If you have less than $1000 in your super account, or you have children or grandchildren with part-time jobs (or starting their first full-time job), then you will be very interested in this article.
Effective since 1 July 2013, the federal government abolished the ‘member protection’ rule which protected small super accounts (account balances of less than $1,000) from being rapidly eroded by fees charged by super funds.
What are ‘member protection’ rules?
Until 30 June 2013, there was a special cap on fees for super accounts worth less than $1,000. If a super account held less than $1000, and it contained Superannuation Guarantee (compulsory employer contributions) amounts, then the super fund was required to ‘protect’ the account under the ‘member protection’ rule.
Until 30 June 2013, such a protected account was treated differently to a regular super account because any administration fee that the super fund charged could not be greater than the investment return credited to the super account. For example, where a super fund suffered a negative return (investment loss), any ‘protected’ super account should not have been charged an administration fee, with one exception. If the investment return/loss didn’t cover the administration fee for the fund, then the super fund had the option of charging the super account up to $10 more. For example, in a year of negative investment returns, the super fund could impose a $10 administration fee, rather than a zero fee.
Note: A member-protected super account was still subject to taxes, indirect fees (such as those fees deducted from investment returns before announcing a final return) and insurance premiums.
Fee hike since July 2013, triggered by MySuper
Effective since 1 July 2013, the federal government abolished the member protection rules which protected small super accounts from shrinking as a direct result of fees charged by super funds. The federal government abolished the member protection rule due to the introduction of MySuper (the introduction of a standardised type of default super fund for Superannuation Guarantee contributions, for those Australians who do not choose their own super fund).
According to the federal government, the MySuper rules (which commenced on 1 July 2013 although MySuper funds were not in full operation across the industry until 1 January 2014), are intended to protect members from unnecessary fees and charges, and provide a simpler superannuation product for those who do not actively choose their superannuation fund. The MySuper rules require that all MySuper members are charged fees on the same basis with respect to their MySuper super account. The federal government states that this requirement cannot be met at the same time as the member protection standards remain in place.
Consider combining your super accounts now
The removal of the member protection rules coincided with the introduction of more aggressive ‘lost super rules’.
Important: Since January 2013, an ‘active’ super account is defined as a super account that has received a super contribution within the previous 12 months. If you have one or more super accounts floating about and those accounts are not ‘active’, that is, you or your employer, have not made a super contribution to those super accounts in previous 12 months (and you super fund has not been able to contact you), and your super account is less than $4,000, then your super money will be transferred to the ATO as ‘lost super’. You will no longer receive investment earnings, but effective since July 2013 onwards, your transferred super balance increases in line with inflation (CPI). You can claim these lost super amounts from the ATO at any time. For more information on this lost super change, see SuperGuide article Lost super making money for the government.
Where does this leave super accounts that are still ‘active’ (that is, a super account that has received a super contribution within the previous 12 months) and the account balance is worth less than $1,000?
The abolition of the member protection rule in July 2013, means that where an active super account is worth less than $1,000, the super account is now charged full super fees (since July 2013), rather than having the super fees capped to the amount of investment earnings (if any). Active small super accounts, like all super accounts, are charged the same types of super fees, even when the super fund suffers an investment loss.
The federal government may be well-intentioned but MySuper (which has also introduced standardised costing and disclosure rules), does not redress the issue of small super accounts that are continuing to receive super contributions, and are now being charged administration fees at the full rate. Typically this issue affects young people starting their careers, part-time workers and individuals who either work several jobs or who have worked several jobs.
Note: Super accounts may also be subject to contributions tax (if employer super contributions or other concessional contributions are made to the account), investment earnings tax, insurance premiums and indirect investment fees. Note that indirect investment fees are deducted before investment earnings are credited to a member account. These additional costs have always existed and continue to exist under the MySuper regime which commenced from July 2013, and has been in full operation since January 2014.
Why was the Member Protection Rule abolished?
The federal government explained its rationale for removing the member protection rule (MPR) in the draft explanatory statement supporting the draft regulations repealing the member protection rule. The government gave the following reasons for abolishing the MPR:
- trustees can still deduct administrative fees in years with a negative investment return [Trish’s comment: yes, but only to a maximum of $10, rather than $50 or $100 or some other amount, depending on the super fund]
- the standards effectively require members with larger balances to subsidise the costs of low balance members [Trish’s comment: yes, and now the smaller account balances will subsidise the larger accounts because administration fees are a flat rate per member]
- the standards may be a disincentive for members to consolidate small account balances [Trish’s comment: perhaps, but this does not solve the problem for those small active accounts, which may not be able to be consolidated due to industrial awards and agreements]
- funds must provide for member protection in their administrative systems and procedures, adding inconvenience, complexity and cost [Trish’s comments: I can list plenty of other less worthy rules that arguably add unnecessary complication and cost for all fund members]
- costs levied before earnings are allocated to members (such as insurance premiums and tax) can erode small balances, despite the standards [Trish’s comments: True, but insurance premiums are a benefit that the fund member receives compared with an administration fee that is a cost]