I spoke in parliament this week about the MySuper reforms, using the insights of behavioural economics to make defaults better.
Superannuation Legislation Amendment (MySuper Core Provisions) Bill, 22 August 2012
Retiring with dignity after a lifetime’s effort and contribution should not be a luxury for a few. Thanks to successive Labor governments and their vision for the future to introduce, enhance and defend the Superannuation Guarantee for all Australian workers, retiring with dignity is a right for Australians. Addressing the Australian Graduate School of Management in 1991, Paul Keating said of the Superannuation Guarantee:
‘It will make Australia a more equal place, a more egalitarian place and hence a more cohesive and happier place.’
Prime Minister Keating said it was the safety net most Australians would need when they retire.
The Labor tradition of looking after Australians’ retirement savings continued at the 2010 election. At that election our government made a commitment to introduce a simple cost-effective superannuation product to replace existing default superannuation products. That flowed out of the Cooper Review and the choice architecture framework in the Cooper Review. The Cooper Review was commissioned by Senator Nick Sherry, one of the greatest champions of superannuation that the parliament has ever known, on 29 May 2009 when he was then the Minister for Superannuation and Corporate Law. The review, chaired by Jeremy Cooper, noted that all members want to make choices about their superannuation. It noted that the current assumptions that underpin the superannuation system are that all members want make choices about their superannuation and all members are interested in receiving a variety of superannuation services.
But the report noted that that was not always the case. It recommended that the government introduce a new, simple low-cost default superannuation product called MySuper for those who have chosen not to have direct engagement in their superannuation decision making. The philosophy in the early 1990s was that everyone would choose the best fund and choose the best plan within that fund. But behavioural economics has taught us that that is not always the way that people approach decision making. Most people take the default fund and the default plan.
So the focus of MySuper needed to be to make sure that defaults were good plans. By having lower fees and more efficiency, we maximise members’ savings. On one estimate, the movement to MySuper products with lower fees can be the equivalent of an extra one per cent of earnings going into superannuation—that is, the philosophy of MySuper underpinned by behavioural economics. Behavioural economics has come strongly into the public policy world thanks in part to the terrific book Nudge: Improving decisions about health, wealth, and happiness by Richard Thaler and Cass Sunstein. They came up with a concept they called ‘libertarian paternalism’ which is based on the notion that, as Milton Friedman said, people should be free to choose. Thaler and Sunstein like to say that libertarian paternalists want to make it easy for people to go their own way.
MySuper takes away no-one’s freedom. What it does is recognise that in busy lives people are often attracted to default. As the Cooper Review noted, libertarian paternalism is: ‘the idea that the outcomes experienced by inert or disengaged consumers should have inbuilt settings that most closely suit those consumers’ objective needs, as assessed by the expert providers of the product or service in question’. It went on to say, importantly:
‘This does not amount to a centrally determined boilerplate option for everyone, as it must at all times have regard to the collective characteristics of the particular consumers affected, any of whom can at any time opt out if they want to take more control for themselves.’
That is the philosophy: high quality defaults but choice if you want to exercise it.
A report by the Industry Super Network called Supernomics also focused on some of the new insights flowing out of behavioural economics. That report noted that only around three per cent of members switch fund every year. It noted that the majority of superannuation consumers are passive consumers, and indeed that most members who were either not aware that they had a choice or did not exercise a choice could end up being at a disadvantage. It noted the reasons for this passivity. There is myopia—a sense of focusing on the present, not on the benefits of retirement savings that will be felt in decades to come. The problem with this is that if young workers are myopic then they are making the wrong choices at the time it matters the most. Making a bad investment choice when you are at the beginning of your career means that you miss out on benefits that will continue to accumulate later.
The Supernomics report also referred to risk aversion, a shying away by young workers from investment choices, such as shares, that have a high risk but a higher long-term return. Research indicates that people place greater weight on avoiding losses than on achieving equivalents gains. We saw that, sadly, during the global financial crisis when — at the bottom of the market — a substantial number of superannuation switchers moved from shares into cash. That meant, of course, that they locked in their losses. There is a reluctance to switch funds, even when fund switching could benefit workers in the long term.
The Cooper review noted that members who got the default superannuation option in their fund did not have adequate protection from underperformance. They could be paying for services they did not need, did not request or did not receive. The Cooper review also noted that trustees of superannuation funds were not always focused on maximising members’ retirement incomes in an efficient and cost-effective way. I commend those who worked on the super review, including Treasury executive director David Gruen—who, as it turns out, is the brother of Nicholas Gruen, possibly Australia’s most passionate behavioural economist.
The solution that came out of the MySuper report is a single diversified investment strategy. It can be a life-cycle approach. Life-cycle investing is the notion that investment products should be riskier at the early stage and then move towards less volatile products as the person approaches retirement. MySuper emphasises that defaults ought to be simple and that consumers ought to be able to compare on the basis of the fees that a fund charges.
For employees who have not made a choice of fund, superannuation accumulation will be paid into MySuper. But we are not taking away choice. All members will have access to the same options, benefits and facilities. For a super fund to be named in an award, it must offer a MySuper product that is reviewed by Fair Work Australia. Funds can tailor MySuper products to employers with over 500 employees to meet the needs of their particular workplace. MySuper trustees must articulate the targeted rate of return over a rolling 10-year period, with the level of risk determined appropriate for its MySuper members. Fees are limited to the following: an administration fee; an investment fee, including a performance based fee; another exit fee, which must be limited to cost recovery; buy and sell spreads, again limited to cost recovery; and a switching fee, also limited to cost recovery. All the fees charged for a MySuper product must be able to be included under those standard descriptions. That will help members, employers and market analysts make direct comparisons—apples with apples—of MySuper products based on the actual fees paid.
The bill requires that in any performance based fee arrangement with a fund manager in respect to assets of the MySuper product, trustees have to include measurement of performance on an after-tax basis, a reduced base fee that reflects the potential gains the investment manager receives from performance based fees, and provisions for the adjustment of the performance based fee to recoup underperformance.
Trustees wanting to offer a MySuper product will be required to hold a specific licence issued by APRA. All APRA regulated funds will be required to offer life and total and permanent disability cover on an opt-out basis, and would consult on implementation. Trustees must at a minimum allow members to opt-out of life and total and permanent disability insurance within 90 days of the member joining a fund, or on each anniversary of the member joining the fund. That is important because we do know of instances in which members are being both under-insured and on occasion over-insured, by being defaulted into insurance options that they would not choose if they were not the default products. Members must be able to increase or decrease their insurance cover without having to leave MySuper product. In this sense we have unbundled the insurance and retirement adequacy components of superannuation, ensuring that individuals can make a choice of the right investment strategies and the right insurance options for them.
Those opposite, as has traditionally been the case, have taken a raft of different positions on superannuation. When Labor introduced universal superannuation in the early 1990, the opposition said it would be a bust to business. It said that businesses would never be able to sustain the cost of superannuation. That was wrong then and the coalition’s opposition to superannuation is again wrong now.
The history of superannuation is that Labor universalises it and the coalition are unwilling to extend those increases. In 1996 we saw the Howard government block the planned increase of the superannuation contributions. On 23 March 2012 we saw the Leader of the Opposition say, ‘Well, we strongly oppose the superannuation increase. We have always as a coalition been against compulsory superannuation increases.’ The Leader of the Opposition now appears to be saying that if the coalition were to come to office they would continue the increases in superannuation. It is quite unclear what those opposite think about superannuation. But they ought to think first and foremost about the interests of retirement adequacy for Australians. Those opposite, as is the case for all members of this place elected after 2004, receive 15 per cent superannuation contributions. So, 15 per cent is appropriate for them, but somehow they believe that for their constituents nine per cent will do. We do not believe that. We believe that 12 per cent of earnings ought to be the bare minimum that Australians put into superannuation, because that is appropriate to maintain retirement adequacy.
In his opposition to compulsory superannuation, the Leader of the Opposition faces the challenge that he intends to repeal the mining tax, which funds the increase in compulsory superannuation. Yes, superannuation comes from earnings, but because it is taxed concessionally each additional percentage point of universal superannuation costs the government about a billion dollars. So, increasing compulsory superannuation does have a budgetary impact through forgone taxation, and those opposite are going to have to identify where the money is coming from if they support the increase from nine to 12 per cent, as they should.
We on this side of the House are proud to be the party of superannuation. We are proud to be the party that will see the superannuation system grow to $6 trillion by 2035. And in these reforms we are recognising the new insights in behavioural economics, which demonstrate that defaults must be great because most Australians do not spend a great deal of time focusing on their choice of fund and their choice of investment strategy.
We need higher superannuation contribution rates, from nine to 12 per cent, but, complementing that, we need a MySuper product, flowing from the work of the Cooper review, that ensures Australians get the best deal, have the lowest fees and the highest returns, because that is how we will ensure a dignified retirement.