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'Rorts and rip-offs’ prevention in super legislation

The ‘Treasury Laws Amendment (Protecting Your Superannuation Savings Package) Bill 2018’ was tabled in Parliament on 21 June 2018, with superannuation measures foreshadowed in the last Federal Budget.

Key provisions of the Bill

1. A cap on fees and no exit fees

The Bill prevents superannuation funds from charging administration and investment fees exceeding 3% per annum on balances of accounts below $6,000. It also prevents exit fees when members close or rollover their superannuation accounts, no matter their balance. This will remove a disincentive to superannuation fund members consolidating and closing unwanted accounts.

2. Life insurance within super only if chosen

Fund trustees can provide life insurance and charge premiums only on an opt-in basis, and only to new members aged under 25 years, members with account balances below $6,000, and members with inactive accounts, unless a member has directed otherwise. Fund members can choose lesser cover or seek other providers, saving their nest egg from unintended diminution.

3. Consolidation

Accounts below $6,000 will be transferred to the Commissioner of Taxation if they have been inactive for a continuous period of 13 months. The Commissioner will be empowered to then proactively pay these amounts, plus those lost accounts already held by the ATO, into the rightful owner's active superannuation account. In conjunction with the ban on exit fees, this will assist consolidation.

A political stab at Labor

The first paragraph of Federal Minister Kelly O’Dwyer’s media release on the new Bill said it was:

“… action to protect the hard-earned superannuation savings of millions of Australians from rorts and rip-offs ... These measures address significant issues associated with the current default insurance arrangements in superannuation, which were also put in place in 2013 by then Minister for Superannuation, Bill Shorten.”

This is a justifiable shot across the political bow, given that Superannuation Legislation Amendment (Choice of fund) Bill 2016 acknowledged that, due to enterprise bargaining agreements:

“Some employees cannot choose the superannuation fund into which their compulsory employer superannuation is paid. This prevents them making key decisions around their retirement savings, can result in the payment of unnecessary fees and insurance premiums, and can reduce competition between superannuation funds.”

In May this year, O’Dwyer opined that “about one-third of accounts were unintended multiple accounts because employers have forced them into a particular fund of their choice or unions have through enterprise agreements”.

Industry reactions

Industry reactions to the legislation is expected to be largely positive, although the loss of accounts will adversely impact some superannuation administrators and life companies.

Reaction to the consolidation measures included Julie Dolan, a principal of SMSF Consulting, who told SMSFAdviser:

“The ATO has already been tightening up on the efficiency of its current process of dealing with inactive accounts in order to transfer them into active accounts more quickly. The ATO are spending quite a lot of money on their data matching process and this latest measure is expected to push an extra $6 billion into super across 3 million active superannuation accounts. So that's a good thing.”

Treasury officials have estimated that there are roughly six million inactive super accounts in Australia belonging to four million members.

On the opt-out measure, AustralianSuper, Australia’s largest super fund, has already stopped signing up new members under 25 into life insurance automatically. According to a Rice Warner, an actuarial consultancy firm:

“At the highest premiums, a blue collar worker could be up to 34% worse off upon retirement age, or around $600,000 short compared to a blue collar worker without insurance in their super.”

Canstar, a financial comparison website, also reported that:

“There’s been an average premium rise of 215% for death and TPD cover and 82% for income protection over the last four years means the impact of insurance on a super balance is greater than ever.”

A person below 25 with no dependents and a low salary may not benefit from such a high dilution, or at least would benefit from greater tailoring of their life insurance needs. However, the industry should ensure the changes do not lead to under-insurance for people who need it.

 

Vinay Kolhatkar is an Assistant Editor of Cuffelinks.

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