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:
MySuper
A 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.
SuperStream
A 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.
Governance
Reforms 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.
Frequently Asked Questions about this Article…
What are the Stronger Super reforms and why do they matter to everyday investors?
Stronger Super is a package of reforms aimed at making superannuation simpler, cheaper and more transparent for Australians. The package focuses on three areas — MySuper (new default funds), SuperStream (cleaning up back‑office processes and reducing multiple accounts) and stronger governance rules for trustees and SMSFs. For everyday investors this means clearer default options, limits on some fees and commissions, easier comparison of funds, and better protections so more of your retirement savings stay in your account.
What is MySuper and how will it change default super funds from October 1, 2013?
MySuper is a new type of default super fund that employers must use for compulsory super contributions from October 1, 2013 unless an employee chooses another fund. MySuper funds must have a single investment strategy, state the 10‑year return target and risk level, limit certain fees, and cannot pay commissions to financial advisers. The rules are designed to make default options easier to understand and compare.
Will MySuper funds stop commissions and reduce fees in superannuation accounts?
Yes — MySuper funds will not be able to pay commissions to financial advisers and will be limited in the fees they can charge, with trustees required to take costs into account. Funds must publish standard fees and disclose any discounts (for example to large employers), which should make it easier to spot funds with higher costs. The reforms aim to reduce the wide fee variation that can shave tens of thousands from a person’s final benefit over a working life.
How will Stronger Super affect insurance inside my super account?
MySuper rules restrict problematic insurance practices. Funds will be limited in the insurance they can offer and will be banned from charging for insurance members can’t opt out of. Members will generally be given the option to opt out where the fund can buy opt‑out cover. The government will also allow alternative default insurance strategies to be tailored for specific workplaces where appropriate.
What is SuperStream and how does it reduce multiple super accounts and unnecessary fees?
SuperStream is a set of reforms to modernise the ‘back office’ of superannuation by using better technology, standard forms and tax file numbers to process contributions. It also tackles multiple small accounts by automatically consolidating any accounts with less than $1,000 into your current active account (unless you opt to keep them). A review may raise that automatic consolidation threshold to $10,000 in 2014. These changes cut administration costs and duplicate insurance and fees across multiple accounts.
How will the reforms make it easier to compare super funds and see what you’re actually getting?
The Australian Prudential Regulation Authority (APRA) will work with the industry to standardise how funds present key information. MySuper funds must state a single investment strategy, a 10‑year return target and the level of risk, and funds must publish their standard fees and disclose discounts. Standardised presentation should make it much easier for consumers to compare funds without getting bogged down in technical jargon.
What governance and trustee changes are included to protect super members’ interests?
The governance reforms raise standards for those running funds: trustees must give priority to members’ interests, maintain operational risk reserves, and consider expected costs, tax and valuation information when setting investment strategy. The package also proposes independent SMSF auditors and requires related‑party transactions to be conducted through a market or supported by a proper valuation if no market exists.
As an everyday investor, what practical steps should I take because of the Stronger Super reforms?
The reforms make it easier to take action, so avoid inertia. Check whether your employer’s default will be a MySuper fund from October 2013, compare standard fees, the fund’s stated 10‑year return target and risk level, and look at default insurance terms. Consider consolidating small or duplicate accounts and choose a well‑run fund that doesn’t pay commissions if it suits your needs. The reforms give you clearer information to shop around for a better deal.
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