The 2020/21 Federal Budget was packed with personal tax cuts, business tax incentives and infrastructure funding. Lost amongst these big-ticket items were three proposals that stand to dramatically shape superannuation, and advice on superannuation, going forward.

In brief, the three proposals were:

1. That superannuation funds be ‘stapled’ to an employee when they change employers;
2. That an online MySuper comparator tool, ‘YourSuper’, be created; and
3. That super funds be subject to annual performance tests.

These three proposals all have their roots in the Productivity Commission’s 2018 final report on efficiency and competition in the superannuation industry. That said, they do not implement the commission’s recommendations in full.

Therefore, it is important to examine the evolution of these proposals, and to consider what they would mean for the superannuation marketplace, and advice on superannuation, should they become law.

Stapled super

The Budget proposal

By July 1, 2021, an employee’s super fund contributed to by their previous employer (if it is still active) is proposed to be the default fund into which a new employer would contribute. This would prevent employees receiving a new default fund every time they join a new employer, as is currently the case.

This process would be managed by the employer engaging with the ATO. If an employee does not have an existing chosen super account (for example, if it’s their first job), the employer would still need to use a default MySuper fund. The employer would then allocate the employee to that default fund if the employee does not submit an alternate super choice.

The Productivity Commission’s original recommendation

The Productivity Commission’s recommendations included ‘stapling’ super funds to employees as they changed employers, however, it went much further. The Commission gave detailed recommendations on how a default fund be allocated to an employee who doesn’t have an existing fund – and the process did not include any employer choice.

The Productivity Commission recommended that all employees without an existing super account be defaulted into one of 10 funds from a ‘best in show’ list. This ‘best in show’ list was to be created by an independent panel of experts. Employees in need of a fund would be randomly allocated one of the 10 ‘best in show’ funds.

Impact on super and advice

Those with default superannuation are often apathetic about their default super. As the Productivity Commission identified:

Members who default are typically disengaged and exert no competitive pressure — there is limited or no competition in the market.

This disengagement is made obvious by the fact, identified by the ATO, that more than one-third of the population still has multiple super funds.

This disengagement is likely to result in default superannuation as a product becoming ‘stickier’ under the Budget proposal. As an employee moves from employer to employer, the path of least resistance will be to let their super fund follow them automatically, rather than examine whether it is still appropriate for them. The standards applied to MySuper funds will protect such employees from ending up in a fund with features and costs lagging the market to some degree. That said, it will still be important for financial planners to actively review clients’ super fund when providing advice.

The absence of a ‘best in show’ list from the Budget proposals seems positive for overall competition in the default super market. If the shortlist model was adopted, it is hard to see how new market entrants would be able to build up the economies of scale necessary to make the list. Furthermore, dropping off the list would be terminal for many funds, as the loss of inflows is likely to be exacerbated by an exodus of existing members.

The unknowns

There are a number of unknowns regarding the ‘stapling’ process recommended in the Budget. First and foremost, it isn’t clear how the identification of a valid fund stapled to a new employee will fit in the existing ‘choice of fund’ process. Depending on how it is legislated, it could streamline the onboarding of new employees for employers, or it could make the process more onerous with additional steps and stakeholders.

It is also unclear as to how the stapling process will interact with the performance benchmarking (also proposed in the Budget) and MySuper accreditation. If a fund fails the benchmarking, does an employee’s ‘staple’ then break if they move employers before the fund returns their performance to an acceptable level? If a fund loses MySuper accreditation, does this affect the member’s ‘staple’?

YourSuper

The Budget proposal

By July 1, 2021, a new online tool, YourSuper, is proposed to be created that will allow clients to compare the fees and performance of MySuper products. The tool will link clients to websites where they can apply for new MySuper accounts and will also prompt them to consolidate their super if they have multiple funds.

The Productivity Commission’s original recommendation

The Productivity Commission’s original recommendations went much further than having a centralised tool to compare the fees and investment returns of MySuper funds.

The Productivity Commission recommended that all super products, that is all MySuper and choice investment options, be required to issue one-page ‘dashboards’ that contained all relevant data consumers would need to make an informed choice. The Commission also recommended that the dashboards be available via the MoneySmart website and also via the ATO’s super consolidation tool.

Furthermore, the Productivity Commission recommended that funds not just be encouraged to minimise fees, but be compelled:

Because super funds are legally obliged to act in members’ best interests, the fees they charge should not exceed cost recovery levels.

Impact on super and advice

This proposal is unusual as there is already a MySuper funds list on the MoneySmart website that can sort all the listed MySuper funds by performance and fees. It also links to each fund’s dashboard. It seems YourSuper is looking to provide a closer link between the ATO’s lost super service and MoneySmart’s funds list.

Nonetheless, both the MySuper funds list and YourSuper increase the risk of clients changing products without considering all relevant factors, including insurance coverage and investment choice. A broader range of comparison metrics, other than just fees and performance, would better equip consumers to make informed decisions.

Financial Planners and clients will need to communicate closely to ensure they are on the same page when it comes to the choice of a superannuation fund.

Limiting the scope of YourSuper to MySuper funds also reduces its efficacy. The super marketplace is much larger than MySuper funds and it could inadvertently shut the door on a range of options that are available to fund members through a lack of information about non-MySuper options.

It also seems the Government’s proposal aims to pressure funds to reduce fees by comparing them publicly, rather than by regulations mandating that they be on a cost recovery basis. It remains to be seen how effective this approach will be.

The unknowns

One of the Productivity Commission’s greatest concerns when it came to comparing the performance and cost of super funds was the inconsistent methods used by funds to calculate these figures.

Analysing fees is bedevilled by significant gaps and inconsistencies in how funds report data on fees and costs, despite regulator endeavour to fix this. This lack of transparency harms members by making fee comparability difficult at best and renders cost-based competition largely elusive.

ASIC has updated Regulatory Guide 97 to increase consistency in fee reporting, however, adherence to these standards is an issue that needs to be addressed. The amendments to RG 97 don’t apply to Product Disclosure Statements until September 2022 – after the proposed commencement of YourSuper. It isn’t clear in the Budget proposal how the Government proposes to ensure consistent information is provided to consumers from the outset of YourSuper.

Performance benchmarking

The Budget proposal

By July 1, 2021, all investment returns in MySuper funds would be benchmarked by APRA. Funds that are deemed to be underperforming will need to inform their members of this outcome. Funds that are considered to have underperformed for two consecutive years will be closed to new members until their performance improves.

This benchmarking was proposed to be extended to other super products (presumably choice funds), by July 1, 2022.

The Productivity Commission’s original recommendation

The Productivity Commission issued a series of recommendations aimed at ensuring the consistent performance of those superannuation funds and investment options that are available.

The Commission’s final report recommended that each default and choice super fund investment option stay within a narrow band of investment returns centred on a set of market indices. If the investment option fell below the benchmark by 0.5 percentage points a year, no new members could choose that option and a 12-month period of remediation would be allowed. If inadequate improvement in performance was shown after that 12 months, the option or fund will be required to close and roll existing members into another fund or option.

The benchmarks against which an investment option would be tested were to be chosen by the fund from a weighted list of market indices that reflect the fund’s investment split. As such, the indices used for a benchmark would be flexible.

Impact on super and advice

Fund members will be pleased that underperformance of their super fund will be brought to their attention quickly. The potential negative effects of being identified as underperforming will incentivise publicly-offered super funds (MySuper funds initially, and other funds subsequently) to avoid investment choices that could see them underperform the benchmark.

The flipside of this conservatism is that few, if any, publicly-offered super funds are likely to attempt to significantly outperform the benchmark. This could leave self-managed super funds (SMSFs) as the only recommendation available to financial planners where their client wishes to pursue a more aggressive investment strategy within super.

The unknowns

The most important details that are as yet unknown about this proposal are the benchmarks against which investment options are to be tested. The indices, the ability to mix and match indices for varied investment strategies, and the ability for funds to choose their benchmarks, will all impact how this proposal changes the behaviour of super funds.

It is also unknown which ‘other’ super products are proposed to come under this regime by July 2022. Choice funds seem the most obvious candidates. There has been some conjecture that it could be extended to SMSFs. This seems unlikely, as they are regulated by the ATO rather than APRA, aren’t publicly offered super products, and the proposed punishments for underperformance would have little effect.

No tinkering, substantive change

The three Budget proposals add up to the implementation of genuine reform to superannuation. Unlike previous super overhauls, the focus isn’t on the tax incentives provided by super, but on how people are connected to their super fund and how much information is publicly available.

Financial planners and their clients will need to appreciate that understanding their recommended or chosen super product will require more than the fees and returns listed on YourSuper. The proposals could also mean that SMSFs assume a prominent, and possibly exclusive, role as the super fund of choice for those looking to outperform the market.

Staying informed as these changes are refined and then legislated will be essential to ensure future recommendations are appropriate, and potential pitfalls are avoided.

Rob Lavery is Technical Manager at KnowIt Group. 

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QUESTIONS

To answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals

1. Which of the following was not a 2020/21 Federal Budget proposal?
   1. Ensuring super accounts follow employees between employers using ATO data sharing.
   2. Sharing all MySuper dashboards on ASIC’s MoneySmart website.
   3. The creation of an online MySuper comparison tool.
   4. Benchmarking of MySuper returns and, ultimately, extending this benchmarking to other super funds.

2. Which of the following statements is false?
   1. An employee’s super fund contributed to by their previous employer is proposed to be the default fund into which a new employer would contribute.
   2. The ‘stapling’ process would be managed by the employer engaging with the ATO.
   3. Under the Budget’s ‘stapling’ proposal, employers would no longer need to have a default MySuper product for new employees.
   4. The Budget’s ‘stapling’ proposal aims to reduce the number of people with multiple super accounts.

3. Urzana is keen to use the proposed YourSuper tool to help determine which super fund is best for her. What information will Urzana be able to access via YourSuper to help inform her decision?
   1. Fee and investment return information for all MySuper funds.
   2. Fee, investment return and insurance information for all MySuper funds.
   3. Fee and investment return information for all MySuper and choice funds.
   4. Fee, investment return and insurance information for all MySuper and choice funds.

4. TheirSuper’s only investment option underperforms its benchmark for a single year. Under the Federal Budget proposal, which of the following punishments would apply to TheirSuper?
   1. All members would need to be informed of the underperformance.
   2. TheirSuper would be closed to new members until performance returns to an acceptable level.
   3. TheirSuper would be required to close and roll all members out of the fund.
   4. All of the above.

5. Which of the following would be impacts of applying performance benchmarking to all MySuper and choice funds?
   1. All MySuper and choice funds would be incentivised to follow the benchmark indices in order to avoid punishment.
   2. Attempts to outperform a benchmark would risk a fund or investment option being closed to new members, and thus impact its viability.
   3. Super members looking to outperform a benchmark without the risk of having the super investment option closed would be best served considering a self-managed super fund.
   4. All of the above.