Portability of Superannuation Balances

ver the last two decades the Australian financial system has experienced substantial deregulation, but the superannuation sector has run counter to this overall trend. While the superannuation sector has become a major segment of the financial system, this growth has been the result of compulsion, not choice by economic agents. There are two forms of compulsory contributions to superannuation. The first is award superannuation, under which employers are required to contribute three per cent of wages to a superannuation fund specified in the award. The second is the Superannuation Guarantee, under which employers are required to pay a specified proportion of salary, currently nine per cent, to a superannuation fund of their choice. Despite being compelled to invest in superannuation, employees have no effective choice about which fund is to receive their contributions, and no choice about whether to retain accumulated balances in the original fund. Some time ago the Commonwealth government announced a new policy of allowing members of superannuation funds to have unrestricted choice on portability of accumulated balances in superannuation funds, and published the necessary regulations under the Superannuation Industry Supervision Act (SIS Act). The proposed date under which these were to become effective was July 2004, but these regulations were disallowed by the Senate in September 2003. In this paper we argue that the resulting ongoing lack of choice violates the fundamental principle of consumer sovereignty, under which it is held that consumers are the best judges of their own welfare and ought to be able to consume anything they can afford to buy; and similarly, in the investment area, that individuals are the best judges of their own welfare, and so should be able to place their retirement savings in any product they choose. Quite apart from our value judgment that consumer sovereignty is preferable to paternalism, we argue that the lack of choice of both initial and subsequent superannuation fund leads to a lack of competition in this sector. Trustees of superannuation funds are assured of both a flow of captive contributions and stability of accumulated balances, which removes incentives to operate the funds at lowest cost, much less in line with member preferences.