While applauded as a plus for consumers and the economy, the stapling of super funds announced by Treasurer Josh Frydenberg as part of the ‘Your Future, Your Super’ reforms could chip away at the foundation of small-to-medium sized industry funds and accelerate merger activity in the sector.

The changes, which will see members take their ‘stapled’ super funds with them to new jobs instead of having new accounts created automatically, were recommended as part of the Hayne royal commission and are intended to stop the creation of multiple low-balance accounts that are vulnerable to fee erosion.

As a consequence, however, the majority of industry funds that are linked to occupations will lose the opportunity to use a job change as a prompt to sign up new members.

“It’s pretty clear that stapling will see a big shift in the distribution of growth in member accounts across funds,” says Grattan Institute program director Brendan Coates.

According to The Conexus Institute’s CEO David Bell, smaller industry funds will feel the brunt of the changes.

“I think it doesn’t really shift things for strong industry funds because they’re already winning large amounts of active switchers, people are choosing them actively,” Bell notes. “It’s only some of the small and mid-sized industry funds that are relying on their default fund status.”

(Minister Jane Hume actually hinted at the changes to default super in a July conversation with Bell, recorded as part of The Conexus Institute’s ‘Exploring big ideas’ webinar series.)

According to KPMG national sector leader Linda Elkins, any significant shake-up to fund membership is going to threaten smaller industry funds.

“From a sustainability POV a shift in membership has more impact on the smaller funds. But there are considerations in this for all super funds,” Elkins tells Investment Magazine.

The threat to small and medium industry funds could accelerate a frothy superannuation merger environment, Bell adds. “It’s another reason they should be having these discussions; funds that have been going nowhere for years in terms of membership and net inflows, with market performance papering over the cracks, may be under threat.”

Elkins agrees with Bell that stapled super could lead to more merger activity.

“That’s absolutely what we think we happen,” she says. “Covid has probably accelerated the trend already where funds were already considering their feasibility.”

Another nuance Bell notes is that industry funds in the ‘first fund’ space – in particular REST (retail) and Hostplus (hospitality) – will actually be in a better position because they have first crack at workers that are much more likely to become lifelong members.

This advantage is localised, however, to industry funds capturing people in their first or second jobs.

For the majority of small to medium industry funds, the changes will strip away advantages gleaned from union or corporate tie-ins and stifle new member flows.

Industry funds are also still smarting after being disproportionally affected by early access requests – which was exacerbated by their tendency to have concentrated member cohorts – and by liquidity issues stemming from the pandemic.

Adverse effects

Bell believes that while super stapling is certain to benefit consumers by reducing multiple accounts, potential damage to “occupational” industry funds may have adverse overall effects in areas such as education.

“You potentially lose a strong engagement opportunity, being the partnership between employer and funds and (sometimes) unions to improve financial literacy,” Bell says. “You also potentially lose the benefits of areas such as tailored insurance arrangements.”

He notes, however, that the engagement advantage industry funds hold over retail has never been fully evaluated. “Industry, regulators and government have always struggled to put a value on engagement,” he adds.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
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