Consolidation limits mystify

The government says it's serious about reuniting superannuation members with the $19 billion estimated to be in "lost" and inactive superannuation accounts.

The government says it's serious about reuniting superannuation members with the $19 billion estimated to be in "lost" and inactive superannuation accounts.

From 2014, inactive and lost accounts with balances of up to $1000 will be auto-consolidated. The government announced the plan last month as part of its Stronger Super proposals.

There are an average three accounts for every super fund member, many of which are inactive. People change jobs and have their super contributions paid into the default fund at the new employer. Each account has fees and members would pay less in fees if the inactive accounts were rolled into their active account - usually that which is receiving the compulsory super contributions.

super funds can charge high management fees, sometimes more than 4 per cent a year on "lost" accounts. Lost and inactive accounts are cheaper for the funds to administer than active accounts. But who is going to complain about high fees on lost and inactive accounts?

An "inactive" account is defined as one that has not received any contributions or rollovers for the past two years. Under the proposals, the Tax Office and the Australian Prudential Regulation Authority will consider whether the threshold for auto-consolidation should be increased to at least $10,000 from $1000 if significant inroads are not made into reducing the amount of money in lost and inactive accounts. Better processes will be put into place for new employees to consolidate their own accounts when they start a new job.

But if the government is really serious about reducing the mountain of money in lost and inactive accounts, why have any limit on the size of the accounts that can be auto-consolidated? The main point of the reforms is to help "disengaged" fund members have less of their retirement savings eroded by fees.

The main argument for the $1000 cap appears to be concerns that once an account is consolidated, any life and total and permanent disability insurance cover that is with the account will cease. Funds have automatic acceptance, where no medical examination is required up to a certain limit of cover. The concern is that if fund members try to increase their cover in their active account to compensate for the loss of cover in their consolidated inactive accounts, the extra cover may take their total cover in the active account above automatic acceptance limits.

But the government's intention is that fund members will be contacted first and asked whether they want their inactive account consolidated. You can expect the funds and their insurers will make sure fund members are warned they will lose insurance cover if they consolidate. The government is also sure to require that fund members are aware of limits to cover for automatic acceptance on their active accounts.

Provided these safeguards are in place, it seems hard to justify the initial $1000 limit. It appears to be an overly generous concession to the super industry and insurers at the expense of ordinary fund members.

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