one in three Australians have ever heard and understood of the concept of risk/return trade-off and that two in five Australians have ever heard of the concept of diversification. Admitted levels of financial literacy levels in Australia are low, particularly amongst certain cohorts, including the young and low income earners. Estimates of financial literacy based on answers to basic financial questions are arguably considerably lower. When choosing a superannuation fund basic concepts of risk and return trade-offs and diversification are required. The evidence is clear that far too many Australians do not have the required levels of financial literacy to choose a superannuation fund that is in their best interests. The work of Delpachitra and Schumann suggests members of default funds see themselves as consumers not investors and lack the ability or time to monitor investments in a way required by a system that assumes a sophisticated investor. The trust placed in defaults The actual number of default fund members who consciously choose to adopt a default fund (and are therefore invisible as choice members) is unknown. There is consensus that the vast bulk of Australian employees fail to actively exercise their right to choose a superannuation fund and as a consequence there is a need for an efficient process for the allocation of members to funds. The allocation process should be designed to operate in the best interests of both members and society. It is submitted that there is a considerable level of trust in the default process by Australian employees. It is suggested that there is a public assumption that mandated superannuation contributions will be made to a suitable fund. Notwithstanding the lack of fiduciary responsibilities held by employers to employees within the Australian jurisdiction, there is an assumption that there is a sufficient level of regulatory control and oversight. Whilst banking and insurance scandals may have undermined the public’s confidence in the financial system’s ability or desire to operate in their best interests, this is not necessarily the case in the superannuation environment, particularly regarding not-for-profit public sector, corporate and industry funds. Many consumers trust the default fund they are placed in and have a level of confidence that within such a system there will be enhanced consumer protections and standards. Internal research by industry funds consistently demonstrates a high level of trust in default funds that surveyed members have been allocated to.
one in three Australians have ever heard and understood of the concept of risk/return trade-off and that two in five Australians have ever heard of the concept of diversification. Admitted levels of financial literacy levels in Australia are low, particularly amongst certain cohorts, including the young and low income earners. Estimates of financial literacy based on answers to basic financial questions are arguably considerably lower. When choosing a superannuation fund basic concepts of risk and return trade-offs and diversification are required. The evidence is clear that far too many Australians do not have the required levels of financial literacy to choose a superannuation fund that is in their best interests. The work of Delpachitra and Schumann suggests members of default funds see themselves as consumers not investors and lack the ability or time to monitor investments in a way required by a system that assumes a sophisticated investor. The trust placed in defaults The actual number of default fund members who consciously choose to adopt a default fund (and are therefore invisible as choice members) is unknown. There is consensus that the vast bulk of Australian employees fail to actively exercise their right to choose a superannuation fund and as a consequence there is a need for an efficient process for the allocation of members to funds. The allocation process should be designed to operate in the best interests of both members and society. It is submitted that there is a considerable level of trust in the default process by Australian employees. It is suggested that there is a public assumption that mandated superannuation contributions will be made to a suitable fund. Notwithstanding the lack of fiduciary responsibilities held by employers to employees within the Australian jurisdiction, there is an assumption that there is a sufficient level of regulatory control and oversight. Whilst banking and insurance scandals may have undermined the public’s confidence in the financial system’s ability or desire to operate in their best interests, this is not necessarily the case in the superannuation environment, particularly regarding not-for-profit public sector, corporate and industry funds. Many consumers trust the default fund they are placed in and have a level of confidence that within such a system there will be enhanced consumer protections and standards. Internal research by industry funds consistently demonstrates a high level of trust in default funds that surveyed members have been allocated to.