CHAPTER 4
INVESTMENT CHOICE
4.1 Investment choice generally refers to a differentiation of investment
streams within one superannuation fund, or to a provider offering a range
of products with different levels of risk and return. Less commonly, investment
choice can also refer to choices about where funds are invested. For example,
funds may invest in industries and activities their members consider morally,
socially or economically desirable.
4.2 Investment choice products based on different risk and return profiles
are generally distinguishable by the names given to the products by providers.
Three common descriptions are:
- Capital guaranteed funds;
- Balanced funds; and
- Growth funds.
4.3 Investment choice allows consumers to choose an investment strategy
that most suits their personal circumstances. For example, people early
in their working lives may be better off in the long term with a high
growth, higher risk product. This is because variations in investment
return will tend to even out over time, and their fund earnings can be
maximised. Conversely, people later in their working lives might prefer
a fund that offers more security so they can plan their retirement income
requirements with some certainty.
4.4 However, William M. Mercer Pty Ltd advised the Committee that following
the introduction of investment choice in the United States, people tended
to make more conservative decisions than trustees would have made on their
behalf. The result over the longer term, retirement benefits are lower
than they otherwise would have been. [1]
4.5 Studies show that to date, Australians take a very conservative approach
when offered investment choice. This caution is reflected in slow take
up rates where funds have offered investment choice to members.
4.6 Many public offer and industry funds offer investment choice now.
However, the evidence given to the Committee indicates a generally low
level of interest in or understanding of investment choice. Ms Helen Hewitt
of C+BUS recounted her fund's experience with investment choice, concluding
that there was not significant demand for investment choice among members:
We offer three pretty traditional portfolios: the stable fund, the
growth fund and the balanced fund. There are some differences. Our growth
fund tends to have a slightly higher proportion of growth assets such
as property than a lot of other comparable funds. We believe it is slightly
different. Essentially, they are very similar to those offered. We sent out a publication to 250,000 members. We invited them all to
participate in member investment choice. Just a little over 2,000 made
some sort of inquiry and, as at the end of January, 310 made a choice.
[2]
4.7 Several other witnesses made similar comments. Ms Sandra Birkensleigh
of Coopers & Lybrand referred the Committee to material published
by ASFA concerning the take-up rate of investment choice when it was offered.
She noted that the following funds had offered investment choice, with
low levels of response:
- Hesta - 54 of its 125,000 members took advantage of member investment
choice;
- First State Super - 90 per cent of its participants did not exercise
choice; and
- BOC Gases superannuation fund - 12 out of 2,000 members made an election
under the choice regime. [3]
4.8 The slow take-up of investment choice may be associated with the
generally poor understanding of superannuation in the community. Concepts
such as investment choice are difficult for many people to understand.
Mr David Knight, Compensation and Benefits Manager, Coles Myer, linked
the apparent reluctance to move to a lack of understanding and need for
education:
My observation is that there is not currently, amongst Coles Myer employees,
a high degree of understanding of the different sorts of investment
choices or the implications that flow from differing investment profiles.
I think that is a key issue in the education process. [4]
4.9 However, there is evidence that thorough education campaigns have
produced higher levels of response to offers of investment choice. Mrs
Sandra Birkensleigh highlighted two companies that offered investment
choice to their employees:
- Coca-Cola Amatil - 64 per cent made an active choice; and
- Optus - 75 to 80 per cent exercised their right to investment choice.
[5]
4.10 Ms Krystyna Hassall, a member of the board of Westscheme who gave
evidence in a private capacity, corroborated Mr Knight's view. Ms Hassall
recommended offering investment choice as part of the education process
before proceeding to full choice of fund. She considered that people would
then have the opportunity to learn about the choices available to them
within the context of their existing funds, with which they may have greater
familiarity. [6]
4.11 However, Ms Hassall considered that as employees increased in understanding,
the option should be open to progress towards full choice:
As they become more sophisticated, one must argue that, if a fund cannot
provide the sort of products or the range that they are looking for,
the mechanism should be within the legislation for them to move out
and to go to another fund. But I think that that should really be focused
on investment choice first. [7]
4.12 Aon Consulting Pty Ltd took a different view to that of Ms Hassall,
recommending that the choice of fund legislation be `deferred indefinitely'
and replaced with a choice of investments regime. Aon Consulting considered
that the most pressing need was for funds to provide a viable choice of
investment strategies. They argued that the Government's proposals had
four shortcomings in that they do not:
- affect the total contributions being made to the superannuation system;
- ensure that members' investment returns will increase;
- ensure that demands on he social security system will reduce; or
- create the environment where members can make effective choices appropriate
to themselves. [8]
4.13 The Committee sought information from Treasury representatives as
to whether offering investment choice might be a desirable first step
in the process of introducing full choice of fund.
4.14 Ms Deidre Gerathy, Assistant Secretary, Department of the Treasury,
reminded the Committee that many funds already offer investment choice.
She added that investment choice by itself would not fulfill the Government's
policy objective to increase competition between funds:
I think that gets back to the policy rationale for the choice proposal
in the first place - which is to provide competition and greater efficiencies,
which you obviously do not get from just choice of investment strategies.
[9]
4.15 In the current environment, with most corporate, public offer and
industry funds achieving good returns, the climate is not conducive to
change. This may partially explain why people have not generally taken
up investment choice when it has been offered to them.
Footnotes
[1] Submission, Attachment, p. 8.
[2] Evidence, p. 184.
[3] Evidence, p. 272.
[4] Evidence, p. 88.
[5] Evidence, p. 272.
[6] Evidence, p. 288.
[7] Evidence, p. 288.
[8] Submission, p. 3-4.
[9] Evidence, p. 459.
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