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Thursday, 26 September 2002
Page: 5032

Senator WONG (5:06 PM) —It is interesting that Senator Watson speaks of the need for bipartisanship on the issue of superannuation when one recalls that the coalition parties opposed the introduction of compulsory superannuation in this country when it was first introduced by Labor governments. They seem to have changed their tune now. The government says that it seeks to bring choice to the superannuation sector. I think it would be more accurate to say it seeks to bring confusion and potentially consumer exploitation to that sector with the regime that it is seeking to put before the parliament and which it has issued plenty of material on. As was seen in the Senate's recent disallowance of regulations, this government has failed to put in place adequate disclosure requirements in relation to this industry and it has failed to support stronger and appropriate consumer protections for members of superannuation funds, particularly in the area of ongoing fees, entry fees and exit fees. As I said, it really is a government that is not about workable choice in superannuation. If it were particularly concerned about that issue, it would look to the issue of investment choice within existing super funds as a policy priority. Instead, it looks to putting in place a system which would enable funds potentially to exploit consumers who may not be adequately informed about the benefits, charges and fees associated with different fund options.

In relation to consumer protection regarding ongoing fees, entry fees and exit fees, the minister conceded at a press conference on 19 September that some funds might increase exit fees to stop people withdrawing their money under a choice regime. That is a pretty obvious possibility in a so-called choice environment. We can see that already in the unregulated retail funds, a number of which do impose quite significant, and in some cases massive, exit fees to operate as a disincentive to leaving the fund. How can the minister seriously expect people to consolidate their superannuation when they are faced with exit fees such as $11,500 on savings of $65,500, $4,000 on savings of $33,000 and over $3,300 worth of fees on savings of $3,300—in which case the member was left owing the provider $24?

The minister has stated that `the government will reserve the right to regulate exit fees.' But it seems that that right is being reserved without action. There has so far been no action by this government to prevent the massive impost that exit fees sometimes represent. Frankly, this government's failure to act on this issue and to state a clear policy position on this issue in the context of its attempt to introduce choice is a failure of good public policy. The government now seems to be trying to run a line justifying high fees and charges on the basis that higher-cost products in fact deliver higher returns. On 18 September, Senator Chapman said in this chamber:

... the Labor Party are ignoring the fact that it is the final return that counts for people who are investing in superannuation and generally saving for their retirement—not the fees. They are ignoring that it is quite often those funds that charge fees that provide the higher overall return. So, at the end of the day, the retirees will be much better off because of the higher earning power demonstrated by those particular funds than by the union-run industry funds that may not have fees.

This is simply a case of Senator Chapman not looking at the material. Rainmaker Research, which monitors fees and charges, reports that for the year 2001-02 retail superannuation products lost, on average, 4.7 per cent—and that is the sector which has significantly higher fees and charges. However, nonprofit super funds such as the industry funds and corporate funds lost only 2.3 per cent. The hopeful position of the government that higher fees necessarily correlate to higher returns is not borne out by the statistics and is simply an attempt by the government to justify its refusal to act to protect the interests of working Australians by regulating exit fees and the like.

An enormous disparity already exists in superannuation funds in Australia in relation to fees. A report last year by ASFA—the Association of Superannuation Funds of Australia—found a very wide disparity in costs. The cheapest were public sector funds, where the administration and investment costs averaged 0.49 per cent. At the other end of the scale were retail funds, with costs averaging 2.4 per cent. The most expensively administered fund cost 30 times as much per member as the lowest-cost fund. If you were charging fees which were 30 times those of another fund, you would have to be pretty lucky to make 30 times the investment return of other funds given that, at the end of the day, most superannuation funds are investing, in differing proportions, in the same sectors. One does tire of hearing the government harp on in this chamber about union-run industry funds. One wonders whether they do not actually know who runs the industry funds or whether this is simply a cheap political shot that they continue to parrot. Industry funds are not union funds; they are governed by trustees representing employers and employees in that industry in equal numbers. There are no union-only industry funds in Australia.

Another concern we have regarding the government's approach to the area of superannuation is its lack of commitment to genuine education in this area. Answers to questions on notice received by Labor this week revealed that the government plans to spend less than $1.15 on education and communication resources for each fund member and business that will be affected. In the 2002-03 financial year the ATO will spend $10 million in trying to educate over 8 million fund members and 650,000 employers on what choice will mean to them. However, over four years the ATO will spend a total of $14.5 million on changes to its own infrastructure and other administrative costs—half a million dollars more than it will spend in total on the vital education and communication role. Not to resource the education of consumers sufficiently would seem to fly in the face of the government's argument that choice is a good thing and that consumers can be educated.

That is only one part of the argument; the other part is to what extent, and how much, education will actually work in this sector. Around 15 per cent of Australians are functionally illiterate, and one wonders how the government proposes to equip these Australians for a choice environment. One wonders how the government proposes to equip Australians from non-English-speaking backgrounds who may have a limited grasp of English—or at least a limited grasp of some of the financial product disclosure jargon that would be required to make informed choices. The potential for exploitation, in the absence of clear regulation of fees and other charges and a sensible policy approach to this industry, is obvious.

The government know that the amount that they are proposing to spend on education is not enough to ensure that consumers can make informed decisions, nor is it enough to ensure that businesses are able to comply with their obligations. They have been told repeatedly by representative groups such as ASFA, the Australian Consumers Association, the National Farmers Federation—and one would have thought they might have actually listened to the NFF, given their avowed constituency—and other groups that much more needs to be done on the education and communication front. The National Farmers Federation, in their submission to the Senate committee inquiry on choice, said:

Informed choice is critical. Informed choice will not occur unless Government undertakes an effective education campaign for both employers and employees.

NFF believes that the (Government's) reference to pamphlets and a help-line ... is inadequate.

ASFA, in their submission, stated:

ASFA strongly suggests that this campaign be focussed on raising financial literacy among individuals, including enabling individuals to genuinely compare funds. We would caution against either a “feel good about reform” campaign (along the lines of the “Unchain My Heart” campaign for tax reform)—

who can forget that?—

or a campaign chiefly focussed on employer compliance.

CBus's submission—and of course CBus is one of the major industry funds—said:

For the superannuation industry to be competitive in a choice of funds regime it is not acceptable that some consumers, who may have made decisions that they are not happy with in the past, are locked out of making a choice because of the exorbitant fees they would incur if they transferred their superannuation to a new fund. It is not acceptable for some retail superannuation funds to argue for choice on the one hand, but prevent their own clients from exercising choice.

That is a very important point in this area. If the government are serious about choice, why are they not moving to regulate exit fees which, by dint of their financial disincentive, work against a genuine choice by consumers in the area of superannuation?

I want to turn briefly to the issue of fee disclosure and this government's failure to provide consumers with a meaningful, comprehensive and comprehensible regime for fee disclosure. This comes on the heels of the disallowance of the regulations by the Senate, which included, amongst other things, regulations in relation to product disclosure statements and the ongoing management charge. This government does not have a commitment to ensuring a regime for fee disclosure which is readily comprehensible to consumers. If it did, it would not have attempted to push on with the ongoing management charge in the form that it was in in the regulations. The previous speaker tried to suggest that the recent report by Professor Ramsay lent some weight to the government's position. For reasons I will discuss later, if I have time, we say it does not. The most damning thing about the government's proposed OMC was its failure to meet any basic consumer testing standards, and the fact that, frankly, it was incomprehensible to most consumers. I want to quote a number of extracts from an article which appeared in the Australian Financial Review earlier this week in relation to the issue of the disallowance of the regulations and in particular the ongoing management charge. The article said:

However, the Opposition might have done the government a favour by knocking out a disclosure system which not only was less than perfect but which, according to the second survey involving consumer testing, probably could have made things worse.

Association of Superannuation Funds of Australia chief executive, Philippa Smith, last week told an investment conference that initial consumer testing of the new regulations involving the Operating Management Charges (or OMC) had produced “devastating” results.

While the final details are still being completed, she said that comprehension testing among consumers had shown that 80 per cent of them thought that the OMC showed additional charges. In fact, she said, the level of comprehension based on the new disclosure system “went backwards” on the old Key Features Statement.

A second count on which the superannuation industry was critical of the OMC was the fact that it did not include entry and exit fees. Again, it seems that the government not only does not want to regulate those but does not want those to be included in a comprehensible way in any disclosure regime. It seems extraordinary, doesn't it, that the government would put before the Senate a model which is supposedly aimed at consumer protection but that it did not test in terms of consumer response to it and, in relation to which, independent testing shows an 80 per cent lack of understanding of what the model actually means? Surely, any government would have made sure that, if it were seeking to move to a choice environment, it would have a disclosure regime which enables consumers to make informed choices, not a regime which 80 per cent of consumers in this survey could not understand. The government did not conduct and it has not conducted any market testing of the OMC or of its own disclosure measures. As I said, the ASFA results were described as damning. People just do not understand what it all means. The alternatives to the government options include proposals from Rainmaker Research, the Australian Consumers Association and the University of New South Wales researcher Dr Hazel Bateman. All of these models would provide a more meaningful fee metric than the OMC.

I want to briefly discuss the report on disclosure which was conducted by Professor Ramsay and which was released yesterday. We say it provides a useful starting point for a discussion about what should be included in any reasonable disclosure regime. Although Professor Ramsay appears to remain wedded to the OMC, albeit a modified version, he moves significantly beyond the government's flawed disclosure model, proposing a number of improvements along the lines of what Labor has been advocating. These include a long-term measure of the impact of fees, consistent with the ACA's proposal, subject to industry consultation; and a fee calculator on the ASIC web site. Publicly available and unbiased assistance in understanding fees is essential to any disclosure model and was absent from the government's proposed regulations. There is considerable positive overseas experience with fee calculators. There is merit in the United Kingdom's model. Labor would also like to see full public disclosure of fees for all super funds placed on the ASIC web site. If you want choice, let us have proper disclosure. Let consumers really see whether they are getting value for money. Let them really see who is charging the higher fees and who is not and what the relevant rates of return are for those funds.

Consistent with Labor's approach, Professor Ramsay also suggested that the PDS should show, where applicable, how fees are paid to advisers. Currently, a consumer would need to read the PDS together with a financial service guide provided by the adviser to understand how they are paid. The importance of enforcing better disclosure of the commissions paid to advisers is underlined by RMIT research conducted on behalf of the Financial Planning Association which showed that almost 40 per cent of the clients of financial advisers did not know how they paid for advice or thought it was free. These are pretty extraordinary and disturbing statistics. Given that financial advisers are often the group to whom people go for advice on issues such as investing their superannuation, one would have thought that it would be appropriate to have in place a disclosure regime which would enable the clients of financial advisers to know precisely how they are paid. It is, as I said, a pretty extraordinary and disturbing statistic that 40 per cent of their clients did not know how they were paid or thought that the advice was being provided for free. This is particularly disturbing in the context of the government's choice proposals.

Professor Ramsay advocates a further proposal for the disclosure of fee rebate arrangements. Again, that is consistent with the policies and positions that the Labor Party has been calling for. Many consumers do not know that they can negotiate fees lower than the disclosed schedule, and many stand to miss out, because if they do not know a rebate applies then they cannot ask for it. Finally, and perhaps most importantly of all, Professor Ramsay believes in the consumer testing of recommendations. It is apparently a pretty novel idea, on the government side of this chamber, that we should consumer test a measure which is supposed to assist consumers to make sure it actually works. Improved fee disclosure is not generated in a vacuum, nor can it be solely the product of the bureaucracy or the political hierarchy. Research must be undertaken with the people that it is intended to benefit—the consumers.

The government have two choices on fee disclosure. They can carry on as they have, ignoring legitimate concerns raised by consumer groups and a number of industry representatives and pandering to the top end of town, or they can undertake a process of consultation with all interested bodies, including other parliamentary representatives, aimed at providing better disclosure for working Australians. I am sure the ALP would be more than happy to do that if the government were to choose to take that path.