Stapling workers to dud super funds could cost them $300,000: AIST warns

The AIST wants the federal government to step in and amend new super laws, warning if no change is made some Australians will be $300,000 worse off.

The AIST is calling on the federal government to make changes to super reforms so members aren’t stuck with a dud fund for life.

The Australian Institute of Superannuation Trustees has called on the federal government to step in and amend new laws that will staple workers to a super fund for life, warning if no change is made some Australians will be worse off to the tune of $300,000.

Until now, workers shifting jobs would move into the new employer’s default fund if they did not nominate a specific fund. While this led to the creation of many duplicate accounts for workers, it also helped to limit the risk of being stuck in a dud fund. As part of the Federal Government’s Your Future, Your Super reforms, from November 1 workers will be ‘stapled’, or tied, to one super fund that will stay with them for life unless they opt to switch.

With so many workers disengaged from super, this change will expose millions of Australians to untested or underperforming superannuation funds, AIST CEO Eva Scheerlinck warned, as she called for the law to be amended so that workers cannot be stapled to dud funds, in line with Productivity Commission recommendations.

“Being stapled to a persistently underperforming fund could wipe up to several hundred thousands of dollars off the retirement nest egg of the average Australian,” Ms Scheerlinck said.

“We know many members are disengaged and vulnerable and we need to protect them from languishing in dud funds. Consumer disclosure alone won’t result in affirmative action in their best interests from all those that are impacted.”

The government’s new performance test of the sector, also a part of the Your Future, Your Super reforms, last month showed that more than a million workers have entrusted their retirement savings to a dud superannuation fund.

The new test, brought in as part of the government’s Your Future, Your Super reforms, revealed that 13 of 76 funds — or 17 per cent of those assessed — failed the crucial evaluation and were given 28 days to write to their members detailing their failure and suggesting they switch funds to get a better retirement outcome.

The named-and-shamed funds included AMG Super, LUCRF, Colonial First State’s First Choice Employer Super Fund, Maritime Super, Christian Super and Commonwealth Bank Group Super. (See the full list here.)

All up, $56.2bn of 1.1 million workers’ retirement savings are invested in the underperforming funds,

The MySuper products were assessed on both investment performance and admin fees. But while the investment portion of the test spanned the past seven years, only the most recent year’s admin fees were included, after a government backflip just weeks ago.

The longer time frame for judging investment performance was to allow funds to target long-term returns and not blame “one bad year” for underperformance, according to the government.

The named-and-shamed funds have by now sent the required letter to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

If they fail again next year, they will no longer be allowed to accept new members. What’s more, the funds aren’t told why they failed: they are simply given a pass/fail mark.

Despite members being informed of their fund’s dud status, the AIST is concerned that only a small number of workers will take action and switch to a better performing product, leaving a large chunk of workers in substandard offerings.

“Performance testing is a good first step but not enough on its own,” Ms Scheerlinck said.

“It’s not too late for the government to step in and make sensible changes to protect millions of working Australians from being stapled to an untested or persistently underperforming fund.”

Separately, member advocacy group Super Consumers Australia (SCA) is calling on the Federal Government to ban occupational exclusions from default life insurance in super before stapling comes in on November 1, warning the exclusions put workers and their families at risk of being left without cover when they need it most.

“Most people keep their super fund’s default insurance settings when they join their fund, so it’s critical that these settings are fit for purpose”, SCA director Xavier O’Halloran said.

“Continuing to allow funds to exclude certain occupations from cover puts people at risk of paying for cover that they can’t claim on, or being without any cover at all. There is no place for these types of exclusions in the modern superannuation market.”

SCA research also found that excluding certain occupations doesn’t necessarily make cover cheap: One large fund with insurance exclusions charged more than double the average premiums charged by other similar-sized funds that did not have exclusions, the advocacy group said.

“It is clear from what is on offer in the market that the majority of funds have been able to cover people without having to charge exorbitant premiums. The simplest and fairest solution is to provide all default members with a safety net regardless of their occupation,” Mr O’Halloran said.

While the Financial Services Council (FSC) has confirmed it will ensure member funds provide cover to workers when they move jobs, it will not prevent funds from excluding people from cover based on their occupation when they join a fund.

“The FSC plan makes progress, but it does nothing to protect the next generation of young workers who are defaulted into a fund that excludes their occupation,” Mr O’Halloran said.