Super-focussed budget creates product opportunities outside of super

We have become accustomed to seeing all meaningful budget initiatives plastered across the front page of the press in the week leading up to budget night.  But this year the government kept a few superannuation ‘enhancements’ up its sleeve, and the impacts will be felt across the industry.

We focus here on just one of the changes – the introduction of a $1.6m lifetime cap on the amount a member can transfer from accumulation to pension mode, which creates some strategic challenges for not-for-profit superannuation funds, but also generates potentially large product opportunities for all product providers.

The lifetime pension cap has clear repercussions for anyone planning to have substantial superannuation balances in the future.  But the more imminent impact is that those with pension balances of more than $1.6m at 1 July next year will have to roll the excess out of their pension account.

So for a member with $2m in pension phase, $400k will have to be rolled back into accumulation (where earnings will be taxed at 15%) or to another destination of the member’s choosing – presumably a bank account, platform or investment product.

This creates a huge administrative and commercial headache for super funds (not to mention for members and their advisers).  But there is also an opportunity for some.

First the headache.  Funds like members with large account balances.  Most funds have hybrid or variable fee structures and rely on their ‘whales’ to subsidise low balance members.  This latest change will not only reduce the balances of the whales (and therefore the fees a fund can charge), it also creates a decision point for members – one that might spur them to go elsewhere in search of a more comprehensive solution.

This doesn’t create much of a problem for retail funds, which can generally cater to their members’ every whim – investment, super, IDPS, masterfund, bank account, TD, margin loan, property, alternative, passive, high-octane…the list goes on.

Their not-for-profit counterparts, on the other hand, are faced with a problem; up until now these funds have operated on the basis that by providing a superannuation solution they can take care of members’ retirement needs.  That status quo has just changed for a small but important part of the member base, who will have more than $1.6m in retirement – and for whom a superannuation fund now doesn’t provide the full solution.

Which leads us to the opportunity.  We estimate 65,000 members will be caught up in the change, (two-thirds of whom are SMSF members).  Many of these members will simply transfer assets back into the accumulation division of their current super fund.  But this may well be a suboptimal outcome.

Think of a retiree who has very little in the way of income from outside super.  They effectively have an unused tax-free threshold and could consider transferring some of their pension balance into their own name to make use of their personal 0% tax rate.  Given an effective tax-free threshold for retirees of around $30,000, this means they could transfer ~ $500,000 of their pension balance into their own name and – assuming a return of 5% p.a. – that income would be tax free.

If all affected members did this, there would be around $23b of assets leaving the superannuation system by 1 July 2017, as a direct result of the change.  That’s more than half the systems net inflow we’re expecting this year.

Back to the opportunity.  Those assets have to go somewhere.  Product providers of all persuasions should be targeting this new potential wall of cash.  Not least of all, the not for profit funds who will still want to help their members’ meet their retirement goals, an aspiration that may now involve the offering of non-super products.

The opportunity is too small for each fund to build its own non-super solutions, but we suspect they’ll be looking at other ways of collaborating on a product to make sure they can look after all of a member’s retirement needs, a place previously reserved for retail funds.  The government might unwittingly have caused not-for-profit super funds to transition even further towards being full-service financial services firms.  And as a result we can expect to see those funds targeting a greater share of their members’ financial services ‘wallet’.

A wall of cash flowing out of the superannuation system creates a host of new opportunities, but for many will require a change in direction.