- Will employer default still be important?
- More trustee transparency
- Historical returns and fee exposed and dissected
The next eight and a half months will be very busy in Australia's superannuation sector.
As detailed in our Budget commentary, the Government plans to introduce four major changes:
1. Employer super will default to a new employees' existing super fund
For more than 30 years, most employers have made super contributions to a fund that the employer has selected or has been nominated in a legally enforceable industrial relations document.
Many medium-to-large employers have spent considerable time dealing with their default funds. Much time and effort went into choosing a fund and reviewing this selection every two or three years and a range of senior executives would be involved in these decisions.
Most employees have long had the right to select their own retirement vehicle but most have been happy to trust the employer's choice.
This created a situation in which each time an employee changed jobs, they picked up another super fund. As a result, some individuals had many super funds and some lost contact with their hard-earned deferred income – that is, compulsory employer contributions.
The Productivity Commission's review into superannuation and the Financial Services Royal Commission both suggested that employees should belong to one super fund for life unless they wanted to move to another one.
The Budget announcement revealed the Government had adopted this suggestion.
Under the proposed model, employers will contribute to a super scheme that an employee has received employer contributions in the recent past or a fund that an employee nominates from a list of funds on a new website called YourSuper, which will be run by the ATO.
New employees without an existing fund will need to select one from YourSuper. If the employee declines, the employer will make contributions to a nominated default fund.
Under this new model, employers will need a default fund as required under the law. The Government has made it clear that this statutory obligation will not change.
But how often will the default be used? This will depend on how many new employees don't have an existing active super account, or don't want to make their own selection.
For many employers, this means that in time their default fund will no longer hold the importance it once had. Some employers may find their default offering lies dormant from one year to the next.
Will these employers spend anywhere near the time they currently devote on managing their default fund? Anything's possible but it would seem unlikely.
2. Increased fund transparency
The ATO's YourSuper website will be operational by July 2021.
There are six elements to this policy:
- YourSuper will display ranked fee and investment return data for each super fund.
- The displayed fee and investment data will be updated each quarter.
- The funds that don't meet investment performance standards (see below) will be clearly highlighted.
- Funds on YourSuper will be linked to the product's website.
- Individuals will be able to see their current superannuation accounts and will be able to move money from one fund to another.
- Members will be encouraged to consolidate their super accounts if they have more than one.
3. Annual fund performance test
Funds will face a performance test each year that will consider net of fee fund investment returns relative to a specific benchmark. Funds that underperform for an eight-year period by more than 0.5 percentage points per annum will (the first test will be over a seven-year period):
- be listed on the YourSuper website as underperforming
- must write to existing members notifying them of the failed test and referring them to the YourSuper comparison table
- be banned from accepting new members if it fails two consecutive annual performance tests and will not be allowed to accept new members until its performance improves. These funds will also need to justify to APRA how they are meeting their obligations to members.
Why an eight-year period? This idea comes from the Productivity Commission review into superannuation (published in January 2019, p 492) – "Assessing performance over an 8-year period would abstract from much of the year-to-year volatility of investment markets, and thus not discourage funds from long-term investment strategies or from making investments that differ from those that constitute the market indexes."
4. Increased transparency and accountability
There are two key elements to this:
- The Government will legislate to amend the trustees' best interests of member responsibility to a member's best financial interest responsibility.
- Funds will be required before a fund's annual member meeting to provide better information regarding how they manage and on what they spend member money.
The disclosure that must be made under these proposed new rules without question will create a lot of media commentary.