The way your company handles superannuation is about to change. From July next year, employees in most companies will be able to choose almost any super fund for you to place their employer paid super contributions. As Alex Dunnin writes, this will cause a slow revolution for super in Australia
The way your company handles superannuation is about to change. From July next year, employees in most companies will be able to choose almost any super fund for you to place their employer paid super contributions. As Alex Dunnin writes, this will cause a slow revolution for super in Australia
Australians are getting older. We are living longer and are having fewer children. The problem is that as we are getting older there will be fewer taxpayers to pay the taxes that fund our aged pensions. This problem is so extreme that the government forecasts that within the next 50 years we will have just three taxpayers supporting each retiree compared to eight taxpayers per retiree today. Welcome to the policy challenge that led to modern superannuation as we know it today.
To help pay for us in our greying years, the government has been trying to encourage us to save for our retirement through superannuation. To make this happen, the government has put into place policies that encourage us to save in two ways: first, by making superannuation contributions by employers compulsory; and second, by offering tax concessions on our contributions as well as tax concessions on our super earnings to help our savings grow more quickly.
Superannuation currently applies to 95 per cent of Australia’s workforce. However, given the distant nature of this investment and the fact that Australian’s are historically poor savers, most Australians are still ill-prepared for funding their retirement years. Adding to this challenge is the fact that Australia is more than ever comprised of ‘now’ consumers. We’re more educated and active and we’re enjoying a higher standard of living as well as a more sophisticated lifestyle. The downside is that super and our retirement is the last thing on our minds.
But to make us interested in super the government has attempted to make superannuation contributions more attractive through tax concessions whereby superannuation is taxed at lower rates than other investments. This is why it can grow much faster than other types of investments and why it can be so attractive. And not only is superannuation important to members, it’s also an important investment for employers, with nearly a tenth of their payroll going into super. For some generous employers, superannuation contributions are double the compulsory level.
Not surprisingly then, there’s a lot of interest in super. Fuelling this interest, the amount of superannuation savings held by Australians doubles every five years and according to projections by Rainmaker Information it is expected to climb to $2 trillion within a decade. Super is therefore going to be the biggest savings pool Australia has ever seen.
Super has, however. changed significantly since its early days when private pensions were paid only to senior, long serving permanent staff in large private companies and government departments. In those days superannuation was predominantly held by white-collar males and superannuation funds were mostly defined benefit funds. It was effectively an old-boys club.
All that changed though with the 1986 National Wage Case where the government supported the ACTU in its claim before the Arbitration Commission for a 3 per cent productivity payment to be paid to all Australian Workers in the form of Award Superannuation. This was the spur that saw superannuation broadened to include many millions more workers. The old-boys super club was at last broken.
This now effectively compulsory framework freed up super for the masses with the result being an influx of members into superannuation. At that time superannuation was dominated by the retail superannuation sector, which was largely comprised of life insurance investment products sold through tied life agents (individuals compelled to sell one company’s particular products). However many of the new members pouring into super went into the more than 10,000 employer sponsored super funds that were soon to be established.
As time has gone on, however, governments have been unable to resist the temptation to keep changing and tweaking the superannuation rules and this has lead to superannuation compliance management becoming more and more onerous for employers. This has driven them to abandon their corporate in-house super funds and to instead outsource their superannuation arrangements into either corporate master trusts or industry super funds.
Corporate master trusts are super funds operated by banking, insurance or financial adviser groups, while industry funds are super funds set up jointly by employer associations and relevant unions to service a particular industry.
The super outsourcing trend is so strong that the number of corporate super funds is effectively collapsing at 50 per week. Indeed there are 60 per cent less corporate funds now compared to just three years ago. The collapse rate is so severe that on current trends corporate funds could be all but wiped out within two years.
The result will be that over the next few years there is likely to be only a hardcore of probably 100-200 large and sophisticated corporate funds operated by companies with huge interest and skills in superannuation. The implication is obviously that for the rest of us, it means you are in the business of choosing and monitoring super funds rather than actually running them yourself.
How super choice works
In its most basic form, the choice of fund legislation that kicks off on 1 July 2005 will allow each individual worker to choose their own superannuation fund. From the employer’s point of view, the introduction of choice will require individual companies to nominate a default fund.
The default fund may either be the Award default fund for that particular industry, or if there is no Award or no particular fund nominated in the Award, then employers can choose the default fund. This brings into question how this choosing is done. It’s expected that employers may hold an annual vote of employees to determine the default setting. Employers covered by more than one Award or where there are several Award nominated funds may then have to go through the odd situation of choosing between default funds.
Given all this, it’s little wonder that many expect the next battle in superannuation will be what funds are eventually listed on Awards and what will be included as allowable Award matters anyway.
However, if Awards are to be consistent with the choice of fund legislation, there’s a strong argument for either several funds to be nominated in Awards or for no specific funds to be nominated at all. It’s possible therefore the Industrial Relations Commission may well move in the more open direction because nominating a best fund in all cases for all workers may become too hard a legal argument to present and sustain, or to later defend. Time will tell.
What choice means for employers
For employers, all this means is that they will still have to decide upon their company’s default fund. In the first instance they will probably elect to anoint their current fund as their default, provided of course it offers at least basic death/total and permanent disablement insurance as required by the choice legislation. To protect themselves against potential liabilities, companies may wish to review whether their fund is indeed the right choice.
They could of course just switch into the Award’s preferred fund, but if this fund is not the best fund –whatever ‘best’ actually means – then this may not actually solve their liability problem.
If an employer wants to review its current super fund before anointing it as the default it can simply hold a vote amongst the employees. Beyond the legislation guaranteeing that employers will be absolved of legal liabilities, it’s yet to be firmly defined how this vote should be handled. Who nominates the funds for the employees to vote for? Is the employer responsible for gathering enough information for the employees to then make their choice? Is the employer responsible for ensuring that the information received is of a suitable quality for employees? What happens if the vote does not yield a clear winner? What if there are multiple Awards involved?
A trap that could emerge is that even though the choice legislation protects employers from any liabilities, it remains to be tested whether this means that employers will be protected, provided they acted in good faith by trying to be reasonable and assist their employees with appropriate support, or whether it means employers are protected no matter what. In the context of directors’ responsibilities, due diligence and the spirit of industrial law and other legislation, it would seem likely that the former is more likely to be the situation, though we’ll have to wait for the first legal test case to really know the answer.
The choice legislative framework as it currently stands seems to suggest that employers are likely to still have to play at least some role in helping their employees with the super. This can mean handling everything as employers do today or it can mean preparing your HR teams to handle the many questions employees are likely to throw at them.
So while choice pushes the responsibility for choosing a super fund onto employees, in reality it doesn’t seem to mean employers can wash their hands of it either. The implication is therefore that employers may want to think about having mechanisms ready to help their employees understand their super choices – even if that means that if employees start asking questions about super, the employer has a plan regarding what to say.
Employers are already seeking appropriate help in preparing independent profiles and summaries of different super funds for them to hand out to employees. So the lessons seem to be that properly handled super choice can simplify an employer’s administration load, but it could be a nightmare if mishandled, particularly if your employees end up forcing you to spread your company superannuation contributions across dozens of super funds.
A major task, then, for employers is going to be choosing the default super fund for their company. Of course, if an employer has a policy committee in place then a major role of the committee can be choosing the default company super fund, reviewing how it’s going and helping other employees understand their fund choices.
What you should do
When managing the superannuation process for your company and choosing your company’s super fund, regardless of whether you use a financial advisor or a superannuation consultant, you should try to understand how their recommendation or shortlist of possible super funds is compiled. This helps to avoid being manoeuvred into the financial advisor’s and consultant’s preferred contenders as they may sometimes be paid commissions, shortlist appearance fees or finders fees. Indeed, before employing any related consultant or advisor you should require them to categorically declare any explicit or implicit relationships they have with any super fund.
Alex Dunnin is director of Research, SelectingSuper (part of the Rainmaker group). Email: [email protected]
