Super to get a whole lot more appealing
Forget the detail. The big hope for the government's Stronger Super reforms is that they will allow ordinary fund members to take more interest in their super.
Forget the detail. The big hope for the government's Stronger Super reforms is that they will allow ordinary fund members to take more interest in their super.No matter how hard the super industry, or columns like this one, trumpet the fact that for most people super is now their biggest investment outside the family home, the majority of Australians are still unengaged with their retirement savings. It could be that retirement is still a long way off, or that they have more pressing financial issues than money that is locked away. But for a lot of people the mere word "superannuation" just makes their heads hurt.Complex tax rules, a ridiculous number of funds and investment choices, and the inability to easily compare one fund with another all conspire to lead otherwise intelligent people to decide super is simply too hard and they'll just go with whatever their employer offers.Which is fine if you work for a big employer that has screwed an attractive deal from a reputable super fund and given considered thought to an appropriate default investment option, but not so hot if your employer simply signed on the dotted line when pressured by a commission-based salesperson.It is one of the big scandals of the present super system that the proportion of your money being eaten away by commissions and other fees can range from less than 0.5 per cent to 2 or 3 per cent - and occasionally more. Over a full working life, even a small difference in fees can translate into a difference of tens of thousands of dollars in your final benefit.The Stronger Super reforms will place a lot more power in consumers' hands to do something about it.The reforms include three main elements:MySuperA new type of default fund that employers will be required to pay compulsory super contributions to from October 1, 2013, unless you have chosen a different fund.MySuper funds will be required to have a single investment strategy and to clearly state the return they are targeting over a 10-year period and the level of risk it has deemed appropriate. No more of this "adding value with a commensurate level of risk" guffle.The Australian Prudential Regulation Authority will work with the industry to come up with standard ways for funds to measure and present this information so consumers can compare funds without getting a headache.MySuper funds will also be limited in the fees they can charge and trustees will be required to take account of costs. Importantly, MySuper funds will not be able to pay commissions to financial advisers. Parameters have also been set for the payment of performance fees to investment managers.After a battle royale between the retail and industry funds, the government has decided to drop its original one-price-for-all requirement for MySuper funds and allow funds to offer administration fee discounts for big employers.They will also be able to tailor MySuper funds for employers, effectively giving them flexibility on investment fees as well. However, funds will still be required to publish their standard fees and to disclose (and presumably justify) any discounts. This should at least make it more visible if they're ripping some members off.MySuper funds will also be restricted in the insurance they offer members (current practices by some funds such as charging for insurance that members may not be able to get out of the fund will be banned) and members will be given the option of opting out of insurance where the fund can buy opt-out cover.But again, while standard cover will be the norm, the government will allow an alternative default insurance strategy to be tailored for the needs of specific workplaces.Another concession offered to the industry is that funds won't be required to transfer existing money in default accounts to the new MySuper fund until 2017, potentially sentencing members of funds that currently pay commissions to lining the pockets of financial advisers for another six years. There will also be exemptions for certain legacy products and defined benefit funds.But the choice is yours.There are already plenty of well-run affordable funds that don't pay commissions and from 2013 any new compulsory super payments you receive will go to a MySuper fund. It is only inertia and lack of interest that will prevent you from seeking a better deal.SuperStreamA set of reforms to clean up the "back office" of super to make the system more efficient. Talking about SuperStream is a bit like watching paint dry but it is intended to replace many of the archaic industry practices (many contributions are still cheques sent by snail mail) with better use of technology, tax file numbers and standard forms of information.SuperStream will also address the problem of multiple super accounts whereby many people have retirement savings eroded by paying unnecessary fees, such as insurance costs, on more than one account. Any accounts of less than $1000 will be automatically consolidated to your current active account unless you choose to keep them and this limit may be raised to $10,000 in 2014 subject to a review by Treasury.The reforms will also include requirements for employers to inform employees of when their super payments will be made and for funds to notify employees of when contributions are received - a critical first step in ensuring fund members get their proper super entitlements.GovernanceReforms intended to ensure the people running your fund do the right thing. These will include requirements covering the duties and standards to be met by trustees such as giving priority to members' interests, requiring funds to maintain operational risk reserves, and the inclusion of expected costs, tax, and the availability of valuation information in the things trustees must look at when devising an appropriate investment strategy.The package also propose a requirement that self-managed super fund auditors be independent and any related party transactions undertaken by super funds be done through a market, or if no market exists, accompanied by a proper valuation.