CHAPTER 7
THE TIMETABLE
Introduction
7.1 A number of witnesses were adamant the legislation should pass without
delay. ASFA for example told the Committee:
...there should be no delay in the passage of the legislation and the
putting in place of appropriate regulatory and disclosure arrangements.
However, sufficient time should then be allowed for appropriate public
and employer education and for implementation and administration systems
to be put in place. [1]
7.2 Many witnesses, however, while anxious for legislative certainty,
nonetheless considered that funds and employers would have considerable
difficulty in meeting the start-up date of 1 July 1998 for new employees.Many
witnesses favoring a delay advanced reasons why they considered the Government
should postpone the commencement date. The reasons most commonly put forward
in support of a delay were:
- the need for employee and employer education;
- the enormity of the tasks facing employers and funds before implementation;
and
- lack of finality of disclosure standards.
7.4 Other witnesses, most notably those representing the banking sector,
major life insurance companies and the Investment and Financial Services
Association of Australia (IFSA), supported the Government's announced
commencement date of 1 July 1998 for new employees. This support was frequently
conditional.
Employee and employer education
7.5 Almost all witnesses who called for a delay in implementing the legislation
expressed concern regarding whether there was sufficient time to develop
and implement a comprehensive communication program.
7.6 The views of the Institute of Actuaries are typical of the many expressions
of concern which ranged across the spectrum of interest groups, from banks
to trade unions. The Institute advised the Committee that its concerns
are twofold:
- providers are not ready; and
- consumers are not ready.
7.7 The Institute's President, Mr John Trowbridge, advised the Committee
that in his view, the need to educate consumers is the most important
reason why the Government should delay implementation:
It is too important an issue to go into without proper preparation.
There is a major education campaign needed, we believe, by providers,
employers and the government: a campaign which is intelligently and
carefully developed and conducted so that informed choice can be given
to consumers. [2]
7.8 Mr Trowbridge warned that the Government's policy may be compromised
if choice is introduced without adequate consumer education:
If people make poor choices, then the whole legislation and the whole
idea of member choice may be compromised. That is the issue about timing.
We think that is very important. [3]
7.9 Mr Jock Rankin, the Institute's Executive Director, reinforced Mr
Trowbridge's conclusions. He considered that both individuals and the
nation would be the losers if employees exercised choice poorly, as individuals
would be less likely to be able to make an effective contribution to their
own retirement needs:
...if choice is not properly exercised, there will be no net benefit
to the individuals trying to accumulate savings for their retirement,
and no net benefit to the nation. ...There is plenty of evidence to
suggest that, without the capacity to make informed choices...people
are likely to make poor choices. They will make choices which are either
too conservative for their personal circumstances or too risky for their
personal circumstances. [4]
7.10 Significantly, the ABA, while not supporting a delay in the start
up date for the legislation, did not underestimate the magnitude of the
task associated with ensuring employers and employees are sufficiently
well informed :
The thing that we found most significant was the almost unanimous view
that the communication effort ahead is large and is likely to take some
time. [5]
7.11 Most witnesses contended that the start up date simply will not
leave enough time for adequate education. Mr Ken Lockery's views were
typical of many:
I would in some ways prefer us to just stick to the concept that we
have and just give us some time to at least educate those people who
can benefit from that education. At the moment we just have no time
to educate anyone on the subject. [6]
7.12 Mrs Louise Matthews of Coopers & Lybrand thought employees would
need time to evaluate all that is put before them:
...employees are going to need time to absorb all of this information.
They are going to need education regarding the types of investment out
there, the investment cycles, the risk return profiles of particular
asset classes and the various types of products available. They are
also going to need to understand the overall objective of superannuation
to understand that it is a long-term investment and to move away from
an ideal that superannuation should be monitored on a quarterly basis
or even on an annual basis. It is something that should be locked away
for 20 or 30 years. They need to understand the differences between
the different types of savings that they may have been exposed to. [7]
Tasks of employers and funds before implementation
7.13 William M. Mercer, while supporting the Government's initiative,
were, however, amongst the many who consider the Government's timetable
for introducing the legislation is excessively tight, and called for a
delay.
7.14 Mercers noted that much of the detail as to how the legislation
will operate is yet to emerge and `there is a great deal of work to do
to determine the key features statements'. They pointed out that after
the detail emerges, there is much that employers and funds must do. Mercers
listed the following tasks they considered may have to be undertaken:
- select funds (which requires collection and assimilation of a lot
of information)
- carry out due diligence on the selected funds;
- make necessary amendments to existing funds to make them more competitive;
- put robust insurance features in place;
- negotiate workplace agreements;
- put an information package to members; and
- put in place administrative procedures for paying contributions to
a number of funds. [8]
7.15 Mercers concluded:
7.16 Mrs Sandra Birkensleigh of Coopers & Lybrand addressed the tasks
that trustees must address:
On the trustee side, of course, there is the issue of allowing time
for key features statements to be prepared and to ensure that any improvements
that a fund may need to make in order to be competitive under the choice
of fund regime can be completed by the commencement date. [10]
7.17 The tasks of employers are also numerous:
Some of the decisions that employers are going to need to make between
now and the implementation date are such things as whether to establish
or review the existing workplace agreements for new and existing employees,
as I have just mentioned, whether to review a total remuneration structure
for each employer, whether to provide limited or unlimited choice, whether
they are going to provide voluntary employer contributions as well as
SG contributions, and whether they are going to continue making voluntary
contributions to a fund of the employees choice at all. They also have to implement education and communication programs for
their employees. They may have to consider winding up an existing in-house
fund or to restructure the in-house fund benefits structure so that
it is more able to compete in an open marketplace. If that in-house
fund is to continue, they need to decide on the most efficient way to
produce a \DB\PGN\275key feature statement, something that in-house
funds have never had to do before. If limited choice is provided, employers
will also need to provide their employees with a selection of four funds,
and determining those four funds would in itself be a major exercise.
[11]
7.18 Mrs Birkensleigh advised that if the start date is not deferred,
employers may be rushed into decisions that may not necessarily be in
the best interests of their employees:
Employers will need to make decisions and, without deferral of the
commencement date, employers will unfortunately be greatly influenced
by the need to comply within a certain time frame as opposed to making
decisions which are appropriate for its employee base. Therefore, we
believe that allowing such a short time frame will result in some employers
executing their actions without due regard to the consequences of those
decisions. [12]
7.19 While the choice of fund proposal applies initially only to new
employees, turnover in the labour force is substantial and many employers
will have to address the choice of fund issue in the first year of operation.
Ms Helen Hewett, C+BUS Fund Secretary, reminded the Committee of the extent
of labour force turnover and what this means for employers:
...a little over two million people change jobs each year. On top of
that there are new entrants to the work force. We see this, even if
it only applies to new employees from 1 July, as a huge task for people
to try and address, and we do not think it is possible. [13]
Lack of finality of legislation
7.20 Regulations determining disclosure requirements will not be released
until after passage of the Taxation Laws Amendment Bill (No. 7) 1997.
While there has been some considerable discussion and consultation with
industry as to the content of the standards, trustees have been reluctant
to develop key features statements until they are known.
7.21 The ISC has been critical of trustees for their apparent lack of
preparedness for choice of fund. Mr Keith Chapman, Acting Deputy Commissioner
- Superannuation, made the following comments at a 1997 ASFA seminar on
choice of fund:
We have been very surprised at the lack of planning trustees have carried
out for the introduction of fund choice. A common `reason' that is given
is that `we don't have the legislation so can't plan anything'. I think
this is short sighted and potentially leaves these trustees in a position
where they will be behind the eightball from day one and the long term
viability of their funds could be at risk.
7.22 Mr Chapman acknowledged that ASFA has commented about the inability
of trustees to properly fulfill their fiduciary duties if trustees spend
members' funds on implementing changes prior to legislative finality:
I agree that this comment has some value in certain circumstances but
where, for example, an approved trustee is involved which has capital
available outside the fund itself, I do not find this a compelling argument.
[14]
7.23 The Committee questioned representatives of the Australian Institute
of Superannuation Trustees (AIST) regarding whether trustees should have
been better prepared. Mr Stephen Gibbs, AIST's executive officer responded:
I would have thought, with the greatest respect to the ISC, that the
recent events relating to the superannuation surcharge and the changes
to early release of superannuation benefits that were announced and
then amended would be ample evidence to show that trustees should not
be criticised. They should be commended for being cautious about not
moving along a path before the final rules are known. ...there have been a number of announcements that have subsequently
been implemented in a different way and I think trustees are justifiably
cautious about moving in terms of something that is proposed before
they know the final rules. [15]
The case for no delay
7.24 Other witnesses disagreed with those who called for the legislation
to be delayed. These witnesses advanced a number of arguments why they
considered the legislation should proceed on schedule.
7.25 The Australian Banking Association considered the benefits that
choice would bring to the market should not be delayed:
We support the 1 July start up, and we are working actively with the
ATO and the ISC and the government to achieve this. Our reason for this
is simple: the sooner the legislation can be introduced, the sooner
the competitive change can begin to permeate the market. [16]
7.26 The ABA questioned the motives of those who call for a delay:
There are of course a number of people arguing for delay, and some
of these have genuine concerns about the amount of work that needs to
be done by 1 July. Our answer to that is: let's take on the challenge.
This is very desirable if we all work together in the interests of the
people, and there is a lot of innovation that will come forward and
allow people to get through to that date. We would point out also that there are some who feel threatened by
the prospect of increased competition and, tactically, could be arguing
for delay to protect their own vested interests. Where this does not
coincide with the public interest, we would argue that this should be
rejected. [17]
7.27 The AMP, while concerned about the tightness of the Government's
schedule, questioned whether a delay would achieve anything. Mr Kevin
Casey, Manager, Technical Advisory Services, told the Committee:
The ongoing educational campaign will take a very long period before
people actually get to the stage where they are genuinely able to understand
the choices that they make. However by delaying this process, it is
only just pushing those problems out into the future. [18]
7.28 While fully supporting the need for education, Mr Casey indicated
that he did not consider an education campaign could solve the problems
associated with poor understanding of superannuation and the choice proposal
in the short term:
The introduction of choice in superannuation will always cause problems
until you have a genuinely educated public, and that is a generational
type situation. We are not going to be able to magically come up with
a formula to educate the public to make an informed choice in three
or six months. All we can do is start to establish the framework for
this. [19]
7.29 On the other hand, the Committee received contrary comments questioning
the motives of those within the financial services industry who consider
the proposal should proceed without any delay. For example, Mrs Sandra
Birkensleigh, Partner, Superannuation Services, Coopers & Lybrand
noted:
It is widely known that there are a number of vested interests in respect
of this particular legislation. The majority of the vested interests
that support a commencement date of 1 July 1998 are those that see this
as being an excellent opportunity for them to improve their market position
in terms of the financial products that they offer or to obtain additional
funds under management...Clearly spinning from this is the ability of
the sellers of those products to enhance their remuneration off the
back of increased sales volumes and so on and so forth. [20]
Alternative options
7.30 Several witnesses offered alternative solutions to the impasse between
proceeding on schedule and deferring the commencement date announced by
the Government. For example, Mr David Connolly effectively argued that
it may be possible to make implementation optional for the first six months:
...there is in fact a middle road in these things, as there
often is. I think there is a case for the passage of the legislation
within its current stipulated arrangements but perhaps, say, 31 December
this year or some appropriate date like that could be the start-up date.
The reason I say that is that I am genuinely concerned whether we will
be able to get in place the necessary information and education system
between the passage of the legislation, which may not be until after
Easter, as I understand it, and 1 July. A six months extension, effectively,
in its application would make life a lot easier. Now what that could
mean is, if you are in an operation which can start on 1 July well,
great off you go but those who cannot would have a further six months
to get their show in place. [21]
7.31 The AMP and IFSA made similar suggestions. AMP representatives,
while supporting the proposed start-up date, expressed concern about whether
the legislation, including the regulations necessary to set disclosure
standards, could be put in place in sufficient time for the industry and
employers to respond appropriately. AMP suggested the Government waive
the penalty provisions of the legislation for the first six months. [22]
Effectively, this would make the legislation optional for employers for
six months, allowing those who are ready to proceed to do so, while not
penalising those who are unable to meet the deadline.
7.32 Mr John Maroney, the Acting Chief Executive Officer of IFSA, advised
the Committee that the legislation should be implemented on schedule,
but with a penalty free period of up to six months. He acknowledged there
are concerns about the ability of employers and others to adequately educate
employees about choice by the start up date. However, he thought that
the protective mechanisms in the legislation lessened the risks:
Given the protections where employees can change their choice once
a year and a range of other protections in the system, member protection,
the disclosure rules et cetera, we do not believe that there are major
risks in taking that approach. [23]
7.33 Representatives of Towers Perrin also offered a solution in a supplementary
submission to the Committee. Towers Perrin advised there were reasons
why the legislation should proceed. They noted that unless the legislation
proceeds, employers facing federal award restrictions on fund choice will
be unable to offer choice as originally announced. They recommended that
the legislation be amended to make offering fund choice `permissive' rather
than mandatory for the first twelve months.
7.34 Towers Perrin noted there is a precedent for this option in the
SIS Act - Section 52(4) permits rather than requires member investment
choice.
Government position
7.35 At the Canberra public hearing on 2 March, the Assistant treasurer,
Senator the Hon. Rod Kemp, indicated the Government intends to proceed
with its choice of fund proposal on schedule. The government's position
is that there will be sufficient time for employers and funds to make
the necessary changes to administrative arrangements.
7.36 Senator Kemp reminded the Committee that the details on choice of
fund were announced on 13 May 1997, so the proposal has been well known
and in the public arena for some time. He said `It really is a matter
for Governments, in the end, to weigh in the balance'. [24]
7.37 Senator Kemp assured the Committee that the Government would work
very closely with industry to ensure that, where major problems occur,
the problems would be dealt with `in a sensitive fashion.' The Minister
noted:
It is often the case, in my experience, that a deadline will produce
these difficulties, as people wonder whether they are prepared or not.
[25]
7.38 Mr Michael Monaghan, Deputy Commissioner, Superannuation, Australian
Taxation Office, assured the Committee there is still sufficient time
for implementing education programs:
Clearly, it is part of our role to ensure that the people who are making
decisions are equipped to do so, and we are satisfied that there is
still ample time for us to do that. There has been a lot of work going
on in preparing us to develop actual strategies to educate people, and
we do not see any reason why people who are making choices in July will
not be adequately equipped with information to help them do that. [26]
Footnotes
[1] Submission, p. 4.
[2] Evidence, p. 220.
[3] Evidence, p. 220.
[4] Evidence, p. 221.
[5] Evidence, p. 5.
[6] Evidence, p. 311.
[7] Evidence, p. 275.
[8] Submission, p. 2.
[9] Submission, p. 3.
[10] Evidence, p. 270.
[11] Evidence, p. 274-5.
[12] Evidence, p. 274.
[13] Evidence, p. 180.
[14] ISC Bulletin, September 1997, p. 56, 60.
[15] Evidence, p. 115.
[16] Evidence, p. 4.
[17] Evidence, p. 4.
[18] Evidence, p. 354.
[19] Evidence, p. 356.
[20] Evidence, p. 270.
[21] Evidence, p. 262.
[22] Evidence, p. 354.
[23] Evidence, p. 374.
[24] Evidence, p. 407.
[25] Evidence, p. 407.
[26] Evidence, p. 407.
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