18 June 2021
Most Australians who do not have a self-managed fund and who are accumulating superannuation savings don’t regard super as “their money”.
But, of course, it is very much members’ money and the wide-ranging, long-overdue superannuation changes that were passed by the parliament this week will cover 90 per cent of Australians in accumulation outside self-managed funds, so many more Australians will realise that superannuation is “their money”.
And self-managed funds are also helped.
The opposition to the changes was surprisingly ferocious from both the large retail and industry funds and their employer/union backers (plus the ALP), which indicates that there will be unpleasant surprises in some funds when some of the provisions are put into practice.
The changes would not have been possible but for the fact that Josh Frydenberg has become the first treasurer since Paul Keating to take an active interest in reforming superannuation.
And that is long overdue because superannuation savings are around $3 trillion. But the initial driver of these changes was Superannuation Minister Jane Hume.
What Frydenberg and Hume have done is to open a series of windows so ordinary Australians can see what is happening to “their money”.
And so the first big change is that the online accounts of the superannuation funds will tell members where “their money” is actually invested. They will also learn how much of “their money” is being spent on marketing.
Superannuation funds need to attract new members to maintain economies of scale because members retire, die or simply leave the fund. Accordingly some marketing is important but lavish marketing with executive side benefits will be revealed.
Members will also learn how much of “their money” is being paid to shareholders in the case of retail funds and employer and union groups in the case of industry funds.
The second window that is opened up is the ability to compare performances. At the moment superannuation is like insurance policies —the complexity makes it impossible to compare funds. What the legislation proposes is that if you have chosen, say, a conservative or high-growth fund it will be compared with funds with similar investment policies on a like-on-like basis.
For many Australians the first step in seeing superannuation as “their money” came when, in the pandemic last year, Josh Frydenberg gave them the ability to extract cash. But over the next year or so, when the data is assembled, friends will be able compare investment performance rates simply and straightforwardly over the barbecue.
These two measures will have a dramatic affect on superannuation.
But there is a darker side to superannuation in Australia that has taken too long to be fixed.
When Paul Keating set up the original superannuation structure it was based on a craft employment system and so most unions and their equivalent employer group had their own superannuation fund. So when a person started in the workforce in a coffee shop they joined Hostplus; then they went to Coles or Woolworths and joined a retail fund; if they did work on a building site it was Cbus and so on.
Millions of Australians ended up with savings in many different funds. Some of the amounts were small because the person did not work in that industry for very long. These savings get eaten up by administration, which represents a subsidy by young Australians for older Australians who tend to have a more stable fund.
In some industries such as retail and building it has been actually impossible for the employee to join any other fund. Earlier legislation blocked these cartels but there are still some legacy arrangements.
Apart from these cartel arrangements in most areas it has always been possible for people to consolidate their funds, but it tended not to happen. The new legislation provides that the first fund you join goes with you to the next job and so on. But, of course, you are able to switch should you be unhappy with your first fund, and given it will be possible to compare performances, there will be more shifting.
The government says it will save members $280 million so it would seem for some funds the removal of this subsidy will require costs to be reduced or performance after administrative costs will suffer.
That may be the reason for the ferocity with which the retail and industry funds plus employers and unions tried to stop this very logical and beneficial change to our superannuation industry.
It’s true there are areas of downside. It requires more work for small enterprises and Australian Taxation Office systems are unreliable. But the overall benefits are so huge that it is worth the extra time and ATO risk.
And finally, the area which has been given perhaps the most publicity is the ability of APRA to stop superannuation funds which are performing badly from taking new members, which basically means they go out of business and APRA has the power to enforce that exit.
But the test as to whether a fund is performing badly starts by looking at where the money is invested and so if, totally hypothetically, all the fund’s money was invested in infrastructure then that fund would be compared with the infrastructure assets of other funds.
And if over eight years it was too far below other funds then it would be warned to fix its situation and then a year later action would be taken. And so, a balance fund would be tested on the combination of each of the segments that the fund was invested in. If a person joins a fund that turns out to perform badly they will be alerted and then after nine years they will be told of their fund’s failure.
Two other changes are important.
* The limit on the number of members in a self-managed fund will be lifted from four to six which will make it easier for children and their spouses to join their ageing parents, who may be having fund management difficulty. It confirms the government resolve to maintain a healthy self-managed fund movement.
* Those who withdrew money out of superannuation last year will get the opportunity to increase their non-taxable contributions to cover the gap.