Budget super changes explained: How the government’s getting tougher on funds

There was plenty of superannuation talk around this week’s Federal Budget, which introduced four changes to the sector that  could affect Australians of all ages.

According to the Budget, international comparisons ranked the fees charged by the Australian super funds among the highest in the world, with Aussies paying $30 billion in fees on their super savings each year – including about $450 million on duplicate or redundant accounts alone, Treasurer Josh Frydenberg said.

Frydenberg put the cost to super savers in perspective by explaining that “at $30 billion a year, the superannuation fees Australians pay exceeds the cost of household gas and electricity bills combined”. Fixing issues with high and needless fees would save Australians a collective $17.9 billion over the next decade, the government estimated.

Meanwhile, recent Stockspot research found that high super fees were typically aligned with poorer investment returns. Stockspot CEO Chris Brycki pointed out that a combination of high fees and weak returns cost workers on average $200,000 over their working life.

And Brycki noted that high fees weren’t just a problem for those starting their careers. “Fees are also an important consideration for those approaching retirement,” he said last month. “As you reach retirement, your portfolio generally becomes more conservative. Fees take an even larger slice of your returns in a moderate or conservative super fund.”

Even retirees are impacted by high fees and poor returns, because account-based pensions, in which a proportion of a retirees’ savings remain invested even as they draw down a retirement income from their fund, are one of the most popular retirement income products used by older Australians.

These are the changes the Federal Budget introduced to address the high-fee and underperformance problem.

Name-and-shame policy

For retirees, the biggest change will see the government holding underperforming super funds accountable through a policy designed to increase transparency with fund members. The new rule requires funds to inform members when their investments are underperforming and offer members the option to move their money to a better-performing fund.

To enable this, from July 2021 funds will be required to take an annual performance test and those that fail to produce decent returns will be publicly listed as an underperforming fund on the new comparison tool known as YourSuper, until the fund’s returns improve. Funds that fail the test two years in a row won’t be allowed to accept new members then until their performance improves.

The test will initially only apply to MySuper funds, which are the default funds allocated by employers to workers who don’t nominate a specific fund to receive their super guarantee contributions, but will be extended to other super products in 2022.

New super comparison tool

The new government-run website called YourSuper will be an interactive comparison tool that workers can use to decide which super product will best meet their needs. The tool will provide insight into super products ranked by fees and investment returns, provide consumers with direct links to super fund websites and show workers’ current super accounts to prompt members to consider consolidating accounts if they have more than one.

The tool is designed to help super savers make an educated decision on what to do with their retirement savings, as well as stimulate competition in the sector as super funds are forced to work harder to manage member’s money and attract new members.

Commenting on the new policies, Martin Fahy, the CEO of the Association of Superannuation Funds of Australia (Asfa), said that while Asfa supported the government’s move to lift the standards demanded of MySuper accounts, it needed to ensure the changes didn’t reduce competitive intensity or damage the nation-building role of superannuation.

Fahy referenced the Retirement Income Review that the Treasury announced in September 2019, which was due to provide its final report to the government in June 2020. The review has not yet been publicly released.

“In the absence of the release of the Retirement Income Review and the lack of specificity in the Budget papers, it is unclear how the changes will work in practice or what the implications will be for competition, efficiency and incumbents in the sector,” he said. “We need to avoid reducing the complexity of MySuper to a singularity without any reference to the nuance of member preferences and long-term fund performance.”

‘Stapling’ funds to workers

For the first time, workers will keep the same super fund when they change jobs to stop the automatic creation of additional funds under one name, which only serves to diminish super balances. Instead, a primary super fund will be “stapled” to a worker throughout their life unless the worker chooses otherwise.

While the government says that removing millions of unintended multiple accounts over the next 10 years will save workers about $2.8 billion in duplicate fees, insurance and lost earnings, Industry Super Australia’s chief executive Bernie Dean said the plan wasn’t foolproof.

“While it is pleasing the government is tackling multiple accounts, stapling workers to a single fund could leave them stuck in a dud fund for life, costing them hundreds of thousands of dollars at retirement,” Dean said. “Stapling the money to a member would remove multiple accounts quicker and more effectively weed out underperformers. Underperformance is the biggest cost drain on member savings and dud funds need to be removed no matter what type of fund they are.”

Reducing waste

The Morrison government will require funds to be more upfront with members by complying with a new duty to act in the best financial interest of members, demonstrate a reasonable basis to support actions and provide members with key information of how retirement savings are managed and spent in advance of annual members’ meetings.

Ian Yates the chief executive of the Council of Ageing (Cota) praised the Coalition for this increase in the level of transparency and accountability, which that the government has said would save all super members save a combined $1.1 billion extra in their super funds over the coming decade. However, Yates, like Asfa’s Fahy, pointed out the lack of public response to the long-awaited Retirement Income Review.

“We note that the government has not made other announcements in response to the Retirement Income Review, and again call on government to release this independent, once-in-a-generation review of our retirement income system, so that we can all share the rich data it provides on what’s working and what’s not adequate, so we can discuss positive ways forward to strengthen pensions and superannuation.”

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