What choice ?

I can just imagine an echelon of ex-insurance salesmen (there were hardly any seriously successful ‘insurance sales-women’) salivating at the thought of the commissions to be made when superannuation Choice of Fund is introduced in July.

Most of you are too young to remember the activities of a select bunch of extremely well trained employees of insurance companies that ravaged the unregulated investment markets of the 70’s and 80’s. The major product was an ‘insurance bond’ and it incorporated all the attributes that make the provider rich and the consumer ripped off. Thirty years down the track and we are faced with exactly the same scenario, perpetrated by the same insurance companies, albeit with different names.

The term ‘pension mis-selling’ might not mean much to you, but with choice of superannuation fund now a reality it might pay to become familiar with it. Pension mis-selling describes the situation that arose in Britain between 1988 and 1994, after the government decided it would be a good idea to let individuals buy pensions from private-sector providers…..

High-pressure tactics by commission-based salespeople led to tens of thousands of people being sold products that proved to be entirely unsuitable. High fees and charges and poor investment returns combined to shrink the retirement savings of these people. Many found themselves locked in, and unable to switch to more appropriate products without incurring very high exit fees. The result was a nightmare for investors, pension providers and the government. As at the end of October [2004] an estimated £11.5 billion had been paid in compensation for mis-selling.

In Australia, after seven years of false starts, superannuation fund choice is now a reality. A start date of July 1, 2005, has been set. And as sure as eggs, there will be salespeople out to make a quick buck.


The possibility of ‘unscrupulous marketing practices’ is widely recognised, even by the Government who in a Senate select committee discussing consumer protection made the point;

Choice of fund will inevitably lead superannuation providers to actively compete for the business of employees to improve market share. Marketing costs will therefore rise. However, in the long run, the Government believes that competition will drive costs down.

For the first time outside the sphere of optional private superannuation arrangements, employees will encounter providers who will seek to persuade them to direct their SG contributions towards particular products. The Committee received evidence indicating that there is concern in some quarters about whether the consumers of superannuation services and other financial services will be adequately protected from unscrupulous marketing practices……

The committee was urged to be guided by the U.K. Experience where nearly 600,000 consumers were persuaded to change their funds, “lured by unrealistic promises about expected benefits” to their substantial financial detriment. And recent reports have confirmed that the same situation has occurred in Chile.

William M Mercer Pty Ltd supplied the Committee with information about costs of switching superannuation funds in Chile. Chile operates a compulsory private sector superannuation system in which funds compete actively for members. Mercers advised that according to Institutional Investor Magazine, 29 per cent of fund members in Chile switched funds in the year ending June 1997. Much of this switching is triggered by salespeople who are paid whenever a member switches funds. Approximately 38 per cent of the entire cost of managing Chile’s superannuation system is related to costs associated with fund switching. The Committee received evidence that commission-driven sales of superannuation products in Australia may produce similar results to those observed in Chile.

I have blogged in the past about the dismal levels of financial literacy in Australia and the reluctance of the Government to address the situation. Why would they ? Guaranteed of a pension that mere mortals can only dream of, they can make statements like;

The Assistant Treasurer, Senator Helen Coonan, says the arguments against choice “just don’t stack up”. “We know choice works,” Coonan said, in a statement announcing the passage of choice legislation through Parliament. “Many employers already offer employees choice of fund – a fact backed up by the Association of Superannuation Funds of Australia – and choice has been operating successfully in Western Australia for many years. “If Labor’s scaremongering is true, why is there no evidence of choice being costly for employers or of unscrupulous funds taking advantage of employees? “A substantial education campaign will support the introduction of choice. It will encourage people to take an interest in their superannuation and carefully consider any decision to change funds.”

Comparison between the debacle in Britain to the situation that may arise in Australia is valid. The implications of fund choice are not immediately apparent – a 2% increase in fees compounded for 30 years has a huge impact on the final benefit. Some people may be able to work it all out, but most people will have to rely upon an actuary (often employed by the same insurance company pushing for change) to do the complicated calculations. Projections made on the back of a good year in 2004 will raise unfulfillable expectations in gullible consumers. Ask your mum about the glib insurance salesman who promised that by saving $10 per week in 1970, she’d be a millionaire by 2005.

The best defence against making a poor choice or being ripped off by an unscrupulous salesperson is knowledge. First of all, it is worth considering why we need choice in the first place, apart from the ideological or philosophical position that we all should be free to choose how to save for retirement. Most of the people I know want to invest in bricks and mortar, something they are comfortable with, not give their savings to some faceless fund manager. The proposed regime is not the result of consumer demand, but rather the big players in the financial services industry increasing profits by selling their products to members of public-sector, industry and corporate funds, who they otherwise couldn’t appeal to as potential customers.

The Government has tried to deflect the cries of consumer advocates (which have been few and far between) by saying they will provide ‘adequate education and full disclose of fees and charges’. As ASFA’s chief executive, Philippa Smith says;

“Informed choice is key to consumers being better off under the new regime. There is little point in having a plethora of options to choose from if you don’t understand any of them”. She cites research by ANZ Bank on the low levels of financial literacy in the community, and says the Federal Government’s allocation of $14 million over four years to alert people to super choice is a tiny amount when spread over 20 million account holders. “You also need to be able to compare the price tag. Some steps have been made on the fee-disclosure front, but unfortunately they don’t go far enough.”

I can’t remember the last time I waded through the 100 page Product Disclosure Document to find that the fund’s management fees were 10 times the industry average and it would cost me an arm and a leg if I wanted to change my mind and take MY money out of the fund. As for protection, one symbol says it all when it comes to the efficiency of the insurance watchdog APRA – HIH.

No, I’m not convinced that Choice of Fund is for me, although at the end of my working career it affects me much less than my son’s generation, it seems that the Government is spending an inordinate amount of time and money addressing an issue that’s not considered a problem by most consumers. Why then is fund choice such a big deal ? Perhaps it’s got something to do with who is driving the push for change.

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Rafe
2022 years ago

Wayne, the 100 page disclosure statements are the result of counterproductive regulations designed to protect people who lacked the basic prudence or commonsense to ask about things like the management fees and the exit costs. People who think they are being protected by that kind of regulation end up worse off than sensible people under an unregulated system. Actually we all end up worse off from the deadweight costs of compliance with the regulations.

Nabakov
Nabakov
2022 years ago

“Actually we all end up worse off from the deadweight costs of compliance with the regulations.”

Tell yer 70 year old mum that after she’s just spent half an hour on the phone with some smooth talking young man who’s convinced her to shift her pension into a managed fund that offers really high returns because of its “proven low-risk forex trading strategies. Do you realise how under/overvalued the Austrakain dollar is now?”.

A lot of elderly country folks are still burnt out now from when Westpac tried that one on the late 80s.

“People who think they are being protected by that kind of regulation end up worse off than sensible people under an unregulated system.”

Define unregulated system. Yes, if you can’t spot the sucker in the market, then it’s you. I’m sure that thought will be a great conciliation when yer grandparents get ripped off.

As Wayne said, this wasn’t an really a consumer issue until the Government tried to make it so. A bit like the whole “Social Security” hoo-ha in the States.

Cui bono?

Incidentally, you can easily lose a very entertaining hour or so, fossicking around the movement of money through Australian political parties at: http://fadar.aec.gov.au/.

Nakabov
Nakabov
2022 years ago

“consolation” not “conciliation”. Facking MS Spel Chek.

Rex
Rex
2022 years ago

Choice of fund is a good idea if you are regularly moving from company to company, as many IT workers do. In the past such workers ended up with their Super spread amongst all of the funds that their various employers were linked with. In this case having the choice of fund allows you to consolidate your Super into one fund, and therefore reduce overall fees. In that respect its a good idea.

It will be interesting to see after July what happens to the Industry funds. The big public service and union funds luke CBus have so far been the best performing funds of all. far better than the big name brand retail funds, principally I think because their their trustees were more interested in getting good fund performance than getting the latest 5 series Beemer.

What happens with these funds after July will be interesting. Will their performance degrade because of the need to focus on marketing or will they be able to withstand the temptations?, and finally will the non-industry public be able to move money into their funds? Somthing which has so for not been available to us.

(Incidently, great link Nabs! Is there an equivalent one giving the principle donors of Hendo’s Sydney Institute? It seems he gets to spruik his views each week on RN yet he won’t disclose who his supporters are)

kyte
2022 years ago

I wish I had hung onto my insurance. I bought one of those things called a superannuation policy (it had a different name in the 60s but it was the same kind of thing). I surrendered it for a modest sum in the early 70s, and under the terms of that policy which would have matured about 2 weeks ago, I would have been able to retire. It was a very good policy. There is no such animal about today as far as I am aware.

Fyodor
2022 years ago

Interesting demo job on “choice”, Wayne.

I assume you believe the alternative, i.e. no choice, is superior?

Personally, I’d rather control where my superannuation savings go, without having to set up my own DIY super fund.

Nabs,

The “widows and orphans” line is overly strained. Rafe makes a good point: ignorant and stupid people get ripped off all the time, and not just by insurance salesmen. We now have a investments compliance regime in place that’s a joke to work with, and no more protection for the truly stupid than before. More red tape doesn’t help.

derrida derider
derrida derider
2022 years ago

Well, this is just part of the larger problem that privatising social security automatically creates a massively funded lobby group. This generally manages to capture regulators and politicians to get the system designed in its own interests. It’s why I have always been deeply sceptical of compulsory supeannuation generally.

That said, don’t overrate current arrangements. With employers making the choice of fund there is considerable room for all sorts of non-arms-length transactions between funds and businesses. Not many have been exposed yet, but that’s because we haven’t had a recession since the funds grew to a decent size. Just wait.

mister z
2022 years ago

I think compulsory super is a curious beast when you consider that many people would spend the first 20 years of their employed life simultaneously saving (their super) and borrowing (on their life’s major asset, their house) – allowing the financial industry to collect commissions both coming and going.

I am not totally opposed to super fund choice, it does have its benefits for people who regularly move between industries. But I am profoundly suspicious and concerned about the potential for average punters to get milked by the industry. I am not convinced that the answer to addressing the first issue is open slather fund choice.

Finally I guess when you’ve got ten million mums and dads tied up in knots every year on the returns on their fund and their options on shifting and changing for a marginal benefit, a greater sense of their own long-term financial insecurity might only act to take their attention away from the concerns of poverty in the local community, abroad, asylum seekers, ministerial incompetence, etc…