Your Future, Your Super reforms – what they mean for you

[Andrew from Vista Financial]

Australians will be better off under the Federal Government’s Your Future, Your Super (YFYS) reform package which could result in higher superannuation returns and lower fees, experts say. But views are mixed on whether a performance test will be enough to identify underperforming funds.

 

Performance test call out underperforming funds

The central plank of the reforms, passed by federal parliament earlier this month, requires MySuper products to be subject to an annual performance test which assesses the actual performance of a fund, net of fees and taxes starting from 1 July 2021. If you haven’t chosen a super fund, your employer must pay your super into a MySuper fund. Each year, the Australian Prudential Regulation Authority (APRA) will construct an individual benchmark for every MySuper product.

When a fund fails the performance test, it will be required to tell super members and refer them to a new YourSuper comparison tool that can help members “select a better performing fund”. Persistently underperforming products will be prevented from taking on new members.

The test will extend to non-MySuper funds from July 2022. Emanuel Datt, chief investment officer of Datt Capital, believes the performance test is adequate to alert consumers to underperformers. “Superannuation is an investment that should be taken seriously from a young age,” he says. “This reform will help consumers select their superannuation funds whilst also providing an incentive for trustees to act in their investors best interests to ensure their long-term success.”

Drew Meredith, adviser and partner at Wattle Partners, says the test is “a very simple way to compare the performance of multiple funds in an efficient way.” “While superannuation members have ‘choice’ of fund many fail to utilise this and hence some additional oversight on the performance of this diverse array of funds makes sense.”

However, Whitlam Zhang, head of research, Parametric Australia, thinks the performance test is not enough. “While it may identify some underperforming funds, it’s also vulnerable to false positives,” he says. “We agree with industry recommendations that the regulator should also consider risk-adjusted returns.”

Australia’s $3.2 trillion superannuation system is the fourth largest in the world, managing the retirement savings of 16 million Australians. According to Treasury, Australian households pay $30 billion per year in superannuation fees. This is more than the $27 billion Australian households pay on their energy bills or the $12 billion they spend on water bills. 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, according to Treasury documents. ASFA chief executive Dr Martin Fahy says the performance test may unfairly penalise some super funds. He maintains the test should involve two stages, that is, the proposed benchmark test and, if a product does not pass that test, a second assessment as to whether the product is delivering “good member outcomes” and is likely to meet the benchmark going forward.

“There can be perils when ‘automating’ decisions that should be subject to human oversight, as we saw with the Robo-debt saga,” he says. “ASIC requires us to warn consumers that past performance is not always the best indicator of future performance. Many funds may have recently reduced fees and we know that will enhance performance outcomes. This should be considered before good funds are consigned to the scrap heap.”

 

Stapling to stop fees from accumulating

From 1 July 2021, employers must not longer automatically create a new superannuation account in their chosen default fund for new employees when they do not decide on a superannuation fund. Instead, employers will need to obtain information about the employee’s existing superannuation fund from the ATO.

Stopping the creation of millions of unintended multiple accounts by employers will alone boost balances in super by about $2.8 billion by avoiding duplicate fees and lost returns over the next decade, Treasury claims. Overall, Your Future, Your Super changes will save Australians $17.9 billion over 10 years.

Wattle Partners’ Meredith says this is a very positive step. “The stapling of accounts is a much-needed change,” he says. “As an adviser, we regularly see younger clients with three sometimes four industry super funds where they started work in hospitality or retail and then transitioned. Whilst industry funds are low cost, their fixed admin fee is actually high for smaller balances.

“This has the potential of actually getting younger works to engage with their superannuation, rather than view it as someone else’s money. This will reduce cost and duplication as well as simplify insurance coverage given the overlap that can exist where multiple accounts are held.”

However, while stapling fixes the problem of multiple accounts, Parametric’s Zhang says stapling shouldn’t have started until all super funds and all options – including choice options – were subject to the performance test. “As it has ended up, members could be stapled to underperforming funds,” he says.

 

Insurance opt-in

Other Your Future, Your Super changes relate to insurance coverage, requiring that insurance is offered only on an opt-in basis by super funds for those aged under 25 years. This is so young people don’t pay for insurance they don’t need.

Cbus has voiced its concerns about these reforms saying its member-base in dangerous professions could miss out on getting the insurance they need once an individual superannuation account is ‘stapled’ to a member and stays with them for life.

“If the government’s ‘stapling’ proposal does commence 1 November 2021, surely hazardous workers should be made exempt until at least after the exclusions review is complete,” Cbus chief executive Justin Arter says. “Workers in hazardous occupations are at risk of being stapled to a fund containing exclusions or unfavourable [insurance] terms and conditions because their existing insurance cover has not been tailored to their new job.”

 

Superannuation guarantee increase

From 1 July 2021, the Superannuation Guarantee (SG) rate will increase from 9.5 per cent to 10 per cent. “The long-overdue increase in the Super Guarantee will go some way to address the structural imbalances that continue to occur between fat profits and flat wages,” ASFA’s Fahy says.

 

By Nicki Bourlioufas Nicki Bourlioufas, is a Morningstar contributor. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

[Ken]

They seem to have taken the most complicated route with this "stapling". For about the last 5 years all employers have been required to have employees sign a Super Choice Form upon joining. There is the option on that form to tick a box to use the employer's choice of fund (which is really aggravating for small employers if they choose that because they then have to set one up). Would have been so much easier if they had simply required that option to be removed from the form.