How super is "choice"?

by Anna Pha

Eighty-eight percent of the workforce have some superannuation coverage. 
Close to $500 billion of workers' retirement savings are tied up in the 
various superannuation schemes. These funds are not only of extreme 
importance to workers but also to the big financial conglomerates, banks 
and corporate sector as a whole.

In the past capitalists relied primarily on bank loans, accumulated profits 
and wealthy shareholders as a source of capital for expansion: today 
superannuation funds play a substantial role as a source of investment 
capital. There are now almost as many dollars in superannuation funds as 
household savings in bank accounts.

A quick glance at the list of the top 20 shareholders (found in company 
annual reports) of the biggest corporations reveals the names of 
institutional investors, including superannuation funds and the financial 
outfits that use them as capital for investment.

This transformation in the source of investment capital has been underway 
since the Hawke Labor Government commenced deregulation of the financial 
sector in the mid-1980s.

At that time between 30-40 percent of the workforce had superannuation 
coverage — public sector employees along with senior executives. The 
majority of workers — mostly in the private sector — relied on the aged 
pension and any personal savings they may have accrued.

Since then the aged pension has been transformed into a minimum safety net, 
pegged at 25 percent of male total average weekly earnings and tightly 
asset and means tested.

From collective to self-provision

In the years to come fewer and fewer workers will be eligible for the age 
pension which comes out of Commonwealth general revenue.

As the Labor Shadow Minister for Retirement Incomes and Savings, Nick 
Sherry, points out, Labor intended to develop a system administered and 
invested in by the private sector.

In a draft ALP policy paper on superannuation released earlier this month, 
Mr Sherry says, "One of the aims of Labor's reforms was to increase self-
reliance in retirement as against relying on the state and the collective 
to provide retirement income after workers contribute tax throughout their 
working life".

Prior to Labor's "reforms" governments were moving towards making the aged 
pension universal, regardless of assets or other income. The theory was 
that workers contributed to society and paid taxes throughout their working 
life, and on retirement they were paid a pension out of central government 
revenue.

In other words, society had a collective responsibility to ensure the well-
being of retirees.

Gamble with retirement

In the past many employees belonged to what are known as "defined benefit" 
superannuation schemes — the fortnightly or monthly pension to be paid on 
retirement is stipulated in the rules of the fund.

It is usually based on a formula according to the rate of employer (and 
employee in some cases) contributions, the years of service, and income 
level prior to retirement.

Thus workers were guaranteed a certain percentage of their former wage, 
indexed to the consumer price index for the rest of their lives. There were 
also certain guarantees for their children and spouses.

This was very common in the public sector where government guaranteed the 
defined benefit regardless of a fund's performance.

There has been a deliberate shift by government and employers towards what 
are known as "accumulation funds".

The amount a fund member receives on retirement depends on the earnings of 
that fund as it invests the workers' money. It also depends on the various 
fees that have been deducted when the fund was in operation.

These charges often include an administration fee, an entry fee, and an 
exit fee where a worker changes jobs and transfers to another fund.

The shift from defined benefit to an accumulated benefit form of savings 
involves a substantial transfer in risk.

Under the accumulation funds (also referred to as defined contribution) 
there are no guarantees.

If the trustees, private fund managers or financial institutions lose the 
money on the stock exchange or in bonds or through currency fluctuations, 
the loss is the workers' loss.

Likewise, a worker's retirement income can go up in smoke if the employer 
fails to make payments and goes bust, or through theft or fraud. The 
workers are left high and dry without retirement income. And such cases 
have become more and more frequent.

Superannuation and other pension funds hold a considerable percentage of 
their members' financial assets in Australian and overseas equities (mostly 
shares).

They may also have considerable investments in life offices, bonds, and 
even use futures and options (high risk forms of gambling on market 
movements) in their dealings.

The institutions that manage and invest the money do not lose their money 
if the gamble doesn't pay off, and they pocket handsome fees in the 
process.

The classic example is the collapse of giant US energy company Enron, when 
workers' pension funds were wiped out overnight to the tune of hundreds of 
millions of dollars.

The security of funds is not just an issue prior to retirement. There is 
the question of how to invest the lump sum on retirement to guarantee 
security for an unknown number of years.

Protection

The question of the protection of the fund savings is one of the most 
important retirement issues facing workers.

There are some mechanisms in place to deal with the loss of savings due to 
corporate theft and fraud such as a compensation fund which is based on the 
levy of all regulated funds.

But this compensation fund does not protect losses due to poor investments. 
There is no protection for savings that are depleted through a stock market 
crash or a company going belly up.

Nick Sherry looks at the question of legislation for full compensation, 
proposing to extend coverage to a wider range of retirement savings 
schemes: "Whilst it is certainly not possible to protect all retirement 
monies, Labor will investigate whether it is appropriate for certain 
retirement products."

He does not propose protecting workers against poor investments or 
protecting their post-retirement savings which they depend on for an on-
going income for the rest of their life.

Sting in the tail

Labor's proposals address another area of great concern to trade unions 
i.e. costs and charges including administrative fees by funds, commissions 
to agents, investment charges etc which can eat into the pay-out to fund 
members.

The large industry funds, such as those that were established by the trade 
unions, are far cheaper to run and generally charge much lower fees than 
other funds or individual retirement savings accounts (RSAs).

For example, one company charged a woman worker a five percent entry fee — 
five per cent of her retirement savings — if she wanted to move into a 
particular personal superannuation scheme or to take up a particular 
superannuation product.

Another worker attempting to exercise some choice decided to transfer his 
money from another fund and was told that he would have to pay an 18 
percent (in this case $11,500) exit fee to move his money. He had no idea 
of this when joining the fund.

In another case an investor (workers become investors in this super 
process) was charged an exit penalty of $4000 on the account balance of 33 
per cent.

The fees are far lower in the larger industry funds where in effect there 
is a captive audience through the award system, workers being automatically 
covered by their industry fund. Trades unions have some say in the running 
of these funds.

In Britain where there has been considerable deregulation and massive 
privatisation, the "choice" model has seen administrative costs and other 
fees consume more than 20 percent of workers' savings in personal schemes.

The driving forces behind the government's legislation for "choice" in 
superannuation schemes are the banks, who are pushing for individual 
retirement savings accounts, and the insurance companies who are anxious to 
spread their consultancies and other "services".

Nick Sherry recognises the dangers of further deregulation but does not 
oppose it. Instead he attacks the government's model and looks at how to do 
the same thing but with reduced risks or complexity!

He criticises it for not providing "unlimited choice" and "genuine choice".

And the model, he says, is too burdensome for businesses to comply with.

For such reasons he proposes prohibiting exit and entry fees and improving 
disclosure of other fees and costs involved. His main focus is on how to 
tinker with the edges without disturbing the central problems — the 
dominance of the private sector and the replacement of collective 
responsibility by "self-reliance".

No where does he consider how to eliminate the risks altogether for 
retirees by restoring a fully funded public pension with universal access 
and defined benefits. He is happy to see the superior public pension 
whither away.

If the present compulsory nine percent employer contribution were paid into 
a central public fund, it would not only offer greater security and less 
complexity for workers, the fund could be used for socially desirable and 
far more secure investments such as public housing and public transport.

For workers "choice" in the case of super means high risks, insecurity, 
confusion and disaster further down the track.