Your super fund’s ‘loyalty bonus’ might cost more than you think
More big funds are luring investors to stay with them by offering conditional cash payments. But the practice is being questioned by advisers and consumer representatives.
Pressure is mounting for an overhaul of burgeoning bonus payments offered by big super funds, which canny investors have begun exploiting. For others, the payments are a roadblock for smarter investment options once they retire.
The bonus payments are made to investors who choose to stay rather than exit a fund at retirement, and they receive little public attention. But it’s becoming a controversial method of holding on to members who may be planning to take their money somewhere else.
Leading funds, including the nation’s two biggest – AustralianSuper and Australian Retirement Trust – are distributing tens of millions of dollars to investors as a reward for not leaving their ranks.
Retirement bonus payments can run up to $10,000 per investor.
So how does it work?
If you are in a big super fund and you get to the point of retirement, then you are about to move into a tax-free phase. In that phase, most people don’t have to pay tax.
If you stay put and retire with the same fund, that accumulated amount saved up for you need not be paid over to the tax office, so instead you get “rewarded” with what the funds like to call a “bonus” payment.
In recent months, some enterprising super savers have become aware of bonus payments. They have gamed the process by staying with the fund and then quitting shortly after retirement, that is, after they have received their bonus.
This lucrative strategy has sparked a decision by some funds to instigate a clawback on the payments if investors take the money upfront and later leave the fund.
But advisers are now complaining about the entire business.
“We don’t know how these payments are made, or on what basis. All we know for sure is that there are winners and losers here,” said Adam Miliszewski of Signate Private Wealth.
For financial advisers, the bonus payments also create a roadblock that stops investors from considering other investment options.
“It’s very hard for most investors to leave that money on the table. As an adviser, you have to put forward a compelling alternative to match that offer of cash upfront,” Mr Miliszewski said.
“As for clawing back these payments under any circumstance, I just don’t know how on earth that could be justified.”
Independent financial adviser Nathan Fradley said advisers disliked the bonus payments because no two were the same.
“They come under different names, and they all have different terms; we simply can’t compare them,” Mr Fradley said.
The funds are also continually changing the terms of their bonus or “booster” payments.
Earlier this year, the Stockspot group compiled a list of terms and conditions among the biggest funds. It turns out an investor can be entitled to a bonus payment even if they have been with a fund for a relatively short time-frame such as six months to a year. This had led to even more smart investors gaming the bonus payment arrangements.
Big funds generally do not advertise the bonus payments, choosing instead to detail the offer in performance statements that are distributed directly to members on a routine basis.
The controversial clawback conditions tend to be found in the fine print of the bonus offers.
“The funds have to try and keep people from rorting the system, that’s why they have the clawbacks,” Mr Fradley said.
But the deeper problem is whether the bonus payments can be seen as a marketing trick where the biggest benefit is that funds don’t lose money to rival funds or self-managed super funds.
Stockspot chief executive Chris Brycki said the bonus payment schemes also included an opportunity cost to all investors inside big funds whereby the accumulated money kept aside in case of tax obligations might have been more profitably invested on behalf of the super fund member.
“Some funds have super retirement bonuses in the range of half a per cent to one per cent of your balance,” Mr Brycki said.
“While this might seem appealing at first glance, imagine a $5000 bonus on a $500,000 balance; it’s crucial to put it into perspective. You may have contributed much more than this amount during your time in the fund.”
Super Consumers Australia is calling for a substantial makeover of the bonus payments regime.
“The practice should be standardised and it should operate under a transparent system similar to the MySuper regime, where investors can compare big super funds on a like-for-like basis,” said Super Consumers Australia deputy chief executive Katrina Ellis.
“It looks like these schemes are proliferating; the big funds are all copying each other with versions of the same thing.”
Funds can use their discretion to pay the bonus to whoever they like, while the easy access to the arrangements may well be asking for trouble.
A millionaire could put $2m into a fund for a year and get a $10,000 bonus. How does this make sense in a non-profit fund?
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