We are about to enter a transition period where existing default super funds will be replaced by a product called MySuper.
Will result in a better outcome for employees, as it will have;
- Lower fees
- Better investment outcome
- Improved level of personal insurance cover
Employers will not need to change from their current superannuation providers, as we would expect all of them to offer the My Super product. In fact it is designed to sit within the existing default super fund. So whether you are with an industry funds, corporate funds or retail, being your AMP and BT. They will all offer MySuper.
The legislation for MySuper has not passed through parliament, this is expected by Christmas. However it is clear that these changes will be introduced and APRA have commenced sending superannuation funds guidance on how to register a MySuper product.
From 1 July 2013, MySuper will commence, the more important date will be 1 January 2014 where employees who have not made a choice of fund election with their super or who have not made an investment choice within their existing default superannuation fund, will now have future contributions paid into the MySuper account.
From 1 July 2017, again if no choice has been made with either super or investment option then members existing super balance will be rolled from the default fund into MySuper account.
The number of employees who are currently within the employer’s default superannuation fund and also in the default investment option is around 85%. So it is clear that over the next few years most employees superannuation will transition from current default funds into a MySuper account.
So how is MySuper different to existing default superannuation fund? I will focus on three key parts being fees, investment options and insurance.
Fees will be lower with the MySuper product. The reason for this is no trail commissions can be paid to a financial adviser from MySuper. Given that most trail commissions are in the range of between 0.2% and 0.4% this will be a significant fee reduction.
Grandfathering provisions are in place and members can elect to stay within the current superannuation fund that does pay a trail commission to an adviser, but in reality very few people would opt to stay within this product.
This is a better model, a fee for service arrangement, where if a member wants super, investment or insurance advice they can pay for it out of their super account. MySuper does not remove the ability for a member to receive advice, it simply changes the way they pay for it.
In regards to administration fees, investment fees, switching fees and exit fees with MySuper, they will differ between the fund providers, AMP will be different to Australian Super, but I would be surprised once we start to see the MySuper cost details with each provider whether there will be much of a difference, they will all be very competitive, certainly between the large providers. This is a good outcome, and will result in lower fees for employees.
MySuper will only be a single investment option, again this reflects the fact that most members do not make an investment choice. Given that most default investment options are invested 70% growth assets, being shares and property and 30% in defensive assets being fixed interest and cash, it is likely that this will also be the investment option for many MySuper products.
The key improvement is the ability for the trustees of the MySuper product to have life cycle investing. This is where members have different investment allocations between growth and defensive investments based on their age. The younger members will have more aggressive investment allocations and as you get older the growth balance will decrease and defensive allocation increase, this is automatic and does not require the member to action.
All MySuper accounts will have death and TPD personal insurance cover unless the member opts out of the cover. The level of cover will largely be determined by age and also sex and occupation.
If the existing default superannuation fund had a comprehensive plan in place, for instance life cover of 6 times annual salary, it is likely that the trustees would maintain the comprehensive plan.
The other discretion for trustees with MySuper will be whether income protection is also included again with death and TPD cover as an opt out basis.
MySuper offers a lower cost super, with an investment approach that better reflects needs, however does not stop you from making own informed investment choice and also a level of personal insurance cover that is most likely better than the current cover and at worst is equivalent.
Does this mean that employees no longer need advice? Absolutely not. An adviser will need to be more pro active on educating employees on there superannuation. The majority of Australians remain underfunded within super and while proposed SG contributions increases will help, for many retiring in the next 10-15 years will need to contribute more than simply relying on SG contributions alone.
From the employer perspective no immediate action is required, however a review of your super providers MySuper product would be recommended. I would expect that either late this year or early next year employers would receive details of the providers MySuper product. We can assist with this process.
Jonathan Philpot – HLB Mann Judd