Wednesday, June 08, 2005

Super choice - winners and losers

The retail investment press is full of articles about super choice these days. Depending on the ideological slant, they are either along the lines of "what a wonderful thing superannuation choice will be - it will give people the chance to choose something that suits them, and Occasionally, an article makes it in about insurance, and how important it is. They make me wonder what the impact of super choice is likely to be on my clients (mainly retail life insurers and fund managers).

Funds management first

First, the change is likely to be quite gradual, and very hard to disaggregate from all the noise that influences sales of investment and insurance products on a monthly basis. For savings products, it seems likely that anyone who relies on the corporate market (either through true wholesale products, or through the corporate mastertrust market) will gradually leak money. A true retail fund manager will likely pick up some (but not all) of that money. And the industry funds will definitely get some of it, but not the huge amounts that some big-end-of-town scaremongerers are suggesting.

The other winner is likely to be DIY funds (as seems to be the trend from pretty much every super change). Inertia, plus an existing corporate fund that they can't leave, is the main thing stopping many high income earners from going down that path. But super choice is likely to shake a few more of them loose.

Life insurance

The scary thing, though, is life insurance. Unlike the funds management side of super choice, it seems likely that super choice is likely to lead to lower levels of insurance over the longer term. Again, the process will be too gradual to disaggregate from the monthly and yearly sales figures.

But if you take your money away from a corporate super fund, wherever you put it is likely to have a lower level of minimum insurance than where you left. Most people find it hard to believe how much insurance they really should have (a rule of thumb is 10 times income - that seems like an awful lot of money to most people). So they'll take the minimum level, because it's cheaper, and they won't have to do any medical tests or go see their doctor.

And the general population will be even more underinsured than they used to be. A recent study from Comminsure showed the extent of underinsurance in disability income; it's there for life insurance too.

That said, the winners will probably be the insurers to retail mastertrusts and industry funds; and to a lesser extent true retail insurers; the losers will be the insurers to corporate funds.

And what about consumers?

This whole process has made me want to read The Politics of Choice; Why More is Less, by Barry Schwartz. I read a really good review of this recently. The point of the book seems to be that choice isn't just a undeniable good thing; it comes with a cost. That cost is the time you take to think about it, and the cost of making a bad choice. It's hard to know without looking at the outcomes where the cost benefits of super choice will end up. But is likely that more risk will be transferred to consumers, and not necessarily more benefits to match.

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