Welcome to Finance and Fury. In this episode – want to look at the proposals for the superannuation industry overhaul – released in the latest budget – as there are some pretty big changes –

  1. In the budget – the super system is likely to be in for a shake up due to the reforms proposed
  2. But this time – unlike previous proposals – these changes are going to be affecting Industry funds/my super accounts – unlike WRAP or SMSF accounts which have been a major focus of a lot of legislation over the years
    1. Unlike the things such as Stronger Super reforms proposed by Labour – which were in favour of industry funds – these bit of legislation from what I can see are not in favour of the MySuper industry reforms previously implemented – called the Your Future, Your Super package
  3. The Australian super industry is massive – $3 trillion superannuation system and it is the fourth largest in the world –it manages the retirement savings of 16 million Australians
    1. The aims of superannuation is to help Australians fund their retirements in a tax effective manner – after the age of 60 and fully retire – tax free incomes from allocated pension accounts
    2. We have grown to be a large super industry when compared to our population due to the legislated employer contributions – other countries like the US have a matching system – but it isn’t legislated for individuals to actually contribute to a 401K plan
    3. A lack of real oversight and guaranteed inflows has created a pretty docile industry superannuation environment – it wasn’t until 3 years ago that if you worked with some government departments that you could actually choose a different super fund to their default provider
    4. Created a situation where Australians superannuation funds can take advantage of them and not the other way around
    5. At the same time – the super systems complexity and the major onus on the individual to pretty much be an expert to understand the inner workings of the funds means that most people put it out of sight and out of mind – the lack of simple and clear information is holding back more members from finding the best product for them – so it is put into the to hard basket and most members end up in the default fund selected by their employer – as that is the path of least resistance

A review of superannuation was conducted – and the following are some of the major structural flaws –

  1. Funds with underperforming products are not held to account – goes without say that small differences in fees and returns translate into large differences in retirement outcomes – for better or worse – because they accumulate and compound over time – super is a working lifetime timeframe for most people – 35+ years on average
    1. Treasury analysis of APRA data shows that many superannuation funds are consistently poor performers – I see it in reviewing clients industry accounts all the time – especially since the MySuper products have been implemented – 21 out of 77 MySuper products underperformed their own performance benchmark – which are sometimes 3-4% above the cash rate – so all they need to do is get 4.5% and they meet their goals
    2. These underperforming accounts hold around $100 billion in assets across 3 million accounts and charge $1.2 billion in fees – or roughly 1.2% in costs
  2. A lack of competition, disengaged members and embedded inefficiency means Australians pay higher fees
    1. Many Australians are disengaged from the superannuation system – many Australians find superannuation complex and are disengaged from decisions about their retirement savings – following the path of least resistance – due tot is being compulsory have carrying different taxation rules to what the individual normally experiences – it is seem as foreign and treated as such – creates a lack of competition – if you don’t know the difference between super A and B – then employer choice super is the major driver for the choice of the individual – a lot of people do pay attention – but this comes back to low fees – but the fees that are directly charged as small in most cases – as the indirect fees are higher – Without strong competition, all members end up paying more in fees and accumulating less retirement savings
    2. The Productivity Commission found that two-thirds of members do not actively select a superannuation product when starting a new job – the majority of people do not make active decisions about their superannuation until they are close to retirement.
    3. The Productivity Commission found that fees in Australia are high by international standards – in part reflecting the absence of member-driven competition – but I would add that the fact that super contributions are compulsory –
    4. Since the Stronger Super reforms under labour – that introduced MySuper in 2014 – the average annual fee of MySuper products has increased – by approximately 13.6% since June 2014 – at the same time MySuper products have increased in scale from $362 billion in June 2014 to $731 billion by June 2020
      1. The average MySuper product in 2014 was 0.89% – went to 0.93% in 2017 – and 1.01% in 2020
    5. The industry charges substantial fees for its services. Right now, Australian households pay $30 billion per year in superannuation fees (excluding insurance premiums – more than the $27 billion Australian households pay on their energy bills or the $12 billion they spend on water bills – As the system grows, the amount Australians pay in fees will continue to rise. The total assets in the superannuation system are projected to reach $5 trillion by 2034. Under the current system, the amount of fees that will be paid by members in 2034 would reach $45 billion.
    6. Importantly, Australians are required to contribute 9.5 per cent of their salary towards their retirement – Every year, through a combination of compulsory and voluntary contributions, about $121 billion in superannuation contributions is paid into the system
  3. Multiple Account – Unintended multiple accounts are created when you change jobs and do not nominate a superannuation fund – where 27% of Australians have more than one super account
    1. Under our compulsory superannuation system – your employer is obligated to nominate a superannuation fund on your behalf – called a ‘default’ fund
    2. If you change jobs multiple times over your working life and do not nominate a superannuation fund, you could end up with multiple superannuation accounts with different funds, all charging separate fees and insurance premiums – these unintended multiple accounts erode members’ balances via multiple sets of fees and insurance premiums
  4. Some superannuation trustees are not acting in the best interests of their members
    1. While members are saving for their retirement, superannuation trustees have one job: to maximise their members’ retirement savings – The current law attempts to make this obligation clear by requiring trustees to act in their members’ best interests – but unlike with Adviser such as myself – which have extensive legislation between the Corp Act – FASEA – BID legislation – this is a little different with industry funds – as the Productivity Commission found that “funds clearly do not always act in their members’ best interests.
    2. In the Financial Services Royal Commission: “Trustees are surrounded by temptation — to preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members, to establish structures that consign to others the responsibility for the fund and thereby relieve the trustee of visibility of anything that might be troubling. It is opaque, with members finding it difficult to understand how their super fund stacks up against others.” This opaqueness and lack of transparency means members are effectively unable to hold their fund to account for the returns they deliver and the expenditure they undertake.  

Hence – there has been a major overhaul of the superannuation sector proposed – Your Future, Your Super makes the superannuation system better for members in four key ways

  1. Your superannuation follows you – prevent the creation of unintended multiple superannuation accounts.
  2. Empowering members – making it easier for you to choose a well-performing product that meets your needs.
  3. Holding funds to account for underperformance, protecting you from poor outcomes and encouraging funds to lower costs and fees to boost Australians’ retirement incomes.
  4. Increasing transparency and accountability for how superannuation funds use members’ savings.

Breaking down these changes –

  1. Your superannuation follows you – New super accounts will no longer be automatically created every time a worker starts a new job – Instead, your superannuation account will ‘follow you’ when you change jobs, preventing multiple super accounts from being created
    1. This could be good – as your retirement savings should not be eaten away by duplicate fees and insurance premiums on multiple unintended accounts.
      1. Stopping the creation of millions of unintended multiple accounts will boost balances in super by about $2.8 billion by avoiding duplicate fees and lost returns over the next decade
    2. I’m sure I wouldn’t be alone as someone who has multiple super accounts – before I started working in the industry – I had 3 different accounts from jobs that I worked through school and Uni  
    3. Due to the way the previous legislation works – but created unintended multiple accounts as under our compulsory superannuation system, your employer is obligated to nominate a superannuation fund on your behalf – as each employer is required legally have a ‘default’ fund that they pay your compulsory contributions into – however this is if you don’t choose your own fund – which many younger people don’t – I know I was one – so you end up with multiple admin costs and insurance premiums
      1. End up with eroded accounts or lost super
      2. The latest data from the ATO shows there are around 6 million multiple accounts held by 4.4 million people – these multiple accounts charge $450 million in fees a year
  • There was the previously legislated Protecting Your Super reforms – where inactive low balance accounts are automatically consolidated into a member’s active account by the ATO – but doesn’t prevent the creation of new unintended multiple accounts and takes 2+ years for the consolidation to occur
  1. So it appears that employers may still have their own default funds – but only if their employees don’t have their own super account
  1. Empowering members – through providing more information through an online YouSuper comparison tool
    1. The YourSuper comparison tool will aim make the performance of MySuper products clear as well as the fees
      1. Going to be interesting to see how this actually works –
      2. May be easier for people to check on super accounts with fees but it depends on how deep the fees go (just admin and MER or other operating costs which are indirectly charged)
    2. At this stage – the tool will only include the MySuper funds (default super products)
    3. more information is needed about this tool and how it will actually work – weather the performance is going to be updated per year, quarter, or month – a lot of mysuper funds don’t provide monthly reports – most do – but it will be interesting
  2. Holding funds to account for underperformance
    1. The Government will better protect you from poor superannuation outcomes by requiring superannuation products to meet an annual performance test
      1. APRA will identify the poor performers through a new annual benchmarking test
      2. This test might be a performance above a benchmark – normally on a rolling period – example – a 4% return above the cash rate over an 18 month period
  • So it will depend on what the test is measured against – whether it be against the ASX, or a cash+ target
  1. If a mysuper account fails the test it will be required to tell you and refer you to the new YourSuper comparison tool that can help you select a better performing fund if you choose to do so
  2. However – Persistently underperforming products will be prevented from taking on new members if they fail the benchmark 2 years in a row
  1. These changes may come with some unintended consequences – puts more onus onto the employer/employee –
    1. What if the fund shuts down new contributions – but through Super Stream – the funds still get paid to the ATO but they never get allocated to the super fund?
  2. Increasing transparency and accountability
    1. For most people – super can be confusing with the way fees are charged and what is actually occurring with investments – there is a lack of transparency when it comes to some of the investment options – some funds have 18% invested in alternatives – with no real indication on what these investments are
      1. In addition – there isn’t much of a breakdown of fees on where these are paid – a lot of the time there is an ICR/MER which is the cost of the underlying investment – but then there are transaction fees, operating costs, management fees, borrowing fees – which are now listed which is only a new requirement over the past few years (previously not) – but they still don’t say what these funds are actually going towards
    2. The Governments wants Superannuation funds to be held to the highest standards of accountability and transparency in how they spend your retirement savings.
      1. The Government will increase trustee accountability by strengthening their obligations to ensure superannuation fund actions are only undertaken in your financial interests. The Government will also ensure that your superannuation fund is more transparent in providing information about its operations ahead of its Annual Members’ Meeting

Summary –

  1. These changes are hopefully going to help members get a better idea about their super accounts –
  2. Avoid doubling up on accounts – as well as saving members costs if transparency is increased and more pressure is put on these default products

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact

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