Our superannuation system – and its vision of helping Australians to prepare for an independent, dignified retirement, instead of just relying on the government-funded age pension – has been admired around the world.
But in the two decades since its introduction, the system has become more and more complicated – to the point where many of us found it difficult to understand where we should park our retirement investments.
All too often, when employers asked new members of staff where to pay their compulsory nine per cent super contribution – as required by law – their response was the financial equivalent of a shrug and a “whatever”. That was known as the “default option”.
Then the global financial crisis happened – and, in the process, demonstrated that super funds with low fees often did better over the long-term than many funds that charged high fees and promised high performance.
The result is that super funds have been forced to come up with a decent low-fee investment choice for their members, known as MySuper, or miss out on default option business.
The deadline for superannuation funds to have their My Super products approved by the Australian Prudential Regulatory Authority (APRA) expired on January 1 this year.
These changes have resulted in further options to manage compulsory superannuation paid by employers made on behalf of employees who haven’t chosen a fund or a strategy of their own.
MySuper itself was presented to superannuation fund members as a new low-cost option without any frills, an option that was appropriate for the large majority of super fund members.
So, with the January 1 milestone having passed, one of Australia’s largest super fund advisers and investment managers, Mercer, has assessed the early effects of MySuper.
The Mercer research shows there were 116 MySuper products licensed to operate by APRA before last month’s deadline. This covers roughly half the funds who could have applied.
The best interest
The Mercer report noted one of the lasting benefits of the MySuper process was that it prompted many superannuation providers to reassess what investment options are really in the best interests of their members.
“The process of defining what level of investment risk is ‘in the best interests of members’ has led to an increased interest in investment options where the underlying strategy is more aligned with a member’s specific circumstances and will very likely change at different stages of their working life,” the report said.
“Considering there were less than 10 lifecycle products in the market prior to the start of MySuper, versus 22 today, it is clear that they are becoming more prevalent.
“There are also a number of funds that have re-branded their pre-existing static default option under MySuper, but are continuing to investigate the adoption of a lifecycle strategy as the default investment strategy.”
However, some industry funds already had lifecycle investment options in place that are very similar to those licensed under the new MySuper requirements.
“My impression, especially from an industry fund perspective, is that the overwhelming majority of members who were in default options prior to MySuper coming into play will notice little, if any, difference,” Russell Mason, national leader of superannuation at Deloitte, said.
While a member’s age is the factor that is most commonly taken into account with life cycle funds today, the government agency with the most direct responsibility for super funds, APRA, has acknowledged that further work on new products will lead to other factors being considered.
Specifically, APRA has stated that factors such as a member’s gender, account balance, contribution rate and salary may be used for a lifecycle MySuper product.
Add insurance benefits
Mason said that, under the new regime, it will be possible to have an insurance strategy that matches more closely to a MySuper lifecycle investment strategy.
Some funds are starting to offer a level of total and permanent disability cover that is more relevant than, say, life insurance or mortgage cover, especially for younger members.
“Where the differences [from MySuper] might be more apparent are in the insurance changes coming through, especially when it comes to matching these to your age and career progression,” he said.
“For example, a single 20-year-old doesn’t need very much – if any – death cover. But if they become disabled, they will need insurance for a continuous type benefit over what would have been the rest of their working life.”
For many people, the default option may be appropriate for them in the early stages of their working lives. But at some stage – as their balances increase, or as retirement draws closer – they should contact their super fund for advice on other option.
“MySuper is not a perfect option for all fund members, and as people get older they should be de-risking their portfolios,” a chief executive officer at a large public sector industry fund, who asked not to be named, said.
“The best game plan is to get advice on how to build up funds in the most effective but uncomplicated way, in order to have enough to retire on.”
This might be advice on salary sacrificing to make extra payments into a super fund, for example. Or it could be planning your retirement to allow for Social Security benefits.
Life beyond lifecycling
The Mercer report also noted that the post-retirement phase of life did not fall under the aegis of MySuper.
“The MySuper legislation has only focused on the pre-retirement phase, despite the fact that helping members access an adequate and sustainable income in retirement is one of the main objectives of the whole superannuation system,” it said.
There is broad recognition that more needs to be done to improve the options available to retirees to draw down their income in retirement, the Mercer report observed.
“We note that some of the MySuper lifecycle products will continue into … retirement in an effort to provide members with a more comprehensive investment solution,” the report said.
“Over the coming months, the MySuper landscape should become clearer as more detail – investment strategy, insurance, fees, brand positioning – surrounding each approved product becomes available.”
Bernard Kellerman is an independent finance writer, bank-watcher and ex-accountant.