Date posted: 6/10/2020

Australian Federal Budget 2020-21 - Employers likely to ditch default super

In a move which will likely spell the end of default employer super, employees will choose a fund through a YourSuper portal, and the fund will move with them from job to job.

In Brief

  • ATO to develop a YourSuper portal
  • Employees will select from MySuper funds listed on this portal from 1 July 2021
  • Fund will then move with employee from job to job

The government has finally responded to the Productivity Commission's (PC) default super fund policy.

The PC had suggested that a list of top 10 funds should be selected by an independent panel and then those selected funds were made available to new employees entering the workforce. A selected fund would then move with employees from job to job.

The government's response to this is as follows:

  • The ATO will develop systems so that new employees will select a MySuper fund via the to-be- developed YourSuper portal.
  • Once a fund has been selected by an employee it will follow that employee from job to job (payroll providers will be expected to simplify this process through automated provision of information), unless the employee voluntarily elects to open another superannuation account. Employees with an existing super account will not join an employers default fund (see below).
  • APRA will commence benchmarking net investment returns for MySuper funds from 1 July 2021. From 1 July 2022, non-MySuper accumulation funds will be eligible to be part of the ATO list if "the decisions of the trustee determine member outcomes".

This policy has only become possible because the government successfully passed its choice of fund policy for most in the workforce in September this year and APRA has started to collect its Heatmap data.

We estimate that when fully operational, consumers will be choosing from up to 200 super funds and potentially a range of product offerings within each fund. This may well be a daunting experience for a young worker straight out of school (or working part-time while at school).

The end of employer default funds?

If employees are required to make a choice from a list, then the only logical conclusion here is that employers will not need to nominate a default fund and offer it to employees. New employees who already have a fund will not automatically join an employer's default.

What if an employee refuses to nominate a fund?

If an employee refuses to nominate a bank account for their salary they do not receive any remuneration. Presumably, therefore, no one does this. It is only a matter of time before super will ultimately work the same way. That is, employers will not have to nominate a default fund to new employees.

Better comprehensive disclosure

We have been saying for some time that there is no independent source of information that consumers can access to determine how suitable an APRA-regulated super fund is for them. This is an unacceptable situation. It remains to be seen if this proposed APRA assessment delivers on this obvious need. We certainly hope that it does even though past performance and fees are only some of the obvious measures to consider.

The new APRA performance league table will be updated quarterly and will rank super products by fees and investment returns with funds marked as underperforming where relevant.

Underperformers will also need to tell members that they have not been up to scratch and provide a link to the YourSuper comparison tool. Funds that fail two years of performance tests will be banned from accepting new members and will only be able to accept new members once performance improves.

Amendments to the Super Trustee Best Interest Duty  

The government recently legislated a best interest duty for super funds.  But this can sometimes be hard for APRA and others to prove that trustee actions have not been in members best interests.  

To solve this problem the rule will be tightened to make the best interest test a best financial interest test.  Further the onerous of proof will rest with the trustee not the regulator.  An anti-avoidance measure will be put in place for payments to third parties that might be seeking to escape this rule.

Improved transparency for super funds

Finally, there is this announcement in the budget papers: "improved transparency and accountability of superannuation funds by strengthening obligations on superannuation trustees to ensure their actions are consistent with members' retirement savings being maximised."

The bones on this policy are explained in this document: Your Future, Your Super

This Treasury document notes that large super funds are required to hold annual general meetings. In the notice of annual meetings, funds will also have to provide the following information:

  • The annual report of the fund
  • The annual outcomes assessment funds are required to undertake.
  • A copy of the most recent periodic statement for the member.
  • A summary of each significant event or material change notice that superannuation funds were required to send under the Corporations Act 2001 in the last financial year.
  • Remuneration of key executives, in line with ASX-listed companies along with any related entity of the fund.
  • Marketing expenditures relating to promoting the fund, either directly or indirectly.
  • Political donations, either directly or indirectly.
  • Sponsorships relating to promoting the fund, either directly or indirectly.
  • Payments to industry bodies or trade associations, either directly or indirectly.
  • Related party transactions (including payments to non-investment entities).

Further, funds will be given a template on how the above information should be displayed.

How this will policy be paid for?

Super fund levies fees will be increased. No doubt many super funds will not be happy about this policy but their complaints are likely to fall on deaf ears.