Choice of fund came into force on 1 July 2005. But how does it work and what does it mean for employers and their employees?
By Alex Dunnin

KEY POINTS
Choice in super took effect 1 July 2005. Choice of super fund is expected to take years to make its presence felt. Employers have to nominate a default fund for their company. The default fund can be the Award fund or a fund chosen by the employees.

Only the most dedicated employers run their own in-house super fund. This means that most employers and employees are in the business of choosing and monitoring super funds rather than running them.

Legislation and rationalisation have been the principle forces driving the trend to outsource corporate superannuation arrangements. The passing of choice of fund legislation in mid 2004 only accelerated the process. But based on UK and Western Australian experience, the real impact of choice will not be felt for years.

Admittedly, it has been a long time since corporate superannuation has demanded such headline status. Budget announcements on co-contribution changes, Treasury models on preferred fee disclosure methods, and now the introduction of choice with the potential to affected millions of working Australians. Within just a few weeks, the superannuation regime underwent the most fundamental changes since the introduction of the superannuation guarantee in 1991. But clearly, of all these announcements it is the introduction of choice that will have the greatest impact.

Choice - how it works

In its most basic form, the choice of fund legislation allows each individual worker to choose his or her own superannuation fund. From the employer's point of view, the introduction of choice required individual companies to nominate a 'default fund'. The default fund must either be the Award default fund for that particular industry, or if there is no Award, then an annual vote of employees will determine the default setting. If the Award nominates more than one suitable default fund then the employer has to choose which will be the default, though of course they can - and should - consult with their employees.

It therefore seems clear the next battle in superannuation will be what funds are eventually listed on Awards. The politics here become intriguing as the Opposition coalition parties favour reducing allowable Award matters to a bear minimum while the Government being the Australian Labor Party favour returning to more detailed Awards which are likely to be very specific about which super fund workers should be assigned to.

If Awards are to be consistent with the choice of fund legislation however, there is a strong argument for either several funds to be nominated in Awards or for no specific funds to be nominated at all. Its possible therefore the Industrial Relations Commission may well move in the more open direction because nominating a best fund in all cases for all workers may become too hard a legal argument to present and sustain, or to later defend. But time will tell.

The result though could be that employers may soon find that looking to the Awards to clarify their easiest choice for a default super fund may not actually resolve their problem. This in-turn may mean that employers and their employees will still need to choose their preferred default fund through a company ballot or some other workplace mechanism.

Choice in super is expected to quicken the pace even more of companies outsourcing their superannuation arrangements. With the latest Rainmaker Information data highlighting that of the approximate 4,000 in-house corporate super funds available in 1996 only a few hundred still remain today, the clear implication is that in-house funds are winding up so fast that soon only a few  will be left. Of course this is an extreme view, but it clearly means that only companies big enough to be expert in superannuation and big enough to stay committed to it will be running their own in-house super fund. 

The regulator's moves to license trustees, impose tougher compliance rules and increasing expectations of ever more informed members all mean that the overwhelming majority of employees will have their super in industry funds and master trusts as most companies simply do not have the resources to run an in-house fund effectively.

Choice - how it works

In its most basic form, the choice of fund legislation which came into effect on 1 July 2005 allowed each individual worker to choose his or her own superannuation fund. From the employer's point of view, the introduction of choice required them to nominate a 'default fund'. The default fund must either be the Award default fund for that particular industry, or if there is no Award, then an annual vote of employees will determine the default setting. If the Award nominates more than one suitable default fund then the employer has to choose which will be the default, though of course they can - and should - consult with their employees.

It therefore seems clear the next battle in superannuation will be what funds are eventually listed on Awards. The politics here become intriguing as while the coalition opposition parties favour reducing allowable Award matters to a bear minimum, the government being the Australian Labor Party favours returning to more detailed Awards which are likely to be very specific about which super fund workers should be assigned to.

If Awards are to be consistent with the choice of fund legislation however, there is a strong argument for either several funds to be nominated in Awards or for no specific funds to be nominated at all. Its possible therefore the Industrial Relations Commission may well move in the more open direction because nominating a best fund in all cases for all workers may become too hard a legal argument to present and sustain, or to later defend. But time will tell.

The result though could be that employers may soon find that looking to the Awards to clarify their easiest choice for a default super fund may not actually resolve their problem. This in-turn may mean that employers and their employees will still need to choose their preferred default fund through a company ballot or some other workplace mechanism.

Choice in super is expected to quicken the pace even more of companies outsourcing their superannuation arrangements. With the latest Rainmaker Information data highlighting that of the approximate 4,000 in-house corporate super funds available in 1996 only a few hundred remain today, the clear implication is that in-house funds are winding up so fast that in three years there may be none left. Of course this is an extreme view, but it clearly means that only companies big enough to be expert in superannuation and big enough to stay committed to it will be running their own in-house super fund. 

The regulator's moves to license trustees, impose tougher compliance rules and increasing expectations of ever more informed members all mean that the overwhelming majority of employees will have their super in industry funds and master trusts as most companies simply do not have the resources to run an in-house fund effectively.

What choice means for employers

For employers, all this means that they still have to decide upon their company's default fund. In the first instance they will probably elect to anoint their current fund as their default, provided of course it offers at least basic death/TPD insurance as required by the choice legislation. But to protect themselves against potential liabilities they may wish to review that this fund is indeed the right choice.

They could of course just switch into the Award's preferred fund. But if this fund is not the best fund then this may not actually solve their liability problem.

If an employer however wants to review its current super fund before anointing it as the default it can simply hold a vote amongst the employees. But beyond the legislation guaranteeing that employers will be absolved of legal liabilities, it is yet to be firmly defined how this vote should be handled. Who nominates a set of funds upon which the employees should vote? Is the employer responsible for gathering enough information for the employees to then make their choice?  Is the employer responsible for ensuring that the employees have enough quality information to make an informed vote? What happens if the vote does not yield a clear winner? What if there are mutiple Awards involved?

A curve-ball that could emerge is that even though the choice legislation protects employers from any liabilities, it remains to be tested whether this means that employers will be protected provided they acted in good faith by trying to be reasonable and assist their employees with appropriate support, or whether it means employers are protected no matter what. In the context of director's responsibilities, due diligence and the spirit of industrial law and other legislation it would seem likely that the former is more likely to be the case.

All this suggests that employers are likely to still have to play at least some role in helping their employees with the super. So while choice pushes the responsibility for choosing a super fund onto employees, it does not mean employers can wash their hands of it either. The implication is then that employers may benefit from having mechanisms to help their employees understand their super choices, even if that means that if employees start asking questions about super the employer has a plan regarding what to say. And reflecting this, SelectingSuper is already being approached by employers wanting help preparing independent profiles and summaries of different super funds for them to hand out to employees. If properly handled super choice can simplify an employer's administration load. But mishandled it could be a nightmare.

Of course if the employer has a policy committee in place then a major role of the committee can be choosing the default company super fund, reviewing how it's going, and helping other employees understand their fund choices.

What choice means for employees

For employees, choice carries some similar but different challenges. They now have almost total freedom to choose any fund they like for their super. Of course the fund has to be a complying fund and it has to be one that their employer can find so they can send them a cheque or make a contribution payment.

But while the employer is responsible, albeit perhaps only partly, for choosing the default fund, they are not responsible for choosing other suitable super funds. This means that reviewing and assessing other super is the responsibility of each individual employee. This role can not therefore be flung back onto the company policy committee or human resources team.

The bigger problem for employers may then be what happens if their employees end up wanting to use lots of different super funds? While the current system of using a single fund for all employees may seem like it stifles competition, the upside is that it makes the employers job of sending off the superannuation cheques very simple. The pay off here has been that funds in these situation tend to have much lower costs and so they can operate without charging high members fees - which is win/win for everybody.

In the worst case though, a company may have to send of a superannuation cheque for as many funds as they have employees. So employees may wish to think about helping their employers by perhaps using major super funds that are sophisticated enough to have decent payroll administration systems. This could also mean that funds with clearing-house facilities, or funds which act as halfway houses, could become popular. By this we mean funds that can direct monies into other super funds once an employees balance reaches a reasonable level, say $1000.

Regardless of whether you are an employer or employee, whether your company has a policy committee, and whether you use the company's default super fund, the reality is that all of us will become more responsible for our choice of super fund. How to actively make the right choices and effectively monitor your super fund is what SelectingSuper is all about.

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