Camille Howard asks one of the more public faces of super, Bernie Fraser, what he thinks about super choice legislation, and finds he’s not impressed – He sees expensive confusion and shadowy games on an uneven playing field.
The way he tells it, Bernie Fraser’s life is fairly unremarkable. He talks with the same enthusiasm about his farm—where he tends racehorses and a few cattle—as his rise to the top job at the Reserve Bank of Australia (RBA) and his current role as independent director for industry super funds.
Describing himself as “pretty straight up and down”, he gets to the point with little fanfare. Born and bred in Junee, approximately 200kms from Canberra, Fraser went to the University of New England in Armidale, and in 1961 went to Canberra to work in the public service. “In those days, Canberra was a very small town—around 30,000 people—and there was no lake, just a muddy river with a couple of wooden bridges.”
The landscape changed but Fraser’s career remained constant, spending all his time in the public service, mostly in the treasury. Highlights include travelling to London in the late 60s as a European representative, and being appointed treasury secretary in mid-84. In 1989, he went to the RBA, serving a seven-year term as governor. When he retired from that role in 1996, he settled into life on a farm just outside the nation’s capital.
These days, his main professional interest is his work with industry super funds. He is an independent director of three—Australian Retirement Fund, C-Bus, and STA—and two to three days each week are spent travelling to Sydney or Melbourne for board meetings. He also chairs the Victorian government super fund, which gives him more than enough authority to give us a no-holds-barred look at how super choice will really affect our business lives.
Serious Doubts
Getting straight to the point, Fraser says he’s not convinced super choice is a good thing. At least, he’s not sure the motives behind the legislation are completely magnanimous.
“Is it a good thing for employees to have a choice of where their super money goes? In the abstract, it is. You can’t really argue against people having choice. But in reality is it a good thing? Well, that depends. If there are large numbers of employees currently in funds they’d rather not be in, then obviously it is a good thing. But there’s no evidence that this is so, and if that is the case you have to ask why is all this upheaval about to occur to give people choice?
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“I don’t want to sound too conspiratorial about the motives here, but it’s hard not to be a bit suspicious of the underlying motives for choice. It’s promoted by the government and reinforced in large parts by the financial sector, and I would question some of the motivation there.”
He doesn’t predict a lot of immediate change from employees moving out of industry funds. “Most of them, as I understand it—at least in the industry funds area that I’m familiar with—are reasonably happy.”
He maintains there will not be a mad dash from employees wanting to change funds but rather, gradually, as people change jobs, they will be more inclined to take their superannuation fund with them rather than going through the hassle of joining the employers’ default and rolling old funds into new ones. And this is where Fraser sees the greatest burden on employers, particularly in a few years’ time.
Many employees choose to roll their money into one fund when they change jobs because the administration fees in some funds can be significant. “That’s quite an important benefit of choice because, if you’ve got two or three or more funds and you’re paying administration charges on all of them, it adds up and eats into your savings. However, I don’t think the members have been at the forefront of choice.”
Confusion & Deals
When employers give employees the Choice Form, they will have nominated a default fund. Then it’s up to employees to stay with that default fund—it might be the fund you’re in already—or nominate a different one.
Those employees wishing to go with their own fund must then fill in the second part of the employee choice form, which Fraser argues is too confusing. “They’ve tried to make it quite complicated for employees to fill in, because the employee has to fill in the name of the fund they want and the business number, and they have to get statements to the effect that this is a complying fund from the taxation commissioner, and various other statements. Whereas, all the employer has to do is write down the default fund. So you can imagine ordinary people reading this and saying I can’t be bothered, this is too hard.”
Where the larger commercial funds do well from this, he says, is by approaching employers to entice them with special deals to get them to make their fund the default. Industry funds, says Fraser, don’t have the same capital and resources to draw on to entice employers and so this is not a level playing field.
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He is confident that if the playing field was even, the performance of industry super funds would be more appealing to employees as these perform better than the larger commercial funds. However, he doesn’t believe the new super choice legislation and the administration burden on both employers and employees makes it a fair process.
As for the pressure the extra administration will have on small to medium businesses, Fraser believes it will depend on the size of the business. “The sky’s not going to fall and there’s not going to be a tremendous burden from the outset,” he says. “Some small businesses offer choice already and so they are already coping with the pressure. The trickier area will be medium businesses who face a larger number of employees wanting to take advantage of super choice.
“If several employees choose different funds, which is quite possible, employers may have to pay contributions to a large number of funds and that’s quite an administrative hassle and a costly process.”
But already, he adds, there are discussions about minimising that cost for the employer by way of clearing houses. These are specialist service providers who take the total superannuation contribution for all the employees and allocate the portions among all the chosen funds.
“There’s quite a significant cost involved in this option,” says Fraser, who explains another twist to this alternative. “The commercial funds have already said to employers, look, if you name our fund as the default so that all the contributions go into our fund we will pick up the clearing house cost and you won’t have to worry about that. Not surprisingly, employers think this is a good deal, and effectively it means industry funds are being sucked in to do the same thing. Although this is still being worked out, they will do much the same thing. That will mean more costs, but the critical thing is to keep your members and have a chance to get new members when they come along.”
The not-for-profit industry funds—made up of equal numbers of employee and employer representatives as well as independent directors like Fraser—are widely known for their low fees and high returns. With what are fairly modest directors’ fees and no shareholders to pay, they aim to give all profits back to their members, the most important factor to consider. “Employers, small and large, have an important role in this, but we shouldn’t forget what we’re talking about is members’ money and that’s what it’s all about.”
Expensive Extras
Fraser says the industry funds will be doing two things to help retain their membership base. Firstly they will talk to as many employers as they can, particularly at businesses where some of their members are currently employed, to try to encourage them to keep their fund as the
default. “They have also made some arrangements to provide all this information on the form to the employee who wants to make the change so the employee doesn’t have to go to a website or write to the tax commissioner.
“But there’s work in that for the super funds; work, effort, and expense in providing this and choice is not going to be cheap for any of the funds. The industry funds pride themselves on having low costs and giving all their profits to the members, but they are going to have to spend money to keep in the race and that’s one of the consequences of choice.”
As well as costs involved with funds taking on clearing houses, there will be added costs in the way of advertising and marketing, and so on. Fraser says this will hit the industry funds—with their smaller surplus—harder. And while it might sound like he’s painting a doom and gloom picture of the industry funds, he quickly points out this isn’t his intention. He doesn’t believe a lot of people are going to change from industry funds. In fact, he says, if the playing field is fair we should see more people leaving commercial funds in favour of industry super funds. “They’ve got funds that are out-performing the commercial funds. Industry funds are the best performers of the lot.”
Because of their popularity, their large slice of the superannuation industry’s pie and members’ increased interest in and awareness of their super savings, Fraser says industry funds are being targeted by the larger funds to get part of this action. “Industry super funds represent about 12 percent of the total superannuation industry and they have about $65 billion worth of funds. The big funds would like to get hold of that. And they’ve been lobbying the government to bring in choice in the belief that if [employees] have an opportunity to choose, they will be able to entice some people away from the industry funds.”
Although the Australian Securities and Investment Commission says it’s going to stamp out any unfair deals and enticements that are already being offered, some of this unfair playing will occur, says Fraser. “They haven’t said how they are going to do it or what the members are going to bear.
“The underlying issue to consider is that it is employers’ and employees’ own money that we’re talking about. We should be able to choose where our money goes but we should be able to make that choice without pressure from the government or the financial sector in whatever form.”
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