On the brink of a superannuation revolution

Changes will make it easier for children to join their parents in self-managed super funds. Picture: iStock

It’s taken some 11 years but the long overdue reformation of the $3 trillion Australian superannuation industry starts next week. And in coming months it will gather pace to the great long-term benefit all those with substantial money invested in industry and retail superannuation funds.

In 2010 the Cooper report set out what was required to establish a modern Australian superannuation savings system, where members could discover what was happening to their money.

The report lobbed on the desk of the then ALP government which implemented some parts, but the disclosure recommendations were never implemented by either party until this year when Treasurer Josh Frydenberg and superannuation minister Jane Hume managed to get support from sufficient cross benchers.

Already online there are now interactive YourSuper comparison tools to help people choose between the funds on offer in a way that enables people to compare funds with similar investment components.

But the first really big change comes next Tuesday when a series of smaller industry and retail funds are told that they have underperformed over the last seven years.

The evaluation starts by looking at where the money is invested. If, theoretically, all the fund’s money was invested in leading shares then that fund would be compared with relevant ASX indices.

On October 1 the legislation requires that the poorly-performing funds send to all their members by registered post a prescribed letter that sets out that the fund has underperformed and suggests that members look for other alternatives.

The impacted funds can write separate letters putting other points of view but there can be no getting around the standard letter.

The law states that they are to be given another year to improve their performance but for most it will be the beginning of the end, because it will be impossible to recover the gap established over seven years in just one year.

Accordingly in the final quarter of 2022 APRA can stop superannuation funds which are performing badly from taking new members, which basically means they go out of business and APRA also has the power to enforce that exit.

I suspect the list of funds that are going to be named as bad performers next week will be smaller then might have the case when the legislation was passed last June, because we have seen a volley of mergers in the last two months as funds avoid the ignominy of being “named”, preferring to quietly disappear into better performing funds, which is exactly what the legislation aims to achieve.

In just over two months - on November 1 - the controversial rules that prevent the creation of multiple superannuation funds when employees change jobs will begin.

Currently, if a person starts in the workforce in, say, a coffee shop they join Hostplus. Then if they start working with a retailer they join the retail industry fund. Many Australians have multiple funds containing small amounts. These savings get eaten up by administration. It has usually been possible for people to consolidate their funds, but it tended not to happen.

The new legislation provides that the first fund you join goes with you to the next job and so on. But, of course, you are able to switch should you be unhappy with your first fund.

The government says it will save members $280 million so it would seem for some funds the removal of this process will boost administrative costs for remaining members.

Around annual meeting time funds will be required to disclose information that so far has been kept secret or hard to find. That includes how much money indirectly finds its way to shareholders in the case of retail funds and to employer and union groups in the case of industry funds. Large sums could be involved.

Super savers will know more about where their money is invested.

Another disclosure will be marketing expenditure. Superannuation funds need marketing to attract new members to maintain economies of scale because members retire, die or simply leave the fund. But some embrace lavish marketing that contains executive side benefits, forgetting that it is members’ money they are spending.

The legislation provides for much greater disclosure of where members’ money is invested. In California and other parts of the US funds list all their holdings, how they are valued, and with a delay, most of their major transactions. Sadly a number of the large Australian funds oppose this level of disclosure. The government has caved in and it is unlikely that transactions will be disclosed.

Most listed and unlisted mutual funds list the basis of valuation of assets like property. It works well. But again the superannuation funds are unhappy about embracing this widespread practice. However we will see a list of all investments with an approximately 90-day delay.

This will be very valuable information. While most members will not study the data it will enable commentators to provide meaningful analyses of what is happening in the funds.

Perhaps the most interesting of the disclosures will be the derivatives held by superannuation funds, including those used to hedge US dollar exposure into Australian dollars. Some funds have derivatives that require them to pay money every quarter if the Australian dollar falls in value. They receive money if it rises. Some of the very good performances last year were helped by a rising Australian dollar. It has since fallen. Overall, derivatives are a high risk area for superannuation funds and the disclosure is long overdue.

In self-managed funds the limit on the number of members has been lifted from four to six, which will make it easier for children and their spouses to join their ageing parents.

Those who took money out of superannuation last year will get the opportunity to increase their non-taxable contributions.

Overall, we are going to have a much healthier superannuation industry as a result of these changes.