What the new super changes mean for you

From July 1, Australia's superannuation system will undergo a major facelift in what the Minister for Superannuation and Financial Services Jane Hume describes as the "most significant reforms" our super system has seen since it was made compulsory in 1992.

The Morrison Government says the changes will help bolster the retirement savings of Australians and save them millions of dollars in fees. 

But how, you ask? By removing unnecessary accounts, increasing regulator accountability and performance transparency and providing greater flexibility for those who want to contribute more to their super. 

Plus, we'll also see an increase to the Super Guarantee (SG) from 9.5% to 10% from July 1, set to progressively rise to 12% by July 2025. 

But this is just the tip of the proverbial iceberg. So in this wire, I've invited four financial advisers and a superannuation expert, as well as the Minister for Financial Services herself, to clear up the grey area surrounding these changes. 

They are: 

• The Minister for Superannuation, Financial Services and the Digital Economy, Minister for Women’s Economic Security, Jane Hume
• Rainmaker Information director of research, Alex Dunnin
  
• Industry Fund Services head of technical services & advice enablement, Craig Sankey
• Evalesco Financial Services director and financial adviser, Marshall Brentnall
• FMD Financial senior financial adviser, Nicola Beswick
• Master Your Money Now director and financial adviser, Chris Carlin

We will be asking them everything from whether these changes go far enough, to what they actually mean for you.

Let's dive in and find out, shall we?

The changes from July 1:

1. The super guarantee rate will increase from 9.5% to 12% by July 2025, starting July 1 at 10%.
2. The Government will launch a new online fund comparison tool "YourSuper" on July 1, to make it easier to choose a better fund.
3. The maximum number of allowable members in self-managed superannuation funds (SMSFs) and small APRA funds will increase from four to six from July 1. 
4. The annual concessional contribution cap (pre-tax salary sacrificed contributions to super) is increasing from $25,000 to $27,500. 
5. The annual non-concessional cap is increasing from $100,000 to $110,000  (after-tax savings added to super). For people aged 65 and 66, the bring-forward arrangements will be extended for all contributions made on or after 1 July 2020.
6. The total super balance and the transfer balance cap are both increasing from $1.6 million to $1.7 million. If you exceed the total super balance cap then you can no longer make non-concessional after-tax contributions to super. The transfer balance cap is the maximum amount you can commence a retirement income stream with.

Other changes as part of the Your Future, Your Super Bill 2021:

1. The Government will require super products to meet an annual performance test. Products that fail will be required to inform members and those that consistently underperform will no longer be able to take on new members. Members will be notified by 1 October 2021 if their fund fails this test.
2. Trustees must act in the best financial interest of members and provide better information regarding how they manage and spend members’ savings in advance of Annual Members’ Meetings and through enhanced Portfolio Holdings Disclosure.
3. From 1 November 2021, your super fund will follow you to new employment. This has been dubbed "stapling". This will avoid the creation of unintended multiple super accounts when employees change jobs. 

What do rising Super Guarantee rates mean for you?

First up, let's talk about the rising super guarantee rate. From Thursday, the proportion of your wages that your employer pays into your retirement savings will increase from 9.5% to 10%, and will then lift by 0.5% each year until it reaches 12% in July 2025. 

In a recent study, Colonial First State found that on a hypothetical $100,000 salary, a 35-year-old with a current balance of $100,000 would be more than $86,000 better off in retirement thanks to the new increase, while a 50-year-old with a current balance of $200,000 would be more than $36,700 richer in their golden years. See their findings below: 

Source: Colonial First State. Assumptions for the above: 
1) 5% earnings (3% income return and 2% unrealised capital gain). 2) 2.5% inflation for both Average weekly ordinary time earnings (AWOTE) and Consumer price index (CPI). 3) Salary sacrifice amount is difference between SG and indexed concessional cap for relevant year. 4) Current super balances of: $100,000 (age 35), $150,000 (age 45), $200,000 (age 50), $250,000 (age 55) and $300,000 (age 60). 5) Salary/wage income $100,000 indexed by inflation. 6) Results in today’s dollars. 

For most of the Australian population, this increase will see their base salary stay the same while the super component on their salary would rise. Rainmaker's Dunnin believes for around half of the country's workers their "all-inclusive" enterprise agreement will see their take-home pay suffer. 

"I’m surprised people are surprised," he says.  

"Super is part of your wages, always has been. But if the Government wanted it to not be, it should have made this the law." 

Interestingly, the financial services Minister says the Government weighed this trade-off carefully against economic data prior to this year's budget. 

"Despite months of Labor and Industry Super Australia denying the trade-off between super increases and take-home wages, ignoring the findings of the Retirement Income Review, the RBA, Grattan, ACOSS and others, the Government has always been aware that there is, in fact, a trade-off," Minister Hume says. 

That is to say, the cost of rising super payments is "rarely borne by employers" (Bill Shorten, 2011). No sign of change on that front, though. 

Will this increase be enough to fund my retirement? 

While you may have heard the $1 million figure being thrown around a lot, according to the Association of Superannuation Funds of Australia, single people will need $545,000 in retirement savings to have a "comfortable" retirement, while couples need around $640,000 in today's dollars.  

Meanwhile, former Labor Prime Minister Paul Keating has been petitioning for years to increase the SG to at least 15% so Australians are better off in retirement. But Dunnin says this isn't something that young people should be worrying about. 

"The problem most people who are now young will face as they get older is not that they have too little super but that they have too much," he says. 

"And by the time they get older I wager the age at which they can access their super will get higher and they’ll find it harder to access much in the way of the age pension at all. Sure, it’s a different story for today’s middle-aged people. But if the job of super is setting us up for a golden lifestyle in retirement, even 12% won’t be enough. But how much will be enough?" 

Sometimes he thinks the superannuation community won’t be satisfied until 100% of wages goes into super, Dunnin says. 

Taking a different tack, Master Your Money Now's Carlin argues that we need targeted policies to address "gaps" in contributions. 

"We know there is a considerable gap between men and women’s super balances which can be primarily attributed to women taking time out of the workforce to raise children," he explains. 

"Policies to ensure parents do not lose super while raising a family would be far more beneficial than raising the SG to 15%." 

What do the fresh concessional contributions reforms mean to you?

The Government has also increased its cap on concessional contributions to super from $25,000 to $27,500, allowing Australians to allocate more of their salary to their retirement savings. 

FMD Financial's Beswick said her clients who already understand the benefits of maximising their concessional contributions have been very positive around this change. 

"Those that are focused on working towards building their retirement wealth and use super as one of these vehicles and are completely engaged and see this to increase as a positive," she says. 

Evalesco's Brentnall welcomes the increase to the contributions cap and says he actively advises clients to consistently allocate some of their wage increase each year to superannuation contributions, home loan repayments and to a professionally managed portfolio. This year he has also recommended a number of clients make use of bring-forward unused concessional contributions.

"These rules allow you to make extra concessional contributions, above the general concessional contributions cap, without having to pay extra tax," he says. 

"The carry-forward arrangements allow members with less than $500,000 in superannuation to make use of any unused contributions caps for a period of up to five years."

A number of his clients used this strategy in the year ending 30 June 2021 and noted that for many couples it allowed partners to take steps to equalise account balance gaps that may have been created through time out of the workforce.

For non-concessional contributions (after-tax), Industry Fund Services' Sankey says the "bring-forward rule" means clients can utilise three years worth of contributions in one year. 

"Separate legislation, already passed, increased the age in which you can make super contributions from age 65 to 67 without having to meet a work test," he says. 

"This legislation then brings the ‘bring-forward' age in-line with the age you can make contributions to super without meeting the work test. In the last Federal Budget the Government announced it would look to increase the age to 74, however, this has yet to be legislated."

What are the 'Your Future, Your Super' changes?

As mentioned above, the Government has passed a raft of changes as part of its Your Future, Your Super Bill, which will make it easier for members to compare funds and will see underperforming funds blocked from adding new members. 

A new interactive YourSuper website - run by the Australian Taxation Office (ATO) - will rank MySuper products by investment returns and fees. The tool will display a member's current super accounts and will prompt them to consolidate their accounts if they have more than one. 

This tool is expected to result in member balances rising $3.3 billion higher over the coming decade, by helping Australians select a high-performing product or fund over an underperforming one. 

Beswick says she has seen clients "time and time again" with multiple superannuation accounts being eroded by fees, "purely due to a disinterest within this area".

"However, this comparison is only good if there is a like for like when it comes to various factions such as asset allocation, what comparison benchmark is used, the investment style a manager may use (such as growth & value investing and what’s in favour or not at the time)," she says.  

Meantime, Brentnall considers this to be a positive measure, however, he also has some concerns. 

"It may well lead to the removal of several bad apples, however, it may result in more funds investing in a manner that is in line with the peers, or adopting index-based approaches," he says. 

"The reason for this is that trustees and investment committees will want to limit the possibility of underperformance, and increased levels of index investing will assist with this."

Dunnin believes that some funds would perform better if they indexed more of their assets. 

"Average super returns right now are 17% over the past 12 months. If you’re getting 17% returns, who cares if your fees are 0.7%, 1% or 1.3%? Where the fees story meets the returns story is that despite high returns, lots of super funds still get lower returns than their capital market indexes," he explains. 

"For example, if the ASX is getting a 12-month return of 30% and your super fund is delivering just 20% in its Australian Shares fund then it’s underperforming. The irony is some funds would do better if they indexed more of their assets. And if they did this their fees would fall."

There is already momentum growing in the industry to drive lower fees, and Dunnin argues these new laws will reinforce this drive. 

"We say this because fees last year averaged about 1% p.a., but since then most funds have announced cuts in their fees," he says. 

"Indeed, Rainmaker expects fees to halve over the coming decade from 1% to about 0.5%. We think this because NZ, the US and UK have lower fees than Australia. Australia used to lead the world on these things and is now being taken over."

What is stapling and what is the potential downside?

Perhaps the most highly publicised measure of these new reforms is "stapling", which will see members linked or “stapled” to the first fund they join.

However, Dunnin argues that people can already swap funds pretty much whenever they want, and when people join new employers many bring their current fund with them.

"I’m willing to bet most people won’t realise these new laws are happening and won’t care too much anyway," he says.

"Sure people should pay attention to their super fund at least once a year ... If you want more info, there’s plenty available to you. But if you ignore, as is your right, don’t be surprised if you miss the opportunities and the world passes you by." 

Industry spokespeople have argued that this measure could bring about insurance risk, with workers in hazardous occupations the worst impacted. 

Slater and Gordon has encouraged Australian workers to check that their superannuation insurance is right for them ahead of these changes, with practice group leader Sarah Snowden arguing "stapling" could have some unintended consequences.

“Some total and permanent disability (TPD) and life insurance policies are industry or employer-specific. A policy may exclude jobs deemed as hazardous based on working conditions, or offer benefits only to those employed in a specific industry meaning a person who moves into a different role could be ineligible to claim against their own policy after paying premiums if they are injured or ill while working in that role," she says. 

“People need to give serious consideration and check that their current super insurance policy is the right one for the type of work they are going to be doing going forward. New super accounts will no longer be created every time a worker changes jobs so injured workers won’t have the multiple insurance policies in multiple funds to rely on when making a claim as they have had previously."

Sankey agrees that it's important for these people to review their insurance, and potentially move into a different super fund with insurance specifically designed for that industry. 

"If you are stapled to a fund that has insurance exclusions for higher risk occupations, such as construction or mining, and then move into one of these occupations then you could lose your existing insurance without knowing it," he says. 

Sankey adds that whilst stapling someone to a fund so they don’t have multiple accounts is a good idea, sorting out the good funds from the bad first, before stapling would have made more sense.

Beswick argues that the reforms won't change the general understanding of the importance of insurance, and believes that we will continue to see a chronic level of underinsurance within the population. 

"One positive is people maintaining some insurance cover, but the devil is in the detail when it comes to what people are covered for and if there are specific exclusions that are linked to the type of work they may have previously been doing compared to what they do now," she says. 

What will happen to underperforming super funds?

I asked the Minister to answer this very question and she didn't provide a response, so we are yet to see what will happen to products that underperform for more than two consecutive years. 

In the Government's Your Future, Your Super 2020 report, it noted that $100 billion of Australians retirement savings are currently in underperforming super products. From October 1, MySuper products will be required to inform their members of their underperformance and will need to provide them with information about the YourSuper comparison tool.

These funds, initially only MySuper products, will also be listed as underperforming on the online tool until their performance improves. Products that continue to underperform and fail two consecutive annual performance tests will not be permitted to accept new members. However, they will be able to reopen to new members when their performance improves.

From 1 July 2022, this test will be extended to 'trustee-directed products' outside of MySuper. 

Sankey believes that advisers and financial planning licensees may also look at ways to use these performance tables to help in advising clients, helping them to switch from underperforming products. 

Will we see further consolidation within the industry because of these changes? 

Our advisers believe so. Beswick notes that performance is generally the number one question that her clients have, and with greater transparency, it is likely we will see more people switch to higher-performing funds based upon the Government's new comparison tool. 

"Super fund consolidation is already taking place and it has been accelerating, this will help continue the momentum," Sankey adds. 

"We could end up with some very big funds, but we will also still see some smaller niche funds that continue so long as they offer something different and are competitive."

Meantime, Carlin believes that any fund with less than $30 billion in assets will likely need to consider a merger and/or joint venture with another provider.

Dunnin argues it's not so much the new laws that have forced consolidation to step up a gear, but a general shift in societal expectations of super funds. 

"Regulators can’t force funds to merge - but the political pressure and being law-boned so incessantly by regulators and the media can," he says. 

"This has led to an attitude shift, and when people who run funds start thinking differently, the world changes."

What are the changes to SMSFs? 

Brentnall says this measure will provide more choice and flexibility for those wishing to take advantage of having additional members in their fund, and could lead to a reduction in fees.

"I would however urge caution, as it may lead to additional levels of risk and complexity, both of which could be far more impactful than any fee savings," he says. 

For his clients that want to assist their children, Brentnall recommends they make use of family linking provisions that are commonly available with many funds. These allow for members to reduce fees, whilst preserving their ability to make their own investment choices, he says. 

Beswick believes this provision will likely be embraced by those who wish to hold assets such as property within the superannuation environment (either as individuals or as a collective of business owners who share a common interest in purchasing their real estate business property). 

She also points to family units who are keen to transfer wealth between generations and avoid the liquidity issues that may arise as parents need to draw a higher pension payment. Families with more than two children and want to be part of a "family" superannuation scheme, may also take up the new change, she says. 

Meantime, Dunnin notes that SMSFs have "really come off the boil" in recent years, in part, thanks to the 2017 tax changes that stopped retirement from being tax-free for those with more than $1.6 million in savings. 

"Contributions into SMSFs these past few years have crashed two-thirds," he says. 

"These new laws won’t reverse a trend so massive as that. SMSFs aren’t on life support, but they aren’t as all-powerful as they used to be either." 

Carlin agrees, arguing that the compliance requirements with SMSFs are so high for all involved that the changes are unlikely to make a difference. 

"In addition, advisers are starting to move away from SMSFs ... I’m hearing more and more that some industry super funds top three inflows actually come from SMSFs which is really interesting," he says. 

A word of advice

These changes are rather complex and are nothing short of extensive. It is important that you seek out the advice of a qualified financial adviser for further clarification on these changes and how they could impact you. 

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