CHAPTER 6
INFORMED CHOICE - DISCLOSURE
Introduction
6.1 Disclosure is the second essential element of informed choice. Under
disclosure rules that will be introduced by regulation following passage
of the legislation, funds will be required to disclose features such as
entry fees, crediting rates, exit fees and commissions in key features
statements.
6.2 These key features statements will be an important tool that employees
will use to distinguish between the funds offered to them by their employers
or, if they have unlimited choice, by providers such as the superannuation
funds, banks, credit unions and life offices.
6.3 The Government has announced that a new Australian Securities and
Investment Commission (ASIC) is to be established. [1]
ASIC will have responsibility for the regulation of point of sale requirements
for all investment products, including superannuation products. ASIC is
also to conduct a review of retail financial products to ensure that these
products provide information that enables comparison between products.
[2]
ISC discussion paper on disclosure
6.4 On 17 December, 1997, the Insurance and Superannuation Commission
(ISC) issued a discussion paper on disclosure issues The ISC announced
that the purpose of the disclosure discussion paper is:
to seek industry and consumer group feedback on a number of technical
implementation issues associated with the design of disclosure rules
under the choice of fund policy. [3]
6.5 The introduction of choice of fund requires an important change to
the timing of the revision of disclosure material to members. Currently,
standard employer-sponsored members are only supplied disclosure information
`as soon as practicable after they become a member of the fund'. [4]
6.6 However, the choice of fund initiative requires a different approach
to allow prospective fund members to examine the features of funds before
they join. Accordingly, the Government will, in the new regulations, introduce
an `up-front' disclosure regime. Under this regime employers offering
the limited choice of four funds must supply the employee with a copy
of the key features statements of the prospective fund before the employee
joins.
6.7 The disclosure discussion paper discusses what information trustees
will have to include in key features statements for disclosure to prospective
members. However, the details of the final requirements are as yet unknown.
Comparing apples with apples
6.8 A number of witnesses emphasised that, whatever the disclosure rules
finally adopted, it was important that prospective members of funds be
provided with information that would allow them to make valid comparisons
between funds.
6.9 All witnesses emphasised that there was a need to ensure that the
disclosure regime needed to provide information that people could use.
This is particularly important in view of the relatively low levels of
literacy and numeracy amongst a large proportion of the population, as
described in the previous section of this report on education.
6.10 Ms Sharon Barker, a Policy Coordinator with the Financial and Consumer
Rights Council, described the difficulties that consumers have comparing
products. She said that:
We believe that it is essential that there is a standardised format
for the type of information that is provided to consumers or to the
general public to ensure that people have an opportunity to compare
oranges with oranges. We have some examples of consumers not being able
to compare different types of funds very well. We have examples of banks
offering different products, and it is very difficult for consumers
to compare those products. [5]
6.11 Ms Ann Byrne, Convenor of the Industry Funds Forum, made similar
comments. She told the Committee that, at the moment, it is very difficult
for people to compare superannuation funds. She gave the example of differences
in reporting dates for superannuation funds, which made it difficult for
consumers to make a valid comparison about the earning rates of those
funds:
Some - probably, I think, the vast majority, have a reporting date
of 30 June; some, though, have a reporting date of 30 September, and
some have reporting dates of 31 December or 31 March. So, if you are
doing a comparison, particularly between the earning rates of those
funds, it is very difficult unless you have the same reporting date.
[6]
6.12 Ms Byrne also emphasised the importance of disclosing fees and charges
in a form that permits comparisons to be made. She told the Committee
that public offer funds are already required to disclose fees and charges
in key features statements. However, the manner in which the funds disclose
these charges does not always give an accurate picture. She told the Committee
that:
In the current requirements for key features statements which are only
currently required for public offer funds, when you actually put together
your management expense ratio you do not always have to put in all of
your direct investment expenses. It is my understanding that if your
investments are in a pooled vehicle, because the return you get on that
vehicle is less the expenses then that does not have to be declared.
[7]
6.13 Ms Byrne emphasised that:
We believe that information should be available so that members can
understand clearly what all the administrative charges and all the investment
charges are, and can actually do an accurate comparison. [8]
6.14 The representatives of William M. Mercer Pty Limited, Superannuation
Consultants and Actuaries, advised the Committee that they considered
that a single regime for key features statements is essential. Mr Steve
Partridge told the Committee that currently the ISC is proposing a shorter
form of key features statements for choice of fund and a longer form,
as is already required, for public offer funds. He did not agree with
this approach and told the Committee that:
We think key features statements need to have investment return information
and fee illustrations that are very heavily standardised. That is crucial,
so that key features statements are comparable. [9]
6.15 Mercers' representatives advised that, unless there is standardisation,
it will be extremely difficult for prospective employees to compare funds.
Mercers recommended that one approach that should be considered for the
disclosure regime is for the percentage reduction in benefits that arises
from fees and charges to be tabulated. Mr Colin Grenfell, a superannuation
consultant and Actuary, told the Committee that Mercers considered that
by using this approach, it is possible to standardise and bring out the
impact of fees and charges for all types of funds.
6.16 In a supplementary submission, Mr Grenfell provided the Committee
with two draft forms of wording for key features statements that would
illustrate the impact of fees and charges on benefits. [10]
The tables provided by Mr Grenfell are attached at Appendix E. These
tables are the same as those proposed by the Institute of Actuaries in
their submission to the ISC on the disclosure issues discussion paper.
6.17 Mr Grenfell considered that key features statements would also need
to be supplemented by what he described as generic material. He told the
Committee that:
We envisage that the key features statements would be specific to the
plan. We recommended to the ISC that, in addition to the key features
statements, you need some generic material about superannuation. It
would cover issues like risk and return, preservation, taxation, the
Superannuation Complaints Tribunal (if it exists) and all these issues
that relate to the market as distinct to relating to the plan. [11]
6.18 Ms Helen Hewett, the Fund Secretary of C+BUS, provided the Committee
with an illustration of the current difficulties that are faced in evaluating
fees and charges from current key features statements. She told the Committee
that:
Recently we had a training session where there were 17 representatives
from different superannuation funds and people across the industry.
They were given a document that is put out in the marketplace by a very
well-known provider of superannuation, and they were asked to calculate
the fees. There were 14 different answers that came about. [12]
6.19 In common with a number of other witnesses, Ms Hewett concluded
that :
...all of the disclosure requirements have to be uniform, so that there
is the same information available on each product, that is expressed
in a simple way, and so that all costs are easily identified. [13]
6.20 It is clear that there is widespread support for a simplified disclosure
regime that will allow valid comparisons to be made between funds. An
adequate disclosure regime is clearly an important issue in consumer protection
as well.
6.21 Ms Helen Martin of the Institute of Actuaries confirmed the importance
of adequate disclosure for consumer protection:
The disclosure regime is critical in that sense. I think a lot of the
developments that have happened in the individual insurance and personal
superannuation products have been because of the development within
the ISC and other industry bodies of good disclosure regimes so that
you can't hide the commissions and charges to the extent that you could
in the past. [14]
6.22 The Committee explored the option of whether charges themselves
could be standardised so that consumers could readily understand the costs
associated with investing with particular funds. However, most industry
witnesses opposed this idea. The evidence of Mr Jock Rankin of the Institute
of Actuaries was typical:
I do not think you can standardise fees and charges and so forth, but
you can standardise the disclosure, so that people understand that,
if they go into an industry fund they're going to be up for much less
in costs than your average master fund. And they need to be able to
look at a document which tells them that. [15]
Key features statements
6.23 Key features statements currently produced by public offer funds
can be complex documents. The Committee received evidence from a number
of sources highlighting the importance of publishing documents most employees
can understand.
6.24 The difficulties that employees may face when confronted with key
features statements were highlighted by evidence from Ms Krystyna Hassall.
Ms Hassall, a director of Westscheme, has a background of some 16 years
in the superannuation industry. She described an exercise she had undertaken
to determine the sort of difficulties consumers might have in interpreting
key features statements.
6.25 Ms Hassall undertook an examination of the key features statements
of two currently available public offer funds. She told the Committee
that she spent in excess of three hours considering the two key features
statements and had considerable difficulty understanding the features
of the two funds on offer.
6.26 The Committee questioned Ms Hassall about the difficulties she thought
somebody with low literacy and numeracy skills would face in interpreting
these documents. She responded:
My background is a legal background. I am not what you would call a
highly numerate person. When I looked at the calculations that I would
have to make to simply work out the historical return ... I realised
that I would certainly want someone else to check my calculations. So
I have a lot of sympathy for anyone who might have a lower literacy
rate than myself and even someone who has my numeracy skills will still
be struggling. [16]
6.27 Ms Hassall considered that the proposed key features statements
should be tested on ordinary Australians to see whether they could, in
fact, comprehend the information put before them. She thought that it
was `ridiculous' to rely on people within the investment industry to assess
how well a particular document communicates the features of the fund.
She concluded:
I think that what we should be doing is asking the man in the street.
After all, it is his money and his choice - we are imposing this on
him by regulation. [17]
Conclusions
6.28 The Committee is of the view that there is a need for a standardised
approach to disclosure issues within key features statements. The obstacles
faced by prospective consumers of investment products are already considerable
and these should not be increased by providing key features statements
where direct comparisons between products are difficult.
6.29 The Committee considers that the suggestions for a method for comparing
fees and charges put forward by the Institute of Actuaries and William
M. Mercer Pty Ltd have considerable merit and should be considered by
the ISC.
6.30 The Committee also considers that the ISC should commission field
tests of key features statements on employees. Disclosure is an essential
element of informed choice on which the success of the choice of fund
proposal depends. The Committee believes that it is important that the
Government and the Parliament can be assured that consumers can understand
these documents and use them to make valid comparisons between the choices
offered.
6.31 The Committee is conscious of the tight timelines for finalising
disclosure requirements. The format and content of key features statements
have not been set at the time of writing.
Footnotes
[1] ASIC was originally to have been named the
Australian Corporations and Financial Services Commission (ACFSC).
[2] Disclosure Discussion paper, p. 4.
[3] Disclosure Discussion paper, p. 4.
[4] SIS Regulations, Division 2.3.
[5] Evidence, p. 22.
[6] Evidence, p. 30.
[7] Evidence, p. 30.
[8] Evidence, p. 30.
[9] Evidence, p. 147.
[10] Evidence, p. 148.
[11] Evidence, p. 158.
[12] Evidence, p. 178.
[13] Evidence, p. 178.
[14] Evidence, p. 233.
[15] Evidence, p. 235.
[16] Evidence, p. 291.
[17] Evidence, p. 293.
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