ALI MOORE:
Have you ever sat down trying to decide where to put your super, tried to work out where you might get the best deal or where you'll be charged the least fees? Have you struggled to think about just where the best place is to put your money? And if you have and you've ended up all confused, you're not the only one.
New research shows that almost one in two Australians believe financial investments and superannuation are too complicated to understand properly. And the man behind the research is the Australia Institute's Josh Fear, who joins me in the studio.
Good morning, Josh.
JOSH FEAR:
Good morning.
ALI MOORE:
And also joining us to respond and talk about how we can resolve the problem is the Minister for Superannuation, Nick Sherry.
Good morning, Minister.
NICK SHERRY:
Good morning and good morning to your listeners.
ALI MOORE:
Well, Josh, let's start with you. What exactly have you found? It's just about too much choice, or does it go further than that?
JOSH FEAR:
Well, for a start, not everyone has a problem with having too much choice. But there's a fair proportion of people out there who experience what we've called choice overload. Around four in 10 is our estimate.
And too much choice occurs where people don't necessarily have a preference for one option over another or where they lack the specialist expertise to make an informed decision.
ALI MOORE:
Because isn't the issue not so much that there are so many different options, but just that you can't work out the difference between the options and which one - it's not clear enough which one is the better one for you.
JOSH FEAR:
Well, exactly, and if anyone's received a product disclosure statement in the mail, for example, recently, they'll know that the information you want is buried underneath mountains of text that just sounds like legal jargon. And our research found that people just simply don't read that.
ALI MOORE:
So what were you looking at? You were looking at super. What else?
JOSH FEAR:
Superannuation, private health insurance, retirement investments, whether they be super or, you know, managed funds or - and also investing in the share market.
And we found that - I mean, we're now known as a nation of share owners. The ownership society is a phrase that's been championed in recent years. But we found that one in three share owners, in fact, didn't buy their shares, they received it as a result of a, you know, a corporate restructure or maybe even a gift from their parents.
ALI MOORE:
Like an AMP or something like that when they…
JOSH FEAR:
Exactly. So they didn't choose to buy shares. And we found that people who didn't choose to buy their shares they ended up with, they're actually less confident in their financial future. They don't really understand what they've got, what they need to do with it.
ALI MOORE:
So Josh, did you - if people don't read this stuff because they simply can't find what they want, what's happening? Are they making the wrong decisions? Are they losing money? Are they worse off?
JOSH FEAR:
We found that there's a range of different types of behaviour that you could call irrational when it comes to financial - one's personal financial affairs. For example, not planning properly, relying too much on advertising for information rather than objective information.
ALI MOORE:
Because it's easier, it's simpler.
JOSH FEAR:
Yeah, and it's in your face. Not making decisions systematically, making them arbitrarily, basically, and not seeking out the right information in the first place.
And one of the biggest forms irrational behaviour, if you want to call it that, is procrastination. Procrastination in financial affairs is extremely common. And we found that - our estimate is that one in three people are serial procrastinators, so they regularly put off decisions that they know they need to make, action they know they need to take, but it's not important on the day to actually get around to doing something about it.
ALI MOORE:
Because it's too hard.
JOSH FEAR:
It's too hard, it's too boring, and they've got better things to do.
ALI MOORE:
But they still watch their wallets, [laughs] and that's the ultimate irony, isn't it?
JOSH FEAR:
Yeah, the real challenge is to find a way through all this maze because if - you don't want to compel people too much, but at the same time, a lot of people are making choices that aren't in their own best interests.
ALI MOORE:
Nick Sherry, if I can come to you now. Did the results of this survey surprise you?
NICK SHERRY:
I thought you'd ask me that. No, not in the slightest, I have to say. From 20 years of experience in superannuation, and not just dealing with the industry as such, but with individuals within superannuation, there is a considerable proportion who find it very confusing, very difficult to understand and very difficult to make decisions.
And this is true worldwide. I mean, I don't think this research is unique to Australia, so it doesn't surprise me in the slightest.
ALI MOORE:
And it's not just a comment, is it, on how financially literate we are, because I know - I normally present a program called Lateline Business and we have a massive audience of people who are, just for want of a better word, a mum-and-dad investor and they're fascinated, and they do watch their, you know, watch their stocks and they're really interested in how companies go.
But that is completely different to getting a 20-page disclosure document related to their superannuation, should they wish to, you know, change funds or whatever. I mean, it doesn't necessarily - financial literacy and the gumph [sic] that goes with this stuff, they don't necessarily correlate, do they?
NICK SHERRY:
Well, that's right, and I think one of the critical differences for superannuation is it's compulsory. And of course, the irony of the discussion this morning is that a former Labor Government, in fact, 20 years ago, made it compulsory because the majority of people do nothing, they don't save for retirement. And again, that's a worldwide issue.
So having made it compulsory, I think the next question to ask is: what is a reasonable level of choice to offer and how do we assist people to make an informed choice, and if they don't make an informed choice and there's a decision required, what is the default, if you like? And the classic in superannuation is that - and we know 20 years on today that 80 per cent, eight out of 10 Australians, don't make an investment selection. The trustees have selected a default investment, which is, in our case, I think very well designed.
ALI MOORE:
But it's like portable super. Since that's been introduced, not a lot of people have chosen to move their super. They'd rather just leave it where it is.
NICK SHERRY:
That's right, there's inertia. I think a lot of people have great difficulty - and I agree with this - reading disclosure documents. I mean, one of the plans - and I've been a long-term critic of the very complex, lengthy disclosure documents we have in Australia. People generally are scared [clears throat] - excuse me - people are scared by a document that's 40, 50, 100 pages long. What they need is a simple document that gives them the key information on which they may make an informed decision.
But the classic in superannuation is lost superannuation. There's over six million lost accounts with $12 billion. Now…
ALI MOORE:
A lot of them young people who have moved on job after job after job and just forget.
NICK SHERRY:
True, but they can, they have the legal right to roll it together, but they've got to go and find the fund, they've got to fill in a form or forms, and they've got to provide identification.
So you've got millions of people who we know won't make a decision because the red tape, it's just too difficult. So that's a problem of such size it needs a default solution.
So again, we plan to introduce an auto-rolling together so if a declared lost account is sitting there for more than two years, it will be automatically rolled together for you so the job is done for you, you don't…
ALI MOORE:
What, they find where the rest of your super is?
NICK SHERRY:
What will happen is we'll use tax file numbers and automatically roll together the account into your last account. And then if you're an individual and you don't want that to happen - and millions of Australians are not doing it - you opt out of the auto-rolling together.
So I think there's a range of smart tools we can use much more effectively, much simpler, sharper disclosure documentation, improve defaults. But I also think we need to recognise that there are a significant group of people in the community who are simply not interested in making what for them are complex decisions. They're grappling with keeping their job, putting the kids through school, you know, the health system.
ALI MOORE:
And this is not uppermost in their mind.
You're listening to the Minister for Superannuation, Nick Sherry. And also with me in the studio is the Australia Institute's Josh Fear. We're talking about the complexity of financial products at 16 minutes past nine.
I wonder what you think and how much trouble you've had when you've sat down and looked at your super or looked at potential investments, or for that matter, even looked at your mobile phone account and whether or not you could get a better deal there. My number is 1300 222 774.
John from Laverton, good morning.
CALLER JOHN:
Good morning. I'd like to point this question to the Minister, if I may. I would like to know why, seeing that we don't have to pay tax on earnings on super even as an allocated pension, why couldn't I just take mine out of the fund that I've got it in so I don't have to pay the fees and charges, don't have to go - I shouldn't have to go - I don't see I should have to go to an accountant or a solicitor to make my own super. Why can't I just put it into a term deposit, say, at the Commonwealth Bank or somewhere like that…
ALI MOORE:
John, how old are you? Can I just interrupt and ask how old you are?
CALLER JOHN:
I'm 66.
ALI MOORE:
Well, at your age, he could, couldn't he, Minister?
CALLER JOHN:
No, hang on, hang on. Without paying fees I'm talking about, without having to go to a solicitor. Just put it in there and declare it as superannuation or an allocated pension, take my six per cent per month and don't have to pay all these hanger-ons the money that they require?
ALI MOORE:
John, let the Minister respond. Minister?
NICK SHERRY:
Well, superannuation is tax advantaged. The savings are tax advantaged within a superannuation structure, so there is concessions on contributions on fund earnings within a superannuation system, and that's part and parcel of a retirement income system. If you save that money outside the superannuation system…
CALLER JOHN:
I want it in the superannuation system.
NICK SHERRY:
Yeah, but what you're proposing is to transfer it out into some sort of…
ALI MOORE:
Outside the system.
NICK SHERRY:
…cash deposit, outside the system where the same tax concessions don't apply.
ALI MOORE:
Can I just cross to Josh for a minute because I'm interested to know what you came up with in terms of how to resolve the issue, because, Minister, you say that one of the answers is clearer documentation, et cetera, but how do you provide clearer documentation - this is such a long-running argument - when at the same time, you've got all these regulatory issues and all these other, you know, complexities of, you know, acknowledgements and things that have to be, you know, laid out for people. How do you marry that with simplicity?
JOSH FEAR:
Well, we made a recommendation recently - not in this report but in a recent report about the market for credit, consumer credit - that monthly credit card statements could be, could include compulsory information like how much interest you've paid over the last 12 months, or how long it will take to pay off the credit card if you only make the minimum repayment.
So that's information that's really important that financial institutions don't currently provide. So you could kind of shift that principle over to something like superannuation where the really critical information is up front.
ALI MOORE:
Yeah, so the first page is what you really want to know, what your fees are, what your returns are and how that is annualised.
NICK SHERRY:
We've actually started a lot of work on this, Ali, and I've been really interested in this for a long period of time. You really do have to find what are the key pieces of information people need to make an informed decision, convey it very simply without legal jargon. And to do that you've got to have standard formatting, simplified, standard formatting of documents.
One of the great difficulties at the moment is if you don't have that and have it in regulation or statute, then a document goes off to a legal firm and lawyers will do what they're supposed to do. There's a whole series of legal caveats, which is why you've got very lengthy documents. So you've got to confer - you've got to have a very simple, standardised document, depending on the product, you've got to confer legal immunity on the issuer that if they conform with that simple, standardised information…
ALI MOORE:
They're covered.
NICK SHERRY:
…they're covered and protected.
ALI MOORE:
That's the point, I think, that Kevin from Ballarat, is that what you found?
CALLER KEVIN:
Well, what I've found is Josh's study is true and correct. I mean, as your position in life changes - and I've now got my own super fund, but to retrieve money from funds from a previous employment is near on impossible. I mean, it's something the Minister should and needs to address. People are lethargic because of the red tape. Six months in one fund to get money out to put it back into your own fund, it's ridiculous and needs to be addressed not with rhetoric but with action.
NICK SHERRY:
Well, we are going to address it. I mean, we've only just been elected to government and I've long argued auto-rolling together of lost accounts. And individuals shouldn't have to go through all the red tape, the form filling, with over six million lost accounts. We can roll most of those together automatically using TFN numbers. The individual should not have to do that if they don't want to do it.
ALI MOORE:
So how quickly will you introduce that?
NICK SHERRY:
I estimate by the end of next calendar year. I mean, there's a whole range of administrative issues and legal issues to get right. We're not going to rush it. But it will be done.
ALI MOORE:
Now, in terms of - I mean, because this is wider than just super. But I know that the former head of the ANZ Bank came up with a proposal where you number rate financial products, so when you're looking at risk, et cetera, you get a sort of one to five rating. What about something like that?
NICK SHERRY:
Great idea. I mean…
ALI MOORE:
You'd look at it?
NICK SHERRY:
Yeah, look, I think what are the key informations that individuals need when they look at any form of financial investment, purchase of any product? One of them is level of risk. And you can describe risk all you like, and I mean, we've seen some recent fallout in terms of the stock market.
Unfortunately, people, I think to some extent, have forgotten risk but also find it very difficult to understand the degree of risk. So a simple five-star rating. You know, if it's five out of five, there's absolutely no risk at all, and then four, three, two, one.
And I think that's conceptually something people would relate to and understand and I…
ALI MOORE:
But could you do it though?
NICK SHERRY:
Oh, yes, you can do it.
ALI MOORE:
But who'd be responsible for giving a rating, because that would be a highly contentious thing?
NICK SHERRY:
Well, obviously the ratings and research houses who rate products, and then the regulator itself would have to ensure that the parameters they set are accurate. But again, that's part of the work we're doing on simplifying and standardising financial disclosure products.
ALI MOORE:
Well, will any of that help the situation when we hear now about - we've had the collapse of a couple of brokers, we've got the whole Opes Prime situation, and the question of just how much people knew in terms of who had beneficial ownership of shares, et cetera, I mean, even that documentation for people who, if they're margin lending, they're obviously relatively sophisticated investors. It doesn't matter what end of the scale you're at, there can still be confusion.
NICK SHERRY:
Well, I'd be interested to know ultimately how many people actually read the disclosure documents and understood it. I mean, as I've argued for years, our disclosure documents are Latin-like. I mean, they may as well be written in Latin because people just can't understand then.
ALI MOORE:
Well, as you say, you're new to government. If we come back to you in 12 months' time, do you reckon you might have helped to fix that problem?
NICK SHERRY:
Twelve months to two years, yes. It's a major task of work for us, which we've actually begun, simplification of - and standardisation of disclosure documents across the board.
ALI MOORE:
And Josh, do you think that that - you can get simpler documents and even, probably more importantly with your research, if you can get the key at the top of the first page?
JOSH FEAR:
That's definitely one thing. But if I could take this back to a non-financial issue, just quickly, which is about basic literacy and numeracy. So there's OECD statistics which are quite disturbing, showing that between one in five and as much as one in two Australians are functionally innumerate, so they can't necessarily make sense of financial documentation.
ALI MOORE:
How do you address that?
JOSH FEAR:
Well, financial literacy is directly related, I think, to basic literacy. So sustained, long-term investment in public education and in adult education, I think, can go a long way to address these kinds of problems.
ALI MOORE:
So it really does go back to core competencies, if you can call it that. I mean, it's as basic as what you learn at school and carrying it on from there.
NICK SHERRY:
Again, I totally agree with Josh. I mean, I've always been aware one in five Australians is functionally illiterate. They can't read through and understand a map, telephone book. And we've got to understand that we've got different issues for different people.
I mean, I think one of the most important things in schools is basic budgeting, basic budgeting, credit card debt, cost of telephones, working out an expenses revenue little - if we could just get those basics right, it would go a long way.
ALI MOORE:
It would be a very good start.
Gentlemen, thank you very much for joining me. Nick Sherry, the Minister for Superannuation and Josh Fear from the Australia Institute.
And I know we've had an enormous number of calls and I'll take them a little later in the program. But thank you very much for your time this morning.
NICK SHERRY:
Thanks, Ali.