Impact of cleaning up multiple accounts

Most young superannuation members do not actively engage with their fund until their balances become meaningful.  Passively, they let their Superannuation Guarantee (SG) contributions be paid to the default fund selected by their employer.  As a result, when they change jobs, they often leave their old benefit behind.  Over time, they collect membership in multiple default funds.  Those accounts which no longer receive the member’s SG contributions are deemed to be inactive.

Changing legislation has exacerbated the problem of inactive accounts.  There was a time when many funds charged active members $1 a week and inactive accounts 50c a week.  However, fees became equalised when funds and administrators saw an opportunity to increase revenue.  There was also once a ban on charging fees for accounts less than $1,000, but that member protection disappeared with the introduction of MySuper funds.  Finally, casuals and part-timers were often excluded from group insurance but now all new entrants are charged an insurance premium.

The problem of account erosion from the deduction of fees and premiums from inactive accounts was recognised in the Super System (Cooper) Review, which made a recommendation to consolidate multiple accounts (Recommendation 9.14).  It was quantified in the Productivity Commission’s draft report in April 2018, and that led to the 2018 Budget changes which have just been legislated (with some last-minute amendments).

With the ATO’s influence and SuperStream, we’re starting to address the problem

The number of multiple accounts is already reducing. There were 32.8m superannuation accounts at 30 June 2010, but despite a growth in the working population, this figure was 28.0m (i.e. 15% lower) at 30 June 2018. This reflects several initiatives:

• the ATO auto-consolidation of lost, inactive accounts (initially below $2,000 and now up to $6,000)
• the efforts of the ATO through SuperMatch to encourage consolidation
• internal activities of funds to consolidate duplicate and zero balance accounts, and
• the introduction of Single Touch Payroll (STP), which makes it easier for an individual to nominate their existing superannuation fund as their fund of choice on starting a new job.

The number of accounts is forecast to reduce to between 26m and 27m over the next few years as the STP process is extended to small businesses.  This reduction will occur as the expected population with superannuation will grow from about from 17.5m Australians today to 20m by 2026.

We will never move to a single account per capita as many Australians want to hold more than one account.  This includes those who leave employment with a preserved defined benefit account, those who set up an SMSF but keep an account in an APRA-regulated fund for insurance purposes, and those who set up a Transition to Retirement account.

The Protecting Your Superannuation Package will have further impact

The measures designed to reduce the number on multiple accounts in the Protecting Your Superannuation Package (PYSP) outlined in the 2018 Federal Budget have now been legislated and will take effect from 1 July 2019.  From this date, all inactive accounts with balances below $6,000 will be transferred to the ATO to protect members, whether the member is lost.  The accounts will also be automatically reunited with an existing superannuation account where the ATO can identify one.

The definition of inactive member has been amended for this purpose to mean 16 months without a contribution unless the member has made investment or insurance changes in the last 16 months or has made or amended a binding death benefit nomination.  We predict that this measure will reduce the number of superannuation accounts by about 3m in the short term, bringing forward some of the consolidation already anticipated over the next few years.

However, unless legislation goes further, unintended multiple accounts will continue to be established and subsequently consolidated.  The problem has long been recognised and stems from the genesis of superannuation as a workplace employment condition enshrined in industrial law.

THE PRODUCTIVITY COMMISSION AND ROYAL COMMISSION GO FURTHER AND LOOK TO PREVENT THE CREATION OF UNNECESSARY MULTIPLE DEFAULT ACCOUNTS

The Productivity Commission’s fund-for-life default

Commentary on the Productivity Commission report has focused on how default funds are selected, with criticism from many quarters of its ‘best-in-show’ model.  This structure is designed to provide an individual with a single fund, as they would be defaulted to a superannuation arrangement once in their lifetime.

The Productivity Commission has recommended that members only be allocated to a default fund when they first join the workforce, and then take that default fund (or a fund they subsequently select through fund choice) with them as they start a new job. This would eliminate the remaining incidence of unintended multiple accounts, likely removing a further 2m accounts from the superannuation system.  However, it puts an emphasis on superannuation distribution models to new workforce entrants and will radically change fund distribution strategies.

Of course, the Productivity Commission intended this recommendation to be implemented along with its best-in-show distribution model, though introduction of that concept is unlikely.

The Royal Commission ‘stapling’

The Royal Commission into Misconduct has also looked to prevent unintended multiple accounts, even though this was outside its investigation, perhaps to support the Productivity Commission.  Its recommendation 3.5 states: that ‘A person should only have one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.’

IMPLICATIONS OF FEWER MEMBER ACCOUNTS

The number of superannuation accounts will likely be 26% lower than its 2010 level once the PYSP changes have taken effect and will be 32% lower if/when the Commission recommendations take effect. For many funds, given their largely inactive membership base, the impact will be far greater than this.

The removal of five million unnecessary accounts will reduce annual dollar-based fees charged by superannuation funds by around $350 million.  This has implications for the cost base of superannuation funds and for their administration service providers.

As there is a cross-subsidy of inactive accounts to active ones, these changes will put pressure on the revenue of many funds, and their administrators.  The STP process should help to reduce costs, but on balance, administrators will have lower margins.

Fees will need to rise to provide the same services to members. This will make many smaller funds unviable, and we have already started to see merger activity as these funds seek to avoid the price increases.

Finally, we know that members take an active interest in their superannuation once it reaches a reasonable balance.  Consolidation of accounts will grow the member’s balance more quickly and engagement should occur earlier.  This should lead to a higher need for intra-fund financial advice initially, and a potential interest in SMSFs for those who the funds ignore.