CANBERRA, Australia - The federal government introduced legislation that would give workers a choice of superannuation funds in which their employers must make contributions for them.
The legislation, if passed, would apply to every employer.
The bill now in Parliament would require employers to make compulsory pension contributions for workers to one of four types of funds: an in-house corporate fund (a defined benefit or defined contribution plan); a publicly offered fund (similar to a mutual fund); an industry fund (roughly equivalent to a U.S. multiemployer plan); and a retirement savings account (similar to an IRA).
Legislation also provides for a default arrangement: If employees make no decisions about fund types, then contributions automatically would go into employers' existing funds.
The bill is likely to pass sometime in the first half of the year, although it may still be amended. Once passed, the introduction of choice would take effect July 1 for new employees and one year later for current workers.
Employers now must put an amount equal to 6% of each employee's salary into the existing schemes - a figure that will rise gradually to 9% by 2001.
The legislation covers only new contributions. Existing balances would not be involved until at least 2000 because of fears that this new plan could cause too much instability among funds.
Experts say the government has launched this initiative to spur competition among suppliers of superannuation products. It's believed that more competition would trim overall costs of providing superannuation benefits.
However, employers and financial services groups lobbied the government for changes to the original proposals in the government's May budget. The new legislation includes a lessening of the duties and responsibilities of employers and an option to allow employers to nominate one supplier or provider of funds. (The initial proposal would have forced employers to deal with several potential suppliers.)
The current proposal covers only a potential of A$25 billion to A$30 billion a year of contributions made to pension funds initially. The industry believes a large percentage of existing members might not switch to new funds.
The choices to be offered, according to the plan:
Public offer funds, which are operated by most financial service providers and typically offer a wide range of investment approaches. These are mutual funds, similar to the funds Chile has set up, and are managed by outside providers.
Corporate funds, which may be defined benefit in nature, but which are now almost exclusively defined contribution or accumulation funds.
Industry funds, which are multiemployer funds, often begun or sponsored by trade unions. They have equal union and employer representation on their boards.
Retirement savings accounts. These were launched in 1996 as a low-cost, low-risk savings alternative. They usually are capital guaranteed by banks or life insurance companies or are capital stable look-alike funds run by other managers.
burden and advantage
From employers' perspective, the introduction of choice might prove burdensome. If employees are offered choices from at least four funds, suppliers and money managers will need to market to them through quasi-prospectuses required under law. In turn, employers would have to collect and distribute these prospectuses and make sure they remain factually current. All of this work could prove burdensome - especially for smaller and midsized employers - some experts believe.
However, major companies with existing, well-established corporate funds would have an advantage over their smaller brethren: they could offer unlimited choice of funds while also subtly promoting their in-house funds. Because they would not have to provide information on alternative funds beyond the required four, such employers might find many of their workers remain with or select their funds.
The legislation would allow employers and employees to reach a workplace agreement on which fund an employee can choose. This can be a negotiated or an informal agreement and can involve a union. Where this exists, an employer would have to offer only one kind of fund to affected employees.
Managers still uncertain
From money managers' perspective, uncertainty still exists over how this will shake out, and most major financial groups are shaping their strategies to address the changes.
In many cases, it appears the potential choice could favor such major players as AMP Society, Sydney; National Mutual, Melbourne; MLC Financial Services, Sydney; Colonial Group, Melbourne; and a few of the better-known fund managers, such as BT Australia, Sydney.
These groups all have major investments in administration and computer systems, major slices of the wholesale or retail investment market, or significant sales forces.
Apart from firms with U.S. parents, such as BT Australia and J.P. Morgan Investment Management Australia, which have local funds under management, many U.S.-based managers might be limited to supplying international equity investment for Australian funds, said Richard Darke, managing director of Fidelity Investments Australia in Sydney. The consensus is that the initial stages may favor local life insurers and money managers.
But officials at Fidelity (with A$800 million under management, mainly in international equities) and Vanguard Investments Australia (A$1.2 billion of wholesale funds under management) believe they can play a role in education and communication with members of funds.
Meanwhile, J.P. Morgan Investment, Melbourne, is gearing up to launch a retail service in 1998. Others, such as Merrill Lynch Australia, Sydney, are rumored to be considering retail acquisitions.