Consolidation delayed – auto-con kicked into the long grass

One of the goals of Stronger Super is to increase scale in the Australian super system by encouraging, if not forcing, mergers of super funds.

The formal part is a self-administered annual test on trustees that their MySuper members are not disadvantaged by a lack of scale in assets or members. It looked vague and rather toothless from the start, with lots of wriggle room for small funds, and hasn’t exactly provoked a wave of mergers.

But there was an informal force for consolidation within the reforms, in the form of auto-consolidation. There are 3 super accounts on average for each working Australian, each incurring fees and expenses. Sometimes there are good reasons for an inactive account, for example to maintain insurance cover. But most of the time, it’s because members have lost track of their super accounts or don’t have the time or the know-how to consolidate them, so it’s just inefficiency.

Auto-consolidation was the proposed solution, with the ATO to facilitate mergers of members’ inactive accounts with their active account wherever that might be in the system. This was to commence with account balances of under $1,000 in 2014, moving up to $10,000 in 2016.

While designed as an efficiency measure to consolidate member accounts, it also shaped as a potent force for consolidation of funds.

How? It’s common for funds focused on workplace super – particularly not-for-profit funds and retail corporate super funds – to have 10-30% of their total members in each of the sub $1,000 and $1,000-$10,000 inactive segments. Workplace super funds often have much or most of their revenue calculated as dollars per member per week. So all things equal, auto-consolidation implied a loss of perhaps 40% of members – and up to 40% of revenues – which would force funds to consider large increases in fees, or mergers with other funds.

Now those are numbers which really get your attention, far more so than the prospect of the APRA scale police.

No doubt this provoked considerable inbound consultation. Hints of delays emerged in a March media release from then Minister Bill Shorten, confirmed in a Treasury discussion paper last month “Lost and unclaimed superannuation money”. You can find it here:

The paper actually deals with proposals to increase the threshold at which lost accounts are transferred to (confiscated by?) the ATO from $200 to $2,000, and then $3,000 after 2016. Buried on page 3 was confirmation that inter-fund consolidation will now be reviewed in late 2014 following further industry consultation.

Where does this leave us?

Intra-fund auto-consolidation commenced on 1 July, with the first round to occur by June 2014. This won’t have much impact; by definition funds retain their existing members although there may be some marginal loss of revenue from duplicated accounts.

Small lost accounts transfers to the ATO have stepped up dramatically.

Inter-fund auto-consolidation – the main game in terms of lifting industry efficiency and improving member outcomes – has been kicked into the long grass and it’s now hard to see it commencing before 2015-16, if at all.

So the bottom line is that more money flows into the Treasury while industry efficiency goes not far at all.

Winners and losers?

Winners (apart from consolidated revenue) include workplace super funds, especially not-for-profits (which tend to have large numbers of inactive members). Smaller funds in particular gain a reprieve, and may continue to struggle on. Owners of major fund administrators – such as AAS (PEP) and Superpartners (5 industry funds) – have dodged a bullet and must be relieved.

And the losers?

Well there are probably a few retail competitors who would have welcomed a turn of the regulatory screw on some of their not-for-profit competitors.

But the real losers are the members, at least for a while longer. Not just members with inactive accounts who would have benefitted from reduced costs. There are also ordinary members of too many small funds that really should consolidate, but free of the threat of auto-consolidation for a while longer, will hang on to their independence, delivering mediocre returns and falling further behind in the contest to provide quality products and services at a competitive price. There are some great small funds, but these are the exception, not the rule.

Posted In: Trialogue