A matter of choice

Though a potential blockbuster measure back in 1996, choice of superannuation fund is still stuck in the stalls.

There have been no new initiatives on long-running attempts to introduce choice legislation for some time, and it received little mention in the recent Federal Budget.

Senator Helen Coonan says she will reintroduce the Choice Bill for debate in Parliament’s spring sittings, but its passage for scheduled introduction next July seems unlikely.

Why? One of the hurdles that still needs to be overcome, according to various industry groups, is member education.

It is not reasonable to expect the majority of Australians to make sound and sensible, long-term investment decisions until a suitable framework for improving their understanding of investment fundamentals and financial market dynamics has long been in place. And it is not.

We are also yet to see a comprehensible format for the disclosure of fees and charges, and a standard information document that will enable investors to make meaningful comparisons between funds.

Association of Superannuation Funds of Australia(ASFA) chief executive Philippa Smith says though it is critical for people to make an informed choice, this can only be achieved with a disclosure regime and proper education system.

“Currently, it is virtually impossible for consumers to understand and compare costs, which can vary substantially. The cheapest may not be the best, but people should at least be able to choose,” she says.

Smith warns that without a set fee structure in place, there is a risk of mis-selling funds at a higher cost.

“No structure means it’s the fund with the highest advertising budget that wins, and that cannot happen.”

The need for more education has been underlined by the survey of financial advisers by the Australian Consumers’ Association (ACA) and theAustralian Securities and Investments Commission(ASIC), and by ANZ’s recent study into Australians’ financial literacy.

Bruining & Associates financial planner Nick Bruining says: “It is one thing to give people choice, but it doesn’t necessarily mean they will make wise decisions with that choice.”

To address this knowledge gap, Bruining expects a raft of companies to spring up that offer educational seminars to the public.

There may have been some improvement, but the surveys illustrated that there were still large deficiencies both in the quality of advice being given and in the level of investment knowledge.

Bruining says that trust in financial planners needs to be enhanced, with serious questions over standards raised by industry surveys.

“Is it appropriate for a 22-year-old to have a capital guaranteed cash product as their default option?” he asks.

While super funds continue to educate workers on super, the Government seems to be in denial on the possibility that it is the complex system and tax levels that contribute to the low levels of public understanding and interest.

Smith says a complicated savings system is the root cause of financial inertia and has led to the fundamental problem that many consumers do not necessarily want to be engaged.

“The process is so complex. Many either wait until they have enough money to worry, some don’t take notice at all. Reducing complexity is a priority for people, but less priority is given to increasing choice,” she says.

The Senate Select Committee on Superannuation, which examined the arguments for and against choice of fund, says nearly four out of five people do not complete their own tax return, because of the complexity, and even fewer attempt to work out their superannuation arrangements.

Despite many investors already having some choice, they fail to use it.

The industry estimates that up to 30 per cent of members now have the right to choose which fund they use. That will grow substantially if the Government succeeds in plans to offer choice to the members of the two commonwealth super funds.

In addition, the percentage of fund members who have the right to make a choice on the way their member accounts are invested, so-called member investment choice, is now at about 80 per cent of nine million fund members.

However, Smith says that of the 80 per cent, only around 10 per cent actually make use of that choice.

The Senate Committee says that the end benefit of choice is therefore largely a philosophical one, purely giving consumers the ability to choose.

Other benefits would be greater competition in the super industry, greater efficiency, more responsive investment strategies by trustees, and improved value and returns for members, says the committee.

Choice would give workers the freedom to decide who manages their superannuation, and greater choice and control over their superannuation savings would give them a greater sense of ownership of these savings.

Senator Coonan says: “We don’t let employers choose our homes. We don’t let employers tell staff where to bank, whom to insure with or which stocks to buy. So why continue with a system where people have little say in how one of their largest assets is invested?”

Few groups or individuals argued against the principle of choice of fund. But, a number of concerns have been raised about the practical consequencesof the proposed legislation.

One anticipated problem is an increase in advertising for the various competing products, which could increase costs to funds and so reduce members’ returns.

The ACA states that without adequate regulation, fees and charges would keep rising with superannuation in the same way that deregulation of banks led to an increase in bank fees and charges.

The onus will then be on the employee to research the available options.

A potential problem is the method in which funds are presented to employees and the likely emphasis on short-term growth rather than longer-term growth and stability.

Previous returns may also be used to advertise fund performance, but making investment decisions based on past performance data has been particularly unreliable as an investment strategy.

It is feared that employees may be offered a fund that promises a large return based on short-term performance rather than the long-term viability of the scheme. This could be used to attract people to a fund where the potential member does not fully understand the associated risks.

In the UK, people were given a choice of pension fund, with subsequent enquiries finding 570,000 cases of mis-selling worth around $11 billion.

However, Senator Coonan disputes this is a real concern.

“What they fail to take into account is the different regulatory environment we have in Australia to the UK, and particularly the recent reforms to financial services regulation, which provide safeguards, disclosure and information to implement a system of choice,” she says.

Bruining is based in Western Australia, where choice of super has been available for years. He says the system was abused until strict regulation was introduced, with employers only offering limited funds.

He expects compliance to be a serious issue for broadening the choice legislation across other parts of Australia.

Other concerns are that choice of fund could stimulate a further proliferation of accounts, says the Senate Committee. Each employee has over three superannuation accounts, on average. Annual choice of fund offering, combined with short-termism, employees choosing the fund with the highest returns, may lead to a person having a number of small accounts rather than one account.

The sheer scale of the changes would constitute the biggest transformation in the superannuation system since the introduction of the Superannuation Guarantee levy.

Despite reservations that the market is ready for the changes, there is one reason the industry would at least like to see clarification.

The parliamentary secretary to the Treasurer, Ian Campbell, said in early May that the $28 million set for education on choice “is contingent upon the choice legislation being passed”.

So, while funds and fund managers scramble to educate members to cope with investment losses, they would like some official effort from the Government to underline their individual efforts.