Reforms, including a standard default option, are set to put more money in the pockets of customers.
It took a financial crisis for people to question whether their superannuation fund was delivering on its promise of a comfortable, self-funded retirement. After several government inquiries, reform of the $1.4 trillion superannuation system is on its way, with a focus on lower fees and greater simplicity and transparency.
Many investors and industry insiders are critical of constant government tinkering with super, but the test will be whether the changes produce better retirement outcomes for fund members.
The research director of Rainmaker, Alex Dunnin, says the changes will have a big impact on consumers, even though they will take a while to filter through the system. "They will also make the superannuation industry more accountable," he says.
Here is a rundown of the big reforms on the way.
INCREASE IN THE SUPER GUARANTEE
Beginning next year, the super guarantee will be ratcheted up from 9 per cent to 12 per cent by 2020. Of all the coming changes, this is the one guaranteed to put more money in your pocket.
Employees will receive a 0.25 per cent increase in their compulsory super guarantee payments on July 1 next year, 0.25 per cent in 2014, then 0.5 per cent a year until 2019-20.
Dunnin says increasing the guarantee to 12 per cent means people will be working for about six weeks a year just to tip money into super. With so much at stake, he says people will start demanding more from their fund.
From July 1 next year the majority of working Australians will be switched into a new product called MySuper. MySuper is a low-cost, simple fund designed to replace existing default funds - the option that's chosen for you if you don't choose one yourself.
A MySuper fund must offer a single, diversified investment strategy, charge no entry fees, inbuilt adviser fees or commissions and charge a low annual member fee. They may also offer services such as life insurance and financial advice. All funds will have to offer MySuper as their default investment option, whether they are industry, public sector, corporate or retail funds. Federal Treasury estimates that someone aged 30 today on average earnings could be $150,000 better off on retirement, thanks to the combined benefits of MySuper and the increase in the super guarantee.
The government hopes fees on MySuper funds will fall to about 0.66 per cent, although just the threat of MySuper has put downward pressure on fees.
According to Chant West, the average fee on a $50,000 balance has fallen from 2.4 per cent three years ago to 1.9 per cent for retail super funds, while the average fee on industry, public sector and corporate funds has stayed at
1.1 per cent.
However, costs and contributions are only one part of the investment equation returns net of fees and tax are the final measure of success or failure.
Dunnin says the changes will turn super into a blood sport. "Greater simplicity will make it easier to compare products and people will gravitate to funds that offer a value proposition," he says.
FUTURE OF FINANCIAL ADVICE (FOFA)
The government's FoFA reforms are designed to promote cheaper, more transparent and accessible financial advice for all investors, including super members. Previously common practices such as automatic commissions on financial products will be banned.
Retail funds are already beginning to unbundle super investment platforms from advice for investors who want a
no-frills product. Another trend is the move to scaled advice, where people are offered different levels of financial planning according to their needs.
The director of education and professional standards at the Self-managed Superannuation Professionals Association of Australia, Graeme Colley, says some people might want advice only about insurance, so there is no need to pay for a full financial plan.
'LOST' ACCOUNTS AND
From December 31, super funds will transfer "lost" accounts of less than $2000, where there have been no contributions for 12 months, to the Australian Taxation Office. Accounts of less than $2000 that belong to members who are contactable but have lain dormant for five years will also be transferred to the Tax Office.
Although people will still be able to claim their lost funds, it is in the interest of members to consolidate their retirement savings into one account they can actively manage.
Also, from January 2014 the Tax Office will use members' tax file numbers to consolidate accounts with less than $1000 where there have been no contributions for two years. This "auto-consolidation" should benefit people who have small amounts in multiple accounts being eaten away by fees.
LOW-INCOME SUPER CONTRIBUTION
Low-income earners will also receive a boost to their super at the end of the current financial year. From July 1, people earning less than $37,000 are eligible for a government contribution of up to $500 towards their super. Essentially, this is a refund of contributions tax on their super guarantee payments.
At the same time the government
co-contribution has been reduced to a maximum of $500. To receive the maximum you need to earn less than $37,000 and make a personal (after-tax) contribution of $1000. The
co-contribution cuts out at incomes of $46,920.