SYDNEY - 9 May 2013: The whole structure of modern society increasingly relies on human actors that are willing to engage in markets and make choices. The concept of the ‘financial citizen’ is particularly relevant in the superannuation industry, where people who fail to engage or assume responsibility are at risk of being left behind or exploited. [i] Choice, whether we like it or not, plays a number of key roles in the superannuation system.

Libertarians laud choice.  The freedom to choose between alternate courses of action is a fundamental element of individual empowerment and self-realisation.  It also, as von Hayek argued, has the potential to bring a form of ‘synaptic’ wisdom to a system. Locally-informed and individually motivated actors have a granular appreciation of the opportunities and risks available to them and can harness, or avoid, those opportunities and risks in a way that a centrally-controlling authority, however expert, might not.

The provision of choice within the superannuation system has expanded rapidly over the past two decades.  Members get to nominate which fund their contributions are directed towards and, in most cases, they can choose the investment strategy that applied to those contributions[ii].  That has inspired questions about financial literacy[iii], and accountability when things don’t quite work out.[iv]  What is often overlooked is that to a large extent an individual’s ability to make choices regarding their superannuation is created and influenced by decisions made elsewhere in the system. Put simply, people are only able to make decisions within the confines of an existing regulatory and institutional framework. 

To appreciate the nature of ‘choice’ in the superannuation industry, it is necessary to acknowledge the significance of decisions made at a policy level that permit and shape individual choice. As an obvious example of this, the ability of an individual to choose from a menu of investment strategies is predicated on the fact that the  options available to the individual have already been ‘chosen’ by the trustee of the fund.   That trustee is in turn subject to duties of care, skill and diligence.[v]  Unlike a convenience store in which the shop owner owes no liability for ensuring that the product is safe or even true to label, the trustee of a superannuation fund must, at a minimum, conduct due diligence research and ongoing monitoring of all options.  The trustee will not ordinarily be liable if the member makes an improvident choice, but it does have an obligation itself to choose prudently the options it makes available.  The regulatory scheme thus indirectly conditions the choices that are made available.[vi]

Recognition of this multi-tiered ‘choice architecture’ has been growing in recent times. The Cooper Review expressly crafted its recommendations in those terms,[vii] especially in relation to the MySuper product now positioned as the default strategy in the system. This takes the notion of choice to a higher ‘meta’ level even than the choices already described.  The choice to create the MySuper product regime was a political one, born out of frustration that the competitive pressures one might expect to see in a contested market were not driving efficiencies in the superannuation system.[viii]  A plain vanilla product designed to accommodate a generic set of member needs would both address some of the over-engineering of default superannuation products and, crucially, provide a highly visible benchmark for cost and investment performance for the system as a whole.  This was not a choice made by individuals in the sense that a member makes a choice between different investment options, funds or even rates of contribution.  Rather it is a choice made by individuals in combination as part of a broader political process, a process in which the voice of the consumer was largely susurrant and at times altogether inaudible against the clamour of interest groups and professional associations.

So despite growing emphasis on personal engagement in the superannuation system, it is clear that the concept of ‘choice’ in superannuation extends beyond simply deciding between funds or investment strategy, and extends to the political and regulatory processes that enable institutions to offer choice in the first place. The role and value of individual participation in the superannuation system can only be properly understood when viewed in the context of this broader framework.

An earlier, longer version of this paper was presented to the 18^th Annual Colloquium of Superannuation Researchers.  The author would like to acknowledge the assistance of Andrew O’Connor in preparing this version.