Your Future, Your Super
On July 1, 2021, the Your Future, Your Super reforms come into effect. Find out what's coming your way and how the changes will work in practice.
Written by Victoria Kent, Senior Investment Specialist
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
Winter is coming. And July 1, 2021 is getting closer.
While a White Walker attack is unlikely, it could be helpful to know what is coming your way in terms of superannuation reform.
On July 1, 2021, the Your Future, Your Super reforms come into effect (subject to the legislation being passed).
Far from a frosty winter, the new legislation represents a well-needed spring clean to our 3 trillion-dollar superannuation industry.
The reforms are designed to correct structural flaws in the current system, and ultimately increase everyone's retirement savings by an estimated combined $17.9 billion over 10 years.
But as with most things, the devil is in the detail.
The legislation itself is not prescriptive, with some sections clearer than others. Questions remain about how super funds must demonstrate accountability and transparency, and how the changes will work in practice.
What are the high-level changes?
For the everyday Aussie, the intent of the legislation is to make it easier to choose a well-performing superannuation product that meets their needs, reduces unnecessary fees and prevents the creation of multiple, unwanted accounts.
The super funds themselves will be held accountable for underperformance and will be required to increase transparency and accountability around how they use member savings.
What does this mean in practice?
Well now, that's a very good question. Let's take this section by section.
‘Naming and Shaming’ - aka highlighting and penalising the poor performers
Putting your money in an underperforming superfund is akin to putting your money in a leaky bucket, then paying for the privilege to do so.
Does this sound too farfetched? Sadly, underperformance is not uncommon – Treasury estimates suggest a member in an underperforming super fund could be up to $98,000 worse off at retirement.
Additionally, poor performers will be forced to communicate their poor performance. This may prompt you to abandon ship, or prompt the fund to pull up their bootstraps. But rest assured, their continued underperformance will be penalised. Hooray!
From July 1, 2021, MySuper products will be subject to an annual objective performance test based on net investment returns.
If a super fund is deemed to be underperforming, it must let its members know. If a fund fails two consecutive annual underperformance tests, it will not be permitted to accept new members until their performance improves.
The test will extend to non-MySuper products from July 2022.
But comparing super funds can be like comparing apples and oranges; each has its own asset allocation, risk classification and fees (among other things) which makes super funds notoriously difficult to compare.
So, how does the government propose to do it? So far, it seems regulatory body APRA will construct a benchmark for every single product, which will then be compared against itself.
Currently, in Australia, there are over 40,000 superannuation products, so this task itself seems daunting, laborious and complex.
No more default - aka hello 'stapling'.
‘Consolidate, consolidate, consolidate!’ used to be the rallying cry of super funds, ‘find your lost super' was another, and the reason was default super (also referred to as an employer-nominated fund).
It meant every time we started a new job and didn’t bother to nominate a superfund, another account was automatically created.
This was obviously a recipe for lots of forgotten super accounts. 6 million accounts for 4.4 million to be exact.
And this in turn meant the erosion of account balances through multiple sets of fees (including insurance premiums) to the tune of $450m each year.
The new legislation will mean your super will be 'stapled' to you. Sounds ouch, but it’s a good thing.
It effectively means you keep your current super fund, even when you change jobs. It puts the onus on the employer to contact the Australian Tax Office (ATO) if you haven’t nominated a fund.
While this sounds good in theory, there will likely be teething problems as both employers and the ATO get used to a new way of doing things.
As for the system which will enable digital communication between the employer’s payroll system and the ATO by July 2022, we'll believe it when we see it.
Let’s hope the ATO has plans to up their tech game to deliver on the promises made on its behalf.
Accountability and transparency - bring it on!!
In a system of compulsory super contributions, it is paramount that those who have custody of our money have our best interests at heart. Unfortunately, this was not always the case.
In 2019, the Productivity Commission found “[super] funds clearly do not always act in their members’ best interests.” This culture of lack of accountability was enabled by a system of opaqueness and complexity, and clearly needs to change.
Things have improved somewhat since then, with super funds required to hold Annual Members’ Meetings. These are similar to a listed public company's Annual General Meeting (AGM), allowing the trustee to explain the performance of the fund and provide a forum for members to ask questions.
But from July 1, 2021, this will be enhanced as the notice of meeting will be required to include remuneration of key executives, as well as information on:
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).
Let’s hope these reforms bring on a new era of responsibility for trustees.
So, that’s a bit of commentary on what's to come in the land of superannuation. The author unashamedly apologises for all the Game of Thrones references.