What if...: Annette Sampson

The compulsory system is too complex for many employees but that could change soon

SPOILT FOR CHOICE

As anyone who has taken an interest in their super would know, there are thousands of funds and investment choices available. Not surprisingly, this is all too hard for most people and two-thirds of fund members stay with the default fund chosen by their employer. How employers choose default funds varies. It may be part of an industrial award, contract or agreement or a different arrangement.

Under recent reforms, default funds must be designated as a MySuper product, which is a simple, lower-cost fund with a single diversified or lifestyle investment option to ensure members are not paying for bells and whistles they don’t need.

Employers have been required to pay your super to a fund that offers MySuper since January 2014 and if you were within an existing default fund before then your fund has until July 1 to transfer your balance to a MySuper account.

But even so, there are still more than 100 MySuper accounts available and there is no guarantee members are getting the best available to them.

Last year the government asked the Productivity Commission to investigate how default funds are chosen and it released its draft report in March. The final report is due in August and a major shakeup could be on the way.

WHAT IS PROPOSED

One of the problems with the current system is that each employer you work for can direct your super contributions to a different account unless you ask them to make contributions to a particular fund. According to the Australian Tax Office, 43% of Australians had more than one super account in June 2016.

A small minority of these people might have valid reasons for holding extra accounts but the Productivity Commission reckons it is mostly unintentional and wasteful. The Financial System Inquiry found that simply addressing account proliferation and “lost” super accounts could increase super balances by around $25,000 at retirement.

A key proposal in the report is that people who don’t want to choose their own fund would only be defaulted once. In other words, instead of each new employer putting their super into its default fund,

they would automatically be required to contribute to the employee’s existing fund or a fund of their choice.

It has also raised the idea of reducing the number of default funds to as few as five, though this would depend on what changes to the system were introduced.

While only a draft report so far, the commission is looking at four different ways of choosing default funds:

• Employees get to choose their own fund

from a shortlist of four to 10 high-quality products selected by a government body using a filter to narrow down the bestperforming products. Employees would receive information to help them make an informed choice.

• Employers choose the fund from a wider shortlist. However, minimum standards to protect employees would still apply.

• Funds would compete for a share of the default pool on a range of criteria including performance, investment strategy, member satisfaction, quality of member services, fee levels and transparency and innovation.

• Funds would compete for default status by bidding in a fee-based auction. Competing funds would have to prequalify by meeting certain standards. The commission says each of these options comes at a cost but argues we need to address the core problem of a compulsory superannuation system that is too complex for many people to make appropriate choices by themselves.

WHAT ABOUT EXISTING MEMBERS?

The report says funds should be required to extend any benefits provided to new default members to existing members as well. If you have already exercised the right to choose your own fund, you would be able to remain with it, though it might be worth asking whether it was still the best option for your needs.

DID YOU KNOW?

Almost 90% of the $474 billion held in MySuper accounts is with not-for-profit funds. Just $55 billion is invested in MySuper accounts operated by the retail or for-profit funds.

Annette Sampson has written extensively on personal finance. She was personal finance editor with The Sydney Morning Herald, a former editor of the Herald’s Money section and a columnist for The Age. She has written several books.