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Eternal Returns: Budgetary Reforms Set to Shake Up Super

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by Will Chapman
Oct 18 2020

Australians are set to benefit from recently unveiled reforms in the $2.7 trillion Superannuation Funds industry, while underperforming funds are likely to be hammered. According to the Federal Government, the proposed reforms will save Australians $17.9 billion over 10 years by reducing fees paid and increasing transparency. The reforms include measures to reduce instances of individuals having multiple super accounts and improved compliance mechanisms.

‘The proposed reforms indicate the Federal Government’s belief that improved transparency will reap financial rewards for Australians. By making information regarding fund performance more readily available, and by requiring underperforming funds to notify their members of that fact, these reforms are designed to make individuals more comfortable with switching funds,’ said IBISWorld Senior Industry Analyst Will Chapman.

MySuper and you

A major incoming reform is the YourSuper comparison tool, which will enable consumers to compare MySuper products by fees and investment returns. This tool is set to launch by July 2021, and will also show individuals their current super accounts and prompt them to consolidate if they have more than one.

‘Originally a reform made by the Gillard Government in 2011, MySuper aimed to simplify superannuation by creating simple, default products with low fees. With its recently announced reforms, the Morrison Government is hoping to increase competition among MySuper products by making consumers more aware of their performance and fees. This move has the potential to boost account balances if consumers switch out of underperforming or costly funds more frequently,’ said Mr Chapman.

The reforms also mandate an annual performance test for MySuper products from 1 July 2021, with underperforming funds required to notify their members of their underperformance by the subsequent October. Underperforming funds will also be required to provide members with information about the YourSuper tool, on which they will be listed as underperforming. Funds that fail two consecutive annual underperformance tests will not be permitted to accept new members. These tests will be extended to other superannuation products by July 2022.

‘The new performance tests will place significant pressure on publicly offered super funds to ensure they are delivering solid returns for their members. Being listed as underperforming would significantly deter consumers from joining a fund and would likely lead to outflows to other funds. Consequently, competition is forecast to intensify among super funds as Australians seek out funds with above-average returns and low fees,’ said Mr Chapman.

Best and worst performers

MySuper products offered by HOSTPLUS, the Goldman Sachs & JBWere Superannuation Fund, AustralianSuper, the Max Super Fund and UniSuper recorded the strongest returns over the five years through 2018-19. The HOSTPLUS Superannuation fund was the top performer, with a five-year net return on investment of 9.65%. All of the top five performers recorded five-year returns on investment in excess of 9.30%.

Aside from investment returns, the fees charged by super funds have a significant effect on account balances. Fees charged by the top five performing funds vary significantly, with the Goldman Sachs & JBWere fund having the highest fees, at 4.37% of a $10,000 account balance. In comparison, fees charged by HOSTPLUS totalled 1.69% on an account with the same balance. Of the top five performers, the Max Super Fund had the lowest total fees on a $10,000 balance, at 1.12%.

‘Investment fees tend to disproportionately affect individuals with smaller account balances due to the economies of scale that larger accounts benefit from. Consequently, fees are a significant consideration for younger individuals and new entrants to the workforce, who typically have smaller account balances. The government’s reforms are anticipated to prompt consumers to choose lower cost funds, placing pressure on fund managers to reduce their fees,’ explained Mr Chapman.

At the other end of the table, the worst performers over the five years through 2018-19 included the Energy Industries Superannuation Scheme, Maritime Super, SmartSave, Christian Super and Perpetual’s Select. All of these funds generated five-year returns on investment below 6.8% over the period. However, the fees charged by the Energy Industries Superannuation Scheme were lower than those charged by the top performers, totalling 0.95% of a $10,000 account balance.

Spotlight on super

Disruption in financial markets caused by the COVID-19 pandemic has significantly affected the Superannuation Funds industry, with industry investments losing $16.1 billion in 2019-20. While financial markets have broadly recovered from lows recorded at the beginning of the pandemic, the strong volatility experienced in 2020 has drawn increased attention to the state of Australia’s primary retirement savings system. Industry revenue, measured as investment returns, is anticipated to recover in 2020-21, with an expected gain of $135.2 billion.

The Federal Government’s COVID-19 Superannuation Early Release Scheme, which allows individuals in financial distress to withdraw up to $10,000 from their super accounts in both the 2019-20 and 2020-21 financial years, has led to over $34.1 billion flowing out of super funds as at October 2020. According to APRA, 3.2 million Australians have applied to access the scheme, with 1.3 million making a repeat application.

Statistics released by the ATO indicate that over one-third of applicants to the scheme are under the age of 30, which has significant implications for players in both the Superannuation Funds and Superannuation Funds Management Services industries. While these funds have boosted the Australian economy over the short term, the reduction in funds under management is forecast to constrain both investment returns and fee income over the long term. In addition, fund managers face the added task of balancing their remaining assets to cover the outflows, constraining their ability to make long-term investments in the Australian economy.

‘The long-term implications of early super withdrawals are forecast to be significant, as many young people have likely emptied their accounts to withstand this short-term crisis. As a result, they are projected to have lower account balances at preservation age, which could push them into working longer or reducing their living standards. Policymakers will likely need to address this issue, whether by increasing the Superannuation Guarantee or by other means,’ concluded Mr. Chapman.

-ENDS-

IBISWorld reports used to develop this release:

 

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Jason Aravanis
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