The superannuation reforms announced in Tuesday’s budget risk inadvertently stripping people of vital insurance cover, according to industry experts.
Under the changes, aimed at addressing the problem of 4.4 million Australians having six million unintentional multiple accounts charging them fees, funds will follow members throughout their working lives.
That means when people begin working they will pick a super fund that follows them from employer to employer, unless they choose otherwise.
At the moment, default funds are allocated to workers by employers each time they change jobs, if they don’t make other choices.
That can leave people with multiple funds they don’t know about.
But stapling funds to workers could leave them exposed to losing insurance cover.
“If you join a standard fund on entering the workforce in a casual job, in say retail or hospitality, then move to a new more risky industry like mining or building, you might find yourself underinsured,” said David Knox, partner with super consultancy Mercer.
“Worse still, the insurance attached to your old fund might not insure you at all if you move into a high-risk area. Currently, you would move to the default fund of your new employer and be covered by insurance appropriate for the industry.”
Mr Knox added: “These are questions many people wouldn’t potentially be aware of in a system that automatically transfers existing funds to new employers.”
He said issues might arise when workers move between the private and public sectors.
Public sector sticking point
“If you move into the Commonwealth public service, which doesn’t have a public offer fund, then you couldn’t take your old fund with you. Alternatively, if you move into the private sector, you couldn’t take the public service fund with you,” Mr Knox said.
Reducing multiple funds will save members $2.8 billion in unnecessary fees and lower returns over 10 years, according to the government.
To date, measures uniting members with lost accounts have saved $700 million in fees on $2.9 billion in funds.
Elsewhere in the budget, the government said it would scrutinise the performance of funds and inform members if their provider was performing badly.
If the fund underperforms for two consecutive years, then it will lose the right to accept new members until it lifts its game.
The policy could save Australians millions in lower returns, but industry experts say the way in which it is enforced will determine its success.
“There is a danger there that funds would not be compared like for like,” said Russell Mason, superannuation partner with Deloitte Access Economics.
“I might have a fund that returns 7 per cent this year while another with a slightly different investment strategy would return 10 per cent, yet the two could be compared.
“Over time, would the lower returns mean the fund is declared underperforming?
“The other issue is, how will performance be judged?
“Will fees and returns simply be added together? Will fees be included?
“For a young person, say, at age 22, having lower fees is actually more important than higher returns over a working life.”
That’s because the fees erode end balances more than variable returns in a reasonably performing fund, Mr Mason said.
Performance may vary within funds in different allocations with, say, the conservative allocation doing well and the balanced option less well.
“That means that people risk being told their fund is underperforming in an option that they don’t have,” Mr Mason said.
At its worst, telling people their funds are underperforming could lead to a rush of sales, forcing funds to quickly dispose of assets.
Mr Mason said that could leave the “members left behind with illiquid assets or the wrong assets for their needs”.
The Association of Superannuation Funds of Australia (ASFA) said it supported the measures to improve superannuation outcomes in the budget, but that care was needed in the design of the policies.
“We don’t suffer from a shortage of good funds and we need to ensure that these measures don’t reduce competitive intensity or damage the nation-building role of superannuation,” ASFA CEO Dr Martin Fahy said in a statement.
“In the absence of the release of the Retirement Incomes Review and the lack of specificity in the budget papers, it is unclear how the changes will work in practice or what the implications will be for competition, efficiency and incumbents in the sector.”
Mr Mason also called for the release of the Retirement Incomes Review, which has been with the Treasurer since July and was touted as the blueprint for future super reforms.
The New Daily is owned by Industry Super Holdings