Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory, a member of that group. Here, he talks about the changes afoot from 1 July 2021 for your precious superannuation savings. It’s not legislated yet, but the government is looking at clamping down on super funds where the investment returns are sub-standard. There are various questions which can only be resolved once the legislation is drafted. eg If you are in a fund that is neither bad enough to be told “don’t accept new members”, but not really good, does this mean you can’t transfer for higher growth rates and lower fees? The legislation is not drafted yet and we’ll need to see the fine print to see if it’s to be fair to all parties.
Over the last two decades, we’ve become used to receiving a raft of changes to superannuation every budget night. Last Tuesday was different – changes were few in number, but significant in their potential effect.
A key finding of the Cooper enquiry into superannuation was that 80% of Australians were “disengaged” with their superannuation. As a result, they were paying excessive fees, stayed invested in inappropriate products by default, and many had multiple accounts due to job changes. But, as I have said repeatedly, the major factor that determines how much superannuation you have when you retire is the net rate of return, after all fees and taxes.
Think about two people aged 30 now, with $25,000 in super and earning $60,000 a year. Their salaries increase by 4% per annum and their contributions remain at 9.5% of salary. One is in a fund that averages 8% net returns: by age 65 they have $1.8 million in super. The other is in a fund that returns just 5% per annum; they end up with a measly $940,000 in super – half what they could have had in the better fund. The difference over time is immense.
So a major plank in the reforms announced last Tuesday night is that employees would have a lifetime fund, which would be “stapled” to them. This means that when changing jobs, they would automatically stay with their existing fund unless they opt to move to the new employer’s default super fund. This change in thinking presents smart employers with an opportunity to make a huge difference in their employees’ financial futures. Employers could facilitate avenues for both new and existing staff members to examine the superannuation fund options to them and decide on the most appropriate one for them. It’s a great way to get them engaged.
One of the problems contributing to the current disengagement of the average fund member, is knowing where to find a good superannuation fund. To this end, the ATO will develop a new, interactive, online super comparison tool which will rank MySuper products by fees and investment returns, provide links to super fund websites, and prompt members to consolidate multiple funds.
And there’s more. From 1 July 2021, APRA will conduct benchmarking tests on the net investment performance of MySuper products, which will make it easier for members to compare the fees and investment performance of super funds in the market. This will create more competition, lower fees, and lead to the demise of some funds that have been under-performing for decades.
And there are further strategies to clean up underperforming funds. A fund that is deemed to be underperforming will be required to inform its members of its underperformance by 1 October 2021. At this time, members must also be provided with information about the super comparison tool. Funds that underperform on two consecutive annual benchmarking tests will not be permitted to accept new members until a further annual test shows they are no longer underperforming.
By 1 July 2022, the annual performance test will be extended to other superannuation products. As yet no detail has been announced, but one could expect that self-managed superannuation funds will fall under this umbrella. This would be a great outcome. Many self-managed super funds seriously underperform, often because their trustees are unskilled at investing, or because they haven’t got a clue about how to measure their own funds’ performance.
In short, I think the reforms are fantastic. They offer realistic ways for members to become more engaged, access better information about fund performance, and so make better choices. This could be worth hundreds of thousands of dollars to them when they retire.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au