Participants in Australia’s compulsory retirement provision system—the Superannuation Guarantee, first activated 10 years ago—have long described their rules as complex; now the nation’s government has threatened to make them more so with the proposed ‘fund choice’ legislation. Since July 2002, Australian employers have had to set aside retirement-fund contributions equal to 9% of an employee’s salary, up from 8% during the previous two fiscal years. The augmented percentage is bound to boost superannuation assets: at December 2001, superannuation funds held A$528 billion (US$291 billion) and received more than A$50 billion in net new inflows alone.
Fund choice is an old Canberra chest-nut. First introduced four years ago, the proposed fund choice rules would allow employees to select an investment vehicle for their superannuation fund, rather than leave such decisions to their employers. The first version of fund choice legislation died in the Australian Senate last year. The reintroduced version is substantially stronger: it calls for employers to help employees direct their contribution to any superannuation fund. The first iteration of the proposal allowed employers to restrict fund choice to a list of four drawn up by the company. Implementation of the new rules is sought by July 2004.
Fund choice proponents say the measure is only common sense and point to examples in other countries, such as Chile’s multifondos reforms of 2001 and the 404(c) provisions of the U.S. Internal Revenue Code, both of which call for diversified investment options for pension-plan participants. Introducing fund choice, cheerleaders argue, would allow people in different age groups (and with different risk pro-files) the ability to invest in line with their individual circumstances. Opponents argue that the system is unnecessarily complex in a country where 90% of plan participants, when given a choice, simply select the default option anyway.
Cerulli Associates argues that the fund choice debate has been more about politics than superannuation and would do little but raise administrative costs that participants would probably end up bearing.
Critics have sniped that fund choice proponents include the banks—seeking to find more ways to introduce participants to their principal deposit-based superannuation product, Retirement Savings Accounts (RSAs). Equally, the main Senate opponents to fund choice—the Labour and Democratic parties—are backed by unions, many of which run large industry funds. These schemes are profit centres in their own right as the unions have opened them to non-union customers; industry schemes fear fund choice would allow their members to opt for other products.
Many Australian superannuation schemes have already increased the investment options they present to clients— the highest number so far is 12—deflating fund-choice proponents’ arguments that further choice is necessary in the Australian corporate superannuation market place.
Fund choice will undoubtedly further add to compliance and disclosure burdens on superannuation plans. These obligations are likely to become even heavier following enactment of the Financial Services Reform Act (FSRA) in March 2002. Many Australian observers believe that FSRA already forces superannuation plans to issue a whole new set of product fact sheets every time a member seeks to change from fund to fund. (These particular rules apparently will not come into effect until 2004.) Cerulli Associates doubts Canberra would allow switching from fund to fund without similar requirements.
T he biggest winners from fund choice could be Australia’s investor-directed portfolio services (IDPS) platforms, a fund distribution vehicle. The majority of net new inflows into the nation’s retail man-aged funds industry remain linked to superannuation. Savvy financial planners will likely use fund choice to convince consumers to place their superannuation and non-qualified assets on the same IDPS or IDPS-like system in order to aid holistic financial planning. Planners will undoubtedly make it less clear that IDPS systems will charge higher fees than a large-scale corporate superannuation fund—but consumers, particularly those employed by companies without substantial occupational retirement schemes, will likely warm to the idea of common planning. This could further augment the already robust predicted growth rates for fund assets resident on Australian distribution platforms.
Source: Cerulli Edge Retirement Issue – August 2002
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