The Government’s change to the threshold at which inactive funds can be transferred to the Australian Tax Office (ATO) will hit membership numbers and put upward pressure of fees, agrees the Association of Superannuation Funds of Australia (ASFA) and SuperRatings.
The current $2,000 threshold will increase in two phases—first to $4,000 from December 31, 2015, and then to $6,000 from December 31, 2016, Assistant Treasurer Josh Frydenberg announced in the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015.
Frydenberg reasoned for super accounts with smaller balances, the cost of fees and charges and insurance premiums can exceed investment returns.
“This can be particularly problematic for lost super accounts because, in most cases, the members are not aware that they have these accounts and can end up losing money that was meant for their retirement,” he said.
“Transferring lost super accounts with low balances to the ATO will help protect these accounts from fee erosion and preserves their value until they can be reunited with the member.”
However, Pauline Vamos, chief executive of ASFA said there were a number of issues in moving the threshold to $6,000, not least the potential loss of members’ insurance benefits. She also flagged that the definition of lost and unclaimed monies remains haphazard leading to inconsistencies in approach.
Vamos was vexed by the Government’s decision to push forward with the changes as originally it was only going to occur if account consolidation did not work.
“What we have seen is a tremendous increase in the amount of account consolidation and we’ve seen a much greater improvement in the ability of the tax office to reunite members. We are in the process of a clean-up and part of that is the implementation of SuperStream, as well as previous legalisation,” she said.
In the 2014-15 financial year, over 450,000 accounts worth nearly $2 billion were consolidated using ATO services. SuperRatings attributes a drop of 1.5 per cent in membership numbers over the past two years mainly as a result of the transfer to the ATO.
Vamos added: “Why don’t we continue that clean up rather than apply yet another threshold which means we need to change our systems, which means we need to change our processes, which then increases the cost on members and these costs need to be paid by all members, high or low account balances.”
Adam Gee, chief executive of SuperRatings, predicted the reduction in membership could go as high as 5 or 10 per cent. This in turn would create increasing pressure on administration fees because the base on which fixed fees are spread would shrink.
“What we have found is that super funds continue to live off the revenue of that very large membership base in order to fund their operating costs,” Gee said. “We think this [change] will have a real upward pressure impact on fees going forward.”
“If for example we were to see a drop of 5 or 10 per cent some of the larger funds, your AustralianSupers, your RESTs, we would be talking in the vicinity of 100,000 to 200,000 members potentially for these funds, at $78 per member, that is a significant revenue loss.”
He added another factor was the reduction in revenue would force funds to consider their ongoing viability and scale, with some funds being forced to consider mergers.
Another issue, in Gee’s analysis, was insurance premiums could increase.
“Again, if you are taking members out of the system there’s less breadth to spread the costs across,” he said.
On the positive side, he expected member engagement statistics to increase as a natural result of getting rid of inactive members.
According to the ATO, 45 per cent of working Australians have more than one super account and in many cases members are not aware that they have lost super accounts.
The Australian Prudential Regulation Authority (APRA) estimates that the median total fee paid by Australians for a low-cost super account is around $532 per year.
Frydenberg added: “The ATO does not charge any fees for maintaining these [transferred] accounts. In fact, individuals are able to reclaim their super money from the ATO at any time and are paid interest calculated in accordance with the consumer price index on this money. The process for reclaiming these monies is quick and simple.”
Other changes include: updating the definition of ‘uncontactable’ to account for contemporary forms of member communication, for example on-line communication; supporting eligible rollover funds proactively consolidating lost accounts; and allowing direct payments of lost super held by the ATO to persons with a terminal illness.