25 Defined benefit to defined contribution This re-structure generally requires most effort in communication. An understanding of the

changing nature of the benefits and how to manage the investment risk is critical. Actuaries can add significant value here in helping members understand the change in benefits through:

• Helping set an appropriate framework of assumptions about future experience to make comparisons meaningful and credible;

• Helping members understand the sensitivity of their benefits to future experience;

• Helping members understand the links between contribution rates, investment strategies, investment horizons, disinvestment strategies and the resulting retirement income.

Communication media 4.26 Communication programmes will generally use most of the following media:

(a) Introductory flyers. Brochures, post-cards, posters and intranet sites can be utilized to let employees know about impending change. The aim is to raise awareness and help build confidence that benefits are being properly attended to.

(b) Written material, distributed individually. This material contains detailed written

explanation of all the changes being implemented, for example:

• Booklets describing the new fund;

• Details of how transfer benefits will be determined;

• Explanation of choices that are required to be made by members, and the defaults that apply if no choice is made;

• Appropriate forms to allow members to effect their choices and authorise the transfer of benefits (where necessary).

(c) Personalised comparison calculators. These are generally only required where

members are being converted from defined benefit to defined contribution. The comparisons could be on a fixed basis or variable. Intranet or internet-based calculators are ideal to allow members to change the basis of comparison, within limits, to effect sensitivity testing. If an intranet calculator is not available, a printed page can show a comparison of projected benefits on two different bases. The greater the flexibility built into the comparison, the more sophisticated the audience must be to obtain meaningful results.

(d) Group discussions. Presentations with question and answer sessions with small

groups of members are a highly effective means of communications. It is often only after such a session that members can review the written material with a clear understanding of the context and the consequences of the change.

(e) Telephone or email hotlines. For those members unable or unwilling to ask questions

at group meeting, a telephone or email hotline is a valuable feature. It is essential if there are employees at remote sites.


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5. THE SPECIFICS OF DEFINED BENEFIT TO DEFINED CONTRIBUTION

CONVERSIONS

5.1 This section considers specific issues that arise when members of defined benefit funds are converted to a defined contribution arrangement, because of a fund termination or transfer.

Determining the Future Service Benefit Retirement and resignation benefits 5.2 The first step is to establish the best estimate of the cost of the retirement and resignation

benefits currently being provided. There are various different data sources that are typically considered to help finalise the actuary’s assessment of the cost of the current defined benefits:

• The most recent actuarial review report may give an indication, although this will depend on the funding method that is being adopted. An accrued benefit funding method such as the projected unit credit method will report the normal cost of the benefits as that arising in the year following the valuation date. This rate will generally be lower than a rate reported by a projected benefit funding method, such as the attained age normal method. Also, the basis that has been used in the actuarial valuation may not be suitable for determining, on a member-by-member approach, the equivalent cost of the defined benefits.

• The actuarial certificate used for determining each member’s notional contributions for surchargeix purposes. Depending on the format of the certificate, it may be possible to get a view as to the average future service cost of any particular member, expressed as a percentage of salary. Again, this is determined using an actuarial basis that may not be considered to be appropriate for the current exercise.

• Finally, a special valuation could be conducted to establish an individual rate on a member-by-member basis. Under this approach, the actuary will have freedom in setting the basis so that it can be truly a best estimate basis. It also has the advantage of producing a rate unique for each individual member, thus removing the averaging effects of some of the other methods. This method will allow the actuary to be most confident that the costs of the current benefits are reasonably accurately estimated on a member-by-member basis.

5.3 The above sources of data will allow the actuary and employer to devise an appropriate

defined contribution rate, per member, to be paid in respect of future service that would be expected to provide a benefit equivalent in value to that being accrued prior to the transaction.

5.4 However, this is not the only approach that could be adopted. Other methods include

providing a uniform rate of Company contribution in respect of future service for all members. Differences on a member-by-member basis could then be allowed for:

• by adjusting the transfer value; or

• by adjusting salary.

Expenses 5.5 Whether any allowance is made for the cost of expenses will depend on the terms of the new

benefits to be provided. If the employer is to continue to meet expenses then there is no need to load the defined contribution rates. However, if expenses will be deducted from the members’ benefits in future, then it would be appropriate to build in an expense assumption in costing the defined benefits. This could come from the most recent actuarial valuation, which will be based on the actual expense experience. However, the expense assumption of the new fund may differ. For example, when transferring members into a master trust from a typical corporate fund, it is important to check the various different types of expenses that are levied on members.


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Insurance costs 5.6 The current fund’s insurance benefits will need to be separately costed if they have not

already been included in the employer cost above. The cost of insurance benefits are typically a relatively small proportion of the total cost of benefits and so a simple practical approach is often taken by adding a flat percentage of salary to the defined contribution rate being determined.

Dealing with Member options in the current defined benefit fund 5.7 Some funds offer members the option to change their rate of accrual by changing their rate

of member contribution. This means that the current level of benefits being provided differ in employer cost according to the rate of member contribution. There are broadly three ways of handling this in practice:

• By treating every member as if they were contributing at the highest possible level. This is clearly the most generous approach.

• By treating everybody according to his or her rate of contribution as at the transfer date. This is the harshest approach and is likely to be considered by some members to be disadvantageous to them, owing to the removal of potentially higher benefits available to those not already contributing at the maximum level.

• To continue the concept of providing higher company funded benefits for increasing rates of member contribution. This is a more complicated approach and does have some other disadvantages. For example, it reduces the certainty of the employer’s superannuation costs. It means that the employer’s cost still varies with experience, as in a defined benefit fund, although not to the same extent. However, it could be considered to be the most fair and equitable approach. An assessment of the extra employer cost for the extra rates of member contribution would be required. Ideally, the additional costs would be capable of being expressed in round numbers, with a scale of increase consistent with the relevant scale of increasing rates of member contributions.

Tax 5.8 The costs of the benefits so determined are then grossed up to allow for contribution tax,

usually by simply dividing by 85%. Surcharge tax is unpredictable and almost universally paid for by the members. Therefore, no adjustment is generally made in respect of surcharge tax.

Parities 5.9 Frequently more than one benefit category of member will be involved in the assessment of

costs. It is necessary to compare the raw costs that have been calculated by category from following the steps above to ensure that differences between categories are appropriate and justifiable to the members. Also, the rates so determined must comply with the Superannuation Guarantee requirements and any other requirements imposed by the employer.

Sensitivity analysis 5.10 Once the scale of defined contribution rates has been determined, it is then tested for

sensitivity to changes in the actuarial basis used to determine it. The degree of sensitivity depends on the terms of the benefits being assessed. A defined benefit fund that provides a defined contribution style benefit on resignation (eg a multiple of accumulated member contributions) is much less sensitive to changes in the actuarial basis than a pure defined benefit payable on all forms of exit. Benefit designs in Australian defined benefit funds typically include such a defined contribution benefit on resignation.


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With increased rates of vesting being imposed by the Superannuation Guarantee, and with the requirement since 1 July 1987 that contribution accumulations be credited with net fund earnings rather than an artificial rate of interest (eg. 4%pa), the sensitivity of costs to changes in experience has reduced. However, an understanding of this sensitivity is essential in order to have confidence in the final scale of defined contributions.

Margins

5.11 There will be three factors to be considered in determining the extent of any margins for conservatism to be built into the actuarial basis.

• The degree of sensitivity to changes in the basis, as tested above.

A typical margin will be a reduction in the discount rate used to value the current benefits. For example, the actuary may assume a 3% pa differential between the assumed rate of salary inflation and net of tax discount rate, where the best estimate margin for a typical investment portfolio may be of the order of 4% pa.

• The benefit design to be provided after conversion.

There is scope to provide a benefit design after conversion in respect of former defined

benefit members that reduces the need for margins of conservatism. One method is to provide a supplementary accumulation in respect of each member, payable only on attainment of the first age at which the former defined benefits would have been paid. This is in recognition of the fact that many Australian funds already provide defined contribution benefits on resignation and it is only those members that survive to a certain age (eg age 55) that receive a defined benefit. An additional accumulation, only vesting on attainment of that age, can allow more freedom in setting the post conversion rate of defined contribution.

As an example, a typical resignation benefit being up to twice the accumulated member

contribution (5% of salary) subject to a minimum of the current net of tax superannuation guarantee minimum benefitx (in defined contribution form) will cost the employer:

MAX ( 8% of salary, 5%/(1-15%) of salary) ie. 8% of salary, net of expenses, regardless of experience. The only assumption required

is that member contributions are accumulated with interest at the net fund earning rate. No margin is required in this case. However, the benefit payable on attaining age 55 may

be the order of X% x Final Average Salary x completed membership and so the prospect of protection from poor investment returns becomes important.

• The desire of the employer to make the conversion a more attractive proposal.

An employer sponsoring a fund with defined benefit liabilities may be very keen to

rationalise its funds or convert the remaining defined benefit liabilities into defined contribution liabilities. So keen, in fact, that it will specifically want the conversion basis to be skewed in the members’ favour. This will help to encourage members to voluntarily agree to convert to the new benefit.

Practical means of creating an enticement include increasing all conversion values by a

fixed proportion, eg 5%, dependent on the ability of the employer to fund it. Another common approach is to have the employer meet all future costs of insurance and

administration. This benefit can be restricted in provision to those converting members or it can be extended to include new employees.


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Avoiding spurious accuracy 5.12 In practical terms, it is impossible to come up with a benefit that is based on a defined

contribution arrangement that perfectly matches the benefit previously being accrued on a defined benefit basis. The final rate selected will often be rounded to the next higher ½% or 1% of salary to avoid the impression of spurious accuracy.

Past Service Benefit 5.13 It is common practice to determine the value of the defined benefit member’s past service

benefits as the greater of the actuarial reserve and the vested leaving service benefit. The actuarial reserve could be calculated on a basis similar to that used in the most recent actuarial valuation or a simplified approximation to that.

5.14 Owing to the increasing rates of vesting that have applied over recent years, it is now quite

common that a member’s vested benefit is very close to or sometimes could exceed the theoretical actuarial value of their past service benefit, depending on the actuarial basis of measurement. For this reason, it is fairly common that a simplified means of calculating the actuarial value is adopted. A typical formula would be the accrued retirement benefit multiple multiplied by current final average salary multiplied by a discount factor, where the discount factor would be, for example, 2% pa compound for each year prior to age 65. In comparing the value of the actuarial reserve and the vested benefit, rollovers and voluntary contributions would be excluded from both. The approximation formula adopted will depend partly on the design of the benefits being valued. For example, if the fund provides an undiscounted early retirement benefit from age 60, then discounting from age 60, rather than 65, would be appropriate.

5.15 An alternative approach could be adopted for determining the actuarial value of the past

service benefit based on a full valuation of projected cash flows, including assumed decrements. This would be consistent with a normal actuarial valuation. In practice, this can add a significant amount of work for limited gain. Firstly, the result may be similar to that arising from the simplified approach. The extent of the difference will depend on the actuarial basis and the benefit design. Secondly, it is a much more complex basis to explain to the interested parties, particularly the members. In particular, it would be very difficult to justify to members an assumed resignation decrement.

5.16 The resulting value of the accrued benefit may then be further increased depending on the

exact terms of the conversion and the trust deed and the employer’s desire to make members better off. For example, part of the surplus could be shared as a way of increasing the accrued benefit and improving the chances that the members will be no worse off as a result of the conversion.

5.17 The extent of any sharing of surplus will depend on affordability, the employer’s objectives,

and the terms of the trust deed.


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6. SPECIAL ISSUES Participation periods

6.1 In the event of a partial termination of a fund where some of the members are to be

transferred to a new fund, sometimes there is no new fund readily available. This frequently happens when an international company establishes a business in Australia by buying a business from an existing Australian company. Since the commercial deal can move very quickly, it is often unrealistic to expect the purchasing company to be able to set up a new superannuation fund at the same time. Also, even if there is an existing fund, the purchaser may need to establish a new category to replicate the benefits of the employees and hence will require time to make such changes. In these situations, a ‘participation period’ is a useful and practical solution.

6.2 A participation period refers to a limited period of time where the purchaser participates in

the vendor’s superannuation fund. It is intended to give the purchaser a reasonable amount of time to establish its own superannuation fund. The members continue to accrue the benefits that they were accruing prior to the sale. It requires three parties to agree: the vendor, the purchaser and the trustee of the vendor’s superannuation fund. In order to achieve such agreement, it is necessary to specify the details of the participation period in an appropriate document.

6.3 The document governing the period of participation will be mainly concerned with specifying

the contributions that are to be paid by the purchaser and how to deal with any surpluses or deficits that arise during the period of participation. Other matters detailed will include the meeting of expenses of administration, benefits to be accrued during the period of participation and amounts to be paid out of the fund at the end of the period of participation.

6.4 A common way of handling any surpluses or deficits that emerge during the participation

period is to define the aggregate asset value to be paid out in respect of the relevant members at the end of the participation period as being the sum of:

(a) transfer values calculated as at the effective date of changing employment, plus, (b) actual contributions paid by the purchaser and employees of the purchaser since the

change, plus, (c) actual investment returns over the period since the change, less the expenses, tax

and any benefits and surcharge paid during the participation period. 6.5 This approach means that the purchaser and the employees of the purchaser will remain

exposed to investment risks during the participation period. However, it also means that the vendor and the vendor’s employees are protected from any surpluses or deficits arising in respect of employees of the purchaser.

6.6 During the period of participation, the purchaser will be establishing its own superannuation

fund in preparation for receiving the transferring assets and benefits. 6.7 Particular care must be taken in measuring the investment return during the period of

participation. The period of participation will bear no resemblance to the normal fund financial year and so there may not be readily available asset valuations or revenue statements over the appropriate period. In such cases, it is necessary to make suitable estimates of the investment performance. Where the fund has a significant portion of its assets invested in a unitised pooled superannuation trust, that trust’s manager will have a method of valuing units on a regular basis thus permitting the easy calculation of investment returns, provided that the trust’s manager’s unit pricing methodology is acceptable and sufficiently frequent. In respect of assets held directly, the trustee will need to make its own valuations. It is possible that the fund’s normal policy for crediting interest on an interim basis could be adopted for this purpose, but it will again be necessary to check that policy for appropriateness.


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6.8 It is also necessary to take care with the expenses of administration and their allocation

between assets held in respect of the vendor’s members and assets held in respect of the purchaser’s members. Most expenses cannot be clearly allocated to any particular group of members. An expense analysis is required in order to understand how the different expenses arise; on what basis they are charged to the fund; and therefore what is an appropriate basis of allocating them. For example, if the administrator of the fund charges a fixed fee depending on the number of members, then it would be appropriate to allocate them in proportion to the number of members. Likewise for any fees that are charged in proportion to assets, an appropriate basis for allocation would be in proportion to assets held. Note that an approximation would be required to determine what the value of assets held in respect of the purchaser’s members is. Other expenses are less clearly allocated. It would be up to the purchaser’s actuary and the vendor’s actuary to agree on an appropriate methodology that is simple, justifiable and practical and then set it out in the participation period governing document.

Pensions in payment 6.9 Some superannuation funds, particularly larger ones, have a class of pensioners in receipt of

a regular pension. These are retired employees of the company and therefore are not affected by any partial termination and transfer out of members arising from the sale of a business. However, they are affected when the employer wants to rationalise superannuation funds or completely restructure them.

6.10 There are typically three ways of treating the pensioners:

(a) Seek their consent to have their income benefit transferred to another fund and continue unchanged. This approach might not be suitable or preferable, particularly if the employer is trying to convert any remaining defined benefit liabilities into defined contribution liabilities. It also requires that the trustee of the receiving scheme agrees to continue administering and paying the pensions and therefore that sufficient assets are transferred to meet the liability. If the trustee of the receiving scheme is agreeable, then the benefit could be transferred on a successor fund basis.

(b) Offer a commutation option to the pensioners. This approach often has mixed success

and introduces an element of self-selection such that the less healthy pensioners will tend to accept the offer and the healthier ones will reject it. Overall, the employer is left with a healthier (and more costly) group of pensioners and still may not have achieved its rationalisation objectives.

(c) Seek a commercial arrangement to transfer the liability to a life insurance office. This

is similar to option (a) in that the income of the pensioners is not disrupted and it permits the fund to be closed. However, owing to the commercial arrangement, it will be a more costly option than option (a). Ignoring any differences in the actuarial basis used to value the liabilities, the life office will require a profit margin to be included. However, many employers are willing to meet the additional cost of such a commercial arrangement in order to simplify future superannuation arrangements.

Effect of accounting standards 6.11 The measurement of an employer’s expense associated with the funding of a defined benefit

superannuation fund has always been difficult to account for adequately in the employer’s financial statements. Differences in the pace of funding and short-term volatility in the market value of assets leading to a continual stream of gains and losses, mean that the funded status of a fund, and therefore the extent of pre-paid contributions available to meet future liabilities, was not necessarily meaningful from year to year. To help prepare more meaningful accounts, the United States accounting fraternity developed the FAS87 accounting standard. One of the features of FAS87 was that gains and losses were not necessarily to be recognised immediately. Instead, they could remain unrecognised, within certain limits, for a number of years. So the actual funded status of the superannuation fund could be quite different from the associated asset or liability recognised on that company’s balance sheet.


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6.12 However, the associated accounting standard FAS88 requires the recognition of any

unrecognised gains or losses when there is a curtailment or settlement of defined benefit liabilities. In practice, this means that a significant transfer out or a conversion from defined benefit to defined contribution arrangements will mean that the company will need to recognise its unrecognised gains or losses. This may require an asset on the company’s balance sheet to be written off in order to immediately recognise those losses that were previously unrecognised. Similarly, any unrecognised gains would become an item of profit in writing off a liability on the company’s balance sheet.

6.13 Other international accounting standards are generally following the lead of the US FAS87

and FAS88 standards. This tends to mean that it is undesirable for a company to be holding any asset or liability to any significant extent in its balance sheet. In turn, this means that employers are keener to adopt for funding purposes the same valuation methodology that is used for expense reporting purposes.

Conflicts that the actuary must deal with 6.14 During these transactions, the actuary involved will be subject to conflicting demands. Some

of the common conflicts are discussed below.

(a) Two groups of members

In determining the transfer value for each defined benefit member leaving the fund, the actuary is in the situation that to the extent the transfer values are increased, the remaining assets are reduced. Therefore the financial security of the remaining members’ benefits may be reduced. However, if the transfer values are inadequate then the transferring members will be potentially worse off. The exact party that benefits from such differences will depend on the nature of the benefit design, both of the fund that the benefits are being transferred into and also the fund from which the benefits are being transferred out of.

(b) Two employers

This point is related to point (a) above in that the higher the transfer value, the lesser the residual assets which therefore increases the costs of the remaining employer. Likewise, the cost of the benefits of the purchasing employer is reduced accordingly.

(c) The employees and their new employer

In this case, the actuary will be required to assist the new employer in determining the rate of contribution in respect of future service benefits. Commercial reality will mean that the employer may prefer the actuary to certify a lower rate of company contribution and therefore lower the cost of providing the benefits.

(d) Two clients, one actuarial firm

It is not uncommon that the two corporations involved on either side of the transaction use the same actuarial firm for advice. In this case, two different actuaries within the one firm will be advising on both sides of the transaction. There could be a perception among the corporations that one of the actuaries could impose undue influence on the other.

6.15 The actuarial profession has many positive attributes that can help to maintain public

confidence in the standards of ethical behaviour and the treatment of conflicts.


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These features are:

• A high standard of entry;

• Established means of providing professional guidance eg by professional standards and guidance notes;

• Sessional meetings to debate topics of relevance;

• The code of conduct;

• A disciplinary mechanism; and

• Requirements of continuing professional development.

6.16 Ferguson (1996) stated that he believed that actuaries are “….the ethical guardians of the

public interest in those matters which fall squarely within our purview, and most notably in pensions and insurance.” Knox (2000) stated that “Our integrity, including our public roles, remains our most fundamental characteristic.”

6.17 As a profession, we must be mindful of the conflicts that exist in superannuation fund

terminations and take positive action to balance the needs of all parties.


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7. CONCLUSION 7.1 The aim of this paper has been to document a range of issues that exist when funds

terminate, or partially terminate, and to show how actuaries deal with these issues in practice. I believe there is little documentation on the public record in relation to these transactions. Consequently, it would be difficult to demonstrate to the public, if called upon to do so, that we approach these transactions with a well discussed methodology, capable of standing up to the rigours of commercial reality.

7.2 Many of the issues are worthy of separate detailed analysis. If this paper also stimulates

further discussion of these issues, it will have served a useful purpose. Acknowledgements 7.3 I am grateful to my colleagues at Watson Wyatt, in particular Andrew Boal, Brad Jeffrey and

Nick Callil, for their valuable input into this paper. I am also grateful to my wife for her forthright efforts to stamp out what she correctly described as tortured sentences. The views expressed in this paper are my own and not necessarily those of my employer or colleagues.

8. REFERENCES APRA, Superannuation Trends September 2000 quarterly survey Garner, A.S, Thornton, P.N. & Wise, A.J. 1986, Pension Aspects of Takeovers: A Review of Practice, Journal of the Institute of Actuaries, Vol 113, Part 1 Edwards, D.A. 1989, Calculation of Superannuation Transfer Values, Transactions of The Institute of Actuaries of Australia, vol I Ferguson, D.R. 1996, Presidential Address to the Institute of Actuaries, reprinted in Transactions of The Institute of Actuaries of Australia, 1996 Knox, Dr David M. 2000, Presidential Address to the Institute of Actuaries of Australia, Australian Actuarial Journal, Vol 6 issue 1 Reserve Bank of Australia, Statement on Monetary Policy November, 2000 Solomon, D.J. and Bone, S.M. 1997, Super Surpluses – Cause for Concern, Transactions of The Institute of Actuaries of Australia, 1987


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APPENDIX A: EXTRACTS FROM TYPICAL SUPERANNUATION FUND TRUST DEEDS RELATING TO TRANSFERS OUT AND TERMINATIONS

TRANSFERS OUT Example 1 Subject to Rule […………]and to such conditions as the Company may impose, if a Member or Beneficiary is or becomes a participant in another fund or benefit arrangement, the Trustees, with the approval of the Company and the Member or Beneficiary, may pay or transfer to or towards that other fund or benefit arrangement such amount as may be agreed between the Trustees and the Company but not exceeding the amount calculated by the Actuary (whose decision shall be final) to represent the value of the Member’s or Beneficiary’s interest in the Fund. Example 2 Transfers of Benefits. […………]In the case of – (a) a Beneficiary who is entitled to an immediate benefit from the Fund; or (b) a Beneficiary who is entitled to a deferred or preserved benefit from the Fund or a Member

who would be so entitled if he or she ceased to be in the employ of the Employer (hereinafter called a “Deferred Beneficiary”),

in lieu of providing all or part of such a benefit from the Fund the Trustees may with the consent of that person (and shall if so directed by the Principal Employer in respect of a Deferred Beneficiary but without obtaining that Beneficiary’s consent) pay or transfer to or towards an Approved Benefit Arrangement nominated by that person […………] (i) an amount representing the value of all or part of that benefit, as determined by the

Trustees; or (ii) subject to such conditions as the Principal Employer may impose, such greater amount (if

any) as may be agreed between the Trustees and the Principal Employer but not exceeding the total amount standing to the credit of that person in the Fund.

Example 3 Transfers from and to other Funds (1) The Trustee may at its discretion at the request of a Member and subject to such conditions

as the Trustee may determine transfer the amount of his share of the Fund or such proportion thereof as the Trustee may think fair in all the circumstances to the account of such member with any other provident, benefit, superannuation or retirement fund into which a transfer may be made without prejudicing the compliance hereof with the Relevant Law, and may make such arrangements as it sees fit to effect such transfer. The receipt of an officer of such other fund shall be sufficient discharge to the Trustee and the Trustee shall not be in any way responsible for the payment or disposal by the trustee of such other fund of the amount so paid or transferred.

(2) Notwithstanding anything to the contrary herein contained the Trustee, with the consent of

the Member and the Principal Company, may pay or transfer to or towards an Approved Benefit Arrangement an amount agreed or determined in a manner agreed between the Trustee and the Company.


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FUND TERMINATIONS Example 1

If the Principal Company at any time constitutes or adopts any other fund being an indefinitely continuing fund maintained solely for the purpose of providing superannuation benefits for Employees in the event of their retirement or in the circumstances of incapacity for work attributable to illness or accident approved by the Commissioner or in the event of the death of such Employees for their Dependants and the Trustees have received the consent in writing of the Members to transfer their benefits under this Deed to such other fund; or a resolution is passed or an effective order made for the winding up of the Principal Company (otherwise than for the purpose of Reorganisation) (a) then the Principal Company may terminate the Plan by advising the Trustees of its intention

so to do and the following provisions shall apply as from the effective date of termination being whichever is the later of the date of termination (if any) specified in the advice and the date on which the Trustees received such advice (hereinafter called “the effective date”).

(b) No Employee shall become a Member. (c) No further contributions shall become payable under the Plan. (d) There shall be no claim upon the Plan by or in respect of any Member otherwise than as

hereinafter mentioned. (e) The Trustees shall […………] convert into cash all investments comprising the Plan. After payment of the expenses of an incidental to the termination of the Plan and allowance for outstanding taxation liability the remaining assets of the Plan shall be transferred to the other fund or shall be paid by the Trustees to or for the benefit of all persons who were Members at the effective date in such proportions as shall be determined by an Actuary to be equitable PROVIDED THAT no benefit shall be paid to or in respect of such a person while he/she remains in the Service other than for the support and maintenance of that person or his/her Dependants in the case of hardship. Example 2 Termination of the Fund (1) If the Principal Company shall from any cause whatsoever cease to carry on business or any

order be made or an effective resolution passed for the winding up of the Principal Company (unless such winding up shall be for the purpose of reconstruction or amalgamation and the new company then formed or an Associated Company shall have the necessary power and shall agree with the Trustee to take the place of the Principal Company in the Fund) the Fund shall upon the expiration of not less than three months written notice given by the Trustee to the Members be dissolved and all moneys and other assets of the Fund after payment of any expenses incurred by the Fund in the execution hereof shall be distributed by the Trustee with the advice of the Actuary in such manner as it considers equitable taking into account the provisions of the Deed and Rules and any other circumstances which it considers relevant and every Member shall accept such benefits allotted to him by the Trustee in full discharge of all claims in respect of any rights or benefits under the Deed or Rules or otherwise in connection with or arising out of the Fund and all decisions of the Trustee in respect of any benefit shall be final and conclusive.


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Example 3

1.18 Closure of Fund

1.18.1 Cessation of Business. Where the Principal Employer –

(a) is or includes a body corporate and a resolution is passed or an order is made for the winding up thereof or a scheme of arrangement providing for the dissolution thereof is approved by a court; or

(b) is or includes a partnership, that partnership is dissolved; or

(c) is or includes a natural person or natural persons not in partnership, that person or any of those persons become bankrupt; or

(d) ceases to carry on business,

then –

(i) the Trustees may agree with an Associated Employer that it shall assume the office or Principal Employer, in which event the former Principal Employer shall be deemed to be an Associated Employer and Clause 1.17 shall apply in respect thereof in lieu of this Clause; or

(ii) if the Trustees believes that such event occurred for the purpose of amalgamation or reconstruction of the Principal Employer or otherwise for the purpose of the replacement of the Principal Employer by a successor, or the Principal Employer ceased to carry on business by reason of the disposal of its business undertaking to another person, the Trustees may enter into an agreement with person which the Trustees believes succeeds (or largely succeeds) the Principal Employer for that successor to take the place of the Principal Employer or (where an existing Associated Employer has become the Principal Employer as provided in sub-paragraph (i) hereof) become an Associated Employer.

Any such agreement shall be in writing in a form acceptable to the Trustees and shall be binding on the Trustees and all Employers Members and other interested persons.

1.18.2 Principal Employer not Replaced. If no Associated Employer or successor agrees to assume the office of Principal Employer as provided in Clause 1.18.1 within three months after the occurrence of the relevant event provided for in Clause 1.18.1 (the “Relevant date”), then (without prejudice to any notice which has already taken effect in respect of the Principal Employer under Clause 1.29) the following provisions of this Clause 1.18.2 shall apply with effect on and from the day (the “Closure Date”) which is three months after the Relevant Date.

(a) all benefits, including a benefit which became payable before the Closure Date, shall be subject to the provisions of this Clause 1.18.2 and no benefit shall be paid from the Fund other than under and in accordance with this Clause;

(b) Clause 1.29 shall apply as if the Trustees had received on the Relevant Date a notice from each Employer pursuant to that Clause that it had decided to terminate all its contributions to the Fund with effect on the Closure Date;

(c) the Trustees, after obtaining the advice of the Actuary and after making such allowances as the Trustees may consider appropriate for the costs and expenses incurred or likely to be incurred by the Trustees in connection with the Fund, shall make such provision from the assets of the Fund as the Trustees may consider appropriate to provide benefits in lieu of the benefits which are payable and which would or might have been or become payable from the Fund but for the operation of this Clause, with benefits which became payable before the Closure Date but have not been fully paid having first priority subject to the Relevant Law; and


25


(d) The benefits to be provided pursuant hereto -

(i) shall be in lieu of and in full satisfaction of the benefits which would or might have been or become payable from the Fund but for the operation of this Clause; and

(ii) may be provided on such basis and conditions, in such form (whether cash, life insurance policies, annuities or otherwise howsoever) and by way of such arrangements (whether within or without the Fund) as the Trustees may think fit;

and for the purpose of providing such a benefit hereunder for or in respect of a person the Trustees may transfer money or property from the Fund to another person who appears to the Trustees to be a trustee for or legal representative of that person (whether appointed by the Trustees or otherwise) and the receipt of such other person shall be a complete discharge to the Trustees who shall not be bound to enquire as to the application of the money or property so transferred.


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APPENDIX B:

EXTRACTS FROM THE SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993 REGULATIONS

DIVISION 9.3 - FUNDING AND SOLVENCY OF DEFINED BENEFIT FUNDS REGULATION 9.15 MINIMUM BENEFIT INDEX

9.15(1) [Calculation of index] The minimum benefit index in respect of a defined benefit fund is the index calculated in accordance with the following formula:

NRV - BEF

FMRB

9.15(2) [Definitions] In this regulation:

“adjusted minimum benefit index” , in relation to a defined benefit fund, means:

(a) if the index calculated as at the initial date in accordance with the following formula:

NRV - BEF

MRB

is less than l - that index; and

(b) in any other case - an index of 1;

“BEF” , in relation to a defined benefit fund, means the value of the benefit entitlements of former members of the fund;

“benefit entitlements of former members”, in relation to a defined benefit fund, means the beneficial interests in the fund of beneficiaries (including pension beneficiaries and deferred beneficiaries) who are not standard employer-sponsored members of the fund;

“FMRB” means the funded minimum requisite benefit;

“funded minimum requisite benefit”, in relation to a defined benefit fund, means the amount that is the sum of:

(a) the value of the pre-initial date component of the MRB multiplied by the adjusted minimum benefit index; and

(b) the value of the post-initial date component of the MRB;

“initial date” means whichever is the earlier of the following dates:

(a) the date on which the first funding and solvency certificate in relation to the defined benefit fund takes effect in accordance with subregulation 9.11(1);

(b) 1 July l994;

“MRB” means the total amount of the minimum requisite benefits of all current members of the fund;

“net realisable value of the assets”, in relation to a fund, means the amount calculated by deducting the estimated cost of disposing of the assets of the fund from the market value of those assets;

“NRV”, in relation to a defined benefit fund, means the net realisable value of the assets of the fund.

REGULATION 9.16 NON-COMPLIANCE WITH SOLVENCY REQUIREMENT - TECHNICAL INSOLVENCY

9.16(1) [Declaration by actuary] If an actuary, in the course of carrying out actuarial functions in relation to a defined benefit fund, other than a fund that is technically insolvent, discovers that he or she is unable to certify the solvency of the fund as required under these regulations, the actuary must, as soon as practicable:


27


(a) declare, in writing signed by the actuary, that the fund is technically insolvent on the date on which the declaration is made; and

(b) deliver to the trustee a copy of the declaration of technical insolvency.

9.16(2) [Date of insolvency] A defined benefit fund is, for the purposes of these Regulations, taken to be technically insolvent on and from the declared date.

REGULATION 9.17 TECHNICAL INSOLVENCY - OPERATING STANDARD 9.17 The trustee of a defined benefit fund that is taken to be technically insolvent for the purposes

of these Regulations must either: (a) initiate a program in accordance with this Division that is designed by an actuary to return

the fund to a position that would enable the actuary to certify the solvency of the fund in a funding and solvency certificate in accordance with regulation 9.10 not later than 5 years after the date on which the technical insolvency commenced; or

(b) initiate winding-up proceedings in accordance with Division 9.4. REGULATION 9.18 TECHNICAL INSOLVENCY PROGRAM - SPECIAL FUNDING AND SOLVENCY CERTIFICATE

9.18(1) [“concluding date”] In this regulation, “concluding date”, in relation to a funding an solvency certificate of a defined benefit fund, means whichever of the following first occurs:

(a) the expiry date; or

(b) the date on which the certificate ceases to have effect under subregulation 9.12(2).

9.18(2) [Special funding and solvency certificate] If a defined benefit fund is technically insolvent, the

funding and solvency certificate that the trustee is required to obtain under regulation 9.09 must be a special funding and solvency certificate that complies with this regulation.

9.18(3) [Period of effect] A special funding and solvency certificate takes effect from and including

the effective date to and including the concluding date. 9.18(4) [“first special funding and solvency certificate”] A special funding and solvency certificate (the

“first special funding and solvency certificate”) must be obtained as soon as practicable after the date on which a defined benefit fund becomes technically insolvent and not later than 3 months after that date.

9.18(5) [Effective date of first certificate] The date on which the first special funding and solvency

certificate obtained under subregulation (2) takes effect must be a date that is not more than 9 months earlier than the declared date.

9.18(6) [Further certificates to be obtained] At least one further special funding and solvency

certificate must be obtained in each subsequent period of 12 months following the concluding date of the first special funding and solvency certificate until the end of the period of technical insolvency.

9.18(7) [Time for obtaining further certificate] Each further special funding and solvency certificate

required under subregulation (6) must be obtained not later than 3 months after the concluding date of the previous special funding and solvency certificate.

9.18(8) [Effective date of further certificate] The date on which a further special funding and

solvency certificate required under subregulation (6) takes effect must be the date immediately following the concluding date of the previous special funding and solvency certificate.


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9.18(9) [Contents of certificate] In a special funding and solvency certificate relating to a defined benefit fund, an actuary must:

(a) specify the date on which the certificate takes effect, in accordance with subregulation (5) and (8); and

(b) identify any event relating to the fund that, if the event occurs during the period when the certificate is in force, should, in the opinion of the actuary, require the certificate to cease to have effect and a new certificate to be obtained; and

(c) specify the date on which the certificate expires, in accordance with subregulation (10); and

(d) certify the minimum contributions reasonably expected by the actuary to be required to secure the solvency of the fund at the end of the period of technical insolvency; and

(e) certify the improvement (if any) in the level of the minimum benefit index from its level at the effective date of the immediately preceding funding and solvency certificate relating to the fund.

9.18(10) [Date certificate expires] The date specified under paragraph (9)(c) as the date on which the

certificate expires must be a date that is 12 months after the effective date of the certificate. REGULATION 9.19 TECHNICAL INSOLVENCY PROGRAMS - PROCEDURE 9.19(1) [Procedures during technical insolvency] This regulation sets out the procedure to be

followed in relation to a defined benefit fund to which this Division applies during any period of technical insolvency of the fund.

9.19(2) [Employer-sponsor to continue to contribute] An employer-sponsor of the fund must continue

to pay contributions that are not less than the certified minimum contributions as required under regulation 9.08.

9.19(3) [Trustee to secure services of actuary] The trustee of the fund must secure the services of

an actuary for the fund who accepts responsibility for the actuarial management of the fund during the period of technical insolvency, including responsibility for the provision of special funding and solvency certificates and any approvals required under subregulation (4).

9.19(4) [Payments from the fund] The trustee must not make any payment from the fund unless, in respect of a payment:

(a) the responsible actuary gives written approval for that particular payment to be made; or

(b) the amount of the payment is determined in accordance with a scheme for payment approved in writing by the responsible actuary.

9.19(5) [Actuary not able to accept responsibility] If, during a period of technical insolvency of a fund,

the responsible actuary for the fund is no longer willing or able to accept responsibility for the fund, the actuary must, if practicable, inform the Regulator and the trustee that this is the case, giving the actuary's reasons.

9.19(6) [Change of fund's responsible actuary] As soon as a trustee of a fund becomes aware that

the responsible actuary for the fund is no longer willing or able to accept responsibility for the fund, the trustee must secure the services of another responsible actuary in accordance with subregulation (3) and must inform the Regulator of the change in the fund's responsible actuary.

DIVISION 9.4 - WINDING-UP OF DEFINED BENEFIT FUNDS REGULATION 9.20 APPLICATION 9.20 This Division applies only to defined benefit funds other than: (a) funds that are part of one of the following schemes:


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(i) the scheme established by the Superannuation Act 1976;

(ii) the scheme established under the provisions of the Superannuation Act 1990;

(iii) the Military Superannuation and Benefits Scheme; and

(b) funds that are part of an exempt public sector superannuation scheme; and

(c) funds that have never been used to reduce or remove the superannuation guarantee charge imposed by section 5 of the Superannuation Guarantee Charge Act 1992.

REGULATION 9.21 INTERPRETATION

9.21(1) [Definitions] In this Division:

“benefit entitlements of former members” has the same meaning as in subregulation 9.15(2);

“funded minimum requisite benefit” has the same meaning as in subregulation 9.15(2);

“minimum benefit index at the winding-up date”, in relation to a defined benefit fund, means an index calculated in accordance with regulation 9.15 except that the net realisable value of the assets is, for the purposes of the calculation, taken to be the net realisable value of the assets at the winding-up date as defined by this Division;

“net realisable value of the assets at the winding-up date”, in relation to a defined benefit fund, means the amount calculated by deducting the sum of:

(a) the actual cost of disposing of the assets of the fund; and

(b) the administration, and other, costs associated with the winding-up proceedings being carried out in relation to the fund in accordance with this Division;

from the amount received on realisation of the assets of the fund;

“period of technical insolvency” has the same meaning as in Division 9.3;

“responsible actuary”, in relation to a defined benefit fund, means an actuary who, under subregulation 9.19(3), accepted responsibility for the fund during its period of technical insolvency;

“winding-up date”, in relation to a defined benefit fund, means the date at which the trustee determines the allocations to be made, under the winding-up proceedings, to members of the fund in respect of their benefit entitlements.

9.21(2) [Solvency of a fund] In this Division, a reference to the solvency of a fund is to be read as a

reference to the fund’s minimum benefit index, as that term is defined in Division 9.3, being certified in accordance with that Division as not less than 1.

9.21(3) [Technical insolvency of the fund] In this Division, a reference to the technical insolvency of

the fund is to be read as a reference to the fund’s minimum benefit index, as that term is defined in Division 9.3, not being able to be certified in accordance with that Division as not less than 1.

REGULATION 9.22 PRESCRIPTION OF STANDARDS 9.22 For the purposes of subsection 31(1) of the Act, the standards contained in regulations 9.23,

9.24 and 9.25 are prescribed as standards applicable to the operation of defined benefit funds to which this Division applies.

REGULATION 9.23 WINDING-UP OF DEFINED BENEFIT FUNDS 9.23(1) [Initiation of winding-up proceedings] Subject to subregulation (4), the trustee of a defined

benefit fund that is technically insolvent must initiate winding-up proceedings in accordance with this Division if:

(a) the fund fails to comply with regulations 9.17, 9.18 or 9.19 during the period of technical insolvency; or

(b) the actuary is unable to certify the solvency of the fund at the end of that period;and regulation 9.24 does not apply.


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9.23(2) [Operation of Division] Winding-up proceedings initiated under subregulation (1) must be

carried out in accordance with this Division. 9.23(3) [Proceedings initiated under other conditions] Subject to subregulation (4), if a trustee of a

defined benefit fund to which this Division applies initiates winding-up proceedings in relation to the fund otherwise than under subregulation (1), the winding-up proceedings must be carried out in accordance with this Division.

9.23(4) [Winding-up schemes by the Regulator] This regulation does not apply to a defined benefit

fund in respect of which the Regulator formulates a scheme for the winding-up of the fund. REGULATION 9.24 ALTERNATIVE PROGRAMS APPROVED BY THE REGULATOR 9.24(1) [Actuary’s recommendations] If, as an alternative to commencing winding-up proceedings,

the responsible actuary of a defined benefit fund recommends in writing to the trustee of the fund a specified course of action, the trustee, if he or she wishes to accept the actuary’s recommendations, must, within 21 days after receiving the recommendations, forward a copy of the recommendations to the Regulator, together with a request that the Regulator approve the recommendations.

9.24(2) [Trustee to follow approved recommendations] If the Regulator approves the actuary’s

recommendations, and notifies the trustee in writing of the approval, the trustee must follow the specified course of action as recommended.

REGULATION 9.25 WINDING-UP PROCEEDINGS - PRIORITIES 9.25(1) [Liabilities of the fund] If, under regulation 9.23, winding-up proceedings in relation to a

defined benefit fund are to be carried out in accordance with this Division, priority must be given to the liabilities of the fund in accordance with this regulation.

9.25(2) [Administration and costs of proceedings] The first charge on the assets of the fund must be

the liability in respect of the administration and other costs associated with the winding-up proceedings.

9.25(3) [Determination of priorities] In determining the priorities to be given to the remaining liabilities

of the fund, the trustee must ensure compliance with subregulations (4) and (5). 9.25(4) [Minimum benefit index equal to or greater than 1] If the fund’s minimum benefit index at the

winding-up date is equal to or greater than 1, the benefit entitlement allocated to each individual member of the fund at the winding-up date must be an amount that is not less than the sum of such part of:

(a) the funded minimum requisite benefit; and

(b) the benefit entitlements of former members;

as is attributable to that individual member. 9.25(5) [Minimum benefit index less than 1] If the fund's minimum benefit index at the winding-up

date is less than 1, the benefit entitlement allocated to each individual member of the fund at the winding-up date must not be either:

(a) greater than the amount referred to in subregulation (4) in respect of that individual member; or

(b) less than an amount calculated by multiplying the amount referred to in subregulation (4) in respect of that individual member by the fund’s minimum benefit index at the winding-up date.

Division 9.6 - Solvency of accumulation funds REGULATION 9.34 APPLICATION

9.34 his Division applies only to accumulation funds other than:


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(a) funds that are part of an exempt public sector superannuation scheme; and

(b) unds that have never been used to reduce or remove the superannuation guarantee charge imposed by section 5 of the Superannuation Guarantee Charge Act 1992.

REGULATION 9.35 INTERPRETATION 9.35 1) [Definitions] In this Division:

“fund's actuary”, in relation to an accumulation fund, means an actuary whose services are secured by the trustee of the fund under subregulation 9.39(2);

“mandated employer-financed benefits” has the same meaning as in Part 5xi;

“member financed-benefits” has the same meaning as in Part 5xii;

“minimum guaranteed benefit”, in relation to a member of an accumulation fund, means an amount that is the sum of:

(a) he member-financed benefits of the member; and

(b) he mandated employer-financed benefits of the member;

“net realisable value”, in relation to the assets of an accumulation fund, means the amount calculated by deducting the estimated cost of disposing of the assets of the fund from the market value of those assets.

“period of technical insolvency”, in relation to an accumulation fund, means the period starting on the first day of the year of income in which the fund becomes technically insolvent or in which the trustee makes an election under subregulation 9.38(2) and ending on:

(a) in the case where the fund is solvent at the beginning of a year of income that is earlier than the sixth year of income following the year of income in which the period starts - the first day of that first-mentioned year of income;

(b) in any other case - the first day of that sixth year of income.

9.35(2) [Reference to accumulation fund being solvent] In this Division, a reference to an

accumulation fund being solvent is to be read as a reference to the net realisable value of the assets of the fund being equal to or greater than the minimum guaranteed benefits of members of the fund.

9.35(3) [Reference to fund being technically insolvent] In this Division a reference to an

accumulation fund being technically insolvent is to be read as a reference to the net realisable value of the assets of the fund being less than the minimum guaranteed benefits of members of the fund.

REGULATION 9.36 PRESCRIPTION OF STANDARDS - ACCUMULATION FUNDS 9.36 For the purposes of subsection 31(1) of the Act, the standards contained in regulations 9.37,

9.38 and 9.39 are prescribed as standards applicable to the operation of accumulation funds to which this Division applies.

REGULATION 9.37 ACCUMULATION FUNDS SOLVENCY STANDARD 9.37(1) [Addition to minimum guaranteed benefits] Subject to subregulation (2), in a year of income

the trustee of an accumulation fund that is solvent at the beginning of the year of income must not add such an amount to the minimum guaranteed benefits of members of the fund, in respect of the earnings of the fund, that would result in the fund being technically insolvent at the end of the year of income.

9.37(2) [Amounts may be added under a program] In a year of income, the trustee of an

accumulation fund to which subregulation (1) applies may add an amount referred to in subregulation (1) if the amount is added in accordance with a program referred to in subregulation 9.38(2).


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9.37(3) [Technically insolvent accumulation funds] In a year of income, the trustee of an

accumulation fund that is technically insolvent at the beginning of the year of income must only add amounts to the minimum guaranteed benefits of members of the fund in accordance with a program referred to in subregulation 9.38(1).

REGULATION 9.38 TECHNICAL INSOLVENCY OF ACCUMULATION FUNDS - OPERATING

STANDARD

9.38(1) [Trustee to initiate program or winding-up] The trustee of an accumulation fund that is technically insolvent must either:

(a) initiate a program in accordance with this Division that is designed by an actuary to ensure that the fund is in a solvent position not later than at the end of the fifth year of income following the year of income in which the fund became technically insolvent; or

(b) initiate winding-up proceedings. 9.38(2) [Trustee may elect comparable program] The trustee of an accumulation fund to which

subregulation (1) does not apply may elect to have the fund comply with a program comparable with a program referred to in paragraph (1)(a), except that the program is designed to ensure that the fund is in a solvent position not later than at the end of the fifth year of income following the year of income in which the trustee made the election.

REGULATION 9.39 TECHNICAL INSOLVENCY PROGRAM FOR ACCUMULATION FUNDS - PROCEDURE 9.39(1) Procedure during technical insolvency] This regulation sets out the procedure to be followed,

in relation to an accumulation fund to which this Division applies, during any period of technical insolvency.

9.39(2) [Actuary to design program] The trustee of the fund must secure the services of an actuary

for the fund, who must, as soon as practicable, design a program of the kind referred to in paragraph 9.38(1)(a) or subregulation 9.38(2) (whichever is applicable) and inform the trustee of the requirements of that program.

9.39(3) [Addition to minimum guaranteed benefits] The trustee of the fund must not add an amount

to the minimum guaranteed benefits of members of the fund during any period of technical insolvency unless:

(a) the addition is approved in writing by the fund's actuary; or

(b) the amount is added in accordance with a scheme approved in writing by the fund's actuary for the adding of such amounts.

9.39(4) [Payment from fund] During any period of technical insolvency of the fund, the trustee of the

fund must not make any payment from the fund unless:

(a) the fund’s actuary gives written approval for that particular payment to be made; or

(b) the amount of the payment is determined in accordance with a scheme for payment approved in writing by the fund’s actuary.

Division 9.7 - Winding-up of accumulation funds REGULATION 9.40 APPLICATION 9.40 This Division applies only to accumulation funds to which Division 9.6 applies. REGULATION 9.41 INTERPRETATION 9.41(1) [Definitions] In this Division:

“fund's actuary” means an actuary whose services are secured under subregulation 9.39(2);


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“minimum guaranteed benefit”, in relation to a member of an accumulation fund, has the same meaning as in Division 9.6;

“net realisable value of the assets at the winding-up date”, in relation to an accumulation fund, means the amount calculated by deducting from the amount received on realisation of those assets the sum of:

(a) the actual cost of disposing of the assets of the fund; and

(b) the administration and other costs associated with winding-up proceedings in respect of the fund;

“period of technical insolvency”, in relation to an accumulation fund, has the same meaning as in Division 9.6;

“winding-up date”, in relation to an accumulation fund, means the date at which the trustee determines the allocations to be made, under the winding-up proceedings, to members of the fund in respect of their benefit entitlements.

9.41(2) [Reference to accumulation fund being solvent] In this Division, a reference to an

accumulation fund being solvent at the winding-up date is to be read as a reference to the net realisable value of the assets at the winding-up date being equal to or greater than the minimum guaranteed benefits of members of the fund at that date.

9.41(3) [Reference to fund being technically insolvent] In this Division, a reference to an

accumulation fund being technically insolvent at the winding-up date is to be read as a reference to the net realisable value of the assets at the winding-up date being less than the minimum guaranteed benefits of members of the fund at that date.

REGULATION 9.42 PRESCRIPTION OF STANDARDS - WINDING-UP OF ACCUMULATION FUNDS 9.42 For the purposes of subsection 31(1) of the Act, the standards contained in regulations 9.43,

9.44 and 9.45 are prescribed as standards applicable to the operation of accumulation funds which this Division applies.

REGULATION 9.43 WINDING-UP OF ACCUMULATION FUNDS 9.43(1) [Trustee to initiate winding-up proceedings] Subject to subregulation (4), the trustee of an

accumulation fund to which this Division applies that is in a period of technical insolvency must initiate winding-up proceedings in accordance with this Division if;

(a) the fund fails to comply with regulation 9.38 or 9.39 during a period of technical insolvency; or (b) the fund is not solvent within the meaning of that term in subregulation 9.35(2) on the date

on which that period ends; and regulation 9.44 does not apply. 9.43(2) [Operation of Division] Winding-up proceedings initiated under subregulation (1) must be

carried out in accordance with this Division. 9.43(3) [Proceedings initiated under other conditions] Subject to subregulation (4), if a trustee of an

accumulation fund to which this Division applies initiates winding-up proceedings in relation to the fund otherwise than under subregulation (1), the winding-up proceedings must be carried out in accordance with this Division.

9.43(4) [Winding-up schemes by the Regulator] This regulation does not apply to an accumulation

fund in respect of which the Regulator formulates a scheme for the winding-up of the fund.


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REGULATION 9.44 ALTERNATIVE PROGRAMS APPROVED BY THE REGULATOR FORACCUMULATION FUNDS 9.44(1) [Actuary’s recommendations] If, as an alternative to commencing winding-up proceedings,

an accumulation fund’s actuary recommends in writing to the trustee of the fund a specified course of action, the trustee, if he or she wishes to accept the recommendations of the fund’s actuary, must, within 21 days after receiving the recommendations, forward a copy of the recommendations to the Regulator, together with a request that the Regulator approve the recommendations.

9.44(2) [Trustee to follow approved recommendations] If the Regulator approves the

recommendations of the fund’s actuary and notifies the trustee in writing of the approval, the trustee must follow the specified course of action as recommended.

REGULATION 9.45 ACCUMULATION FUND WINDING-UP PROCEEDINGS - PRIORITIES 9.45(1) [Liabilities of the fund] If a trustee of an accumulation fund initiates winding-up proceedings

in relation to the fund, priority must be given to the liabilities of the fund in accordance with this regulation.

9.45(2) [Administration and costs of proceedings] The first charge on the assets of the fund must be

the liability in respect of the administration and other costs associated with the winding-up proceedings.

9.45(3) [Determination of priorities] In determining the priorities to be given to the remaining liabilities

of the fund, the trustee must ensure compliance with subregulations (4) and (5). 9.45(4) [Fund solvent at winding-up date] If the fund is solvent at the winding-up date, the amount

allocated to each individual member of the fund at the winding-up date must not be less than the minimum guaranteed benefit of the member.

9.45(5) [Fund technically insolvent at winding-up date] If the fund is technically insolvent at the

winding-up date, an amount equal to the net realisable value of the assets at the winding-up date must be apportioned among all the members of the fund at that date so that the proportion of that amount that is apportioned to an individual member bears the same relation to the whole amount as the minimum guaranteed benefit of that member bears to the total of minimum guaranteed benefits in respect of all the members of the fund at the winding-up date.


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APPENDIX C: SUPERANNUATION EXTRACTS FROM A TYPICAL AGREEMENT OF SALE OF A BUSINESS 8.1 In this clause 8 the following words have these meanings:

Purchaser’s Actuary means the actuary (or company or firm making available the advice of an actuary) appointed by the Purchaser for the purposes of this clause 8. Purchaser’s Fund means a superannuation fund or funds established or identified by the Purchaser or the Company pursuant to clause 8.2(a). Successor Fund Transfer means a transfer of Transferring Members and their benefits subject to the rules of the Vendor’s Fund and relevant legislation applying to transfers to a successor fund (as defined in the Superannuation Industry (Supervision) Act 1993 Regulations). Transfer Value means the interest in the Vendor’s Fund of each Transferring Member at the Completion Date, determined by the Trustee of the Vendor’s Fund in consultation with the Vendor’s Actuary in accordance with the rules of the Vendor’s Fund. Transferring Members means XYZ Company Employees who are, at the Completion Date, members of the Vendor’s Fund, and who with effect from the Completion Date: (a) accept the Purchaser’s invitation under clause 8.3(a) and consent to a transfer of

assets being made in respect of them from the Vendor’s Fund to the Purchaser’s Fund under this clause 8; or

(b) otherwise become members of the Purchaser’s Fund. Trustee means the trustee of the Vendor’s Fund. Vendor’s Actuary means the actuary (or company or firm making available the advice of an actuary) appointed in accordance with the provisions of the Vendor’s Fund. Vendor’s Fund means the XYZ Company Superannuation Fund established by a trust deed dated 1 July 19xx

8.2 Before the Completion Date, the Purchaser must:

(a) establish or identify one or more superannuation funds which are complying funds for the purposes of the Superannuation Industry (Supervision) Act 1993 for the current year of income, which will provide benefits in respect of each Transferring Member from the Completion Date on a basis which is no less favourable than the basis on which benefits are being provided for the Transferring Members under the Vendor’s Fund immediately before the Completion Date; and

(b) notify the XYZ Company Employees to the effect that, on and from the Completion

Date, they will not be eligible for continued active membership of the Vendor’s Fund and that alternative superannuation arrangements will be offered or provided to them in the Purchaser’s Fund.

8.3 Before the Completion Date:

(a) the Purchaser must seek the written consent, in such form as is approved by the Trustee, of each Transferring Member to becoming a member of the Purchaser’s Fund and to his or her Transfer Value being transferred from the Vendor’s Fund to the Purchaser’s Fund with effect from the Completion Date and must co-ordinate any relevant communications exercise; or


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(b) if the Purchaser wishes to propose a Successor Fund Transfer for any Transferring

Member, the Purchaser must liaise with the trustee of the Vendor’s Fund and the trustee of the Purchaser’s Fund to achieve it and co-ordinate any relevant communications exercise.

8.4 In respect of each Transferring Member who provides his or her consent as contemplated by

clause 8.3(a) or who is to be transferred pursuant to a Successor Fund Transfer as contemplated by clause 8.3(b), the Vendor must use reasonable endeavours to facilitate the transfer of that Transferring Member’s Transfer Value from the Vendor’s Fund to the Purchaser’s Fund in accordance with the rules of the Vendor’s Fund with effect from the Completion Date, with interest applying at the Vendor’s Fund’s interim rate (as determined by the Trustee in the manner prescribed by the rules of the Vendor’s Fund) from the Completion Date until the date payment is made.

8.5 If a Transferring Member is asked to provide his or her written consent as contemplated by

clause 8.3(a) and does not do so, the benefit entitlement of that Transferring Member will be dealt with in the manner prescribed by the rules of the Vendor’s Fund.

8.6 The Transfer Value plus interest thereon must be paid or transferred in cash unless the

trustee of the Vendor’s Fund and the trustee of the Purchaser’s Fund agree that other assets will be transferred. The Transfer Value must be paid as soon as practicable after the Transfer Date and may be paid or transferred in one or more instalments by the trustee of the Vendor’s Fund as agreed with the Purchaser.

8.7 The Vendor agrees to ensure that both before and after the Completion Date, the Purchaser

and the Purchaser’s Actuary are provided with all records and information which they may reasonably require in order to verify the correctness of any calculations or values to be ascertained for the purposes of this clause 8.

8.8 If at the Completion Date the assets attributable to the XYZ Company Employees are less

than the total Transfer Values of the XYZ Company Employees calculated as at the Completion Date (in each case as determined by the Trustee having regard to the advice of the Vendor’s Actuary), the Vendor agrees to contribute to the Vendor’s Fund the amount required to fund the shortfall (increased by such amount as the Trustee determines to take into account any contributions tax or contributions surcharge tax).


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APPENDIX D: NOTES i The Superannuation Guarantee (Administration) Act 1992 imposes an obligation on all employers (with very limited exemptions) to provide a benefit for their employees that meets or exceeds a certain prescribed minimum level. If the minimum level is not provided through a “complying” superannuation fund, the Government may levy a charge on that employer which is then intended to be returned to the fund of the relevant employee’s choice. ii According to APRA (2000), aggregate superannuation assets grew from $165bn to $489bn from 1 July 1992 to 30 September 2000, an average rate of growth of 14% pa. The minimum contribution rate required under the Superannuation Guarantee requirements has increased from 0% to 8% of pay. Over the period from 1 July 1992 to 30 June 2000, the national average household saving rate has fallen from approximately 6% to 3.5% of disposable income (RBA 2000). iii Occupational Superannuation Standards Act 1987 iv Superannuation Industry (Supervision) Act 1993 and Regulations v This paper is not concerned with the reasons for terminating an independent fund or with the relative merits of the different types of funds available. It is sufficient that terminations and mergers occur for various reasons. vi Consider the Australian ASX300 accumulation index (formerly the All Ordinaries accumulation index) growth rate of 12.7%pa (gross) compared to growth in Average Weekly Ordinary Times Earnings of 6.2%pa over the 20-year period to 30 September 2000. vii Technical insolvency means that the total net value of assets of the fund is less than the total value of minimum requisite benefits. viii In order to properly discuss surplus, the basis on which the surplus is measured must first be assessed. Different bases of valuation will be appropriate for different purposes and will give a different assessment of the fund’s surplus or deficit. For the purpose of this paper, it is sufficient to note that using a typical actuarial funding method and assumption set, many defined benefit funds had an excess of the actuarial value of assets over the actuarial value of accrued benefits at the start of the 1990s and by the end of the 1990s, this situation had to a large extent disappeared. ix The ‘surcharge’ is an additional tax imposed by the Superannuation Contributions Tax Imposition Act 1997. With respect to defined benefit funds, the law requires an actuary to express in defined contribution terms the equivalent cost of employer – financed benefits arising in any given year. The basis of calculation is, to a large extent, prescribed. x Being 8% of salary at time of writing, rising to 9% from 1 July 2002. xiFrom SIS: “mandated employer-financed benefits”, in relation to a member of a regulated superannuation fund as at a particular time, means benefits equal to the sum of:

(a) the amount of the mandated employer contributions (if any) made to the fund in relation to the member down to that time; and

(b) the amount of the mandated employer-financed benefits (if any) paid into the fund in relation to the member down to that time; and

(c) the amount of the investment earnings on those contributions and benefits down to that time; less the costs applicable to the amounts down to that time. “mandated employer contributions”, in relation to a member of a regulated superannuation fund, means contributions by, or on behalf of, an employer that are equal to the sum of:


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(a) the contributions made by, or on behalf of, the employer to the fund in relation to the

member, that:

(i) reduce the employer’s potential liability for the Superannuation Guarantee charge imposed by section 5 of the Superannuation Guarantee Charge Act 1992; or

(ii) are payments of shortfall components; and

(b) the contributions (other than contributions of the kind specified in paragraph (a)) made by, or

on behalf of, the employer to the fund in relation to the member in or towards satisfaction of the employer’s obligation to make contributions for the member, being an obligation under an agreement certified, or an award made, on or after 1 July 1986 by an industrial authority.

xii From SIS: “member-financed benefits”, in relation to a member of a regulated superannuation fund as at a particular time, means benefits equal to the sum of:

(a) the amount of the member contributions (if any) made to the fund in relation to the member down to that time; and

(b) the amount of the member-financed benefits (if any) paid into the fund in relation to the member down to that time; and

(c) the amount of the investment earnings on those contributions and benefits down to that time;

less the costs applicable to those amounts down to that time.

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SUPERANNUATION FUND TERMINATIONS: A REVI EW OF … · 2011-04-05 · endowment assurances to provide for their employees now use a master trust. 2.8 The increased regulation of superannuation