Protecting the interests of the disinterested
An employer's default option is where compulsory super goes if employees don't choose a fund to manage their super. MySuper is designed to better protect the vast majority who don't take an interest in their super.
To receive the MySuper tick from the regulator, the default investment option will have to be low cost and commission-free, among other things. Fees, such as entry costs, will be banned, while exit fees will be limited to cost recovery.
SuperRatings head of research Kirby Rappell says that for members of non-profit funds, such as industry and public-sector funds, nothing much will change because those funds never had entry fees or commissions and their default investment options have already been rubber-stamped as MySuper compliant.
The biggest change will be for members of retail funds; those run by the big banks and insurers.
Most retail funds are opting to make a "lifecycle" option their MySuper-compliant default investment option. With lifecycle options, members are put into an option depending on the decade in which they were born. The funds will go by names related to the birth decades - 1950s, 1960s, 1970s etc - and, without the member having to do anything, the investment risk will be gradually reduced as they age.
This reduction in risk is achieved by cutting back exposure to "growth" assets, such as shares and property, while increasing exposure to "defensive" assets, such as fixed interest and cash. By the time the member reaches 65, for example, he or she may be holding about 20 per cent growth assets and 80 per cent defensive assets.
The default options of the non-profit funds typically have about 70 per cent of the money invested in growth investments and 30 per cent in defensive ones, with the asset allocation fairly static.
While the lifecycle approach is supposed to better match members' decreasing appetite for risk as they age, there is a potential pitfall. There is a rule of thumb that says for each dollar spent in retirement, about 60¢ comes from investment earnings in retirement. That's important to bear in mind when only 20 per cent of a lifecycle option may be invested in growth assets by the age of 65.
Growth assets, such as shares, produce greater investment earnings than defensive assets over the longer term. It could mean ending up with less in retirement.
The MySuper revolution is coming, but there's no need to feel rushed or pressured. While compulsory contributions from January 1 next year will have to go to the MySuper-compliant default, balances will not be shifted until July 1, 2017.
Fund members should review their situation and obtain advice where needed. Most funds offer some advice over the phone.
Watch Money's John Collett and Clancy Yeates discuss the latest personal finance news at theage.com.au/money.
Frequently Asked Questions about this Article…
MySuper is a government-driven change to superannuation default options designed to protect members who don’t actively manage their accounts. From the start date in the article, your employer’s compulsory contributions must go to the fund’s MySuper‑compliant default option, which must be low‑cost, commission‑free and meet other regulator standards.
Compulsory contributions will have to be paid to your fund’s MySuper‑compliant default option from January 1 referenced in the article. Existing account balances, however, will not be shifted automatically until July 1, 2017, giving members time to review choices.
Members of retail funds (those run by big banks and insurers) are likely to see the biggest changes because many retail funds are adopting lifecycle MySuper options. Not‑for‑profit funds, such as industry and public‑sector funds, are largely unchanged because they already tended to be commission‑free and have default options that are MySuper‑compliant, according to SuperRatings’ head of research Kirby Rappell.
A lifecycle option automatically places members into a default investment option based on the decade they were born (for example, 1950s, 1960s, 1970s). Over time the fund gradually reduces investment risk by cutting exposure to growth assets like shares and property and increasing defensive assets like fixed interest and cash as members age.
To receive the MySuper approval from the regulator, default investment options must be low‑cost and commission‑free. Entry fees will be banned and exit fees will generally be limited to cost recovery, reducing the cost burden on members of default options.
Potentially. The article notes a rule of thumb that about 60 cents of every dollar spent in retirement comes from investment earnings. Because growth assets like shares typically produce higher long‑term returns, switching to a lifecycle option that reduces growth exposure to around 20% by age 65 could mean lower investment earnings in retirement compared with a higher growth allocation.
Default options in many not‑for‑profit funds tend to hold around 70% in growth investments and 30% in defensive assets with a fairly static allocation. By contrast, lifecycle MySuper options used by many retail funds progressively reduce growth exposure as members age — for example, moving toward something like 20% growth and 80% defensive by age 65.
You don’t need to feel rushed, but you should review your super situation and consider getting advice if you’re unsure. While compulsory contributions will start going to MySuper defaults from January, balances won’t be shifted until July 1, 2017. Most funds offer phone advice to help members understand how a MySuper default or a lifecycle option will affect their retirement outcomes.
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