Super Choice Is A Fizzer That Employees Prefer To Ignore

Sydney Morning Herald

Saturday July 19, 2008

ANNETTE SAMPSON

If you think changing banks is a pain in the proverbial, don't even contemplate changing your super fund.

Super choice was launched in a blaze of fanfare by the previous government in 2005. The idea was that it would empower investors. Anyone not happy with performance could vote with their feet. And that members would no longer be locked into those nasty socialist industry funds was the icing on the government's cake.

But three years on, as funds prepare to meet their biggest challenge in retaining investors, super choice has proven a fizzer. Only a minority of fund members have chosen to exercise their choice, the process of switching can be slow and frustrating, and choice is turning out to be a big cost for both funds and employers.

A survey conducted by the clearing house SuperChoice and the Association for Payroll Services found high levels of employer dissatisfaction with choice processing. It found medium to larger businesses are spending $25 per employee to administer choice and about 60 per cent found the processes cumbersome and unsatisfactory.

That $25 per employee may seem small at first glance, but only a minority of employees exercise choice. SuperChoice says just over 10 per cent of the fund members processed through its service have chosen not to use their employer's default fund since choice was introduced - though this figure may be understated due to employers implementing choice independently. The research group Roy Morgan found only 2.9 per cent switched their super fund last year - although that drop in switching levels would have been due in large part to investors feeling good about their funds in strong investment markets.

So the cost per employee who actually switches funds is much greater. The general manager of SuperChoice, Mike Fielding, says research is being done on the total cost of choice to the industry, but early estimates are that the cost to employers will easily exceed the $20 million to $30 million a year that CitiStreet estimated choice was costing super funds earlier this year. By 2012, CitiStreet estimated, choice is likely to be costing $70 million to $90 million a year, and another 400 to 500 workers will be needed to deal with the additional administration. Increased costs will put pressure on fees for all fund members.

The problems arise because of the nature of super and the often convoluted and conflicting processes put in place. Every time your employer contributes to super on your behalf, your fund needs to know who the money is for, where it comes from and whether it is a before- or after-tax contribution. With your employer's default fund all the systems tend to be in place, so this happens without too much hassle.

But when an employer is asked to contribute to a raft of new funds, funds can have different requirements, different reporting forms, and may not allow electronic processing of contributions.

In the age of the computer many employers are still filling out forms and sending off cheques to super funds, and the funds are having to collect and manually process each contribution. It is a recipe for mistakes, and where they happen they can be expensive. Payroll staff in the SuperChoice survey complained of delays in funds banking cheques and sending refunds when contributions could not be processed. Employees don't know where their money is, and employers risk a tax penalty (and unhappy employees) if compulsory super payments are not paid on time. The survey also found fund members are still making mistakes filling out the standard choice form when they switch or select a super fund, which can result in further costs and delays.

The irony is that, far from embracing choice, employees have shown little interest in taking greater control of their savings. Fielding says the majority of choice elections have occurred when members changed employers. Rather than using choice to dump an unsatisfactory fund, employees are using it to stay with their fund when they change jobs. It's more about portability - taking your fund with you to the next job - than comparing and choosing funds. Indeed, choosing to stick with the old fund looks more like a rejection of choice. Many members find the whole idea of switching too hard.

With most funds now offering a choice of investment options within the fund, many investors are suffering from choice overload. If they do want to change, it is much easier to switch to another investment option than to venture out into the crowded market. With funds shortly to send out news of their worst returns in more than 20 years, you would expect interest in choice to increase. While the super industry will be promoting the merits of staying the course, there are members who could benefit from switching funds. Not because their fund made a loss last year - even the best funds are likely to do that - but because their fund has unjustifiably high fees or a comparatively poor longer term record, both of which can be camouflaged by rising investment markets.

There is unlikely to be a big jump in the number of switching funds, but it would be strange if there was no increase at all.

The challenge for the industry is to get its act together so when employees want to switch the transfer happens quickly and seamlessly. In the budget in May the Federal Government announced funding for an optional clearing house to be free to businesses with fewer than 20 employees, but the industry needs to do its bit. Common standards and reporting requirements would be a good start.

© 2008 Sydney Morning Herald

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