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Superannuation and retirement changes

 

Your Future, Your Super reforms

 

The government has announced a package of further significant reforms to superannuation that includes a major structural change to the way in which employees changing jobs are allocated to default superannuation funds.

 

Responding to recommendations from the Productivity Commission and the Financial Services Royal Commission, a default superannuation account will only be created for members who are new to the workforce or do not already have a superannuation account (and who do not nominate a fund of their own). 

 

Under the Your Future, Your Super reforms, from 1 July 2021:

  • An existing superannuation account will be ‘stapled’ to a member to avoid the creation of a new account when that person changes their employment
  • The ATO will develop systems so that new employees will be able to select a super product from a table of MySuper products through a new ‘YourSuper’ portal 

 

The reforms will reduce the number of duplicate accounts held by employees as a result of changes in employment.

 

Other Your Future, Your Super changes are aimed at:

  • Preventing new members joining underperforming funds based on APRA benchmarking tests 
  • Improving transparency and accountability of superannuation funds by strengthening obligations on superannuation trustees to ensure their actions are consistent with members’ retirement savings being maximised.  

 

Further details of the Your Future, Your Super reforms are set out below. 

Federal Budget

 

 

1. Your super follows you from one employer to the next – super stapling

 

Currently, following a change of employer, an employee who doesn’t exercise choice must have their SG employer contributions paid to their new employer’s nominated default fund. The government has announced measures to require that from 1 July 2021, a new employee’s SG must be paid to their most recent superannuation fund account, unless they choose otherwise. In effect, an employee’s current super account is to be stapled to them and applies in any new employment, unless and until they actively choose otherwise.

 

Their new employer’s ‘default’ superannuation fund, will only apply as a default fund to new employees who have just entered the workforce or to employees who actively choose that fund.

 

The measures are intended to implement key recommendations of the Financial Services Royal Commission and Productivity Commission Superannuation Inquiry.  The objective is to reduce the creation of multiple accounts for members when changing jobs through current default super arrangements. The government indicates that currently in the order of 850,000 new multiple accounts for existing super account holders are created each year under the existing default super arrangements – duplicate accounts that can be avoided.

 

The legislative passage of the new measures will pose some significant challenges for the government. The changes will require legislative amendments to at least the choice of fund provisions of the Superannuation Guarantee Administration Act and to the default superannuation measures in the Fair Work Act.  Interaction with current default super provisions in modern industrial awards will also need to be considered and addressed.

 

Operationally, the measures will operate in two phases and would pose significant implementation issues given the timing announced. For the first year from 1 July 2021, an employer will ascertain an employee’s super fund account for SG contributions from the ATO portal, if not provided by the employee. From 1 July 2022, the ATO is to provide an automated service to communicate the relevant super fund details between the employer’s payroll and the ATO.

 

 

Mercer’s Perspective

 

Mercer supports the concept of a single default superannuation fund for members (unless they deliberately choose otherwise) and the importance of a strong default system to improve efficiency within the industry and reduce the number of individuals with unwanted multiple accounts.

 

The announcement of the new system is light on detail and, as indicated above, the implementation timeframe seems very ambitious for such a major change. 

 

The change does not directly address the issue of existing members with multiple accounts, though the government is introducing measures to make consolidation easier and to help empower members to make an informed choice. Otherwise, the government is relying on the requirements for Inactive Low Balance Accounts to be transferred to the ATO (for consolidation with a member’s active super holding) to reduce the incidence of multiple accounts for existing “disengaged” members.

 

We are concerned that the changes will undermine employer-provided group super arrangements which are some of the most competitive in the industry. 

 

We are also concerned about the group insurance implications of these measures, as discussed below. 

 

 

Implications for super fund trustees 

New default member inflows will be impacted which will have major implications for some funds. However, existing members will become “stickier” under the reforms as any SG contributions would continue to be directed to their existing account on any change of employer as the new form of ’default’ arrangement – unless and until elected otherwise.

 

Implications for employers

Operationally the measures will require changes to existing administration and payroll systems for new hires.  

 

New employees will no longer default into the employer’s nominated fund, unless they do not have an existing super account.  Employers with their own differentiated super arrangements (e.g. tailored insurance cover) will need to ensure new hires are aware of the value offered by the employer default fund, as a new employee will need to actively opt-in to become a member.

 

Implications for individuals

The changes should simplify superannuation account holdings for individuals over the course of their employment. Whether the default fund an individual starts-off with in their first job, remains most appropriate for them as they change jobs is by no means assured. For example, industry-specific insurance that may apply under the existing default arrangements may be foregone.

 

Insurance implications of super ‘stapling’ system 

The Your Future, Your Super ‘stapling’ of member accounts creates the potential for unintended insurance consequences and, combined with the strengthened requirements for trustees (see below), raises questions about the future of group insurance inside superannuation.

 

 

Mercer’s Perspective

 

Life insurance inside superannuation has played a fundamental role in protecting the retirement savings of Australians against the risk of untimely death or disability. The default insurance cover provided within many superannuation funds is generally designed based upon the demographic of their members, which typically includes elements such as the industry sector focus of the fund, occupations of members and the different life stage of members.

 

‘Stapling’ of members to a specific default fund for the duration of their career, particularly where that fund is the default fund for the individual’s first employment, has the potential to exacerbate the underinsurance of the working Australian population. At present, the changing of jobs, employer or career is an event, which allows an individual to default into the new employer’s superannuation arrangements and benefit from the associated default insurance, with that default insurance often designed for the needs of that cohort. 

 

 

Implications for super fund trustees

With the potential now for an individual to be a member of a superannuation fund for their entire working life, the ability to determine the appropriate default insurance arrangements will become more challenging, and potentially more costly to administer, as trustees will need to consider if their insurance design remains appropriate to the changing needs of a member throughout their entire working career.

 

Implications for employers

The ‘stapling’ of members accounts, along with previous changes introduced to insurance eligibility as part of the Protecting Your Super/Putting Members’ Interests First  legislation, means employers will no longer be able to rely upon superannuation to protect employees against the risk of non-workplace illness or injury. 

 

With no universal or consistent approach to the default level of insurance cover available to employees or their dependants, employers will be left with an increasing moral hazard of how to effectively support employees from a financial perspective in the event of their death,  long-term illness or injury. This may lead to some employers establishing insurance arrangements outside superannuation.

 

Implications for individuals

For individuals the key challenge will be ensuring an appropriate level of protection, at the right stage of life, without the ability to rely upon the present approach to default into a new employer’s superannuation fund and benefit from the protection afforded by the typically tailored default insurance arrangements.

 

 

2. Your Future, Your Super - empowering members

 

From 1 July 2021, the government will deliver an interactive YourSuper comparison tool, administered by the ATO. The comparison tool will:

 

  • Display a quarterly updated table of MySuper products, ranked by fees and investment returns, highlighting products that have been identified as “underperforming.”
  • Link members to the fund website of a selected MySuper product.
  • Show a member’s current super accounts.
  • Prompt members to consider consolidating accounts if they hold accounts in more than one fund.

 

The YourSuper comparison tool will be based on information that superannuation funds report to APRA and will be developed in consultation with Treasury. The information about product performance will be updated quarterly to ensure users are making decisions using up-to-date information.

 

The intention is to ensure that members can compare the performance and fees of all MySuper products in a single place, based on independent and reliable information, with underperforming products clearly marked.

 

 

Mercer’s Perspective

 

  • Mercer supports measures that increase members’ engagement with their super and help them select a super product which meets their needs. 
  • The tool is expected to discourage new members from joining underperforming products and encourage the transfer of existing accounts into better performing products, which could have a significant impact on members’ retirement benefits.
  • Careful education of members will be required to ensure this tool is used appropriately.  For example:
    • It appears the tool will not provide members with any information about insurance, which will be an important consideration for some members. 
    • It is also unclear how the fee ranking would take into account individual member characteristics, such as account balance, or discounts which may be available in different products. 
    • There seems a significant risk that, despite any caveats, the tool will encourage members to choose a fund purely based on past investment performance.
  • Mercer looks forward to the opportunity to participate in consultation with the government on the detail of this measure. 

 

 

Implications for super fund trustees

With a higher degree of engagement by some members, this is likely to create more competition between super funds. Trustees will need to look at their fees, fund performance, and other benefits and ensure that the overall value proposition is clearly communicated to existing and potential members. The ease of access by members to this tool, along with the identification of underperforming funds, could have a significant impact on the membership of the fund.

 

Implications for employers

There is little direct impact on employers, although engaged employers will be keen to ensure that their default fund presents favourably in the new tool.

 

Implications for individuals

The YourSuper comparison tool promises to be a useful tool to help members to compare and select a high performing product rather than an underperforming one, which could significantly boost their retirement savings.  This should assist members being better informed and able to take better control of their superannuation.  However, the challenge will be to ensure members are aware of the potential limitations of the tool, and seek financial advice and/or also use other sources of information where appropriate.

 

 

3. Holding funds to account for underperformance

 

From 1 July 2021, all MySuper products will be subject to an annual performance test based on net investment returns, using the same methodology currently used by APRA in its “heatmap” analysis.  Products which underperform their calculated benchmark return by 0.5% per annum over an eight-year period will be classified as “underperforming”, and as a consequence:

 

  • Will need to inform members of their underperformance; 
  • Will need to provide members with information about the YourSuper comparison tool;
  • Will be listed as underperforming on the YourSuper comparison tool.

 

A product which is classified as underperforming at two consecutive annual performance tests will not be permitted to accept new members. Trustees of funds closed to new members will need to justify how they are meeting their obligations to existing members if they do not merge or improve their performance.

 

From 1 July 2022, the measure will be extended to all ‘trustee-directed products’ (essentially non-MySuper options which invest in more than one asset class), with the same consequences applying for underperformance.  

 

It is envisaged that over time the measure will be extended to other investment options although no detail is provided.

 

 

 

Mercer’s Perspective

 

Mercer supports the objective of protecting members’ retirement savings from underperforming funds.

 

However, we have concerns that the measure outlined is a somewhat ‘blunt tool’ to measure performance given the significant consequences for funds (and for existing members of those funds) classified as underperforming.  

 

It is also unclear how the measure will assist those funds which are underperforming to exit the market in an orderly fashion. To the contrary, it seems likely that any fund which notifies its members of underperformance will find it difficult to attract new members, and may experience an outflow of members or even a run on investments.  This would make it very difficult for the fund to improve its performance and/or facilitate a merger (as appears to be envisaged) leading to detrimental impacts on those members who remain in the fund.

 

We note the intended start date of 1 July 2021 allows very little time for trustees to prepare or for APRA to ensure its investment benchmark return calculation is suitable for this purpose.

 

The measure also seems to incentivise trustees to design their investment strategy around not underperforming the index return under the methodology used by APRA, which may lead to highly passive and less diversified portfolios with poorer member outcomes. 

 

We encourage further consultation with industry on the development of the legislation and the YourSuper tool to ensure it adequately reflects the varying circumstances of individual funds and their members.  

 

 

Implications for super fund trustees

These measures place a far greater emphasis on the net investment return calculated by APRA and as such trustees will need to consider whether this has implications for their investment strategy.

 

Trustees with a history of poor performance may need to review their viability in light of the proposed changes.

 

Implications for employers

A fund which is excluded from accepting new members due to underperformance would no longer qualify to be a default fund, so affected employers would need to nominate another default fund (for new entrants to the workforce).    

 

Implications for individuals

Provided that the metrics used are fair, these measures are likely to help protect new members from joining underperforming funds. However, they may exacerbate the plight of existing members of such funds.  As outlined above, once a fund is deemed to be underperforming the measures will make it more difficult for the fund to improve its performance and/or negotiate a suitable merger. 

 

 

4. Increasing accountability and transparency – trustee expenditure

 

The government will ensure superannuation trustees are more accountable and transparent about how they are managing the retirement savings of their members. The following changes are announced to apply by 1 July 2021:

 

New trustee duty (including for directors individually) to ‘put beyond doubt’ that they must act in the best financial interests of members in all forms of expenditure decisions.

 

Super trustees will be required to comply with a new duty to ‘put beyond doubt’ that they must act in the best financial interests of members, when exercising any of their powers – in particular their powers of expenditure on non-operational activities. In addition to “strengthening” the existing best interests duty owed by trustees to their members when exercising any expenditure powers, the onus on demonstrating compliance with the new duty will be reversed so that trustees must establish that there was a reasonable basis to support their actions being consistent with members’ best financial interests. 

 

To ensure that the best financial interests duty is complied with by superannuation funds (the trustee and each director individually) these changes will be accompanied by anti-avoidance measures, to ensure payments from the superannuation fund to a third party (including an interposed or a related entity) do not undermine the intent of the changes.

 

No materiality threshold will apply to the new duty.  The same penalty provisions as for breach of the trustee’s current statutory covenants will apply to the new duty.

 

New annual member information requirements

 

Trustees will be required to provide members with key information about how they manage and spend their money in advance of Annual Members’ Meetings.

 

The government will implement regulations that will require the notice of meetings to members to include the following: 

  • The annual report of the fund. 
  • The annual outcomes assessment funds are required to undertake. 
  • A copy of the most recent periodic statement for the member. 
  • A summary of each significant event or material change notice that superannuation funds were required to send in the last financial year. 
  • Remuneration of key executives, in line with ASX-listed companies along with any related entity of the fund. 
  • Marketing expenditures relating to promoting the fund, either directly or indirectly. 
  • 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). 

 

Guidance will be provided to assist funds in presenting the information in a way that allows members to understand the information and ensure there is consistency across the industry.

 

 

Mercer’s Perspective

 

The ‘best financial interests duty‘ changes appear to be designed to place greater pressure on trustees to ensure that non-operational expenditure in areas such as advertising and sponsorship can be demonstrated to have a clear connection to improved financial outcomes for members in excess of the expenditure. 

 

 

Implications for super trustees

Trustees will be keen to understand what practical changes will be needed to comply with and to demonstrate a reasonable basis for discharge of the new ‘best financial interests duty’, in relation to expenditure decisions.

 

Implications for employers

Not applicable. 

 

Implications for individuals  

The changes should result in greater transparency on fund expenditure, in particular where not directly related to Fund operations, and better enable members to challenge expenditure decisions. 

 

 

Confirmation of deferrals of previously announced reforms

 

The 2020 Budget also confirmed revised start dates for a number of previously announced superannuation measures:

 

  • Increasing the maximum number of allowable members in a SMSF and small APRA fund from four to six (2018-19 budget measure). Will now commence from date of Royal Assent of enabling legislation (previously was to start from 1 July 2019).
  • Reducing red tape for superannuation funds (Exempt current pension income changes) (2019-20 Budget measure). Start date has been revised from 1 July 2020 to 1 July 2021.
  • Cutting red tape - lost and unclaimed superannuation (2015-16 Budget measure) to allow the ATO to pay lost and unclaimed superannuation directly to a New Zealand Kiwisaver.  Will now commence 6 months after Royal Assent of enabling legislation (originally 1 July 2016).
  • Retirement Income Covenant (2018-19 Budget announcement). Commencement deferred to 1 July 2022 (previously 1 July 2020) to allow continued consultation and drafting. This will also allow finalisation of this measure to be informed by the Retirement Income Review.
  • Facilitating the Closure of Eligible Rollover Funds (ERFs) (2019-20 MYEFO): The government confirmed it intends to amend the  Treasury Laws Amendment (Reuniting More Superannuation) Bill 2020 currently before the Parliament to:
    • by 12 months the start date of the measure that prevents superannuation funds from transferring funds to ERFs  (to 1 May 2021)
    • Defer the date by which ERFs must transfer accounts under $6,000 to the ATO to 30 June 2021 
    • Defer the date by which ERFs are required to transfer remaining accounts to the ATO to 31 January 2022  
    • Allow all superannuation funds to voluntarily transfer amounts to the ATO when they believe it is in the best interests of those members (such as amounts that would previously have been transferred to an ERF)

 

 

 

 

 

 

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