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Government Actuary defines super schemes

Government Actuary Geoff Rashbrook says, in the following discussion paper, that only a small proportion of super scheme payouts can be used for non-retirement benefits.

Wednesday, March 22nd 2000, 12:00AM

by Philip Macalister

  1. The Superannuation Schemes Act 1989 defines a superannuation scheme as a trust principally for the purpose of providing retirement benefits to beneficiaries who are natural persons. Legal advice obtained by the Government Actuary, and discussed in Newsletter Number 32 (May 1995), sets out the basis on which a trust will be registered as a superannuation scheme under the Act. In general, registration will occur unless we have reasonable cause to believe the scheme will not be operated in accordance with that principal purpose, taking into account the provisions of the deed and any other relevant matters such as marketing material and information given to prospective members.
  2. Continued registration depends on the Government Actuary being satisfied that the scheme is in practice operated as a superannuation scheme within the definition in the Act. Neither of the terms emphasised above are defined in the Act, and nor, to our knowledge, have their meanings been examined in any superannuation case. For the good administration of the Act, however, I must take a view as to what Parliament intended them to mean. In the following paragraphs I set out the interpretation I am contemplating settling on. I would very much appreciate submissions on this proposed interpretation from the industry, and will reconsider my view in the light of any submissions received.
  3. For avoidance of doubt, I would emphasise that this matter is being raised at this time through increasing pressure over recent months from some scheme sponsors and operators to "push the edge of the envelope". The interaction of "locking-in" provisions with the possible use of registered superannuation schemes for minimising the effect of an increase in the top marginal rate of income tax is, at least in principle, a different issue.
  4. Firstly, what might the expression "retirement benefit" be sensibly taken to mean? A starting point is a payment to a person who has retired, or is in the process of retiring, from a significant level of paid employment. This is consistent with the superannuation concept, acknowledging that the Act is a superannuation statute. Retirement in this sense would comprise "normal" retirement along with early retirement, ill-health retirement, redundancy in a situation where future employment is highly unlikely, and total and permanent disablement.
  5. In the New Zealand context, the benefit payable from an employer-sponsored scheme on cessation of employment with the employer presents a definitional issue. This resignation benefit could possibly be considered a form of "retirement" benefit, in the sense that the employee can not remain a member of the scheme any longer and has effectively ceased paid employment, if only for the time being. However, to determine whether or not such a resignation benefit in any particular case is truly a retirement benefit would require investigation as to what use the resignation benefit was put. The legislature in enacting the statute can be presumed to have been aware of the absence of compulsory preservation; nonetheless whether or not resignation benefits were to fall within the definition of retirement benefits remains unclear.
  6. It can however be confidently stated that payments from a scheme which are not retirement benefits, are those payments to persons who are still in paid employment, or likely to be so at some future time. Such non-retirement payments would include "in-service" withdrawals from employer-sponsored schemes, and withdrawals from retail (ie individual provision) schemes at younger ages, except where such payments were transferred to another registered superannuation scheme. Other non-retirement benefits would be payments of benefits (or purchase of insurance) in relation to medical costs, periods off work (eg salary continuance), and the like.
  7. Insured benefits for death and/or total and permanent disablement need careful consideration. It may be considered not unreasonable for the benefit payable on total and permanent disablement to approximate to that which would have been payable had the member continued in the scheme until "normal" retirement, but any insurance beyond that level is, in my view, a non-retirement benefit. Payment of a benefit on death may be considered in a similar light, and although it could be held that a payment in excess of accumulated savings at the date of death does not fall within the scope of retirement benefits, I would not wish at this stage to pursue that point, as long as the level of benefit approximates the expected benefit on "normal" retirement.
  8. Because superannuation schemes have traditionally made use of group purchasing power to provide ancillary non-retirement benefits on death or total and permanent disability for member protection, it is arguable that it is in fact these kind of benefits the legislature had in mind when coming to the definition that is in the statute, and why the expression "principally" was used rather than "wholly".
  9. One may note that an occasional source of non-retirement payments to members occurs when a distribution of scheme surplus is made. If such distributions are made in cash, rather than as an enhancement to accrued benefits, then arguably they must be considered to be non-retirement benefits.
  10. Finally, returning to the subject of withdrawals from retail schemes at younger ages, such schemes have a more tenuous connection with superannuation, since membership is not directly linked to employment with a particular employer. As it is likely (although not necessarily so) that the majority of persons accessing benefits over the age of 55 are retiring or preparing for retirement, our principal focus tends to be on access by those who are under age 55. To some extent this delimitation is artificial, and in cases where substantial withdrawals occur from such schemes for those in the 55 to 60 age category say, and are not transferred to other registered schemes, we may wish to investigate whether the recipients were genuinely retired.
  11. Turning to the definition of "principally", the concise Oxford has the definition "for the most part; chiefly". "Chiefly" is defined as "above all; mainly, but not exclusively". Simplistically this suggests "principally" could be anywhere on a continuum between 51% and 99%, which is not particularly useful.
  12. To our knowledge no superannuation cases exist, but there is a tax case, CIR v Mitchell (1986), 8 NZTC 5,181. In this case, despite argument by the Crown that "principally" meant something of the order of 85%, Davison CJ preferred a meaning of "mainly", and accepted 60%. I have had advice that in the context of that case, the meaning of "principally" related to whether or not a person qualified for a particular tax treatment, whereas in the superannuation context a different view could properly be taken, by reference to the framework in which superannuation schemes operate.
  13. Having considered all the above points, I am of the view that I may reasonably expect non- retirement benefits, as already described, to form a relatively small proportion of the benefit payments from a scheme. In numerical terms, something of the order of at least 15% would appear an absolute maximum, and a reasonable expectation would be something of the order of 5-10%, at most. Some variation could perhaps be expected from time to time, in special circumstances, but this should be exceptional.
  14. In forming this view, I am taking into account that employer-sponsored schemes will be paying out resignation benefits as well as retirement benefits. Given the ambivalent status of resignation benefits, it would seem inappropriate to treat them as being clearly non-retirement benefits; on the other hand, to treat them as being in essence retirement benefits does not appear appropriate either.
  15. For retail schemes, it is arguable that "principally" might allow a greater proportion of early withdrawals (ie non-retirement benefits) than suggested above, were for example it to be considered that it is not possible to distinguish the situation from the tax case noted in paragraph 12. However, this would not seem consistent with the stance I propose in respect of employer-sponsored schemes, nor consistent with what the legislature may reasonably be thought to have intended in a superannuation statute.
  16. One might base an assessment of the proportions of retirement and non-retirement benefits in relation to accumulated assets, but this approach is on its own likely to present some difficulties of identification. Analysis of current levels of payment is likely to give a better picture of the manner in which a scheme is operating, always making allowance for exceptional circumstances. . I note that in respect of all registered schemes, my report for the year ending 30 June 1999, in Appendix 3, shows those payments classified as Pensions, Retirement Lump Sums, Deaths/Disablements and Transfers Out as making up 45% of benefit payments, with a further 10% being classified as Redundancies. This leaves Other Exits (which as well as resignation benefits would include early withdrawals from retail schemes and in-service access from employer-sponsored schemes) as 45% of total benefit payments, perhaps raising a question as to how well the present regime in toto is operating principally for the purpose of providing retirement benefits.
  17. Focus on amounts may be misleading where operation of the scheme is inconsistent with the overall superannuation objective. For example, I believe I should be concerned if substantial numbers of members are receiving non-retirement benefits, even if the total of such benefits is less than 5 or 10% of total benefit payments; and I also believe I should be concerned if amounts being taken in non-retirement benefits are significant in relation to current contribution levels and/or benefit accruals.
  18. When monitoring the activity of schemes for which the trust deed provisions allow payment of non-retirement benefits of the nature described above, I therefore propose to give serious consideration to de-registration where I find:

  19. - The level of non-retirement benefits being paid or provided indicates that the scheme is paying, or likely to pay, more than 5 to 10% of assets being accumulated in respect of members under the age of 55 as non-retirement benefits
    - Non-retirement benefits are being paid or provided to more than 15 to 20% of the membership;
    - The level of non-retirement benefits being paid or provided is greater than 5 to 10% of contributions towards, or the accrual of, retirement benefits in the same period, and where provision of these non-retirement benefits can not be explained to my reasonable satisfaction by some particular circumstance.
  20. Please note: This discussion paper is designed to elicit response from the industry which can hopefully assist me in carrying out my statutory duties. The views expressed in this paper are my initial thoughts and a general guide. These views should not be taken as definitive in any particular circumstances as any decision I make will be based on the relevant facts and circumstances at the time.
  21. Please also note that this paper is not intended to address the situation where I form a view that a scheme is operating principally for some other purpose, such as operation of a business activity, despite the assets of the scheme being similar in nature to those of a superannuation scheme.
  22. It would be helpful if any submissions could be made prior to 31 March 2000. If this is too tight as a deadline in any particular case, we would appreciate advice of intent to make a submission and the date that it is expected it will be provided.

Geoff Rashbrooke is the Government Actuary

What do you think? Should money in super schemes be locked in until retirement? Have your say in the DISCUSSION FORUM

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