The ‘terrible’ unintended consequences of superannuation reforms

By Cameron Micallef

March 30 2021
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Members will be tied to an underperforming fund, creating ‘terrible’ retirement outcomes under the current stapling arrangements in the Your Future, Your Super legislation.

During an AIST media conference, AI groups chief policy adviser Peter Burn explained how changes to superannuation that are designed to protect members, such as stapling, will likely hurt their retirement income.

Under the government’s Your Future, Your Super reforms, from July, members’ contributions will be ‘stapled’ to a single account – effectively, superannuation for life.

While in support of the idea of removing multiple funds, Mr Burn noted that stapling achieved this purpose but at a greater cost to members.

“What that means [is] that people will face the risk of being initially defaulted into an underperforming account and staying with that throughout their working life,” Mr Burn said.

The policy officer cited the Productivity Commission, which found that 14 per cent of funds underperform, with members naturally weeding out poorer funds through creating multiple accounts throughout their working lives.

“The effect of this process is that without weeding out underperforming accounts is that after your third job, you have less than 0.5 per cent chance of having all your money in a low-performing fund,” Mr Burn explained.

“But the downside of the present proposal is that 14 per cent of people remain in a low-performing fund.”

He opined that the 0.5 per cent of people who currently have all their money in an underperforming fund will expand to 14 per cent, if the member is stapled to a default account.

“So that is a terrible outcome for those people. They end up low performance, low investment returns, high fees and they are stuck with that until retirement,” Mr Burn continued.

Despite facing its critics, the Minister for Superannuation Jane Hume has been vocal in her support of the changes, highlighting the importance of stapling, which avoids creating duplicate accounts, leaving members as much as $98,000 better off in retirement.

Ms Hume also highlighted addressing fees for younger members, which are unnecessarily reducing balances.

“Putting members’ interest bill prevented members, particularly young members, from paying for automatic insurance that is unnecessary.

“Often, these excessive premiums eroded the balances of young people that took years and years of contributions to finally increase their balance, which is not an inspiring entree into the world of compulsory super saving,” she concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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Retirement