Sent: 27-01-2009 11:36:01
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What is the 'Choice' debate about?
In late December 2008 The Australia Institute published a discussion paper, "Choosing Not to Choose", in conjunction with the Industry Super Network.
The following points are worthy of note (and are direct quotes from the publication):
* "all ages and at all levels of the income scale expressed strong support for the SG. The fact that superannuation is compulsory was regarded very positively, with most people agreeing that they would not have the self-discipline or foresight to plan properly for their retirement in a way that would ensure a minimum standard of living."
* "According to CHOICE (2006, p. 11), the barriers to account consolidation include 'onerous administrative and identification requirements ... poor communication by funds and inadequate assistance to fund members ... the absence of an industry wide protocol on consolidation, inadequate consumer education ... exit fees, difficulties obtaining simple financial advice, and problems consolidating legacy products'. Many of these barriers apply equally to the process of switching funds, and have continued to apply since the introduction of Choice of Fund."
* "65 per cent of respondents to a survey by ANOP Research Services were not confident that the changes to the super system in the 2006 budget were here to stay (Cameron and Gibbs 2006). Focus group participants of all ages and at different ends of the income spectrum expressed concerns about the constant changes to the superannuation regime. Not only were such changes said to be difficult to keep up with, they were also said to 'shift the goalposts' so that people planning for retirement in the long term could not be sure what the right financial decisions might be given the prospect of future alterations to the superannuation system."
* "According to a recent Ipsos Mackay Report, 'Australians of all ages find the language of superannuation confusing and often irrelevant. They are often suspicious of super funds because of the complexities of the information provided by them"
* "Almost half (44 per cent) of survey respondents agreed that 'superannuation is too complicated to understand properly', while only 26 per cent disagreed. The inherent complexity of financial products can also inhibit rational decisionmaking. Many people lack the ability to match their risk 'preferences' with the right kinds of financial products (Sunstein and Thaler 2003). Because of the publicity surrounding prominent financial failures (e.g. Centro and Westpoint in Australia) and the fear of losing money, many people may be unduly conservative in their investment decisions, for example choosing 'capital stable' or 'capital guaranteed' rather than 'growth' products."
* "An ASIC study found that most people do not contemplate how they will structure their retirement incomes until retirement is imminent. The majority think little about superannuation until there is a specific trigger, such as poor health or job loss, that highlights the importance of doing so ... Even among people with 'direct' investments in shares, investment properties or managed funds there is a failure to plan properly, with a more recent study by ASIC finding that 37 per cent of such investors do not have a long-term financial goal or a plan to reach it."
* "Almost half of those who expected to be dependent on the age pension in retirement did not expect it would be around when they retire."
* "Research indicates that the way options are presented is 'a more powerful influence on participant decisionmaking than the underlying risk and return characteristics of the investments being offered' "
* "people who said they did not have a good understanding of finances and investments were more likely to agree that their super fund should invest in more ethically responsible ways than respondents who said they did have a good understanding."
* "Prior to Choice of Fund, Brown et al. (2002) floated the notion of a government-run 'Universal Default Fund', which would protect 'passive investors' against poor fund choices by directing them into a single, government-managed investment vehicle. More recently, Sy (2008b) has argued that a national default option based on the 'proportionate shareholding approach' (i.e. investing across the Australian Stock Exchange rather than actively managing the investment mix) would result in much lower management fees. He estimates that such an approach could 'save fund members up to $20 billion per year' and 'potentially double the terminal wealth accumulated by a worker through superannuation over a working life'. This default investment strategy could, he contends, bring the management expense ratio down to as low as 0.1 per cent (Sy 2008b, p. 23-4). While these proposals are based on strong economic analysis, reallife consumer experiences also need to play a part in the design of default provisions for the superannuation system."
The overriding theme of the Australia Institute (TAI) paper is to argue that the Choice of Super Fund policy has failed because super investors are not engaged with their super investments and that a better option may be to improve the selection of the default fund which applies when an employee does not make a choice.
The TAI paper refers to research published last year by Deloittes about Choice of Fund and its impact in the overall market place.
At present about 2.5% of Industry Fund members leave those funds to move to a retail fund or an SMSF. Deloittes found that if the Industry Funds were able to reduce this switiching to 1.25% of members then they could expect to have 23% (almost $200 billion) more funds under management of pre-retiree assets and a 48% increase in post-retirement assets (some $70 billion) in 2021 than if the switch rate remains at the current rate of 2.5%. By this step alone, Industry Funds could expect to have more than 30% more FUM in 2021.
Deloitte's also said that it "does a lot of work with corporates and we know of cases where up to 30% of otherwise eligible new members are not joining company funds. These people are exercising choice to not switch out of their existing fund."
The biggest beneficiary of the default fund mechanism remains Industry Funds and with the recent Australian Industrial Relations Commission decision on employment award changes may continue.
The Industry Super Network should be congratulated for providing some intellectual basis for their arguments. I think it's fair to say that other sectors of the super industry have not gone to the same effort which will ultimately be to their detriment.
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