PensionReforms' summary and comments
One aspect of the Australian retirement income regime that PensionReforms thinks notable is the dearth of research reports offering critical comment on, particularly, the shape, size and outcomes of the compulsory Tier 2 regime.  There is no shortage of cheerleaders.  PensionReforms has recently commented on one - the new "Melbourne Mercer Global Pension Index" (see here) where, mainly because of compulsory private provision, Australia's overall regime was the top scorer of 11 countries measured.

However all is not well as this 2007 report on costs and on the 'rents' imposed on scheme members by the Australian financial services industry illustrates.

The Australian Tier 2 scheme requires employers to pay at least 9% of employees' pay to an approved superannuation scheme, sometimes of the employees' choosing but usually of the employers' or unions' choosing.  There is, ostensibly, a free market in that members can move from one approved scheme to another but that's not what happens; at least, not yet.  The financial service providers seem to be profiting from the members' apparent unwillingness to find out what's really happening to their money.  This apparent lack of interest seems also to extend to the member's choice of scheme provider and then of the investment strategy for their retirement saving (see here).  More rules to 'correct' members' apparent 'mistakes' are apparently needed.

This report looks at the effects of another set of rules - the 2004 'Registrable Superannuation Entities (RSE) licensing regime.  The intention of these regulations was ".to bring about improvements in terms of prudential control/safety mechanisms which, in turn, would ensure that the superannuation monies under investment increased significantly."  Among other things, the regime required trustees to implement ".measures to improve fund governance such as the requirements for each fund to produce a formal risk management plan."

So, have the 2004 RSE rules worked?  Probably not, according to the report because, apart from anything else, ".there was no attempt to identify and then address any existing fund member/consumer detriments."  As a result the promoters of the superannuation schemes are the winners.  The report bases its work on a survey of 90 superannuation scheme trustees and licensees.

"In terms of the actual outcomes or impacts of the RSE reforms,. there is no evidence to suggest that even these limited national interest objectives have been realised.  Rather, the recent data collected from fund trustees, highlights that the combination of: increasing compliance costs; the "mass" fund exit; and the resultant transfer of funds worth billions to the more expensive retail fund sector, has left member funds, and, therefore, the overall savings pool, worse off, and to an extent of nearly $200 million per year."  (Emphases in this and subsequent quotes are the author's)

And, as might be expected when there is so much money at stake, the scheme providers are apparently behaving in ways that might be more in their own, rather than in their customers' best interests - this includes significant donations to political parties:
"In addition to compliance costs concerns, recent evidence has also highlighted that the remaining large funds within the industry are engaging in anti-trust behaviour.  For example, there have been recent calls for the immediate review of the Eligible Rollover Fund sector in the occupational superannuation industry, following the RSE reforms, given that "some funds were engaged in predatory pricing" with estimated losses to fund members of over $100 million per year.. As a consequence of these outcomes, the "performance" and "social justice and equity" objectives of both governments have been subjected to negative pressures."

The report suggests that the RSE licensing requirements have forced employers and unions to fold their own 'stand-alone' schemes into more expensive retail schemes:
".consistent with the principles and assumptions of the private interest framework, the fund managers appear to be the real "winners" under the RSE regime.  That is, the licensing requirements have forced many of Australia's largest corporate and industry superannuation funds to exit the industry with member monies primarily being transferred to the retail sector (dominated by the life offices)."

The report suggests that this has resulted in a "financial windfall for the fund management sector which no longer has to face the threat of terminations, surrenders and forfeitures related to these occupational superannuation investments."

None of this, in PensionReforms' view, is very surprising.  It is yet another example of the Law of Unintended Consequences.  The government, in adopting the RSE licensing regime probably thought it was acting to improve the security of member's benefits.  The report does acknowledge that there may be some positive effects (from "better risk management strategies being adopted" by schemes), but the new regime has, according to the report produced four negative effects:
"1) member benefits associated with "closed" funds have been transferred to the master funds in the retail industry in spite of the fact that there is a priori evidence that retail/master funds have the highest expenses and lowest returns of all fund types;
"2) the compliance costs associated with implementing the RSE reforms have been estimated at $50 million with ongoing costs estimated at a further $10 million per year;
"3) the fact that the overall compliance costs of the two and half decades of regulatory reforms in the occupational superannuation industry is now approaching $200 million per year which is a direct reduction to fund member balances; and
"4) in the absence of any anti-trust legislation, the remaining large firms in the industry have the ability to engage in predatory pricing activities which further "rip off" fund members." 

Given the current framework of the Tier 2 scheme, the report suggests there is not a lot the government can do about these negative effects.  It suits the financial services industry to have multiple, competing offerings that comply with the rules:
"That is, the existing framework is the lobbied for outcome of the powerful fund management group who viewed single, government-controlled, national schemes as a "threat to their profitability", lobbying extensively against any earlier attempt to introduce such a national scheme.. Given that this framework is now delivering extremely high levels of returns on net premium income, assets and equity for the remaining firms (as a result, at least in part, of wealth transfers from fund members) there is little incentive to accept an alternate regime."

These findings lay the groundwork for an example of the industry-serving, laudatory report of the kind covered next by PensionReforms - see here.  PensionReforms notes that the 2005 introduction of "fund choice" that lets members, with some exceptions, choose their own superannuation provider, seems not to have improved things because it is relatively difficult to change provider.  The switch rate is a low 3-5% of members a year.  Inertia rules and, based on the findings of this report, the financial services industry would probably prefer it to stay that way.  (File size 239 KB; 34 pp)  357