Report by Senator Lyn Allison
Australian Democrats member
The Australian Democrats support the introduction of Retirement Savings
Accounts. We endorse the recommendation of the Government Members report
that the Government amendments to the legislation be passed. However,
we believe that further amendments are necessary to the legislation to
ensure its workability and adequate consumer protection..
The Government members report adequately summarises the background and
evidence to the inquiry, and it is not intended to repeat this. By way
of further background, it should be noted that the Committee took considerable
evidence on the issue of Superannuation Savings Accounts in the review
of the Superannuation Guarantee System. In the Fifteenth Report of the
Committee, tabled in February 1995, the Coalition/Democrat members of
the committee supported the introduction of Superannuation Savings Accounts
as a further means of alleviating the small amounts problem in the SGC
system. The Committee majority further recommended that the development
of Superannuation Savings Accounts should be allowed providing:
- they came under the jurisdiction of the Superannuation Compliance
Tribunal;
- consumer protection was further enhanced by additional funding for
the Consumer Credit Legal Service to provide representation and advice
in the absence of trustees. This was consistent with the Committee's
recommendation in its Ninth Report that the Government consider supporting
the establishment of an independent superannuation advisory service;
- accounts were not subject to entry or exit fees;
- the rate of return was comparable to that of long-term deposits; and
- there was a maximum amount for such accounts of $3,000 beyond which
balances are transferred to a managed fund (although the account can
be reopened with a balance of zero). [1]
The legislation as presented by the Government falls short of the "best
practice" criteria set down by the Committee in 1995. Indeed, the
legislation will need to be substantially amended to ensure that Australian
workers are able to maximise the benefits and minimise the costs that
the introduction of RSAs to the superannuation system will engender.
1. Choice:
Both the Government and Opposition members' reports refer to the problems
in the legislation in relation to constraints on the ability of employees
to freely choose the superannuation vehicle of their choice. The Democrats
accept that full freedom of choice would be difficult in relation to superannuation.
Indeed, we acknowledge there are arguments against freedom of choice given
the general level of knowledge of or interest in financial matters among
many Australian superannuation fund members. The heavy fiduciary obligation
placed on the trustees of their funds reflect and recognise that shortcoming.
The Coalition has vigorously promoted RSAs as an additional option for
employees, with the Coalition's pre-election superannuation policy promising
that:
RSAs will provide Australians with greater freedom of choice. [2]
The policy also pledged to increase the freedom of choice open to workers
in relation to superannuation, pledging that a Coalition Government would:
- require awards and workplace agreements to offer a choice of up to
five funds including employer, industry, personal superannuation and
RSAs. Additional funds many be used with the employer's concurrence;
- allow employees not covered by awards to choose a fund in consultation
with their employer.... [3]
The Policy goes on to note that:
The small amounts problem could be resolved by allowing employees greater
freedom to choose the fund into which contributions may be consolidated.
the current inflexibility of the superannuation system is contrary to
other areas of policy where the Labor Government has promoted deregulation
to encourage greater competition so as to reduce fees and costs to consumers.
The Coalition accepts that unlimited freedom of choice would impose an
onerous and costly burden on employers, however limited freedom of choice
will provide the benefits of competition without the costs associated
with forcing employers to pay into a multitude of funds. [4]
While the Democrats welcome the view expressed by the Government members
(paragraph 2.28) that the Government should address the issue of employee
choice in both RSAs and trustee products in an overall review of superannuation,
we do not agree that it is inappropriate to consider choice issues in
relation to this legislation. Choice has always been a fundamental rationale
for introducing RSAs. If the introduction of RSAs does not expand opportunities
for freedom of choice, then the rationale for their introduction is flawed.
The Democrats believe that the legislation as it stands not only fails
to expand the opportunities for choice open to employees, but embeds a
process which precludes employee choice. Indeed, section 51 of the Act
which permits an employer to open an RSA account without the consent of
the employee and allows an employer to continue to direct contributions
to an RSA even after the employee has directed to transfer funds to another
fund picks up the worst aspects of the current SIS legislation but without
the offsetting assurance that the rights of employees will still be protected
by the trustees. Indeed, the absence of trustee protection for members
funds, combined with the lower returns that all observers accept will
be delivered by RSAs, make it doubly important that the decision to enter
into an RSA is solely that of the employee.
In addition to that, choice must be real. That is, for RSAs to play a
role in reducing the costs of the current superannuation industry, employees
must have a real choice to join the relevant industry fund (or, if there
is no industry fund some other managed fund) or an RSA.
Recommendation No 1:
The Democrats recommend that the legislation be amended such that:
An employee cannot join an RSA unless they have been provided with
the following choice:
- joining an RSA with the financial institution to which their salary
is paid; and
- joining any other RSA (if any) to which the employer is prepared
to agree; and
- joining the relevant industry fund; and
- if there is no industry fund, joining any other superannuation fund
which the employer nominates.
The choice should be in form provided by the ISC which explains the
difference between RSAs and superannuation funds and the likely lower
long term returns from an RSA. The ISC must be required to produce Plain
English guides which make the choice easy to make.
Where an employee has failed to nominate a fund within a given period
of receiving the documentation, the employer may open an RSA account,
or an account with the relevant industry fund or, in the absence of an
industry fund to such other fund as is approved for SGC purposes.
2. Fees and Charges:
The Government's clear intention is that RSAs be low cost. Indeed, the
Explanatory Memorandum makes this quite clear:
RSAs will be a simple, low cost, low risk product especially suited to
those with low amounts of superannuation, such as itinerant and casual
workers. [5]
The legislation allows the ISC to set standards in relation to fees,
and gives the SCT the ability to modify the terms and conditions of RSAs.
However, in evidence , the ISC indicated that it has no intention of monitoring
fees in any systematic way. The Democrats share the concern of the Government
members and the Opposition members that monitoring of fees is essential
to ensure that the Government's objectives for RSAs to be a simple, low
cost product are met.
This must be a minimal requirement - it however fall well short of best
practice. Best practice, as outlined in the Committee's Fifteenth Report
and also in the submission from the Credit Unions (CUSCAL) would be no
fees at all. Indeed, it is hard to see on what basis fees should be justified.
The legislation does not require RSA providers to set up a trustee structure.
Deposits will be regular (probably quarterly), withdrawals quite rare.
The costs should be minimal - the capital is quite immobile.
Recommendation No 2:
The legislation should be amended so that RSAs are entirely free from
fees. Failing that, fees and charges should be closely monitored by the
ISC, with intervention where fees fail to meet the criteria of a low cost
product.
3. Disclosure Rules:
The Democrats welcome the statement by the Treasurer that RSAs will have
disclosure requirements that are quite similar to traditional superannuation
vehicles. However, we are concerned that much more of the detail of these
standards are to be left to regulations compared with the SIS legislation.
Disclosure is particularly important at the account opening stage, but
should also encompass regular reporting. The Australian Consumers Association
proposed the following should be clearly addressed in the initial disclosure:
There are several key elements that consumers must understand when purchasing
RSAs:
fees, charges an commission in dollar terms;
- a clear explanation of risk;
- historical and possible future returns (which allow for the impact
of inflation);
- where to go if disputes arise;
- preservation and access;
- the importance of the 'switching balance' ($10 000) and the requirement
to consider higher investment returns;
- cooling off period.
Further consultation and consumer testing is required before the final
framework for disclosure can be determined. ACA believes that focus group
testing is necessary for the best outcome - full consumer understanding
- to be achieved. [6]
The Democrats endorse this approach to disclosure, and commend it to
the ISC. The disclosure regime must be kept easy to understand and low
cost, while providing the maximum possible information. The responsibility
for developing appropriate draft information statements should rest with
the ISC.
Recommendation No3:
The legislation be amended so that:
i. Where an RSA provider receives an application from an employee
to open an account, they must disclose in a Plain English statement to
the employee all fees and charges on the account (in the event that Recommendation
No 2 is not accepted), historical and further investment returns with
fair comparison with managed funds, and information on risk, dispute resolution
and exit and transfer of accounts;
ii. Where an RSA provider receives an application from an employer
to open an account without the consent of the employee, they must provide
to the employee, in addition to the above, informing them of the right
to move to another fund within 28 days and outlining the difference between
managed funds and the RSA.
Where an employer is advocating that their employees join a particular
RSA, the employees need to be assured that the employer will not receive
any financial benefit from the RSA. The ACA raised the concern in evidence
that the provisions of section 47 of the Trade Practices Act in relation
to "third line forcing" may not be adequate to prevent employers
and RSA providers entering into such financial arrangements. The ACA argued
a clear prohibition on inappropriate conduct between RSA providers and
employers was needed in the legislation. Failing that, the nature of the
relationship between employers and the RSA providers must be fully disclosed.
Recommendation No 4:
The legislation be amended to provide a specific prohibition on third
line forcing between RSA providers and employers, and to ensure that the
disclosure regime includes full disclosure of any incentives or commissions
received by the employer in rleation to promotion of the RSA.
4. Maximum Amount for RSAs:
All members of the Committee acknowledged that RSAs will deliver lower
investment returns than managed funds. This is the nature of a low risk
capital guaranteed product. However, as pointed out by the ACA, if employees
- largely by inertia - hold all of their superannuation savings in RSAs,
they stand to retire with substantially less retirement savings than if
they had invested in a managed fund. The illustration given by the ACA
in their submission showed that the shortfall over a full working life
could be as much as 36 to 58 per cent. Yet, it is the Democrats expectation
that lack of understanding of the superannuation system, combined with
heavy advertising by RSA providers, will lead to many lesser informed
workers leaving the bulk of their savings in RSA vehicles. This may suit
itinerant workers, or workers very close to retirement seeking low risk
product. But, clearly RSAs are of limited value to the vast bulk of workers
for significant superannuation savings.
The Fifteenth Report of the Committee recognised this, proposing a maximum
balance of $3,000. Similarly, the Government acknowledges this, calling
for a notice to be sent to the employee when the account reaches $10,000.
While the $3,000 balance may be somewhat low, the legislation certainly
falls short in ensuring that employees are able to make fully informed
choices about maximising their retirement savings.
Recommendation No 5:
The legislation be amended so that
i. The balance at which a warning should be issued is reduced from
$10,000 to $5,000, with a further warning issued when the account reaches
$10,000 and $15,000.
ii. The warning must be in a form prepared by the ISC which compares
average RSA returns with managed and capital guaranteed funds.
iii. There must be no exit or transfer fee on movement at the threshold
amount.
iv. The statement must include an options sheet which includes the
relevant industry fund nominated by the ISC, a managed fund nominated
by the RSA provider (if any) and may also include the RSA, and such other
choices as the financial institution wishes to provide.
v. If the person fails to respond within 2 months, a further notice
should be sent.
vi. If the person fails to respond within another two months, the
RSA provider must transfer the balance of the account to a managed fund
approved for the purpose by the ISC and inform the person accordingly.
5. Other Issues:
Consumers must be in a position where they can challenge unfair terms
of an RSA in the courts if they need to. The defence provided in section
168 to RSA providers of "due diligence" will make it extremely
difficult for RSA providers to be held to account for their actions. Indeed,
the defence does not occur in the SIS legislation .The ACA warned that:
The introduction of a due diligence defence is first and foremost a benefit
for corporate lawyers, secondly for RSA providers and a clear backwards
step for consumers. [7]
The ACA also expressed concern that courts in section 73 and 75 were
not given the remedy of varying contracts, or requiring the repayment
of money received by the party to the RSA.
Recommendation No 6:
Section 73(1) and 75(2) - Court relief powers should include capacity
to vary terms and conditions of RSA, and even closing of an RSA and refund
of money. The "due diligence" test (section 168) should be repealed.
To encourage a level playing field in superannuation, if other superannuation
funds are to be allowed to offer "like-minded" products, these
should be able to take the form of and be called RSAs. Full disclosure
of fees and full explanation of the benefits of the managed funds should
equally apply.
Recommendation No 7:
Superannuation funds offering like products that meet the requirements
for an RSA should be entitled to label them as RSAs.
The legislation provides that RSA providers may take up to 12 months
to refund an RSA after an account holder has requested the account be
closed or transferred. This is an extraordinarily restrictive provision
given that it is likely that most RSA balances will be fairly small (i.e.
less than $10,000). There is no justification for this latitude, which
is potentially anti-competitive.
Recommendation No 8:
RSA providers should be required to transfer the balance of RSAs within
28 days of being requested to do so by a member without any exit or transfer
fees. Where a balance is more than $10,000, they may apply to the ISC
for an extension where the provider can show that the provider will require
additional time to secure the funds necessary to repay the account.
Senator Lyn Allison
Footnotes
[1] Fifteenth Report of the Committee p.102
[2] Super for All - Security and Flexibility
in Retirement Coalition Policy February 1996 p.11
[3] ibid p.13
[4] ibid p.14
[5] Explanatory Memorandum p.1
[6] ACA submission p.4
[7] ACA submission p.2
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