Senator SHERRY (4:52 PM) —We are continuing debate on Taxation Laws Amendment Bill (No. 3), which deals with the issues relating to choice of superannuation—or the deregulation of the retail delivery of superannuation. I would like to comment on the experiences in the United Kingdom and Chile in respect of the introduction of choice, because we do have two case studies of what occurred with those two systems.

In the United Kingdom, in the 1980s, the then Thatcher government decided to allow employees to opt out of their company pension fund and, instead, to set up a personal pension arrangement. Many employees were persuaded to give up a generous employer financed benefit and move into a personal pension vehicle, where the only contributions were their own. Employees in many cases were inappropriately lured into these products by life insurance salesmen using unrealistic projections of expected retirement benefits. So many people were disadvantaged by this system that the Thatcher government was forced to introduce a complex system under which those disadvantaged could claim compensation and/or be reinstated in their former scheme. The whole affair is now universally acknowledged to be a total debacle, and the mess is still being sorted out.

Although the circumstances differ slightly, similar risks apply in Australia under a proposed choice of fund regime. There is a danger that members of well run and generous enterprise based funds or industry funds will be persuaded by aggressive sales techniques to give up existing entitlements and rights to future benefit accruals for other arrangements that are less attuned to their needs.

Just an update on the United Kingdom pension problems: the misselling scandal losses to consumers were recently revised upwards from £4 billion to £11 billion. Ninety per cent of the 560,000 people who transferred out of their occupational products were literally ripped off and, interestingly, the then Thatcher conservative government launched its initiative, wrapped in the rhetoric of freedom and, of course, the words `choice for the individual'.

Briefly, to Chile. Chile operates a compulsory accumulation style private sector superannuation system. Most of the population is in one of 15 private sector funds, all of which compete actively for members. The Institutional Investor magazine reported in its June 1997 edition that 29 per cent of members switched funds in the previous 12 months. Much of the switching is triggered by sales people working for the funds being paid for each switch. Some 38 per cent of the entire cost of managing the Chilean superannuation system is related to switching between funds. Members are convinced, cajoled, induced and even seduced by a wide range of offers to switch to a new fund, with gifts such as mobile phones, mountain bikes, and many other initiatives. Such practices are illegal in Chile but widespread, nonetheless.

I seek leave to table two documents: one on choice in Chile, and the other on lessons from the United Kingdom that were presented to the recent conference of major superannuation funds. These documents are very informative.

Leave granted.

Senator SHERRY —The last issue I want to deal with is what I think is likely to happen under choice in Australia, in addition to the comments that I have made earlier about Chile and the United Kingdom. I seek leave to incorporate a document headed `The benefits generated by an industry fund compared with leading master trust providers', prepared by Industry Fund Services, dated 22 May 1998.

Leave granted.

The document read as follows—

THE BENEFITS GENERATED BY AN INDUSTRY FUND COMPARED WITH LEADING MASTER TRUST PROVIDERS

Source: INDUSTRY FUND SERVICES, 22 May 1998

Table B

2. Master Trust Fee Structures

A flat $ monthly fee

A % or each contribution

A % of the value of the clients accumulation

Various transaction fees— exit fees

switching fees

Table C

FEE COMPARISON

Table D

FEE COMPARISON

Table E

Table F

Manager declared return: 6%

Table G

Manager declared return: 8%

Senator SHERRY —This document, prepared by Industry Fund Services, shows the benefits generated by an industry fund compared with those by a trio of leading master trust providers. They are not selected because they are the worst performers; they are, in fact, among the better ones. Under most master trust structures, small-scale employer based members and personal direct-paying members are treated identically. The old distinction between the two styles of product have largely disappeared. So the worst excesses of the personal superannuation products are behind us in respect of high front-end loading commission. There are still a few small operators selling this form of product—and, frankly, this form of product is largely rubbish.

The real issue with master trusts is not the additional administration fees; the impact they have on end benefits is only a fraction of that of the management fee levied by the promoters in addition to the investment managed fees levied by the fund managers. Typically, fund managers charge between 0.5 and 0.6 per cent for wholesale funds, and up to 1.2 per cent for retail fund management. Master trust providers charge an additional one to two per cent. So it is not unusual for two per cent of the actual fund accumulated by the member to be levied each and every year, especially as many fund managers charge their retail, rather than their wholesale, rates in master trust investment funds.

What is the outcome of this? The document that I have had incorporated, as I have said, is a comparison between industry funds on average and three leading master trust providers—and the three leading master trust providers are Colonial, AMP balanced and Mercantile Mutual balanced. The comparison shows that a person earning $32,000 a year, contributing over a period of 41 years, with a declared return of six per cent under an industry fund would end up with a total balance of some $376,000. With Colonial balanced, the final balance would be $285,000; AMP, $295,000; and Mercantile Mutual, $287,000.

In other words, the comparison shows that in three what are reasonable, by any private industry standards, balanced funds, with Colonial you would be $90,000 worse off at retirement, with AMP balanced you would be $80,000 worse off and with Mercantile Mutual you would be $87,000 worse off. That is, approximately one-quarter of your final retirement income is reduced as a consequence of being in what are not, frankly, unreasonable products, compared with what is the best product on the market—and that is an average industry fund.

This highlights the most significant problem that will emerge as a result of the govern ment's so-called choice of superannuation model: it is deregulation of superannuation at the retail end of the market; it is deregulation in an environment where people will simply not have the product knowledge in order to make an informed choice. Competition, per se, is good, but competition is based on individuals having product knowledge. As I have already said in this debate, how on earth do the, at the very least, 2½ million people in this country who are either certainly illiterate but also functionally illiterate develop the product knowledge in order to make an informed choice and be better off? Labor disagrees with this government's proposed choice of fund model and I hope the amendments we put forward will be supported.(Time expired)