Released: 7 May, 2015

There appears to be a common misconception that Eligible Rollover Funds (ERFs) are dead. Let’s look at the five most common myths and have them destroyed!

In Australia, an ERF is required to be authorised by APRA. In past years there have been as many as 16 ERFs operating at any one time. In today’s more regulated environment there are only 6 ERFs. Some are better than others. Money in ERFs as at 30 June 2014 just under $5.1b.

Let’s remove any confusion over which members are impacted.

In all cases it is best to have data cleansed by an ERF, before it is sent to the Australian Taxation Office (ATO). The ATO’s data is key to it finding a match for those that search. Note that ERFs may hold more member records than the ATO.

1. Lost and Inactive member accounts must go directly to the ATO

Many funds think they must transfer their lost and inactive account balance of $2,000 or less directly to the ATO. This is not true.

By transferring any lost members to the ERF before they become due to be transferred to the ATO, they effectively give a new 12 month period for the ERF to work at finding them. They may then go to the ATO if their balance is below the threshold and they cannot be found by the ERF. However, in that 12 month period, they have only been exposed to minimal ERF Fees whilst earning interest and having a concerted effort made to find them.

Any Inactive members can also be parked in the ERF. When an ERF receives these members they are no longer considered as inactive. In some cases members can remain indefinitely in the ERF. Whilst there the ERF will reunite them with any active accounts they find.

A good ERF should be used as a parking fund, before money is transferred to the ATO.

2. Lost and Inactive Members are better off remaining with a fund rather than transferring to an ERF

Members that need insurance for death or TPD or income protection will not receive this cover in an ERF. If a member doesn’t need insurance they don’t need the fund! Lost and Inactive members can be better off in an ERF if they do not need insurance cover.

In addition if members know they will be out of the workforce for a period, they can transfer their existing balance directly to an ERF. Not many members know they can do this, and funds do not advertise the fact.

In many cases a member is financially better off in an ERF than remaining in the fund, if they do not need insurance cover.

3. The ATO will relocate and consolidate accounts for lost and inactive members

Yes, the ATO can assist with relocations in many cases. There are also many cases they cannot assist with. If your Tax File Number (TFN) is not recorded – no matches will be found. Unless your TFN matches member details, a record will not be displayed. If your account is not classified as Lost, it may not be linked through the search (over 96 per cent of records are not lost). If you don’t have patience for completing lots of ATO questions to register, your success may be limited. ERF’s will hold records that you can’t find using the ATO search tools because of lack of TFN and/or details that don’t match.

Members need more than the ATO to help them. A good ERF can fill in the gaps.

4. A member is financially better off with the ATO than with an ERF

The ATO will give interest to money it holds, at the rate of CPI. Also, they don’t charge any fees. So, yes it does give interest, but it’s not much and has been declining! The overall gain to a member will be greater in most cases, if the money had remained parked in an ERF. For example, a $2000 account held for the 12 months to 30 June 2014, with AUSfund, Australian ERF, SuperTrace or SMF ERF, would have been better off by a significant amount when compared against the ATO and other ERFs.

There are only two scenarios where the ATO based member account would have been better off than in an ERF (AMP and Super Safeguard).

In many cases a member is financially better off in an ERF than with the ATO.

5. Trustees don’t need an ERF anymore.

This is a complete misnomer. There are three principle considerations.

Firstly, who focuses on this small group of small account balances for lost or inactive accounts? Resources and limitations of the trustee, trustee office, and administrator may mean their focus is elsewhere. What about an ERF? They are designed to deal with these members. They have a business designed to try and relocate lost members and transfer accounts to the members’ active accounts. No one is better placed to work for this group of members; it is their specialty.

Secondly, where is the cheapest place to house these lost and inactive members? Fees must be considered so as not to just gobble up any existing savings. Think about the students working part time, who frequently change employers, migrants and casual workers. A red flag should be raised when no ongoing superannuation contributions are coming in to a super fund. Trustees need to determine an appropriate design and fee arrangement. If the fund gives insurance to these members and it is not wanted and can’t be paid for, or eats away the entire balance, that can’t be a good thing. Even if no insurance is given to these members, how do the fund fees stack up against other fee options, such as an ERF? The dollar fees deducted from member accounts in the MySuper products (supposedly the cheapest options) ranges from $50 per annum to $97 per annum. Also many funds charge an exit fee which can be up to $100. How does this compare against the ERFs?

Thirdly, Trustees need to ask themselves how they can best use the services of the specialist ERFs. They are ideal for parking money. After a period of inactivity members can automatically be transferred to the ERF, to give an extra 12 months (for lost members) of a specialist working for the member. If the member recommences contributions in the fund, the fund will know and if communicated to the ERF, accounts can be rejoined with the active account. In many cases there is no advantage of sending these accounts directly to the ATO.

So we see there clearly continues to be a need and an important role for the ERFs. But Trustees should give at least some time to checking that they have a good ERF. A good ERF will deliver and will address the holes the trustee cannot fill for these lost and inactive account balances. Trustees have a duty of care to determine if their own ERF is undertaking appropriate and extensive relocation activities, and measure their successes.

Trustees need a good ERF more than ever!

Heron’s Review of Australian ERFs

The Heron Partnership has recently completed their 10th annual review and assessment of the ERFs operating in Australia. In conducting the extensive review, they have focused on the most important features of an ERF which include:

• Relocation Activity (50% weighting)
• Investment Arrangements (20% weighting)
• The Impact of Fees (20% weighting) and
• The Organisation (10% weighting)

Whilst the expectation has been that the ERF market will decrease over time, there remains over $5.095b invested in ERFs in Australia, as at 30 June 2014, and they collectively continue to represent an important proportion of Australian superannuation assets.

Average Account Balances with most ERFs have continued to grow year by year despite successful relocations, with the AMP holding the highest average account balances.

This year Heron have awarded three ERFs with the highest Heron Quality Star Rating of 5 Stars.

5 Star Heron Quality Rated ERFs – Outstanding Products

The Heron Partnership’s Managing Director, Chris Butler, said “These ERFs rated highly over the four Areas of Importance and are to be congratulated on their continued successes with their relocation activities, achievement of investment objectives, returns to members and provision of fair fees for members.”

“We found that further scrutinisation of compliant websites was required, together with thorough reviews of the investment structures and performance. Fees continue to be of concern with some ERFs which in extreme cases show that for certain account balances the interest given does not cover the fees charged; defeating any previous protection principals which have recently been removed.”

Mr Butler said, “Heron supports the continued reduction of the number of ERFs that operate in our superannuation environment, believing that only a few are required; perhaps differentiated by their investment philosophies and being required to meet minimal hurdles in regarding to relocation activities and fees.”