Take note: Your super will radically change in 2021
A partner at a big-four accounting firm recently told me he planned to gift a superannuation contribution to his granddaughter for Christmas.
While such a gift might have once been met with an eye-roll, this year, things are different.
The early release super scheme under the federal government’s COVID-19 induced financial hardship provisions saw more than $35.5 billion drained from the system. Since April, more than 20,000 applications have been made each day.
For a sector that is usually defined by a “set and forget” ethos, this year was a super game-changer. The early release scheme reminded people they had “real money” in super. Members were forced to find their details and navigate the system.
As a result, more people are now engaged and interested in their super than ever before.
And what great timing, as major change is afoot. Here’s a brief list of what is to come:
1. Stapling
“Under our reforms, your super will follow you,” Treasurer Josh Frydenberg said in his October federal budget speech.
This measure aims to tie a worker to their first super fund for life.
The aim is to avoid duplicate accounts that erode balances through multiple fees. It was warmly welcomed by the bank-led super sector (retail funds) who have long lobbied for such a policy.
However, industry super funds, although also set to benefit, were not so pleased.
The default system has long been a cornerstone of the union-backed system. It’s wrapped up in the spirit of collective action and power in numbers.
By automatically being signed up to a fund tailored to your industry, the unions can organise job-specific insurance and use it as a bargaining chip in employment negotiations.
Despite the pushback, the measure to staple your fund to you will start July 1, 2021.
2. Performance test
Frydenberg’s budget also introduced a new regime – set to start in the middle of next year – that aims to kill off underperforming super funds.
An annual test will benchmark fund performance in each asset class against 12 indices, with assumptions made on fees. Those that fall more than 0.5 per cent below the benchmark will fail the test. If a fund fails two test years in a row, members will be notified and the fund banned from accepting any new members.
Advocates say it is an effective slap for underperforming funds. Opponents say it will drive a race to the bottom in performance as funds seek out low-cost investment strategies.
3. Super rate rise
The Superannuation Guarantee (SG) – the minimum amount employers must pay in super – is set to rise to 10 per cent of wages in July. This is the first increase since 2014 and it will climb by a further 0.5 percentage points annually to reach 12 per cent by 2025.
These incremental changes are a lightning rod for debate that goes to the heart of the most difficult of questions – what is the purpose of super?
The Reserve Bank, Grattan Institute and a large number of economists have warned raising the SG will slow wages growth. The super sector say this is rubbish – wages have been slow growing for years and it is time for business to stump up.
Following the COVID-19 induced recession, opponents of the SG rise became louder as the impact of the tweak may have a more profound impact on the economy. Many proffered Frydenberg might sneak a freeze to the rise in his 2020 budget but this never eventuated.
So, for now, you can expect to see 0.5 per cent more super on your payslips come July. And, hopefully, this will not come at the expense of wages growth.
4. Super for Housing?
Liberal MP Tim Wilson’s #HomeFirstSuperSecond campaign has also caused quite a stir.
Homeownership is no doubt an important pillar of security in retirement and Wilson reckons Australians should be able to dip into their super to contribute to a first home deposit.
Advocates of this idea say it would give workers a necessary leg-up onto the property ladder. Opponents say it would push up house prices, force super funds to have more liquid investment strategies that would harm returns and degrade living standards in retirement.
5. Frugal funds
A new “best-financial interests” test will crackdown on super funds spending on items such as advertising and corporate sponsorships.
The funds say these expenses build brand awareness and drive scale, which helps improve performance and returns for members. In many cases, the cash comes out of an operational reserves, meaning members’ money is not being spent directly.
The prudential regulator has been monitoring these expenses for some time and some funds have already tightened their belts in this area.
However, they still need to prove discretionary expenses pass the “best interests” test and the government has the power to ban spending deemed unsuitable.
6. End to hawking
Laws were passed last week to ban unsolicited selling of super products. Consumer advocates claim this will protect people from being bullied into signing up to a dud fund.
Australia’s super system remains world-class. The government acknowledges this but still wants it to work harder.
With a raft of major reforms designed to boost performance set to kick in next year, it will likely further lift standards and scrutinise the badly performing funds. Gifting to super this Christmas might not be such a bad idea after all.
Charlotte is a reporter for The Age.
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