PensionReforms' summary and comments
Australia has a three Tier system for retirement income:
- Tier 1: a residence-based, flat-rate, income and asset tested "Age Pension" payable from general taxation.
- Tier 2: a compulsory Defined Contribution, lump sum scheme called, misleadingly, the "Superannuation Guarantee" or SG.  It requires employers to contribute 9% of pay.  The government tops this up for the lowest paid.
- Tier 3: all other work-related retirement saving arrangements ('superannuation') and other individual provision.

Tier 2 and the superannuation component of Tier 3 attract significant tax subsidies.  See here for more - they cost taxpayers about the same as the cost of Tier 1.  There is about the same amount in all superannuation schemes, including Tier 2, ($AU1.14 billion at June 2007) as there are deposits in all Australian banks ($AU1.11 billion at June 2008).

The report uses the results of a survey of 1,002 Australians to inform its analysis.

"In Australia's compulsory [Tier 2] superannuation system, workers are faced with an extensive array of choices about which fund they join and how their savings are invested.  Yet many people decline to make active choices about their super and some make choices that are not in their financial best interests.  As this paper has argued, recent policies designed to extend choice and competition have not delivered optimal outcomes for many fund members.  In a hybrid superannuation system combining choice and flexibility with compulsory saving, good default systems are paramount.  This is especially the case where workers enter a fund by default rather than through active choice."

All this has led to considerable wastage, according to the report.  Average fees are 1.25% of assets and it is estimated that members pay about $AU860 million a year in commissions on the Tier 2 contributions.  Only 10% of members actively choose their fund and there are more than 30 million individual accounts, more than three times the working population.  Someone has estimated that the fees on "unnecessary" accounts cost between $AU1.2-2.0 billion a year.

The report then looks at what might make a 'good' default option that should, in the report's view be the sole responsibility of the employer (currently the default can be specified in industrial awards).  According to the report, "[t]his would ensure that workers who choose not to choose get a good deal, while also making matters easier for employers."  The report suggests this would lead to a lowering of fees and more 'sensible' investment strategy decisions.

There should be an approved list of "accredited default funds, which together provide a 'safety net' for workers who choose not to choose."  Here are the criteria with which a fund might comply in order to be considered for inclusion:

"1. Cap ongoing fees and charges. The maximum fee should be determined by an independent regulator such as APRA.....

"2. Prohibit entry and exit fees. One-off entry fees should not apply where workers are assigned to the default fund because they have declined to make an active choice. Similarly, exit fees discourage people from making active decisions about their super and consolidating multiple accounts....

"3. Prohibit the payment of ongoing financial advice fees, including commissions. If workers are placed in the default fund, by definition they have not made an active decision about their superannuation fund. It is therefore unlikely that they have received any formal financial advice at their instigation. Prohibiting the deduction of ongoing advice fees from default funds ensures that members' savings are not unnecessarily eroded and that members are not charged for advice that has not actually been received. ...

"4. Offer employers a clearinghouse service. .... The clearinghouse would ... become the mechanism for channelling contributions from the new employer into the default fund. This arrangement preserves one of the important beneficial features of the present system, the ability to take a super fund from one job to the next. It would also lower administrative costs for employers who would then be more likely to make decisions about default funds in the best interests of their employees.

"5. If contributions cease, keep members in the default fund. Some super funds automatically transfer their members to a more expensive 'personal plan' or to an external [Eligible Rollover Fund] if no employer contributions are received within a certain period. ....

"6. Automatically follow up arrears in payments. Although most employers meet their superannuation obligations, some shirk their responsibilities. Default funds should establish a mechanism to identify and respond to situations where full contributions have not been paid. ...."

In addition, the report suggests that compulsory schemes should be obliged to offer "socially purposive" investment options because that's apparently what Australians would like to see.  "For their part, super funds should consider the ethical and environmental implications of their investments and better communicate these to members."  PensionReforms notes that, if Australians really want those kind of options, it seems odd they haven't emerged in response to that.

PensionReforms thinks that, once a country has decided to intervene at Tier 2 in the retirement saving arrangements of its citizens, it is forced into the kind of intricate regulation that the report recommends.  Many employees simply aren't interested enough to educate themselves about where their money is invested and why it matters to understand the implications of that decision.  So someone is going to have to do it for them.  Allowing the standard industry-wide default options to persist will potentially seriously damage the saver's financial wealth at retirement.

PensionReforms thinks that the default options should certainly not be selected by the government (as is the case with New Zealand's KiwiSaver and the upcoming Personal Accounts in the UK).  So, if anyone has to do it, it's probably best for that to be the employer.  But that means replacing one set of prejudices (or lack of knowledge) by another's.  But at least that will give those responsible for educational resources a smaller target to aim at. (File size 281 KB; 74 pp) 341