From 1 January 2014, employers will be required to pay all Super Guarantee Contributions to a MySuper compliant fund where employees have not nominated their own fund, or for members of a default fund who have not made an investment choice.
At the time of writing, 81 entities have received MySuper Authorisations which is an increase of 38 since our August newsletter. The breakdown of these entities is:
- 58 operate public offer funds (anyone can become a member) and some of these entities hold multiple MySuper authorisations
- 41 represent industry or public sector funds; and
- 17 represent retail superannuation funds
It is worth noting that some of the larger superannuation providers are still to attain their MySuper authorisations.
We have more clarity about MySuper now that all the legislation has been passed and superannuation funds have started promoting their MySuper products. However, the legislative start date for Product Dashboards (where members can go to find out information about their MySuper product) is not until 31 December 2013, though this could be pushed back further. There is still debate within the industry about the complexity of information required to be published in Product Dashboards and how useful this will be for members. Based on the MySuper product information currently available it is apparent that most entities have simply re-badged their existing default investment option and altered their fee structures to comply with MySuper. Conversely, other entities have used MySuper as an opportunity to discontinue their legacy products and start afresh with the support of new technologies. There are also a number of entities that are relatively new players in the superannuation industry and are using the introduction of MySuper to build their direct product presence.
Features of MySuper products include:
- Investments – either a diversified or age based strategy
- Fees – a structure which allows members to compare super funds
- Insurance – offer minimum death and Total and Permanent Disablement (TPD) cover
Investments
The diversified investment strategy is being adopted by roughly two thirds of the entities operating public offer funds, 35 of which are industry or public sector superannuation funds.
Of the 19 entities implementing an age-based default investment strategy, 13 operate retail superannuation funds. The age-based strategies being introduced include:
- Lifecycle - where the investment glidepath is actively managed
- Lifestage - where the asset allocation of a member’s portfolio is changed based on the member’s birthdate
- Target date – where the investment glidepath is managed based on a target retirement date selected by the investor
In some cases, funds have been tinkered with to comply with the above MySuper investment criteria. Other providers have introduced new investment concepts to differentiate their MySuper products. In a number of cases the new investment defaults may not have been tested through all market cycles and do not come with the support of historical returns. The Product Dashboards will provide critical information to assist investors in determining which investment option is best for them.
Fees
The following types of fees can be charged on a MySuper product:
- administration fees
- investment fees
- buy-sell spreads
- switching fees
- exit fees
- insurance fees
- advice fees
- activity fees
Retail employer superannuation funds are able to offer large plan discounts based on the size of an employer’s plan in order to reduce administration fees. In addition, depending on the investment menu available to members, it may be possible to create lower cost alternatives to the MySuper default.
Providing consistent labelling of fees will make it easier for members to compare fee structures, however the combination of fixed dollar amounts and percentage based fees make this comparison more complex when applying it to an individual members portfolio. Adopting a simplistic fee comparison may mean the intrinsic value assigned to various products features may be easily overlooked. This is especially the case when comparing a MySuper product with a diversified strategy or with an age-based investment strategy.
Insurance
Under the Superannuation Guarantee, it was compulsory for a default fund to provide a minimum level of death cover. With MySuper this insurance extends cover to include TPD. However, it is up to the MySuper entity to decide what is appropriate for their fund.
Retail employer superannuation funds have included a MySuper offer inside their corporate products, which enables them to differentiate themselves from industry superannuation funds and direct retail MySuper products. For retail employer superannuation funds, the type of cover (Death, TPD & Income Protection), levels of cover, premiums and automatic acceptance levels (cover provided without health evidence) can be customised based on the scale of the employers workforce.
Winners and losers
Although, the former Government had intended ‘MySuper’ to deliver more cost effective outcomes for members, our experience has shown that whilst some members will see a reduction in fees, others will actually see an increase in fees. In the case of MySuper it pays to research the options available rather than simply accepting the status quo.
Transition of Accrued Default Amounts
Not only will MySuper impact where contributions post 1 January 2014 are paid, it will also affect the superannuation accrued prior to the commencement of MySuper. If a member has not made an investment switch (even if it is only $1) between now and 1st July 2017, their accrued super sitting in the former default investment option (Accrued Default Amount or ADA) will be transferred to a MySuper product. As part of the MySuper licencing process, entities were required to seek approval for their strategy to transition ADA’s. It is intended for this information to be available on the Product Dashboards.
MySuper has evolved on the basis that ‘low cost’ is best for default members. Most MySuper investment solutions have a heavy reliance on passively invested monies in order to reduce costs. However, it is worth considering the impact this will have on Australia’s financial markets if significant volumes of funds under management are moved from ‘actively’ managed portfolios to ‘passively’ managed portfolios between 2013 and 2017 and whether this is another ‘unintended consequence’.
Which ‘MySuper’ product is best for my workforce?
Determining which MySuper product is the best option for your company’s default fund is not any easier now than what it was prior to the introduction of MySuper. Key things to consider when making your decision are:
- what MySuper options will make you appear more attractive to prospective and current employees
- leveraging MySuper products to deliver efficiency in your payroll functions
The Coalition Government has indicated it will remove unnecessary red tape and make the superannuation system more competitive to allow employers to choose their own MySuper default fund.
