CHAPTER 3
THE PRINCIPLE OF FUND CHOICE
Introduction
3.1 The Committee encountered a range of views about the principle of
choice, ranging from strong support to a more critical appraisal. Some
witnesses took no firm view either way on the policy, preferring instead
to accept the Government's decision to proceed with its policy, and to
restrict their comments to the implementation details.
3.2 The Government places considerable emphasis on the benefits it considers
increased competition will bring to superannuation. A group of witnesses,
while not necessarily opposing the choice of fund principle, disputed
whether choice of fund would deliver economic benefits to employees.
3.3 Evidence was received questioning whether the choice of fund policy
provides true choice for employees. Some witnesses also questioned whether
the choice of fund policy is supported by an underlying demand for change
or is a product of representations from groups who hope to derive a commercial
advantage from its introduction.
Support for the choice principle
3.4 William M. Mercer Pty Ltd, Australia's largest firm of superannuation
consultants, welcomed the Government's draft choice of fund legislation
as a `positive contribution to the development of the Australian superannuation
industry'. Mercers told the Committee that:
It is clear that the Government has listened to concerns expressed by
employers and the superannuation industry and has made a number of welcome
changes. [1]
3.5 The Committee also encountered support for the Government's view
from a range of other witnesses. For example, Mr Tony Aveling, Acting
Chief Executive, Australian Bankers Association said that:
Lack of member choice is an important reason why competition and efficiency
in this marketplace are not as strong as they should be. Allowing member
choice of fund will increase competition between funds, it should enhance
efficiency, and it will put downward pressure on costs and encourage
rationalisation of the industry. This is important when saving for retirement,
as a reduction in cost translates into higher returns, the benefits
of which should compound. [2]
3.6 Mr Aveling advised the Committee that the industry has a number of
features that suggest there is scope for considerable competitive gains.
He said that there are a considerable number of small funds - only 4 per
cent of active funds having assets in excess of $1 million. In his view,
this offers scope for substantial economies of scale in funds management
and administration. He illustrated his point by quoting how the administration
cost per member in defined benefit and corporate funds drops by a factor
of 10 as the number of members increases from 15 to 10,000. He concluded:
So the point is that modest cost reductions, therefore, should and
can provide substantial benefits to superannuants. [3]
3.7 A number of witnesses also considered that giving people choice would
increase general community interest and understanding of retirement saving.
For example, Mr Stephen Child, Senior Manager, Technical Services, Commonwealth
Bank, told the Committee that choice offered individuals the opportunity
to optimise their superannuation to their individual needs and circumstances.
He thought that without choice, people would have no motive to take any
interest:
...we firmly believe that, unless an environment is created where choice
can be exercised, individuals will lack the motivation to understand
the importance of retirement savings and how best to achieve their objectives
for retirement. [4]
3.8 The Investment and Financial Services Association (IFSA) considered
that the introduction of choice could have beneficial effects beyond compulsory
minimum SG contributions and lead to greater voluntary contributions `once
people have a greater understanding of how much they really need to put
away to save for an adequate level of retirement income.' [5]
3.9 Mr David Connolly, Director, Superannuation and Government Relations,
Phillips Fox and former member of the House of Representatives, saw introducing
choice as a logical second step after introducing compulsory saving for
retirement through the SG system. He told the Committee that:
Having instituted a compulsory environment for the collection of superannuation,
the next step in the process is to say to people, `If the government
is going to require you to contribute to your requirement income, surely
it is not unreasonable that you should have some say as to where those
funds go.' [6]
3.10 The Association of Superannuation Funds of Australia also lent its
support to the choice concept. ASFA's Federal President, Ms Rosemary Vilgan,
told the Committee that on balance, ASFA had come out in favor of choice
for a number of reasons. These reasons were similar to those advanced
by other witnesses. ASFA also were of the view that people currently in
inappropriate funds should be given the opportunity to move:
...the ownership by the members of their superannuation benefit, we
believe, is likely to increase. That is, their sense of belonging and
their understanding of their superannuation benefit is likely to increase.
We believe there will be some benefits from competition in the industry
and also that there are people in funds now which are not suitable for
them, and those people should be allowed to leave those funds. [7]
Alternative views
3.11 Alternative views on choice of fund fall into three broad categories:
- Will competition reduce costs?;
- Does the proposal deliver true choice for employees?
- Is there a demand for choice?
Will competition reduce costs?
3.12 The Government places considerable emphasis on the benefits it considers
increased competition will bring to superannuation. The Assistant Treasurer,
Senator the Hon. Rod Kemp, reaffirmed this principle in evidence during
the Canberra public hearing:
We believe the direct benefits of increased competition are lower costs
and increase productivity. Competition does provide the spur for business
to improve its performance and to develop new and better products, as
well as to offer existing products at lower costs... Choice of fund will increase competition and put pressure on superannuation
funds to improve their efficiency and investment performance. The least
efficient superannuation funds may merge - and this has been put to
me - with more efficient funds, as is often the outcome in a competitive
market environment. [8]
3.13 A number of witnesses, while not necessarily opposing the choice
of fund principle, disputed whether choice of fund would deliver economic
benefits to employees.
3.14 Towers Perrin, a prominent firm of consulting actuaries, were amongst
the several witnesses who questioned the economic benefits of increased
competition in choice of fund. Mr Ken Lockery, Principal, considered that
choice of fund was fully supportable on democratic principles alone:
From our perspective, employee choice of superannuation fund is the
sort of individual freedom of choice that one can readily associate
with a democratic society such as that that we enjoy in Australia. Furthermore,
individuals are more likely to value and take an interest in something
where they have an element of choice or control. For those reasons alone
one could justify the introduction of a system giving far greater control
of the choice of superannuation fund to individual employees.
3.15 However, Mr Lockery sounded a note of caution about the anticipated
benefits of competition. He argued that the majority of employees in large
employer based or industry funds would not receive any benefit and might
instead suffer a net economic loss. He said that this was because the
Government had not recognised the intense competition that already exists:
The key issue that the government has failed to recognise is the efficiency
of our present trustee based system in producing intense competition
at the wholesale level between investment managers and between fund
administrators. It is clear that many other industries' participants
support our view. [9]
3.16 Mr Lockery was of the view that costs would increase because of
factors such as greater marketing costs, administrative costs and costs
of people switching funds. He thought that particularly in the case of
people who were in a default fund, `their net benefits will be a little
lower'. However, this had to be weighed up against the advantages:
Against that, it probably is fair to say that we have definitely seen
in the marketplace a lot of people looking at how they can improve their
fund with the advent of choice coming. That is the offset to that. That
is the case of somebody - particularly, say, employer sponsored funds
- saying, `How can we make our fund more attractive to members? What
can we do better?' In that sense, the mere threat of choice, if you
like, is actually having some positive benefit in the marketplace, because
people are saying, `Yes, we think we've got a good fund but maybe we
could make it a little better to be more competitive.' [10]
3.17 Towers Perrin recommended that `clear, objective benchmarks' be
established to monitor the success or otherwise of the policy. They contended
that such measurement should be established before the Government put
the policy in place:
If we do not set these benchmarks from the outset, we will have no
way of judging, in an informed manner, how well the new system is performing
and the impact of any changes to improve the system where deficiencies
are identified. [11]
3.18 The Australian Institute of Superannuation Trustees were also among
the groups who disagreed with the Government's proposition that costs
and fees would fall under choice. Mr Geoffrey Cook, the Institute's President
was emphatic:
In my view the implication that costs are going to drop is totally
wrong. My view, and certainly the view of most of our members, is that
costs are going to rise. The arrangements are going to be to the disadvantage
of those members. [12]
3.19 Mr Cook attributed the likely increases in costs to a number of
factors. These include marketing, which he thought would increase `very
materially'; administrative costs associated with the transfer of members;
and legal costs. `All of these add up to more and more dollars which are
going to be paid by our members out there.' [13]
3.20 It is clear that low overhead funds will have to increase expenditure
on product promotion if they are to survive in a fiercely competitive
post choice environment. Some indication of the competitive environment
they may face is provided by current finance sector expenditure on advertising.
3.21 Ms Helen Hewitt, fund Secretary, C+BUS, provided the Committee with
information about current expenditure on advertising in the finance sector.
She noted that in 1997, this sector spent $390 million on advertising,
$216 million of which was on television advertising. She said that `One
big life office spends $1.5 million a month promoting superannuation to
the community.' [14]
3.22 Ms Hewitt speculated on what this might mean for C+BUS and attempted
to quantify the extra costs that might result from choice induced competition:
We think that for us to be able to effectively promote our product
and look after our existing members we will have to spend more money
on promoting our superannuation fund. We do not think that that is going
to benefit the members of the fund. For us to spend $12 million on advertising
- which we would not do, but if we were to - we would have to take approximately
one per cent off the crediting rate. [15]
3.23 Ms Hewitt concluded by casting doubt over whether competition would
in fact produce better retirement benefits for fund members:
If the objective of all of this is to increase competition so that
people have greater security and more money to rely on in retirement,
I am not sure that this objective is going to be met unless there is
some way of managing these costs. [16]
Government view on benefits of competition and effects on fund
costs
3.24 The Committee sought information about the apparently conflicting
views it received during the Sydney and Melbourne public hearings concerning
the likely effects of competition on funds costs. The Government's stated
position is that it believes increased competition will drive down costs
and fees and result in better benefits for fund members. However, several
witnesses disputed whether this, in fact, would be the case.
3.25 Mr Keith Chapman, Acting Deputy Commissioner - Superannuation, Insurance
and Superannuation Commission (ISC), told the Committee that, overall,
the costs should drop because they are competitive. I think people
are going to compete on benefit investment portfolios, investment returns
and costs. [17]
3.26 However, Mr Chapman acknowledged that `individual funds may incur
cost'.
3.27 The Committee sought information as to whether the ISC could provide
any information about the overseas experience of expenditure on advertising
and marketing costs when choice is introduced. Mr John Larkin, Assistant
Commissioner, Policy, ISC, told the Committee that:
We have not undertaken any specific research on the impact on industry
compliance costs in terms of marketing the choice of fund. My preliminary
thought is that most market players would undertake their own commercial
assessment of the costs and benefits of investing dollars into marketing
and the likely returns against those investments. [18]
3.28 Mr Larkin advised that there was some evidence of how competition
could drive down costs. He told the Committee that the ISC had:
...seen some evidence in the marketplace recently of the entry of indexed
funds offered by global fund managers, funds which significantly undercut
some of the active managers in the commercial marketplace and can offer
an investment management service. [19]
3.29 He said that this flows through to cheaper fees and charges for
the end user, the consumer. `I think these developments will gather pace
as choice of fund is taken up.' [20]
Does the proposal deliver true choice for employees?
3.30 A number of contributors to the inquiry questioned whether the government's
choice model will provide adequate choice for employees. For example,
the Australian Consumers Association, a supporter of the choice principle,
contended that the Government's model will not allow choice for many employees:
It is effectively the employer's decision over the type of choice offered
or whether there will be any choice at all. [21]
3.31 The submission acknowledged that there are `reasonable arguments'
for minimising administrative loads on employers that may result from
fund choice. However the Association considered that the Government has
not achieved an appropriate balance:
...the balance between employer cost and employee choice has shifted
too far away from fund members. It is not employee choice of fund. [22]
3.32 The Association proposed an alternative model, under which the employer
would take responsibility for the default fund, coupled with open ended
choice for those employees who wanted it. [23]
Essentially, the Association's model amounts to choice driven by employee
demand.
3.33 The ACTU also disputed whether the Government's model provides employees
with adequate levels of choice. Ms Linda Rubenstein, Senior Industrial
Officer, Australian Council of Trade Unions, contended that the choice
proposal in its current form actually offered employees minimal choice.
She said that:
...this legislation is not really about employee choice; it is about
employer choice. It is employers who have the lion's share of the ability
to choose. First of all, of course, it is the employer who chooses whether
to offer unlimited choice or restricted choice, and in reality it will
be the employers who choose whether to have workplace agreements - particularly
where they are AWAs. [24]
3.34 In common with other witnesses from the Trade Union movement, Ms
Rubenstein contended that the power relationship between employers and
employees is such that the employers wishes are likely to prevail leaving
the employee with little real choice:
...although in theory under the legislation an employee can come to
the employer and say, `I want this fund,' in reality the employer can
say `No', because you are going to need the employer's agreement for
any proposal of the employees. As we said in the submission, the reality
is the employer will say, `I would like you to sign this AWA; I would
like you to sign this informal agreement,' and the employee will really
not be in a position to do anything else, even if they want to. [25]
Government position
3.35 The Committee sought information from the Assistant Treasurer about
the extent to which the Government's proposal delivers choice to employees.
The Minister noted that at the moment, there is no choice for many employees:
The truth of the matter is that the employee does not have any choice
at the moment. He has no choice. [26]
3.36 The Minister advised that the Government aimed to give employees
choice, but had to balance this against employers' interests:
In the end, we had to strike what we saw as a reasonable balance. We
believe that the proposals that we put down do deliver choice and that
they do so in a way which is cost-effective to employers. So it is a
matter of just striking the right balance. I accept that people of goodwill
will differ on that. [27]
3.37 There are arguments both for and against the Government's choice
model and alternative options. While some may see totally unlimited choice
as a more reasonable option, this also has shortcomings. Unlimited choice
may impose excessive administrative burdens on employers. While unlimited
choice may be attractive for some well informed employees, it does open
up the possibility of poor decision making on the part of employees who
are not able to make an informed choice.
3.38 Unlimited choice, however, removes a number of potential legal problems
in respect of liabilities that were of great concern to many small employers.
This is because responsibility for selecting a fund shifts from the employer
to the employee.
3.39 It can be argued that the four fund option places too much power
in the hands of the employer. However, while the employer is able to select
the funds offered, this model nonetheless does offer greater choice than
that presently available to many employees and can only be regarded as
an improvement on the present situation.
Is there a demand for choice from employees?
3.40 Several witnesses, particularly those representing the union movement,
questioned whether many employees were in fact actively seeking choice
of fund. They also questioned the motives of some choice supporters, suggesting
that these groups may in fact be driven by the potential for commercial
gain.
3.41 The view expressed by Mr Michael O'Sullivan, National Executive
President of the Australian Services Union, are representative of those
who question the need for this policy. Mr O'Sullivan suggested that the
Government's agenda in this area arises out of hostility towards industry
funds and lobbying by the banks and major life offices to gain a share
of the superannuation market. He told the Committee that:
We say they do not arise from any visible demand from employers or
employees, and they are likely to operate against the interests of both
employers and employees. They seem to us to stem from two things. Firstly,
the government appears to be very unhappy with the present superannuation
regime and especially industry funds... Secondly, the legislation seems, to us anyway, to be manifestly the
result of successful lobbying by banks and life offices for an increased
share in the control of retirement savings...these commercial and profit-making
interests want a greater share of the pie. That seems to be driving
the choice legislation. [28]
3.42 Mr O'Sullivan considered that opening the superannuation market
up to these groups would have detrimental effects on his members, leading
to poorer retirement benefits:
They open the gate to mis-selling. They open the gate to commissions.
They open the gate to increased fees and charges of entry and exit,
and they artificially impose marketing and advertising costs on an industry
which largely is without them at the present time - and a host of other
negative factors... [29]
Application to Public Sector schemes
3.43 The Committee received some "grassroots" evidence of public
sector employee discontent with the funds in which they found themselves.
Mr Brian Werndly and Mr Darryl Brick, former defence force employees,
wrote to the Committee complaining about the defence force fund. Mr Werndly's
"employer" contributions are locked into the fund until he reaches
retirement age. The value of his benefits is indexed to the CPI. He claimed
that this was `grossly unfair', because almost all funds return better
than the CPI. [30]
3.44 The Committee does not draw any strong conclusions from these complaints,
which are clearly based on a misunderstanding of the nature of unfunded
defined benefit schemes. However, these views usefully illustrate the
principle that some people, when they are in funds with low earning rates,
are conscious that they could do better and might benefit from the possibilities
that choice of fund may offer.
3.45 The principle of choice is not being extended to military superannuation
schemes. Current members of the PSS and CSS will be offered choice of
fund from 1 July 2000. The Government has announced that it intends to
close the PSS to new entrants from 1 July 1998 and will offer new Commonwealth
employees choice of fund from that date.
3.46 The Committee is currently considering legislation concerning the
application of choice to Commonwealth employees and the closure of the
PSS.
Employer attitudes to choice of fund
3.47 Generally, smaller employers have expressed concern about quickly
coming to grips with legal responsibilities and key features statements.
3.48 Some employers clearly saw the need to learn about and implement
choice of fund as an imposition. Two pithy comments made in a submission
by Mr Stephen Cole, a patisserie manager, summed up his views:
We are not in the financial services industry; we make cakes. ...business is hard enough without the imposition of yet greater paperwork.
[31]
3.49 Coles Myer, Australia's largest private sector employer, supports
the concept for choice of fund. Coles Myer was, however, concerned about
a number of issues relating to the implementation of the choice policy.
In particular, Coles Myer was concerned about training requirements for
staff, changes to payroll systems and whether the company could meet the
Government's announced start-up date. [32]
Footnotes
[1] Submission, p. 1
[2] Evidence, p. 3.
[3] Evidence, p. 4.
[4] Evidence, p. 199.
[5] Evidence, Mr John Maroney, p.374.
[6] Evidence, p. 253.
[7] Evidence, p. 238.
[8] Evidence, p. 405.
[9] Evidence, p. 302.
[10] Evidence, p. 308-9.
[11] Submission, p. 11.
[12] Evidence, p. 104.
[13] Evidence, p. 104.
[14] Evidence, p. 180.
[15] Evidence, p. 181.
[16] Evidence, p. 180.
[17] Evidence, p. 434.
[18] Evidence, p. 433.
[19] Evidence, p. 435.
[20] Evidence, p. 435.
[21] Submission, p. 8.
[22] Submission, p. 8.
[23] Submission, p. 8.
[24] Evidence, p. 123.
[25] Evidence, p. 123.
[26] Evidence, p. 419.
[27] Evidence, p. 419.
[28] Evidence, p. 54.
[29] Evidence, p. 54.
[30] Submission no.11, p. 11.
[31] Submission no. 1, p. 1.
[32] Evidence, p. 84-85.
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