You might not have noticed, but Financial Services Minister Kelly O’Dwyer’s emphatic 2018 Budget proposal to put a 3 per cent cap on administration and investment fees in pooled super looks like it will sail through both houses of Parliament in the next few days, with nary a murmur of dissent. The bill was introduced into Parliament on June 21 – just last Thursday.
The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 contains a number of measures foreshadowed in the May Budget, and comes in the wake of a damning Productivity Commission draft report and the industry’s turmoil relating to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hearings.
The new rules include banning trustees of super funds from charging administration and investment fees exceeding 3 per cent per year of the balance of accounts holding less than $6000. It will ban exit fees when members close or roll over their accounts, and will institute the new opt-in regime for new fund members under 25, allowing them to choose whether or not to take up group insurance. That opt-in arrangement will also apply to members with account balances below $6000 and members with inactive accounts.
Fees add up
But hold on, what circumstances would cause it to be necessary to legislate a 3 per cent cap on fees in a world where most annual fees seldom exceed 1.5 per cent? The key is the new legislation will force indirect and direct fees to fit under the cap.
Industry Superannuation Australia director of public affairs Matt Linden says it’s all about low-balance accounts.
“By definition, the fee cap only applies to accounts under $6000,” Linden says. “Small account balances exist across the industry, so it is not sector-specific.
“It will [affect] older Choice products with multiple layers of fees,” he says, noting that people are still paying trailing commissions and when including administration fees, platform fees and investment fees, the total could easily exceed 3 per cent.
“However, the changes will also [affect] newer MySuper products offered by industry and retail funds with fixed dollar-based administrative fees.”
These charges, which are about $1.50 a week or $78 a year, mean low-balance industry fund and retail MySuper accounts may breach the cap – on a $1000 balance, that fee would be 7.8 per cent a year.
Mopping up inactive accounts
Linden indicates that whether the fee cap comes into play will also depend on the account consolidation measures the Australian Taxation Office is putting into place, which provide the best opportunity yet devised to reunite inactive sub $6000 accounts with the active accounts of their rightful owners, by using tax records.
The new rules will require every account with a balance below $6000 to be transferred to the Commissioner of Taxation if it has been inactive for 13 continuous months.
As of June 30, 2017, there were more than 6.3 million lost and ATO-held accounts, with a total value of just under $18 billion, ATO data shows.
While insurers will be quietly disappointed by the move – which allowed them to quietly collect group life insurance premiums from these lost accounts – for managers of superannuation accounts, the change will end up relatively revenue neutral because the sum total of those lost accounts will be added to the super balances of their rightful owners.
Swift path
Bernie Ripoll, a former opposition spokesman on financial services who chaired the 2009 inquiry into super, notes that the progress of a bill of this nature is something of a first, an unexpected bonus consequence of what he calls the “perfect storm” of publicity surrounding the superannuation industry.
Ripoll summed up the mood in Canberra for Professional Planner when he said the opportunity for the industry to self-regulate had now passed.
“What with the Productivity Commission report into super and the banking royal commission still under way, we’ve got the government and the opposition virtually goading each other to take action,” said the former Labor frontbencher, who still works in the financial services industry for his own consultancy in Brisbane, SAS Group.
Ripoll pointed to BT’s announcement last week that it would abolish grandfathering of trailing commissions as an example of how the logjam of mutual hostility within the super industry appears to have suddenly turned into a river of progress.
Comparing the current collaborative mood among legislators with the more traditional Punch and Judy show between industry funds and retail funds, Ripoll said “we might end up seeing things that were regarded as inconceivable before”.
‘MySuper 2.0’
Industry Super’s Linden reveals that the introduction of MySuper in 2013 removed a member protection rule that banned the charging of a fee on any superannuation account holding less than $1000 if it exceeded the relevant investment return.
“This was done because the MySuper rules specifically required fees to be charged on the same basis for all members,” Linden explains. “This prohibited cross-subsidisation of low-balance [members] and other classes of members.”
He said the industry funds were in favour of the fee caps in O’Dwyer’s proposed legislation.
Ripoll, who oversaw the original introduction of MySuper, made clear it would benefit from an overhaul five years later.
“Call it MySuper 2.0,” he said, adding, for instance, that grandfathered trailing commissions have not disappeared at the speed anticipated, since some financial advisers have deliberately kept clients at arm’s length to keep them in financial products they had gone into before July 1, 2013.
It’s difficult to put it better than independent financial adviser James Gerrard, who wrote in The Australian’s Wealth section at the weekend: “The result of this grandfathering provision was that many financial planning businesses quarantined clients who had trailing commission super accounts. As there was no legal requirement to give these clients service, many firms thought the best thing to do would be to avoid contact with these clients at all costs.
“They knew that any contact with the client might lead to a discussion on reviewing super accounts, something the adviser might not want to do, as they would lose their trailing commission if the client moved to a simpler product.”
The Productivity Commission report noted there are more than 630,000 superannuation accounts in Australia still incurring trailing commissions, from which we can now deduct the 140,000 BT client accounts whose owners will no longer have to pay these costs after October.
The fees might be only 0.4 per cent or 0.5 per cent of a product’s value each year, but savers long ago worked out the cumulative negative effect of shaving even a small percentage off their super fund every year: the reverse of the miracle of compound interest.
