The Federal Government passed legislation through the Senate on Monday to allow Australians to choose their own superannuation fund, instead of being forced into a fund because of enterprise bargaining agreements by employers and unions in some industries, such as retail.
Employees under such arrangements were often unable to pick the super fund to which their compulsory super contributions were made, which caught the attention of various financial inquiries in recent years that found denying consumers choice of super fund could lead to them paying higher fees.
For example, a Financial System Inquiry report released in 2014 found that “lack of choice in super contributes to disengagement with superannuation”.
The Fair Work Commission also recently found that allowing employees to choose their own superannuation fund would prevent them from unnecessarily ending up with multiple super accounts “with all the inconvenience and additional administration costs that this involves.”
According to the Treasury, the new legislation passed this week would allow around 800,000 Australians to pick their super fund, representing around 40% of all employees covered by a current enterprise agreement.
The reaction to the law change has generally been positive, but not everyone is entirely in favour.
In a parliamentary submission in January, the Australian Institute of Superannuation Trustees (AIST) said it supported the idea of choice in superannuation, but argued this choice “must only be provided in a way that does not leave consumers worse off” and that “choice does not in itself initiate member engagement.”
The AIST also warned some workers could risk losing out on “benefits such as additional employer contributions, enhanced insurance arrangements and guaranteed retirement benefits” that may have been negotiated as part of an enterprise agreement.
Nonetheless, Canstar finance expert Steve Mickenbecker said it was welcome news for consumers to get more choice and be put in a position where they could make financial decisions that best suited their own needs.
“Everyone’s situation is slightly different, meaning that what might suit one employee under an enterprise agreement might not necessarily suit another. It’s important that employees can make those decisions for themselves,” Mr Mickenbecker said.
He said the new rules would also mean more competition in the super industry, which would ultimately benefit consumers who felt trapped in a super fund.
“Competition discourages the risk of overcharging by super funds and allows consumers to choose the fund that they feel will perform best for them,” he said.
“A single fund that has captive members finds itself protected from that healthy competition.”
A Productivity Commission report released in January 2019 found the way super fund members had been allocated into default funds meant at least 1.6 million people had ended up in underperforming funds, eroding nearly half their balance by retirement.
Research by Canstar shows the importance of comparing when you have the freedom to choose a super fund, particularly in considering the significant differences in returns that different funds can deliver over time.
For instance, of the funds on Canstar’s database, the highest return after fees over the last five years for a 35-year-old was 7.20%, while the lowest was 1.30%. Of course, bear in mind that past performance is not a reliable indicator of future performance, as funds’ returns can go up and down over time.
For a 35-year-old with the average super balance of $51,740 (as of APRA’s June 2019 statistics), being with a fund that delivers even 1% higher returns than the average could see that person close to $128,000 better off in retirement.
“We always encourage customers to fully do their homework, looking at the returns being achieved on investment, the fees they’re paying and the insurance options that are on offer through their fund,” Mr Mickenbecker said.
These changes to super introduced this week also build on the government’s earlier reforms which protect superannuation accounts from being eroded through the capping of fees on low balance accounts and requiring insurance to be provided on an opt-in basis for new members under 25 years of age.
The Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019 had previously passed through the Lower House in February, meaning it will become law once it has received formal sign-off from the Governor-General.
Interested in learning more about super? You might like the follow reads:
If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you selected.