RSE countdown: exploring the options for trustees

Superannuation trustees are faced with a looming deadline to obtain a Registrable Superannuation Entity (RSE) licence by 1 July, 2006. Australian Prudential Regulation Authority (APRA) has stated that trustees need to submit their application for a licence by December 31, 2005. However, many responsible for decisions regarding the future structure of these superannuation funds are not fully informed about all their options.

Most superannuation trustees are looking at two options: terminating the fund; or obtaining their own licence. However, there is a third option available for trustees, and that is to appoint an APRA licensed trustee, such as a trustee company, who has an historical and proven superannuation background.

Many decision-makers may not have a full appreciation of the advantages and disadvantages of each option available. Maintaining a corporate super fund is often in the best interest of members, particularly if it is a defined benefits fund or members and employers wish to preserve the uniqueness and character of their fund.

Attaining their own licence provides the fund with greater control over features and services. Also, the fund in general, retains alignment with the company’s human resources strategy and gives a greater sense of ownership and control. However, a fund which chooses to attain its own licence must continue to meet a number of ongoing requirements following the issuing of the licence, tolerate greater costs and administrative burden, understand the liability of its directors and increase resources for superannuation compliance.

The second option available is to terminate the fund and transfer the fund to a master fund.

Advantages of this structure include members being provided with a wide range of choices as well as value added features. There are also economies of scale and the ease of burden on employers and trustees. The main disadvantages associated with the transfer to a master fund may include a successor fund transfer issues; the termination of all service providers, including fund managers; the long-term cost effect when fee reductions are lifted; and the loss of identity and alignment to the origins of the fund’s strategy.

Further, termination and transfer to a master fund may result in the realisation of capital gains tax (CGT). For large super funds this may amount to millions of dollars. Furthermore, transferring to a master fund may also involve additional expenses such as buying and selling costs. These costs and associated tax realisation reduce the amount of member funds available to benefit from positive returns. Often the termination and transfer of a super fund takes time to implement, and in the meantime assets are invested in cash. If share and property markets are performing well during the period of a super fund’s termination and transfer, the super fund which invested temporarily in cash misses out on the returns from these ‘growth’ investments. This can have a significant impact on members’ returns.

A third choice available for superannuation funds is to appoint an external trustee whose core competency is superannuation. This option takes the headache out of legal and compliance issues whilst allowing the fund to operate under its own identity model — the best structure that supports the origins of the fund. An advantage of this third option is that the fund avoids realising CGT, thereby deferring crystallising a potential tax liability.

Outsourcing the trusteeship of the fund to an APRA approved/licensed trustee allows the fund to retain its own identity, including its defined benefits program, as well as the safety of an approved trustee undertaking the compliance responsibility for the fund.

There are a number of advantages with this model, including the provision of greater comfort to members; a more cost effective alternative to obtaining a licence; the protection of both members and identity; allowing the fund to concentrate efforts on better understanding their members and providing them with a high level of service at a competitive price, thereby protecting their members against fierce competition; and removing the burden and responsibility involved in updating, monitoring and reviewing the licence operations. The main disadvantage for the fund is less control over compliance, which in effect, is an advantage for members.

Many decision makers, including employers in both the institutional and retail superannuation markets, are perplexed by changes in superannuation and lack the full range of information they need to make the best decisions for the future. It is so important for superannuation trustees and employers to be aware and understand the three options available, and then make their decision accordingly.

Trust Superannuation has proven trustee services to both institutional and retail clients, and currently acts as trustee for many well-known superannuation funds.

Assyat David is Executive General Manager, Financial Services, Trust Company of Australia.