Transferring from Stand Alone schemes to a Master Trust

Since 1990, stand-alone superannuation schemes have declined in number as companies have sought alternatives in order to provide more cost effective staff benefits. This has seen a move to master trusts, driven primarily by the cost of maintaining stand-alone schemes, the imposition of the trustee's liabilities on employers and compliance issues such as preparing prospectuses, reporting requirements and more onerous general regulatory requirements, as well as a desire to provide employees with the benefits of greater choice. Master trusts have been seen as convenient and more cost effective than stand-alone schemes, with reduced liability and responsibility on the part of employers.

With the advent of KiwiSaver, many employers with stand-alone schemes will be considering their options. These may include transferring members to a master trust which offers a KiwiSaver compliant section. It is therefore an opportune time to consider the general legal requirements, and steps along the best practice pathway, applicable to an employer considering the move from a stand-alone workplace superannuation scheme to a master trust.

This article considers transfers from stand-alone superannuation schemes to master trusts (including transfers to KiwiSaver schemes and complying superannuation funds under a master trust). Transfers from KiwiSaver schemes and complying superannuation funds are subject to additional rules and these transfers are not considered in this article.

Steps to transfer

The first step for any employer considering transferring members to a master trust is to carefully consider the provisions of the existing trust deed for the stand-alone scheme. The trust deed contains the rules of the scheme that must be complied with and such detail will dictate the employer's ability to transfer members and the form any transfer will take. If the trust deed does not contain an express provision allowing transfer, the trust deed will need to be amended to permit this.

Until recently, a member of a registered superannuation scheme could not be forced to transfer from one superannuation scheme to another. Section 9B of the Superannuation Schemes Act 1989 (the "Act") implies into every trust deed a provision that no member will be transferred to another superannuation scheme without his or her written consent. When KiwiSaver was introduced in 2006 an alternative transfer method was introduced by an amendment to the Act. A power to transfer members and beneficiaries without their consent was added as a new section, 9BAA. However, such a transfer may only take place with the prior consent of the Government Actuary.

Voluntary transfers

Under a section 9B (or 'voluntary') transfer, a member is invited to join a master trust and transfer his or her current benefit entitlements following receipt and consideration of a detailed communications package in respect of the proposed transfer.

The Government Actuary may exempt trustees of a scheme from the requirement to obtain the written consent of all members if the trustees have not been able to contact all members despite having taken all reasonable steps to do so. However, this exemption is available only if it can be established that the proposed transfer is not unreasonable in relation to the best interests of any member who has not been contacted.

Under section 9B of the Act, trustees must provide members with certain information regarding the proposed transfer, and within specified timeframes. The trustees must allow at least one month between the date the communications package is received by the members and the date the members' consent to the transfer is required. The communications package must include details as to:

the proposed transfer and its implications to members;
the date on which the proposed transfer is to occur;
the date by which the written consent of members must be received; and
the fact that a copy of such advice has also been forwarded to the Government Actuary.

One would normally expect the pack to contain, amongst other things, a comparison of benefits and fees between the two schemes, details as to any incentive that is being offered to members to transfer and a copy of the investment statement for the new scheme.

Generally some form of incentive will be critical to get members to transfer. Such incentives could include cheaper fees in the new master trust, improved vesting requirements, lump sum inducements or the fact that part of the scheme's surplus will be transferred to those members. If there is no incentive members will not transfer.

The transfer process therefore involves considerable liaison between an employer and the members of its scheme with the objective of obtaining the consent of all members to the proposed transfer. Normally the master trust provider will attend to the transfer process on behalf of the employer. The master trust provider will usually have the advantage of being familiar with the transfer process with streamlined processes to put this into effect.

The quality of information received by members is therefore a vital component of any decision to transfer. If such information is unclear then a member will be reluctant to take any action. In this regard it is important that an employer is clear as to the reasons why it is promoting the transfer, what the transfer means to existing members, and the options available to members.

Generally, members will be offered the options of transferring their current entitlements to the master trust, retaining their existing arrangements with the stand-alone scheme but joining the master trust for future arrangements, or to take no action and remain in the existing scheme (that could then be closed to future contributions and members). The options will be driven by the employer's objectives, including whether the employer wants any members left behind in the existing scheme. If this is not a favourable option, the employer may consider winding up the existing scheme (which will allow members access to their current benefits). An employer may not, however, want to show its hand in suggesting the existing scheme will be wound up. Instead it may specify that members who do not transfer will be locked into the existing scheme receiving no benefit enhancements or even future contributions. This in itself may be an incentive for members to transfer.

Involuntary transfers

Section 9BAA prescribes the requirements to be met in order to transfer members and beneficiaries without their consent. The section applies despite anything to the contrary in the scheme's trust deed. As previously mentioned, the transfer may only take place with the consent of the Government Actuary. The Government Actuary may only grant consent if:

The terms and conditions of the scheme to which the members or beneficiaries are to be transferred are no less favourable to members or beneficiaries than the terms and conditions of the scheme from which they are being transferred; and
The transfer is otherwise reasonable in all the circumstances (including having a regard to the value of the assets transferred from the old scheme to the new scheme); and
The procedure in section 9BAB has been followed.

The Government Actuary may decline to approve a transfer if the interests of all or any of the members or beneficiaries of the scheme are adversely affected in any way.

The Government Actuary may have regard to the total effect of the new scheme on benefits to members and beneficiaries as a whole and any other matters they consider relevant.

Generally, transfers to a KiwiSaver scheme or complying superannuation fund will not meet the requirements of clause 9BAA due to the strict lock in provisions required of these types of scheme.

We note that the Government Actuary is yet to issue guidelines as to which matters the Government Actuary considers relevant to a transfer under section 9BAA however the Government Actuary has indicated that trustees should consider the Australian successive fund transfer process detailed in the APRA Superannuation Circular Number I.C.4.

The process which must be followed when making an application under section 9BAA is detailed in section 9BAB. The Government Actuary may accept an application for approval under section 9BAA from the trustees of the old scheme, the trustees of the new scheme, or a relevant employer, provided that he is satisfied that it is reasonable in the circumstances that the person has standing to make the application.

The Government Actuary may require a certificate signed by any person of any class specified by the Government Actuary (for example, a solicitor's certificate), that the transfer meets the requirements of section 9BAA; and any other information about the new scheme, the old scheme or the transfer.

The applicant must give notice to every member and beneficiary to whom the transfer will relate that:

The applicant has applied for approval to transfer the members and beneficiaries without their written consent; and
That the member or beneficiary may make submissions to the Government Actuary about the transfer (there is no minimum or maximum time period prescribed for members and beneficiaries to make submissions).

When considering the application the Government Actuary must have regard to any submission before deciding whether or not to grant approval.

The Government Actuary may give approval subject to any terms and conditions that the Government Actuary may specify in a notice of approval, with such approval is effective only if the transfer is carried out in accordance with those terms and conditions.

KiwiSaver employer contributions and scheme transfers

On 1 April 2008 employers became obliged to pay compulsory employer contributions to employees' KiwiSaver schemes. Section 101D of the KiwiSaver Act 2006 provides the formula by which employers calculate the amount of compulsory contribution they must pay.

Under Section 101D of the KiwiSaver Act an employer can reduce their compulsory employer contributions to KiwiSaver by an amount of other contributions. 'Other contributions' means

employer contributions to a KiwiSaver scheme made in the absence of section 101D; or
employer superannuation contributions made to or credited from within a registered superannuation scheme which meets certain criteria.

In relation to transfers, the criteria include:

that the scheme was either registered before 17 May 2007 or all relevant members transferred to the scheme from a scheme that was registered before 17 May 2007 (a prior scheme) by virtue of section 9BAA of the Act.
that all eligible employees had access to the scheme or the prior scheme before 17 May 2007.

If the transfer is effected otherwise than by virtue of section 9BAA, employer contributions to the scheme will not qualify as "other contributions". In such cases the employer will be liable to pay compulsory employer contributions to KiwiSaver in addition to the contributions made to the scheme.

Factors for consideration

Important considerations for any employer considering a move from a stand-alone scheme to a master trust will include:

Determining the objective of the proposed transfer.
Deciding whether the transfer should be voluntary or involuntary.
Reviewing the stand-alone scheme's trust deed to ascertain the requirements relating to transfers and, in particular, whether there is an express ability to transfer and whether this clause is limited in any way (for example, are there any restrictions on transferring vested employer contributions or the reserve?).
Understanding the current benefit entitlements of members so these can be compared to those offered under the master trust, to easily and promptly identify any discrepancies and possible issues.
Selecting an appropriate master trust provider.
Considering and approving the documents required to be executed by the employer to participate in the master trust.
Finalising the benefit design that will apply in the future to members. While in the majority of cases the new scheme will simply replicate the current benefits, a transfer is an opportune time to review the existing benefit design and/or the company's philosophy in respect of its existing scheme.
Considering members' access to current entitlements as a result of the transfer;
Reviewing existing employment contracts to ensure similar or better benefit options are offered to members transferring to the master trust (most employment contracts will contain special requirements or restrictions on an employer's ability to implement changes to employees' conditions of employment or require the employer to consult with its employees).
As a consequence of the above review, considering the possible need to renegotiate the remuneration aspects of an employment contract.
Establishing updated payroll deduction procedures.
If a voluntary transfer is proposed:
Considering the consequence if a majority of members do not consent to a transfer and formulating a plan to deal with this (such as winding up the existing scheme or closing it to new members).
Determining what transfer options members will be given in respect of their current entitlements.
Considering whether any incentives will be made available to members to encourage a transfer (for example, whether there will be access to withdrawal benefits, and if so, on what terms?)

Best practice pathway

To assist employees faced with a transfer decision the following best practice guidelines should be considered:

Provide clear, concise and sufficient information to members in respect of the transfer.
Provide adequate time to ensure the process is not rushed and employees are not pressured.
Consider incentives to encourage the transfer (if a voluntary transfer is proposed).
Ensure benefits of the master trust are the same, if not better, than the existing stand-alone scheme benefits.
Proactively consider any issues under existing employment contracts so issues are dealt with upfront rather than being left to be raised by individual members.

Following these best practice guidelines will require a greater time investment at the outset of the process, but should ensure a smoother and more efficient scheme transfer.

In summary, it is vital that the employer has a clear understanding of the transfer process before it starts the transfer process. At the very beginning of that process, the employer and master trust provider should identify all the steps required for the transfer and agree the timing of these steps. This will allow a clear plan to be formulated and communicated to members, enhancing the likelihood of a successful transfer.

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