May, 2018 – The Federal Budget’s focus on low account balances – and 40% of accounts have less than $6,000 – will have the biggest impact on the shape of super in years. I wrote an overview of the Budget changes last week, but it took a couple of days to sink in that the announced transfer of inactive <$6,000 accounts to the ATO and the 3% cap on fees for <$6,000 accounts in particular would result in major structural change to the industry.
For a start, around 30% of all Super accounts might be transferred to the ATO. There are about 15 million more Super accounts than there are working Australians, so it’s not a bad thing if these accounts are reunited with the active accounts of their owners. And that’s what the ATO plans to do: the question is, how long will it take?
But less accounts are likely to result in more expensive administration fees for individual accounts, and this is something administrators are grappling with. The Link Group has formally notified the Stock Exchange that the announcement may have a material impact on the number of members they administer.
The fee cap is also going to challenge funds with cents-per-member administration fees, and that’s most industry funds. Fee caps and asset based fees are going to be considered, but funds will have to be careful they don’t introduce ‘fees for no service’.
The proposal to have only opt-in insurance for members under 25 is also going to mainly affect low accounts balance accounts.
All in all, these proposals have some merit – the large number of accounts, and the extent of fee erosion on balances have long required attention – but that doesn’t make the introduction of these changes any less difficult.
Fees on small balances and rollovers, insurance, and lost Super in the 2018 Federal Budget – but not much else on Super.
With the 2018 Federal Budget now out, here’s a snapshot of the changes announced for Superannuation. The Budget includes relatively few changes to Super, with announcements covering:
Fee caps on low balances
This is about the same level of change expected in pre-Budget speculation, with only a couple of small surprises. Each of the changes are designed to be positive and improve benefits, but the changes are not large scale.
These changes require legislation and the support of a majority of senators, but these measures are not generally contentious and support is likely to be forthcoming.
The Government has announced insurance changes mirroring requirements in the Insurance in Super Code of Practice:
Automatic insurance for under 25 year old’s to be canned.
Automatic cessation of cover for accounts not receiving contributions in 13 months.
Unlike the Code however, the Government wants to make these changes compulsory for funds. Either way, this will involve a lot of process and system changes from funds.
While these changes require legislation, passage through the Senate is likely because similar recommendations were made unanimously by a recent parliamentary inquiry.
From July 1, 2019, there will be a ban on exit fees on all Super accounts, and a 3% pa cap on fees on Super accounts with balances below $6000.
The ATO is also being funded to help find lost Super and have it sent to active Superannuation accounts – reducing the level of multiple accounts and reducing the fees impost.
There was pre-Budget speculation about a possible delay to increases in the SG from the current 9.5% and new measures to help low-income earners, but these have not eventuated.
At the same time as the Budget, the Government has released a discussion paper on post-retirement arrangements. It’s been suggested that Super funds be required to have a retirement income strategy, including things like managing longevity risk.
Since the Budget was announced, funds have had an increased level of concern about the auto-consolidation measures and changes to insurance. However, the measures remain as they were announced.
Expect some interesting times ahead.
Written by David Haynes, Head of Industry Insights