The head of the Bundaberg-based financial planning firm Bull Financial Group, Leanne Bull, has warned financial planners to be on the lookout for unsolicited offers to find ‘lost’ superannuation from superannuation funds and banks that may lead clients to unwittingly roll over active super accounts into the soliciting fund.
Bull says when her client, Kelly Watson*, received a letter from the Queensland Independent Education & Care (QIEC Super) industry super fund, congratulating her because the fund had ‘found’ her superannuation, Watson believed it was an offer to consolidate lost or inactive superannuation accounts into her existing fund.
It turned out to be something quite different, and Bull says that it was sheer luck that she learned Watson’s $172,000 superannuation account on the Summit master trust had been liquidated pending rollover.
Watson had signed and returned a form sent to her by the industry fund, and Bull says it was only because she was conducting a regular review of her clients’ cash holdings that Watson’s situation was identified. After contacting her client and confirming that Watson had no intention of moving off the Summit master trust, Bull says, she was able to prevent the rollover from going ahead.
But liquidating Watson’s Summit account triggered a capital gains tax bill of almost $1000, as well as incurring transaction costs. Movements in investment markets after the sale of Watson’s investments made the situation worse, leaving her more than $3600 out of pocket.
Be proactive against this problem
This is not an isolated incident of clients of financial planners being approached with offers to consolidate ‘lost’ super, and it illustrates a number of issues financial planners face when clients take action without prior consultation.
Ben Marshan, head of policy and government relations for the Financial Planning Association, says financial planners need to be proactively educating clients that “superannuation funds are undertaking these practices, with little regard to whether it’s an active fund or a truly lost fund”.
Marshan says the FPA is seeing “a lot of instances where clients are approached by their superannuation fund, particularly in online banking models, [with word that] super has been found, or [a request to] look for ‘lost’ super, and then offering to consolidate it”.
“There are obviously big problems with insurance, with losing access to beneficial service states, and merging [superannuation] components in unfavourable ways,” Marshan says.
Getting personal
The Australian Securities and Investments Commission (ASIC) has taken Westpac to court over telephone campaigns by two Westpac subsidiaries recommending that customers roll out of their existing superannuation funds into Westpac-related superannuation accounts.
ASIC says the campaigns involved 15 alleged contraventions of the best interests duty of the Corporations Act following the Future of Financial Advice reforms. ASIC also alleges that the Westpac subsidiaries “did not undertake a proper comparison of the superannuation funds as required by law”.
ASIC alleges that the Westpac subsidiaries provided what amounts to personal advice, which requires the provider to take into account the circumstances and the best interests of the individual.
Bull says she approached QIEC to request compensation for her client, on the basis that it was not Watson’s intention and not in her interests to leave Summit. The matter eventually found its way to the Superannuation Complaints Tribunal and it took about 18 months before a conciliation hearing could be scheduled, which took place on May 8 this year. It was not resolved to Watson’s satisfaction.
Bull says that while QIEC’s actions may be legal, its communication led her client into a course of action that the client did not know she was taking, and did not want to take.
Other financial planners are likely to have clients that have been approached by super funds or other entities making the same sort of “offer”, Bull says, and they need to proactively alert clients not to make any decisions regarding rolling over superannuation without first checking-in with their adviser.
Is this the best policy?
The Australian Taxation Office (ATO) reported that in June 2016 there were about 5.7 million ‘lost’ superannuation fund members, with account balances totaling about $14 billion. It is unsurprising that superannuation providers of all kinds are keen to consolidate as much of that lost money as possible.
A justification often given for consolidation is a reduction in fees or in insurance premiums that may arise where an individual unknowingly has multiple superannuation accounts.
But problems may arise if a fund consolidation does not take into account insurance arrangements in both the fund the individual is leaving and the fund into which they are rolling.
Clients covered for specific medical conditions may lose that protection or face premium hikes when they roll into a new fund if that fund declines to cover them or demands that the cover be underwritten again.
There is a “right way” and a “wrong way” for super funds to find members’ lost super and consolidate it into existing accounts, and it involves examining both whether the member has insurance cover in the lost fund, and where contributions are being paid.
ASIC’s consumer website, MoneySmart, prominently warns consumers to check life cover before consolidating funds. It warns consumers to “be particularly careful if you have a pre-existing medical condition”, and to seek financial advice if uncertain.
A three-day rollover
Bull says Watson’s predicament was caused in part by the legal requirement that a superannuation fund process a rollover request in three business days.
Bull says platforms like Summit and other superannuation entities should amend their automated processes to include alerts to advisers when the master fund receives a rollover request and it appears Summit has started doing that. However, for a fund to liaise with its custodians and other relevant parties within that time, it must begin to process the rollover more or less immediately, reducing the odds that an adviser might know it’s happening before it’s too late.
Bull has called for the three-day period to be extended to allow advisers to be adequately notified when a client’s fund receives a rollover or consolidation request.
In May 2014, QIEC wrote to Watson to advise her that it had received her consent to search the Australian Taxation Office’s database to locate lost superannuation on her behalf. At that time, it said that no lost super had been found, and that Watson’s consent to search would remain in place until she revoked it with the fund.
A letter dated September 7, 2015, told Watson of “good news – we’ve found your super for you”.
It went on: “We have previously received your consent to use your Tax File Number to locate lost super you may have, as well as any current super accounts you hold with other funds. After searching the Australian Taxation Office (ATO) SuperMatch system, we have identified that you have super with [the trustee for Wealth Personal Superannuation and Pension Fund].”
Bull says Watson returned the associated paperwork, believing that QIEC had located lost superannuation and that it would be rolled over into her QIEC account. In a letter to the fund dated November 13, 2015, Watson told QIEC she believed it had located “an old lost super policy [and] it was these funds I was authorising to be rolled into QIEC”.
“At no time was I aware that my Summit super funds would be transferred into QIEC and I certainly do not wish this to occur,” she said.
Compensation request
In December 2015, Bull wrote to QIEC requesting compensation for her client, on the basis that her Summit superannuation account was not ‘lost’ – in fact it was “her main super account that she has regular non-concessional contributions going to”.
“Watson has had a number of casual positions, so when she received your letter and read the words, ‘Good news – we’ve found your super for you’ in the heading, she duly signed the form believing that it was a small lost super and returned it to your office,” Bull’s letter said.
Bull calculated Watson had incurred a CGT liability of $961, with transaction costs and time out of the market costing a further $2714. She also told QIEC that Watson had found the wording of the letter misleading.
Later that month, QIEC responded that Watson had returned a signed form authorising the rollover, but that in the future it would use different wording on communications to members, “to indicate whether the super is lost or active”.
“However, as mentioned above [in relation to the declaration and authority section of the rollover form] there is a clear expectation that members understand the consequences of a transaction before submitting an authority to proceed, as per the terms of the rollover authorisation form,” it stated.
In the final wash-up of Watson’s situation, Bull will reimburse Watson for the CGT liability, but Watson remains out of pocket for transaction costs incurred and for time out of the market.
* The client’s name has been changed to protect her privacy.
