For most Australian workers, superannuation represents one of their two largest assets. With fund balances continuing to grow and the superannuation guarantee rate increasing to nine per cent in 2002, the importance of superannuation for their future financial well being is obvious.
Employees are now showing a greater interest in their superannuation with choice of funds set to arrive in a formal sense while already available informally for many employees.
As a result, more Australians will be deciding which super fund to join in the future but it is unlikely to be in the best interests of individual members if we change our super funds as often as we change our shopping habits.
It is essential that before choice is introduced, an effective prudential framework be in place. This must include proper disclosure and good education to help all employees make an informed choice.
Fund choice must be implemented in an environment where employees are given easy to understand, accurate and comparable information. Without such material, there is a real risk that poor or ill-informed decisions will be made by some employees.
The information must be prepared on a consistent basis to allow comparisons between superannuation funds. The disclosure framework should require all funds to provide the same basic information in the same format as standardised disclosure material.
In particular, information in respect of investment returns, expenses and insurance needs to be presented in a manner that enables valid comparisons to be made between super funds. Without such information, choice cannot be introduced.
Furthermore, I believe this standardised disclosure process should be in place 12 months before the introduction of choice. This would enable members to become accustomed to the standardised format and for any inconsistencies or problems to be solved before the introduction of unrestricted fund choice.
In addition to standardised, informative and user-friendly disclosure material, we need a comprehensive education program to assist employees in making the right choices.
Anecdotal evidence confirms that many Australians are relatively ignorant about their own superannuation plans. Such a result is not surprising given that relatively few Australians have actually made a conscious decision to join one fund over another. Hence, before the introduction of choice, we must have both education and disclosure.
Following the passing of the relevant legislation and regulations, the implementation date for choice needs to be deferred to allow the various implementation issues to be resolved. These will include: the trial disclosure period; the changes required to product and promotional information and material; and ASIC to coordinate, in conjunction with the superannuation industry, a comprehensive education program.
Comparisons between funds require both qualitative information, such as the benefits provided, and quantitative considerations, such as investment returns and expenses.
On the qualitative side, the key to the success of choice is the means by which superannuation funds can be compared by current and prospective members. A suitable framework for standardised disclosure must be developed.
On the quantitative side, a standardised reporting period for past investment returns is critical to achieve comparability of information between funds. A three or five year period ending each 30 June for reporting investment returns is the most practical, as it is consistent with the fund year of the majority of superannuation providers.
It is also important to compare the impact of expenses on members’ future benefits under alternative superannuation funds. This comparison of expenses can be achieved by the use of both:
* a description of expenses applicable to the fund; and
* standardised calculations that quantify the cost of expenses to members, over say a three or five year period.
Given the complexity of superannuation arrangements, broad discussions and consumer testing are required to determine how these comparisons should be presented.
The government’s choice proposals only apply to member’s future compulsory super guarantee (SG) benefits. I understand that the proposed legislative basis for choice will not easily accommodate extending choice to non-SG contributions.
Experience also suggests that if employers are required to extend choice to contributions in excess of SG, the likely response from those that do provide such benefits would be to reduce future superannuation contributions to the SG level. This is clearly counter-productive and will adversely impact upon the financial provisions for retirement.
In practice, I expect that some employers will voluntarily extend choice to the full amount of their employees’ benefit entitlements (i.e. to the total employer contribution), if this exceeds the minimum SG requirements. In such circumstances the same choice reporting/disclosure rules and procedures are likely to apply.
Choice should also apply to employees’ accumulated balances as well as to their future SG contributions. However, given the possible macroeconomic effects in respect of accumulated benefits and the associated investments, a transitional period will be required before choice can be extended to all existing balances.
The introduction of fund choice is a natural development within a consumerist society where there are growing superannuation entitlements for Australian employees. Many members want greater discretion and flexibility in their superannuation decisions.
However, comparing superannuation funds is not easy. Hence, in the interests of informed decisions and better long-term outcomes, it is essential that choice is not introduced without a significant lead time, clear disclosure requirements and a coordinated education program.
<I>David Knox is the president of The Institute of Actuaries of Australia.
