CATRIONA LOWE:
Good morning everybody, and welcome. Welcome in particular to the Minister for Superannuation and Corporate Law, Senator Nick Sherry, to the Australia Institute research fellow, Josh Fear, ladies and gentlemen.
As we've really just been discussing, it's a great pleasure for Consumer Action to host the launch of the Australia Institute report, Choice Overload: Australians coping with financial decisions, by Josh Fear. As we know in modern markets consumers assume ever greater levels of risk and complexity in their financial decision-making.
Decisions consumers make now or don't make can have an effect on their financial security and, indeed, their wellbeing, for many years to come, potentially a lifetime in some cases.
And Consumer Action sees the consequences of some of those choices every day, in the cases that come through our door from consumers who are experiencing significant financial difficulty as a result of their decision-making.
In this context it is clearly critical to have a sound understanding of how consumers make their decisions and what is effective in assisting consumers to make their decisions. Choice Overload is an important contribution to this understanding. It joins a small but growing body of work that focuses on how consumers actually behave in the context of markets. Findings in the report include the need to ensure that consumers can choose not to choose where greater choice can be shown to have detrimental consequences and the importance of independent and comparable information for consumers and, importantly, the importance to evaluate the effectiveness of initiatives that may be designed to help consumers in this area.
These matters are particularly relevant in the context of the release of the recent Productivity Commission study into Australia's consumer policy framework, as well as a number of the Minister's own initiatives around, for example, the simplification of product disclosure statements.
Consumer Action has contributed and will continue to contribute to both of these processes and takes an ongoing interest in the Government's work in this area. We believe the recommendations of Choice Overload make an important contribution and place some significant signposts for government in their quest to improve consumers' ability to negotiate this market.
It therefore gives me great pleasure to introduce the Minister for Superannuation and Corporate Law, Senator Nick Sherry, to launch the report.
NICK SHERRY:
Thanks very much for the introduction and my thanks to the Australia Institute, to Josh, who'll say a few words shortly, and my thanks to the Consumer Law Action Centre for inviting me here to officially launch this paper, although we've had some considerable discussion on the radio this morning about the document.
I note the Australia Institute is an independent public policy research centre, funded by grants from philanthropic trusts, membership and commissioned research so as such this research was not commissioned by or sponsored by anyone with a commercial motive.
I welcome the Australia Institute paper Choice Overload: Australians making financial decisions. It's an important contribution to the ongoing debate about the difficulties that many Australians have in making informed decisions in what can be very, very complex financial decision-making in our - in our financial system.
The research highlights the need between financial literacy and good choices but also the importance of access to adequate comprehensible, readable product information.
As far as the Rudd Government is concerned, we identified the difficulty of reading many of the financial disclosure documents on which Australians do have to make decisions. They're far too lengthy, they're far too complex and those documents are critical for consumers to make informed decisions.
So we're committed to developing strong evidence-based policy and so it's fair to say the work of the Institute with similar bodies is of great interest to me personally and to the work that the Government has started to carry out in this area.
I was interested in the particular research because there is a coincidental link between this paper and some of our own thinking and initiatives that we have commenced work on.
Most people have had - have had the experience that the choice paper - Choice Overload paper highlights, that is at some point in their personal financial decision-making they are faced by an overwhelming choice, a lack of time, understanding or interest. It just becomes too hard and they put off making a decision or they make a bad decision.
The classic experiment, Iyengar and Lepper, 2000, it's referred to in the discussion paper where two groups of supermarket shoppers were given a different number of jam products to sample. The first group had six options, the second group had 24 to choose from. After tasting the jams nearly 30 per cent of those given a limited range of options ended up purchasing some jam. By contrast, a very small proportion, three per cent, of those who were given the extensive range - 24 options - only a very few actually made a purchase. They were literally put off by the choice options that were presented to them.
And again, I know from research in the United Kingdom when it comes to - to pension investment option selections identified in the Turner Commission report, they identified that any more than six or seven investment choice options actually repelled people. They found it too difficult to actually go ahead and make an informed decision.
Josh will go into greater detail, some of the research findings.
The paper notes that most people have to make financial decisions over the course of their lives, some of these choices are rewarding, bringing peace of mind and future prosperity, but for many they can be bewildering, particularly as financial products are very complicated and hard to understand.
As I've said earlier, one of the reasons in launching this paper today is we see a lot of links between it and the policies we're currently developing. Let me give you one example.
We've established the financial services working group and it's working to ensure that investors have access to simple, short, readable and comparable disclosure documents. So, for example, the first home saver account, that is the first project we're working on. It's a new product so let's get the disclosure simple and standardised and readable.
We've also commenced work on superannuation advice within a superannuation fund and also importantly the next priority will be margin loans, margin loans in the current market context where individuals do find it very difficult to - to read those documents, understand particularly levels of risk involved in making a margin loan.
And then the working group will go through every financial product. It will be a big - a big job but it's a job that is very, very necessary.
The other solution that I think we need to make much greater use of, as well as improving and simplifying disclosure documentation, is the use of default solutions. If individuals in great numbers find it difficult to make an informed decision and end up putting the decision off and making no decision, how then - how then is a solution provided to those individuals?
And there are two classic examples in superannuation. When an individual joins a particular super fund and super's been compulsory now for 80 years - sorry, for 20 years - we know that eight out of 10 Australians fail to select an investment option. There might be anywhere between six to 100 or 200 investment options. Individuals fail to make an investment option and yet that's very critical to the end level of savings in superannuation.
So what we have in superannuation is a default investment option and eight out of 10 Australians default. They don't make an active decision so their investment goes into a default which is designed by the trustees, in this case the trustees exercising their expert knowledge, and that works very, very well. It gives a good, long term rate of return and therefore individuals don't have to make an active selection.
So that's one existing solution. The other area where we intend to introduce a default solution is the area of lost superannuation accounts.
There are 6.1 lost accounts, 6.1 million lost accounts. That is, with 10 million, just over 10 million in the workforce, one in two Australian has a lost account somewhere and the 6.1 million lost accounts contain almost $12 billion - $12 billion that we know those millions of Australians will not receive by the time they get to retirement because it's lost.
Now, millions of Australians, they do have the right to consolidate and roll together these accounts but they fail to do so. Why do they fail to do so?
Because they have to identify the fund, identify the account, fill in the forms and provide the identification and many just give up. It's too hard. Inertia overcomes the decision-making.
So the Labor Government plans to introduce auto-rolling together so there'll be a default solution. For millions of Australians who do not roll together their accounts it will be done automatically for them using tax file numbers and they'll be reunited with their - with their lost superannuation account. If the individual does not want that to occur they can opt out so, again, a default solution but if they don't want it to happen, opts out.
And there are big advantages in this approach. We don't want $12 billion in lost superannuation. Ultimately it's eaten up in fees or it passes into government consolidated revenue. So that's another example.
So there are different solutions. There's a solution of improving financial literacy but that is a long, hard job to accomplish. It's very long and hard to accomplish.
There are simply many people who do not want to be involved in making complex financial decisions so you provide effective defaults where they don't want to do that, particularly in compulsory superannuation.
We make sure that the information individuals are given is sufficiently simple but deals in sufficient detail for individuals to make informed choices and informed selections and, of course, in some cases, of course, individuals may choose to utilise the services of an expert advisor or planner. So you need a range of options to overcome the sorts of issues that are identified in this particular paper.
So in closing, let me congratulate Josh in particular, the Australian Institute. This is very, very compelling work. It's work that is being carried out in parallel with some of the overseas research on what is known as behavioural economics, inertia, the difficulty that many individuals have to - have to confront in order to make informed decisions to maximise their wealth, in this case superannuation.
And it's very, very important that there are a range of different solutions to suit different circumstances of individuals. I acknowledge that there are a significant minority of people who are very competent and very happy to make decisions but we also have to make sure that a system provides a default where individuals do not want to make a choice. We shouldn't force choice on individuals if they don't want it, and where they do have those options to make selections, they are properly informed, with proper - proper disclosure documentation that contains the key elements of the decisions they make if they wish to do so.
So congratulations, Josh, congratulations to the Australian Institute.
First class piece of work and it will be a very useful reference point not just for the Government but for this ongoing debate about how to maximise the investment rate of return and interest of Australians, I think in a realistic way, a way that suits the individual circumstances of quite diverse groups of people in the community.
So well done and congratulations. Thanks.