Super Choice: Way To Wealth And Wellbeing For Whom?
The Age
Wednesday June 23, 2004
Super choice legislation has at last been passed by the Senate: the fearsome, well-oiled marketing machinery of Australia's financial services sector will now whirr into action and lurch hungrily towards award superannuation.
The bill was first presented to Parliament in 1997 and for seven gruelling years had been blocked by the Senate.
But the debate has subtly changed in that time: what began as an ideological crusade by John Howard, Peter Costello and Peter Reith against the trade union industry funds backed by Paul Keating and Bill Kelty gradually turned into a well funded lobbying campaign by banks and financial planners to bathe in the wealth-giving waters of the super guarantee river.
Money speaks louder than ideology. Over the past two years the evidence has shown that industry funds consistently perform better than retail funds - because their fees are lower and because they are more prepared to make big asset allocation calls - but in the end that didn't matter.
The retail sector has won an unqualified victory and the business of saving will change forever - for the worse.
Perhaps for the first time in history, a compulsory product (super) will be sold on commission. It's a bit like brokers getting commission for third-party car insurance. And, also a first, competition will push prices higher, not lower.
That's because this is an industry almost devoid of marketing. Banks and life offices will now launch aggressive ad campaigns and will pay commissions to financial planners to distribute their products; industry funds will have to respond with advertising and planners of their own. Costs will rise; and so will prices.
It is hard to argue in principle with greater choice and competition; but in this case it is also hard to imagine anyone actually being better off as a result of super choice. Not employees, who will pay for the cost of being cajoled; not employers, who will soon be sending - and doing paperwork on - contributions to dozens of funds.
The Democrats held out for seven years and achieved the things they said they wanted - equal treatment after death for same sex couples and an improved fee disclosure regime (although it could have been better).
Whether they should have held out for more is academic: the banks, life offices, financial planners and accountants have won; and businesses, savers and industry funds will need to prepare for a different future.
The fact that employers will not be required to recommend a "panel" of super funds to their employees is an important development.
Instead, employees will simply be given a form and will be able to nominate any super fund at all; if they don't nominate any fund, the "award fund" - usually the relevant industry fund - will be the default. The No. 1 task of banks and life offices will be to get everyone to nominate.
This means that all the marketing will be directed at employees, not employers. Existing financial relationships will be crucial: banks will attempt to cross-sell super fund products to existing customers; and accountant/financial planners who have tax-return relationships will also be looking to expand that to super fund commissions.
Financial planners, who have traditionally been confined to harvesting the wealth of retirees with lump sums, will be looking to establish new beachheads with pre-retirement employees. And they have had a big victory in the new fee disclosure regime because their trailing commissions will not have to be added up to show the impact of them long term.
Site access will become important. At the moment, industry funds have a monopoly on corporate relationships; but they don't generally have financial planners dealing directly with employees.
Financial planning networks will be looking to create relationships with companies and to set up shop within premises, including regular planner visitations and perhaps even full-time "occupational wealth and safety officers".
Industry funds will have to respond with planners of their own, and increase their fees accordingly. The new world of super choice will be all about personal relationships; industry funds can no longer rely on a privileged position as award funds.
Meanwhile, the banks will blitz the airwaves with ads, appealing directly to employees with brand awareness campaigns.
Super is a choice that peculiarly lends itself to advertising because, in the absence of any understanding of the arithmetic involved, many people are likely to base their decision purely on emotion.
That means that advertising expenditures are likely to provide a decent return on investment; media companies will probably be the biggest winners from super choice.
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© 2004 The Age