The Federal Government’s Your Future, Your Super reforms announced as part of the 2020/21 budget have the potential to reshape the superannuation landscape.

From July next year, there will be ‘stapling’ of members’ contributions to a single account – effectively, superannuation for life.  The concept of stapling is not new, having been recommended in the Productivity Commission’s Superannuation Inquiry and the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

At present, if a new employee does not nominate a superannuation account, their employer will direct superannuation contributions into the employer’s nominated default fund, or a fund specified under a workplace determination or enterprise agreement. From 1 July 2021, under the new stapling mechanism, if an employee does not nominate an account, employers will pay their superannuation contributions to the employee’s ‘stapled’ fund.

In the context of these changes employers can no longer satisfy the choice of fund requirements by making contributions to an employer default fund or a fund specified under a workplace determination or enterprise agreement made before 1 January 2021. If an employee does not have an existing Australian superannuation account and does not make a decision regarding where to place the contributions, only then will the employer make the contributions into the employer’s nominated default superannuation fund.  Consequently, the default fund will be a last resort and will not attract many new members.

So – if a new employee is ‘stapled’ to an existing superannuation account, does this mark the death of default superannuation? Yes. Does this mark the death of workplace superannuation? No, but it could be another nail in the coffin.

Impact to employers

Smaller employers which consider superannuation a hygiene factor will likely embrace the changes. Provided the mechanism to identify a new employee’s existing superannuation fund is seamless, stapling will remove an administrative headache for many employers.

Large employers which place value on their default superannuation arrangement and consider it part of their employee value proposition will need to actively promote the fund to employees. This will require new employees to make an active and informed decision about joining their new employer’s default fund. As fund comparison or consolidation advice is not covered under intra-fund advice mechanisms and is not generally cost effective under direct personal advice, new employees will be left to their own devices to decide. Many will consider it too hard to compare funds and so will remain stapled to their previous fund.

If default fund providers want to attract new members to existing employer plans innovation will be required. Moving forward, the information provided to new employees when they are onboarded with their employer will need to be highly effective and provided at the right time, to enable and encourage these new employees to opt-in to their default.

Employers which provide generous group insurance arrangements or subsidise part or all of the administration fees or insurance premiums as part of an employee’s benefit package will need to ensure these benefits are well communicated to new starters. Employers will need to provide their employees with the opportunity to make an informed decision about opting-in to the employer default. This, of course, needs to be done without providing advice illegally.

If a large employer’s default plan is not well promoted to new staff, we expect that over time the FUM and number of members will reduce. As these scale benefits reduce, a re-pricing of the administration fees or insurance premiums may be triggered. Employers themselves may begin to question the sustainability of the default fund and consider removing any additional subsidies or other support.

Employers’ changing Default Funds

In recent years, the corporate superannuation market has been increasingly competitive as both not-for-profit funds and retail providers have targeted large employer mandates. The corporate superannuation market is still likely to be appealing to both funds and employers, but increased support from employers will be required to maximise employee choice into the new default fund. Funds will need to work with their employers to develop strong communication tools to enable and encourage default members and new employees to select the new employer default.

Member Consent

At present, under a member consent transition, when an employer changes its default superannuation provider, the contributions for any employee who has not elected choice of fund can be automatically switched to the new default. The member is still required to provide their consent to have their existing balance transferred to the new default.  In a stapling environment, the concept of a default member is all but removed, such that all employees will need to ‘opt-in’ to having both their contributions and account balance re-directed to the new default provider. When a new default fund is selected for a large employer, that default fund will usually work with the employer to embark on a holistic member education and engagement campaign, the focus of this campaign will need to pivot, to enable all employees to readily opt-in to the new default.

Successor Fund Transfers
A Successor Fund Transfer (SFT) is a transfer of members’ benefits from one fund to another fund, where the consent of the individual members is not required. This method of transition is more common for very large or complex employer plans. SFTs are only possible provided they satisfy a number of conditions, mainly that the successor fund confers on the member ‘equivalent rights.’  The concept of stapling raises questions about the mechanism of a SFT.  However, SFTs do support a competitive market, so it is unlikely that there will be a barrier to SFTs in the future.

What’s next?

Treasury has released its exposure draft and the changes will require legislative amendments to Superannuation Guarantee Administration Act (SGAA) and likely to the default superannuation measures in the Fair Work Act. Impacts to the superannuation clauses in modern awards and EBAs will also need to be considered. Consultation on the Your Super, Your Future package is open until 24 December 2020.

Looking forward

Stapling has the potential to reshape the superannuation landscape, but it is not the death of workplace superannuation.

Employers may treat their employees superannuation fund like a bank account – where they make the contribution with little care for where it goes. If workplace superannuation is to continue to be an important part of an employer’s value proposition, the way it is supported and promoted will become increasingly important.

The typical workplace distribution channel for superannuation funds will undoubtedly shift. Funds will need to look for new methods to seek new members.  Funds may consider targeting family members of existing members, of look to see what inducements they can offer to bring in new members.

For the funds that adapt to this new environment, we expect higher levels of retention and longer membership duration. This will likely lead to larger balances and higher levels of engagement. Funds may need to consider their fee structure and member engagement proposition as member demographics shift.