Faster isn’t always better. Our super system needs ‘speed bumps’
Businesses almost always assume that if you can do something faster, it will be better for customers. Whether it’s the ability to order online groceries that arrive the same day, or banks claiming they can approve some home loans in 10 minutes, we’re constantly told that faster is best.
Of course, most of us don’t need a 10-minute mortgage, but that’s beside the point. Companies compete to be the fastest to beat their rivals, and economists will often tell you that competition is a great thing.
But every now and then you come across examples where faster doesn’t necessarily mean better, and in fact competition can have some adverse effects. This latest example concerns us all because it affects the $4.5 trillion retirement industry that was established to protect our retirement savings.
Deputy Treasurer and Financial Services Minister Daniel Mulino said last week that as part of a plan to strengthen consumer protections, the federal government could consider throwing “sand in the wheels” on the regime that allows people to switch super.
What could he mean? Why would you want to do something that would slow down people’s ability to move their own money?
And wouldn’t that go against the logic of making it generally easier for people to move their retirement funds around as they see fit, as has been the case since 2005 when people were allowed to choose their own funds?
Context is important here. Mulino made the comments as he described the government’s efforts to better protect supermembers from disasters like the collapsed schemes like Shield and First Guardian. These were two managed investment schemes in which nearly 12,000 Australians invested and losses of more than $1 billion.
As well as causing huge harm to victims, these collapses shine a light on the risks still lurking in our pensions system, despite past attempts to clean it up, such as the 2018 royal commission into financial abuse.
One of regulators’ main concerns is that in many cases people become involved in these programs through “lead generators” who attract customers through a variety of means, including social media ads offering super health checks.
Super Consumers Australia chief executive Xavier O’Halloran says about 90 per cent of people investing in Shield and First Guardian come through such operators. Mulino also called for “creating high pressure that pushes people to shift retirement savings into higher-risk environments and lower-quality products like managed investment plans.”
Mulino’s comment about “putting sand on the wheels” should be seen in this context; Giving people more time to avoid being rushed by high-pressure sales tactics.
What would such sand look like? The government has not made any decision but may introduce a mandatory waiting period for switching super funds, compared to current rules which require your fund to transfer the money within three days if you decide to leave. Giving people more time to cool down seems reasonable enough, but it’s hardly a game changer.
But how does this square with the general financial tips you often read about the need to shop around and consider switching your bank, insurance company or indeed your retirement fund?
Mulino, who has a PhD in economics, says there is a balance between protecting people’s right to choose where to put their retirement funds and ensuring people are not dragged into such a complex, long-term decision. “I think it’s very risky and alarming for someone to lose their entire life savings after a half-hour or hour-long conversation,” he said.
Mulino draws parallels with the fight against fraud, where there have been recent developments.
In this battle, banks have reintroduced “friction” or “speed bumps” into electronic payments, such as adding extra warnings before allowing someone to make a seemingly risky payment. Banks did this because the near-instantaneous money transfers that started in 2018 had an obvious downside: They made it much harder to get the money back if a customer was fooled by a fraudster. Another case where faster is not always better.
More generally, there is a philosophical point to be made about how well competition works in the superworld. Economists often see more competition as the solution to all kinds of problems, but it’s not that simple. Of course, a market without competition can lead to rip-offs and poor service.
But the textbook version of the concept of “perfect competition” assumes that consumers rationally engage with different options in the market to do what is best for them, and in supercompetition this is often not the case. In fact, many people are notoriously cut off from their pensions because of money they have had to save and haven’t touched for decades. “I think retirement and competition will always be uneasy bedfellows,” says O’Halloran.
For all these reasons – especially the fact that the super sector is essential – it is vital that governments have policies in place to protect the interests of consumers in the super sector, rather than leaving it to market forces.
The fact that many of us do not care deeply about our pension rights is why regimes such as MySuper exist; low-cost super program that puts people in a no-frills account if they don’t make an active choice. That’s why the worst-performing funds are named and shamed by annual performance tests.
Mulino’s question is: What else should the government do to make the ever-growing super pool less vulnerable to risks such as “high-pressure lead generation”?
One option is to overcome predatory “lead generation,” which frankly seems like a no-brainer.
O’Halloran is also pushing for the “performance test” to be extended to the post-retirement phase, when people have more money in their accounts.
Giving consumers choice about their super fund is important but not enough on its own.
Company police have also filed several lawsuits against trustees and other players they believe bear some responsibility for the collapse of Shield and First Guardian.
There is also a heated debate about compensation. Victims of bad financial advice can claim compensation of up to $150,000 in some cases under a scheme set up by the government following the banking royal commission. However, the cost of this plan has increased greatly and is expected to increase even more as a result of the collapse of the Shield and the First Guardian.
Last week Mulino announced a plan to spread this cost across the entire financial services sector, including super funds, which must invest $6 million for 2025-26. Super funds are particularly unhappy about having to pay this increased cost, and designing a sustainable program is another challenge facing Mulino.
The reality is that super money is an enormous pool of money and will inevitably continue to be a target for people looking for a cut, including those who use high-pressure tactics to steer consumers into risky products.
Giving consumers choice about their super fund is important but not enough on its own. At the very least, the government should look at how to expand the crackdown on super spruikers and take steps to ensure that decisions that could affect people’s life savings are not rushed.
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Clancy Yeates is deputy business editor. He covered banking and financial services and was previously a national business correspondent in the Canberra bureau.Connect with: excitement or email.
