OVERVIEW
The Wallis Committee recommended that superannuation fund members should
have greater choice of fund. That Committee regarded education and information
as 'the joint responsibility of the industry and regulators', and considered
that education should cover:
- rights of members;
- different life cycle needs and their implications for risk and return;
and
- the benefits and costs of exercising choice.
Subject to the passage of Taxation Laws Amendment Bill (No. 7) 1997,
from 1 July 1998 employers will be required to offer new employees a choice
about where their compulsory superannuation guarantee payments are paid.
Commencing on 1 July 2000, existing employees will also have choice of
fund.
The amendments contained in the Bill require employers to make compulsory
superannuation contributions (SG contributions) to a complying superannuation
fund or RSA account in compliance with the choice of fund requirements.
The legislation imposes a higher rate of SG charge on employers who do
not comply with the choice requirements. The choice of fund requirements
apply only to SG contributions and do not include discretionary or salary
sacrifice contributions to funds.
Employers will have three possible alternatives for satisfying their
choice of fund obligations. These are:
- offer a limited choice of four complying superannuation funds or retirement
savings accounts (RSAs);
- offer the employee unlimited choice; or
- specify the fund through formal or informal workplace agreements.
Formal agreements are Australian Workplace Agreements (AWAs) and Certified
Agreements. The Government has announced that informal agreements would
be accepted where an employer nominates in writing the fund or retirement
savings account of the employee's choice and the employer agrees to that
nomination. [1]
The Government's choice of fund policy is long standing, and was originally
announced in the policy platform for the 1996 election, details of which
are outlined in Chapter 2. [2]In May 1997, the
Minister for Social Security and the Treasurer further detailed the proposal
in the budget document Savings - Choice and Incentive. Following
several months of consultation and negotiation with industry, the Assistant
Treasurer, Senator the Hon Rod Kemp, announced the final form of the proposal
on 25 November 1997. The Government introduced the Bill on 4 December
1997. The bill differed from the proposal announced in May 1997 in two
significant respects:
- The bill included a new "unlimited choice" option; and
- The limited choice option decreased from five funds to four.
The Committee encountered considerable support for the broad concept
of choice of fund, although many witnesses were doubtful to varying degrees
about its practical operation.
Several witnesses said that a major advantage of the choice proposal
was that it would increase awareness of investment alternatives and understanding
of the need to plan retirement saving. They suggested that implementing
choice will require individuals to have greater knowledge of retirement
savings options and increase their motivation to understand its importance.
Those witnesses considered that with choice and control, individuals are
more likely to feel a sense of ownership and take an active interest in
saving for their retirement.
The Committee also encountered some dissent about whether the policy
would deliver the anticipated economic benefits. Witnesses advised the
Committee that many funds already had very low costs and good returns.
These witnesses considered that choice of fund would force low cost funds
to increase outlays on advertising and administration and this would lead
to higher charges and lower returns.
The Committee heard that there was already a great deal of competition
within the industry, particularly between fund administrators and investment
managers, driven by the demand of well-informed trustees.
Some witnesses also questioned whether the policy was being driven by
actual demand for change on the part of employers and employees. They
told the Committee that there was no evidence that significant numbers
of employees sought choice of fund. Further, employers regarded choice
as yet another unwanted administrative burden. The motives of some choice
supporters were also questioned, and there were suggestions that these
groups may be principally motivated by possible commercial advantage from
the policy.
While the Committee encountered support for the choice principle, most
witnesses emphasised that the success of the policy depended on employees
making an "informed choice".
"Informed choice" requires that employees understand the consequences
of the decisions they make and choose funds that best suit their personal
circumstances and requirements. In many cases, this may mean staying with
their current fund. In order to make good decisions, employees may need
education about choice of fund, its benefits and its dangers.
Many witnesses called for extensive education campaigns to ensure consumers
make an informed choice. Employers, particularly small employers, also
need education about their obligations and how to satisfy them. Many cast
doubt on whether such an education campaign is achievable in the relatively
short time before the legislation is to come into force.
Employees will also need access to useful, comprehensible information
about the fund alternatives, so that they can make valid comparisons.
The information about fund alternatives that funds and employers will
provide to employees who are offered choice of fund will be in the form
of key feature statements.
It is important that the information provided to employees who are offered
choice does not create an atmosphere that encourages change for the sake
of change. Australia must learn from the U.K. experience.
The Government will determine the content of key feature statements through
disclosure standards contained in regulations that will be tabled in the
Parliament after the legislation passes. The Committee received evidence
suggesting that key feature statements be standardised and simplified,
so that consumers can "compare apples with apples".
Almost all witnesses saw disclosure standards as a major issue. The ISC
has released a discussion paper on disclosure, however the final standards
will not be known until the regulations are released. Many witnesses,
such as fund trustees, expressed concern about their ability to prepare
KFSs in time for the start-up date of 1 July 1998. Additionally,
many corporate funds will need to carefully consider whether they will
continue to operate or close and this decision may take time. Employers
will also have to make changes to their administrative arrangements to
meet their obligations under this legislation.
Marked differences of opinion exist about whether the Government's timetable
is achievable. The large financial institutions that have products prepared
for the announced starting date are anxious that the Government adhere
to its announced timetable.
On the other hand, the significant majority of witnesses were concerned
about the short time interval remaining before the provisions of the legislation
come into force. These witnesses called for a delay in the implementation
date, or a period of grace during which choice would be optional. They
advanced a variety of reasons for this, including:
- a lack of knowledge among employees and employers about choice and
its consequences, and a consequent danger that employees might not be
in a position to exercise "informed choice";
- final disclosure requirements have not yet been released, leaving
trustees little time to prepare key feature statements;
- logistical difficulties, including concern, especially among smaller
employers, about contributing to a multitude of funds.
Some employers also consider that implementing choice of fund on the
announced date presents them with major logistical difficulties. For example,
Coles Myer, the largest private employer in the country, told the Committee
that the task of changing their payroll and accounting systems is huge
and they were worried whether the task was achievable in the available
time.
A number of other major issues also emerged during this inquiry. These
included:
- investment choice within funds;
- the default fund;
- insurance cover;
- liabilities of employers and others;
- consumer protection, including dispute resolution;
- application of choice to defined benefit schemes;
- the inclusion of excluded funds under unlimited choice;
- definition of industry funds;
- choice for people on state awards;
- crediting rates/reserving policy;
- limits of S32U;
- dispute resolution and
- implications of removing superannuation from the allowable matters
list under the Workplace Relations Act.
With the exception of the last matter listed above, each of these issues
is discussed in the body of the report.
1 Press Release AT23, Assistant Treasurer, 25.11.1997,
attachment.
2 See Chapter 2, paragraph 2.1 and 2.2
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