Superannuation rules: understanding the changes and how they affect you

The new super reforms package will change the landscape in super and investing – though perhaps not in the way you might expect.

SMSFs can now have more members under changes to superannuation rules. Picture: iStock

They’re calling it the biggest package of reforms in super for decades. This week’s super reform bill which has passed through parliament is a big deal though not perhaps in the way you might think.

There are many useful developments in the new package and on balance it offers a better super system for most workers in most situations.

For investors the changes mean that if you don’t want to run your own self-managed super fund the economies of scale that already make the biggest and best non-profit industry funds attractive have just been enhanced, if not set in stone.

The package, which kicks off on November 1, is expected to do three things:

1. Free workers from workplace agreement arrangements where they got a different fund every time they moved jobs creating huge waste with multiple accounts.

The reality: This is good on balance. Multiple accounts were bad news and eroded the potential super savings of many workers. From now on a worker will automatically have their first chosen super fund ‘‘stapled’’ to their career path – when they move jobs they’ll keep the same fund unless they choose to change funds. All fine: most workers are in reasonable funds.

The issue is that only a tiny minority of workers change funds. So for this new arrangement to make a meaningful difference the average worker will need to pay a lot more attention or they will sleepwalk through their working life with the first fund they entered – those who start in mediocre funds who pay no attention to performance comparisons could be ‘‘stapled’’ to those funds forever.

Still, as Senator Jacqui Lambie said in parliament, she did not want ‘‘the perfect to be the enemy of the good”.

Fair enough.

2. Central and transparent reporting of performance figures.

The reality: Since the Hayne royal commission three years ago, the bigger industry funds completely rule the roost in terms of performance.

The inflows to those funds are up by around 30 per cent; the inflows to the ‘‘retail’’ funds run by insurers and finance firms are going nowhere fast.

The new legislation includes administration fees in the comparison of funds.

Let’s say there are two funds – one a non-profit industry fund that makes 6 per cent a year on investment activities, the other a profit-based fund that makes 6 per cent too. Nine times out of ten the non-profit fund will have lower fees because it does not have to make a profit. Consequently, the non-profit fund will win in the comparison tables. Few retail funds are likely to surmount this obstacle.

3. Stimulate competition across the industry.

The reality: Defaulting people into funds was anti-competitive. Having them switch with each employer undercut the benefits of compounding with one fund. But here’s the thing: in many cases the funds that have benefited from the old system have now mushroomed into mega funds that dominate the system.

Moreover, to the surprise of many, the same big funds have done very well. Their size and scale became an advantage and their long-term strategy of focusing on unlisted investments such as infrastructure has paid off handsomely.

Demographics will now be imperative. Remember, three out of five workers under 25 are with five big funds: Australian Super, Cbus, Hostplus, REST and SunSuper.

These funds, which have enormous reach in construction, hospitality and other ‘‘younger’’ occupations, are most likely to keep their new recruits for longer.

If, on occasion, a young member checks to see how their big five fund is performing, five-year track records will suggest the fund is capable of doing perfectly well. For the rest of the field – such as smaller industry funds and most retail funds – it will be harder now to break the grip of the past winners.

The only upside is that the very worst funds will be forced to merge – or in reality be swallowed up the kingpins on the system.

The Coalition has its eye on a long-term prize. There has been a short-term win in making it a more transparent system and a genuine advance in ending the default system. In the very long term it might weaken the megafunds of today.

For now, however, the unsettling question is whether the new reform package has replaced a cartel in the default system with a legislated oligopoly in a new more transparent system.

The other key development for investors is the final passing of legislation that allows self-managed super funds to expand from four members to six – in contrast to the ambiguities in the bigger package, this is a hands-down win for the Coalition, which has been looking for something to offer more than a million people involved in SMSFs who have had little but sharper regulation and reduced benefits for many years.

This reform has been stuck in parliament for so long it will be ‘‘news’’ for those who don’t remember when it was announced. It will allow families and blended families to look after each other inside the system and run their own affairs.

Originally published as Superannuation rules: understanding the changes and how they affect you