Our super system is internationally lauded for its unique components: preservation, universality and compulsion. We sometimes forget that choice is also a key element of its success. It’s this element that the current reform package put forward by the Federal Government in response to the Shield and First Guardian collapses must safeguard if trust in the system is to be maintained.
Unlike many pension systems, Australians have significant choice over their retirement savings including the type of fund, how savings are invested and how it is turned into income when our working lives wind down.
In 1991 choice as a core principle was laid out by then-backbencher, Mr Paul Keating in a speech. Keating said that superannuation was meant to address not just the fiscal challenge of funding an ever-increasing number of pensioners, but also a moral problem: while people had “dignity and independence” in their working lives, they became state dependents in retirement, at the mercy of fickle politicians deciding “how they will live.”
Superannuation, owned by each individual Australian and preserved for their retirement, restored that choice. As Keating said, superannuation would operate, “in a way which is privately based, competitive, and so completely responsive to a changing market”.
This idea underpins a system that is today one of the greatest strengths of the Australian economy.
For choice to be meaningful, it must be informed. Different choices carry different levels of risk, potential reward, and responsibility, and we are only truly choosing when we understand them.
Millions of Australians opt for large funds that offer full-service investment management and trusteeship, most often regulated by APRA. They have strong investment track records and low fees by global wealth manager standards. Default options allow members to stay mostly hands off while their savings grow within a highly regulated environment.
At the other end of the spectrum, some Australians want more discretion over their fund’s investments and administration and choose a Self-Managed Super Fund (SMSF). For some this works very well, but with this choice comes enormous responsibility.
SMSF participants are their own trustees, they must accept investment risk, have a mind to diversification, comply with complex rules, and manage the administrative burden and cost. It is not a choice that should be taken lightly.
Still others want something else. Wrap platforms bundle multiple self-directed investments into a single account, without the full compliance burden of a SMSF. The key structural difference is that the platform acts as trustee rather than the member themselves accepting all legal obligations.
When Australians make genuinely informed choices to switch between structures, that is the competitive system working exactly as Keating intended.
This month, the government opened consultations on its response to the Shield and First Guardian collapses. The Minister deserves credit for confronting these failures head on.
As the peak body for the entire APRA-regulated super system, from industry and retail funds to wrap platforms, ASFA has the principle of informed choice front of mind as we develop our responses to a range of proposals.
One is removing the ability to pay for financial advice about switching funds using money held in your super fund.
With two and a half million Australians retiring in the next decade, we are fighting for reforms to increase access to trusted financial help and advice. Changing the rules so retirement savers are charged out-of-pocket costs to help them choose the best super fund for them risks putting up another barrier and runs counter to the principle of informed choice.
Applying a choice lens to the Compensation Scheme of Last Resort, informed choice should mean fairness in access and accountability. We cannot support an approach where millions of Australians choosing relatively hands-off default structures are required to fund a scheme from which they cannot claim. Such an approach is inherently unfair and distorts choices by separating responsibility for funding from the ability to benefit.
But the government is in a tough spot as the costs of the CSLR have exploded. So they have also proposed a range of measures to strengthen consumer protections.
This is the right focus because you can’t make a free, informed choice when someone is pressuring you into a decision while hiding the downside risks and their conflicts of interest.
We support any efforts to better regulate lead generators. Phone and internet-based lead generation is a low-margin business. Measures that raise the cost of non-compliance should all be pursued, while avoiding impacting useful consumer information from legitimate comparison services.
The government is also seeking responses on efforts to introduce friction to transactions including mandatory waiting periods for switching funds.
We have seen these concepts considered in relation to scams and fraud – and they do sit neatly there. However, I am concerned that any proposed solution of ‘sand in the gears’ to slow a fund switching transaction is operationally impossible and is too far removed from a consumer’s actual decision point, which has likely been made over a period of weeks or months and may be fully informed or advised.
Rather than slowing down switching between funds, we would like to see more focus on ensuring consumers are genuinely informed of the risks and responsibilities that come with their decision.
More rules doesn’t always mean better rules, it can mean more for funds to do which creates more cost and more frustration.
The legislated Objective of Super – to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way, is the “what” of super. The central components of preservation, universality, compulsion and genuine informed choice are the “how”. Helping Australians make the most of our system and transitioning from accumulation to retirement is the “why”. When the what, how and why of super are aligned, and genuine choice is properly considered through reform, the system can deliver outcomes Australians can trust.
This article was published in the Australian Financial Review.
