Thinking | 8 October 2020
Your Future, Your Super: what do I need to know about the superannuation Budget reforms?
The Federal Government’s ‘Your Future, Your Super’ initiative aims to crack down on underperforming superannuation funds and reduce the costs of superannuation to Australian workers. We examine these reforms, announced in the Federal Budget and expected to take effect from 1 July 2021.
Taking a step back, in the lead-up to each Federal Budget, we wonder whether the government of the day will tinker with superannuation again, or leave the current settings in place. In recent Federal Budgets, we saw announcements that would become the Putting Members’ Interests First legislation, as well as the Protecting Your Superannuation Package which aimed to reduce the amount of unnecessary fees and unwanted insurance premiums members pay.
In the 2020-21 Federal Budget, the Your Future, Your Super reforms are the ones to watch. In this article, we provide an overview of these reforms.
Your superannuation follows you
To prevent the creation of unintended multiple superannuation accounts, the Government will ensure that employers pay their employees’ superannuation to their existing superannuation fund, if they have one, unless the employee selects another fund.
This will be implemented by figuratively ‘stapling’ the superannuation account to the employee, so their account follows the employee between jobs and overrides the employer’s chosen default fund.
How will it work?
- If an employee does not nominate an account at the time they start a new job, employers will pay their superannuation contributions to their existing fund.
- Employers will obtain information about the employee’s existing superannuation fund from the ATO.
- The employer will do this by logging onto ATO online services and entering the employee’s details. Once an account has been selected, the employer will pay superannuation contributions into the employee’s account.
- If an employee does not have an existing superannuation account and does not make a decision regarding a fund, the employer will pay the employee’s superannuation into the employer’s nominated default superannuation fund.
This is a big win for employees, especially those who are young, working part-time, and more often than not, do not make informed choices about their superannuation arrangements. This measure implements Recommendation 3.5 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) which stated that a person should only have one default account, and that machinery should be developed to ‘staple’ a person to a single default account.
This has potentially significant consequences for the ‘default fund’ status of many superannuation funds, as the value of a superannuation fund’s appointment as an employer’s default fund significantly reduces where an employee is ‘stapled’ to their first superannuation account.
We expect this will drive superannuation funds to shake up the way they acquire new members, with a greater focus on securing a nomination from new members throughout the various lifecycle stages (ie through member engagement) as opposed to focussing on employer-default or employer-sponsored arrangements, although there will still be value being the nominated default fund for industries where people first join the workforce (such as hospitality).
For those entering the workforce for the first time, or wanting to review their superannuation, a new online YourSuper comparison tool will be built to empower members to compare and select a MySuper product. The ATO will be developing systems so that new employees will be able to select a superannuation product from a table of MySuper products through the YourSuper portal.
How will it work?
The YourSuper tool will:
- Provide a table of simple super products (MySuper) ranked by fees and investment returns.
- Link consumers to super fund websites where they can choose a MySuper product.
- Show the consumer their current super accounts and prompt the consumer to consider consolidating accounts if they have more than one.
- Make it easier for consumers to compare the fees and performance of super funds in the market.
We expect this measure will increase portability of superannuation accounts as consumers will be prompted to consider funds which produce higher returns at a lower cost. On the one hand, this tool has potential to drive consumer engagement with superannuation, and increases the ability for consumers to make informed choices. On the other hand, there is significant consumer risk, particularly in relation to insurance, if consumers switch funds regularly with the aim of achieving higher returns.
Regardless of whether insurance is offered on an ‘opt-in’ or ‘opt-out’ basis, a member’s insurance is likely to cease in their existing fund when they roll over their entire superannuation balance to a new fund. If the new superannuation fund does not offer default insurance, there is a risk the member will lose insurance entirely. The implications for members switching funds, without first seeking advice, can be significant.
Funds will also be concerned about the way that information is presented to prospective members through the YourSuper tool, and what metrics will be used to ‘rank’ the various funds, so that a balance is struck between financial performance and other features and benefits of funds, such as bespoke insurance benefits.
Holding funds to account for underperformance
The Federal Government is proposing to impose an annual performance test which will expose underperforming funds and will prompt consumers to switch from an underperforming fund to a better fund with an aim to significantly boost retirement savings.
How will it work?
- APRA will conduct annual benchmarking tests on the net investment performance of:
- MySuper products from July 2021; and
- Non-MySuper accumulation products, where the decisions of the trustee determine member outcomes, from 1 July 2022.
- Funds that fail two consecutive annual underperformance tests will not be permitted to accept new members until a further annual test shows they are no longer underperforming.
- Superannuation funds which had products fail the benchmarking test(s) will be required to disclose their underperformance to members and provide their members with information about the YourSuper comparison tool.
This measure is intended to create more competition by making super funds work harder to produce strong returns and remain competitive. We expect this measure, along with the YourSuper comparison tool will bring underperformance directly to affected members’ attention and effectively encourage the member to switch to a stronger performing fund.
We also expect this measure will drive underperforming funds to more actively consider merger options as a priority. Earlier this year, APRA released an article debunking myths and misconceptions associated with superannuation fund mergers and successor fund transfers which is aimed at encouraging superannuation funds to merge.
This measure, along with APRA’s relatively new directions power, gives APRA power to continue to put pressure on trustees of poor-performing funds to merge or exit the industry unless they are materially able to improve performance. The uptick in recent merger activity in the market suggests that funds are now getting the message.
Increasing accountability and transparency
The Government proposes to legislate a stricter requirement for trustees to ensure that expenditure is motivated solely by the best financial interests of members and require superannuation funds to disclose how they are spending members’ money.
How will it work?
- Super trustees will be required to comply with a new duty to act in the best financial interests of members.
- Trustees must demonstrate that there was a reasonable basis to support their actions being consistent with members’ best financial interests.
- Trustees will provide members with key information regarding how they manage and spend their money in advance of Annual Members’ Meetings.
In the Royal Commission Final Report, Commissioner Hayne expressed concerns about large funds spending ‘not insignificant amounts’ on ‘treating’ employers with a view to maintaining good relationships with those who will be responsible for nominating the default fund for their employees.
However, trustees will say that such initiatives are an important way for trustees to win and retain employer and member support in a competitive market. Trustees will also point to existing statutory provisions, such as the sole purpose test and best interests covenant, as well as general trust law principles (this is where we get to reference Cowen v Scargill) as standing for the proposition that they are already bound to make decisions that are in the best financial interests of members.
For this reason, imposing the new duty on trustees may not be the game-changer that the Federal Government thinks it is.
We will have more to say on these issues in the coming weeks as the Federal Government looks to bring the legislation before Parliament.
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