Stapling – another bandage for superannuation

The Your Future, Your Super package announced in October 2020 as part of the Government’s 2020-21 Budget is designed to “make your super work harder for you”. 

Following the findings and recommendations of the recent Productivity and Royal Commissions, these reforms are aimed at improving retirement outcomes achieved for all Australians. The Government undertook consultation in relation proposed legislation, with the bill introduced into Parliament for a first reading on 17 February, 2021.

An issue that this package tries to tackle is the unintended creation of multiple superannuation accounts, a common consequence of people changing jobs and not electing to have future superannuation contributions paid into an existing account. This can see a person paying duplicate fees and insurance premiums on multiple accounts, eroding their savings that have been accumulated over time.

To prevent Australians from facing a proliferation of unintended superannuation accounts, from 1 July, 2021, a person’s existing superannuation account will follow them from job to job (referred to as ‘stapling’), unless they opt to select another fund. The Government estimates that stopping the creation of unintended multiple accounts will boost balances in super by about $2.8 billion over the next decade.

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While good in principle, there are a number of potential pitfalls that should be considered to ensure this reform achieves the outcomes intended.

IMPLICATIONS FOR THE APPROPRIATENESS OF DEFAULT INSURANCE COVER

A key component of Australia’s superannuation system is the life insurance cover available to members. Funds aim to develop an insurance strategy and design that is appropriate for its membership, taking into account key risk factors such as age and nature of employment. A member’s occupation will likely determine their eligibility for cover, the definitions of illness/disablement that apply and the premiums payable. 

Funds aligned to industries and employers with more risky occupations tend to have a default insurance design that better caters for this. In the presence of ‘stapling’, it will be important that a member’s default insurance cover is adjusted appropriately as they shift into and out of riskier occupations.

IMPLICIT ADVANTAGE FOR FUNDS ALIGNED TO THE YOUNGER WORKFORCE

Funds aligned to industries that typically employ young people, such as retail and hospitality, will likely disproportionately benefit from ‘stapling’ superannuation accounts to individuals across their lifetimes. With low engagement rates in superannuation, both at younger ages and in general, some funds will have a better opportunity to set up superannuation accounts for new workers at the start of their careers. This could drive complacency among those funds that benefit, while others face the risk of an increasingly ageing membership and its associated challenges. 

Further, of the handful of funds that are likely to benefit the most from the stapling measures, the majority offer members a single strategy MySuper product as opposed to a lifecycle or glidepath strategy. For a disengaged member, which the ‘stapled’ member may well be, this is disadvantageous as their risk exposure will not adjust with age, having implications for their retirement outcomes.

RISK THAT AUSTRALIANS ARE ‘STAPLED’ TO UNDERPERFORMING FUNDS

The Your Future, Your Super package introduces measures to hold funds to account for underperformance. However, the new annual performance test will look at historical net investment returns achieved over the previous financial year and see members of underperforming funds notified by the following 1 October. ‘Stapling’ superannuation accounts to individuals may see employers make contributions into funds that are underperforming when compared to the net investment returns of the default fund offered to employees.

ABILITY FOR EMPLOYERS TO SET UP A COMPETITIVE STAFF SUPERANNUATION PLAN

Under Australia’s compulsory superannuation system, employers are required to have a ‘default’ fund that they can pay compulsory contributions into if an employee does not choose their own fund. For larger employers, it is common to establish a superannuation plan through its default superannuation fund to cater for the specific nature and needs of its employees. An employer can then work with its chosen fund to cater for the needs of its staff through initiatives such as financial wellness seminars or advice services. 

However, funds may now view employers that do not employ a significant number of young people as less attractive, as ‘stapling’ will likely mean less new members are gained by default at older ages. This may create challenges for employers in setting up comprehensive superannuation plans for their staff in the future and see a potential dilution in the specific needs of employee groups being addressed.

A number of the legislative changes to superannuation over the past few years have been focussed on protecting member balances; whether through the Productivity and Royal Commissions or the Protecting Your Super changes. Stapling is the latest of these. In theory, it should protect balances at the inception of an individual’s superannuation journey.  

However, stapling is not without its pitfalls, as has been noted in this article. The root cause for the majority of the underperforming and eroded superannuation balances remains the lack of member engagement in superannuation. Increasing an individual’s engagement with their superannuation, supplemented by education to help them make an informed choice, should still be a key focus of each superannuation fund’s strategic initiatives to ensure that it operates in its members’ best financial interests. 

Although sound in rationale, regard must be given to the unintended consequences of the legislation. Ultimately, these highlight the important of increasing individuals’ engagement with superannuation to ensure they are getting the best financial outcomes. 

Helena McGeorge is senior consultant and Jenna Mollross is senior manager at Deloitte.