Kelly O'Dwyer announced budget measures to end some instances of mistreatment of superannuation members, particularly young members and those with low balances. Picture: AAP
If you think charging customers for services that are not rendered or not required are activities confined to the big banks and AMP, think again. The superannuation industry is up to its eyeballs in these sorts of ploys and they bring in very large sums of money that never benefit the members.
The hope is that the financial services royal commission will take a good look at the tricks and schemes that generate massive cash flows for the superannuation funds and life insurance companies while providing no benefits to the actual holders of many superannuation accounts. Add in fee-gouging more generally — charging a percentage of funds under management, for example — and there are fertile fields for commissioner Kenneth Hayne to plough in the superannuation space. The fact there have been fewer overt scandals in superannuation compared with the banks — think Commonwealth Bank’s troubles with AUSTRAC — should not deter him.
Before I go through some of the background, it’s worth noting that Revenue and Financial Services Minister Kelly O’Dwyer made important announcements in the budget to kill off some of the most egregious instances of mistreatment of superannuation members, particularly young members and those with low balances.
I’ll come back to these initiatives — which, unsurprisingly, are being fiercely resisted by certain sections of the superannuation and life insurance industries.
The system of compulsory superannuation is a veritable cash cow for superannuation funds, funds managers, asset allocation advisers, life insurance companies, administrators and the list goes on. By law the money comes in like the tide, and accounts are managed on behalf of members with dollars skimmed off left, right and centre.
Of course, for many members this system represents good value. They can accumulate a useful nest egg for their retirement, have relatively low-cost life insurance and disability cover, and can choose an investment strategy that suits their time of life.
But for others the system represents very poor value, particularly for young workers, for those who are forced to have multiple accounts and for those with low account balances. The worst part of the raw deal that these members receive is that it feathers the nests of the superannuation industry and the life insurance industry.
Take the opt-out arrangement that applies to life insurance coverage, something that Bill Shorten gifted to the industry when he was assistant treasurer in the Gillard government. What happens is that everyone with a superannuation account is forced to have life insurance and pay the premiums unless they go to the trouble of opting out.
Take it from me, this is not an easy process. I dropped the insurance option from one of my accounts but had to put up with a person from the call centre trying to dissuade me, as well as complete paperwork requiring witnesses.
For starters, many people, including young people, wouldn’t even be aware that they are covered by insurance (and paying for the privilege), let alone go to the trouble of opting out.
But if that’s not bad enough, many people, including young people, will be forced to have multiple accounts because their employers direct them into particular funds. This is in part driven by the monopoly status conferred on particular superannuation funds in enterprise agreements — they are almost all union-affiliated industry super funds.
Given that many young people have a range of casual jobs before they settle down into a career path, it is quite possible to amass several accounts unwittingly. This certainly happened to my children.
Don’t get me wrong, there is a high degree of apathy and inaction among superannuation members, including young ones. After all, retirement seems a very long way off for them, they can’t get their hands on the money and the system is difficult to understand. The trouble is that a sensible “set and forget” arrangement is not made available to them because of the various vested interests in the system.
What often happens is that the balances of these multiple low-balance accounts are eroded by the high fees and charges levied on them as well as unwanted insurance premiums. Forget the power of compound interest; just think of the amount that is raked off before the money completely disappears.
It is estimated there are 9.5 million superannuation accounts with less than $6000 and that at least one-third of superannuation members have at least two accounts. There are also large numbers of inactive accounts (there has been no contribution in 13 months) for which fees, charges and often insurance premiums are levied. The Treasury has estimated that it is not uncommon for accounts of $1000 to be charged 9 per cent in fees, charges and insurance premiums — which is surely highway robbery.
But this story is not just about figures. There have been some egregious instances of life insurance companies refusing to pay out on policies held through superannuation accounts because of disputes around definitions as well as rules attached to required balances and the need for recent contributions.
For instance, one large industry super fund, with a large number of small accounts held by young workers, required a balance of at least $2000 before any payment would be made under the insurance policy. This is really up there with the AMP scandal. The member had paid the insurance premiums but the fund would not pay out. A similar case related to the denial of a claim because no recent contribution had been made to the account even though the premiums had continued to be deducted.
So where does the budget fit in with this? Several sensible changes are being proposed, including that superannuation members younger than 25 must actively choose to be covered by insurance.
There will also be a 3 per cent fee cap imposed on low-balance accounts, defined as those with less than $6000. Exit fees from superannuation funds will also be banned. Inactive accounts will be shifted to the Australian Taxation Office, with the aim of reuniting them with their rightful holder, hopefully to be consolidated with another account.
Let’s be clear, there is a lot of money at stake for the industry. It is predicted that the industry could lose $3 billion a year in insurance premiums — the benefits of this cash flow are shared between the funds and the life insurance industry. And the 3 per cent fee cap will cause a dent in the profitability of the industry.
But the reality is that the various players in the industry had a chance to get their act together — by promulgating a compulsory code of conduct, for instance — and they failed. To be sure, AustralianSuper is moving to do the right thing but the rest of the industry has resisted.
Expect an avalanche of misleading bleatings from the industry — the insurance premiums will have to rise, young people in high-risk occupations will miss out on insurance, a cap of 3 per cent is not feasible — but the government should stick to its guns.
And in the meantime, we should expect some interesting exposures in the royal commission of the various misdeeds of the superannuation industry, and misuse of members’ money including unjustified sponsorships.
By Judith Sloan
12 May 2018
#ASIC #Advice #FinancialPlanning #specialist #will #enduringpowerofattorney #FederalBudget #smsf #law #estateplanning #Contribution #Retail #Fund #SMSF #Superannuation #Cap #Retiree #EPA #lawyer #Pension