By Steve Blizard 3 Feb 2014
Many default super fund members were surprised to find this month that yet another super fund had been automatically established for them, without their express authority.
Commencing 1 January 2014, employers are now required to pay all Super Guarantee Contributions to a MySuper compliant fund, but only where employees have not nominated their own fund, or for members of a default fund who have not made an investment choice.
The new MySuper changes are an outflow of the former Rudd-Gillard government’s little-known “Stronger Super” legislation.
In October 2012, Coalition members of the Parliamentary Joint Committee on Corporations and Financial Services warned of some serious issues within Labor’s MySuper Bills.
They found MySuper’s mandated automatic funds transfer process could result in a member who had chosen a fund being placed into a lower returning, higher fee paying or higher risk investment option.
MySuper also has worrying implications for insurance cover that people have organised within their chosen superannuation fund.
If automatically transferred, the amount of death and TPD insurance cover under MySuper could be far less than that currently protecting the fund member.
Worse still, some people who accidentally lose their cover may not be able to qualify for replacement cover or may be forced to accept it on inferior terms should their personal circumstances have changed since their original cover was taken out.
Fortunately for default fund members, the Coalition was able to secure an amendment to the Stronger Super legislation, permitting employees to opt out of MySuper.
Many pro-active fund members have already investigated the alternatives available, electing other superannuation investment options that better suit their individual requirements.
Administration Fees Rise
Despite the stated aim of Stronger Super in 2010 to lower default member fees by 40 per cent, new data suggests not-for-profit MySuper fund fees have since increased.
In contrast many “new breed” retail super products are now 10 per cent cheaper than industry funds.
There was only one not-for-profit super fund that had managed to reduce its member fees over the last year.
There are additional risks for members failing to opt out of MySuper.
Since May 2013, over $700 million in “lost” superannuation accounts have been transferred to Federal Government coffers.
MySuper will not solve the fear of your retirement account mysteriously disappearing off to the Australian Taxation Office in the future.
By opting for an active choice super fund, you are more likely to remain engaged with your retirement savings, minimising the prospect of your funds vanishing unawares.
However the only sure-fire way to prevent your retirement savings being appropriated by the ATO is to establish your own family super fund, where you remain the controlling trustee.
Lower retirement payouts
MySuper could also result in Australian workers receiving lower retirement payouts, according to Chant West, a Sydney-based research house.
Chant West principal, Warren Chant, said that while the MySuper concept had a certain superficial appeal, it failed to recognise that there was a difference between price and value.
“In super, as with most things in life, you get what you pay for,” he said.
“The better quality funds, in terms of investment performance, tend to have higher investment fees because of how they invest and what they invest in’
“But there is strong evidence that those higher investment fees pay off because they produce better returns.
“In other words, the additional return is greater than the additional fee incurred to achieve it.”
He said that the government’s forecast cost savings from MySuper were hugely optimistic, and likely to be eclipsed by the reduction in benefits resulting from reduced returns.
Aged Based Fund Rebalancing
Many retail and industry MySuper funds have embraced the philosophy of the life cycle; the idea that members at different stages of their lives should also have different investment allocations.
Although this argument is intellectually appealing, there is scant evidence the strategy actually works.
MySuper funds using Life cycle aged-based “glide paths” can still expose investors to “sequencing” risk.
This means that a person can risk experiencing the worst returns at the moment the invested balance is the largest, often when a super fund member is transitioning into retirement.
In the United States, this rigid automation of rebalancing assets has led a number of pension funds that adopted these strategies to produce rather disastrous results for their members.
In other words, lifecycle funds failed to protect investors from the market volatility they purport to mitigate.
MySuper should therefore be regarded for what it is – a lowest common denominator – and the financial services industry should instead get back to offering investors a better range of options.
Steve Blizard is an authorised representative of Roxburgh Securities