The Guardian 15 June, 2005
Gambling with your superannuation
On July 1, around five million Australian workers will come under the Howard government’s new "choice of superannuation" regime. Employers are required to give each eligible worker a form to nominate their choice of superannuation fund. Where a worker does not nominate a fund then the superannuation contributions will be deposited in a fund of the employer’s choice — known as the employer’s "default fund".
The choice applies to the nine percent compulsory superannuation guarantee (CSG) contributions that employers are obliged to deposit in superannuation funds on behalf of their employees. Initially the scheme will apply to federal award and non-award workers, except for those with superannuation coverage under certified agreements and Australian Workplace Agreements. It also does not apply to state award employees and some schemes covering public sector employees. The government plans to legislate so that virtually all employees are dragged into the choice net.
Page one of the application form consists of instructions and information, presenting two options and some tips for comparing funds.
Option 1: "You do not have to choose a fund."
"If you do not want to choose a fund, you do not have to complete this form." In this case the employer will pay the nine percent CSG into the fund it has chosen as its default fund. If the employer’s choice is the industry or some other fund that a worker is already a member of and wants to remain in, then great. Take Option 1. Otherwise, not completing the form means the choice of fund will be the boss’s, not the worker’s choice.
Option 2: "Choose a fund"
Taking Option 2, actually choosing a fund, is not quite as simple as it first appears. In fact the whole exercise could prove to be rather daunting and confusing — even without pressure from an employer.
To remain in the same fund as before, it is necessary to tick a box marked "my employer’s previous superannuation fund named in part A question 3". The fund referred to here is the fund the worker is presently a member of — the one that the employer previously paid the nine percent SCG into. It does not mean the fund the employer has chosen as the default fund. It is the worker’s fund.
To choose any other fund, it is necessary to tick a "my own choice of fund" box. The worker must then provide not just the name of the fund, but the fund’s Australian business number (ABN), its superannuation product identification number (SPIN) and attach to the form a letter from the fund’s trustee verifying that the fund is a complying fund, and that it will accept contributions from the employer. The letter must also provide details as to how the employer should make contributions!
How many workers would or could exercise that option? This makes "choice" for workers a cruel farce. But not all workers are likely to be even treated to such a farce.
What is to stop employers, where there is no trade union presence, from shifting whole workforces into a fund the employer chooses? No signature is involved when a worker does not wish, or does not know it is their right, to make a choice.
In addition, casual and new employees will have little or no bargaining power when an employer puts a choice form before them. One way of ensuring that it does not become the employer’s choice of scheme is for trade unions to gain agreements from employers on which fund will be the default fund.
The insurance companies and banks (with their various investment schemes and retirement savings accounts) have lobbied hard for years to get this legislation. It was high on Howard’s agenda when first elected in 1996. It took the government numerous attempts to get it through the Senate, which it finally did last year when Labor fell in line, despite strong objections from the ACTU.
There are a number of different types of funds, from individual retirement savings accounts (for the wealthy), to corporate (company) funds, retail funds and industry funds.
The industry funds are by far the largest and most successful, covering around half the workforce. Most of them were set up on the initiative of the trade union movement in the 1980s and grew rapidly when the former Hawke/Keating Labor government’s introduced the CSG. The CSG contributions made by employers have their origin in a trade-off for a wage rise as part of a union strategy for universal superannuation coverage.
These funds have proven to be far superior in practice. Unlike the insurance company funds, they are not-for-profit. Their boards consist of equal numbers of employer and employee (trade union) representatives and in some instances independent members.
They have relatively low fees and management costs compared with other funds and claim on average superior results on their members’ investments than the many for-profit private schemes.
Making a choice
The Australian Securities and Investments Commission (ASIC) provides advice on its website for anyone deciding to choose their own fund. It even offers a super fund comparison worksheet to collect information and make a more considered choice.
It rules out a few obviously dud investment funds and has a 27-page blacklist of the absolutely crook ones. However, the rest is one big gamble. It is a gamble with a lifetime of savings and retirement. What appears on the surface to be a small difference in fees or other costs could by retirement blow out by thousands and thousands of dollars.
ASIC points out that a worker could lose up to 20 percent from their retirement benefit in a fund charging fees of two percent, as against one charging one percent, over 30 years (rate of return and other factors being equal). For example, it could mean the difference between $200,000 and $160,000.
But things are never equal. Workers are already faced with a number of choices within a fund over the types of investments made with their savings. These range in levels of risk — the higher the risk the higher the hoped for return.
ASIC gives some advice on selecting between funds and provides a "super fund comparison worksheet" and a "super calculator" for collecting information and comparing funds.
Obtain the fund’s "product disclosure statement". It will give you information on the fees and costs you will pay; death and disability benefits and insurance premiums; investment strategies you may be able to choose; the objectives of each investment strategy, its risks and likely returns; and the fund’s features and services.
Check management costs — these are usually a percentage of your account balance and sometimes include a fixed amount per annum in addition. They might be as low as 0.6 percent or as high as 3 percent or more. Industry funds tend to charge less, and retail funds more because they have inbuilt layers of commissions paid to financial advisers and profits.
Super funds pay death and disability benefits and insurance — say, if you are ill or an accident makes you unable to work. The premiums and payouts vary considerably. More choices to make.
Then there is the investment strategy; the types of investments, whether in Australia or overseas, in shares, portfolios, property, fixed interest deposits, on futures markets, in ethical investments, etc.
Which fund is likely to be the most successful? How do you judge investment performance? Do you look at the results over the past year, five years or 10 years? Do you pick a fund where you can change the composition of your investments on a daily basis or just leave it to the trustees?
So many choices.
The government’s agenda
Prime Minister John Howard claims that his government’s so-called superannuation choice will result in a more competitive system which brings better benefits, lower costs and higher returns to fund members.
That’s market forces rubbish. It has nothing to do with the aim of the changes. The Howard government’s real agenda is to open up workers’ retirement savings to the parasites at the big end of town with their insatiable appetites for new sources of profits.
The stakes are high, with more than $500 billion in superannuation funds and rising. The retail funds, banks, investment advisers and other sharks in the business are missing out on millions of dollars in commissions and profits because of the industry funds. Workers’ retirement savings in Australia and other industrialised countries are now a major component of private investment capital.
The private sector wants complete control over the use of that capital and the power and wealth that would come with it.
The industry funds and trade unions now have a battle on their hands to retain their members, to protect workers’ savings. But they also have new opportunities to draw more workers into their funds.
The important role of the unions and the need for a universal aged pension.