Bill Buttler wonders whether the Stronger Super framework will lead us to a better and more efficient business model.

Somewhere across the sea, in another part of the world, lies the magical Land of Oz. Politically, economically and culturally, the Oz lifestyle is not so different from ours. What sets Oz apart from its neighbours is the ability of its citizens to make rational decisions about major political questions without too much fuss.

One fine day, the head of the Oz Treasury department approached the Treasurer with a new report.

“Our research shows that we are heading into some long-term challenges requiring us to manage an ageing population. I am afraid that we won’t be able to meet people’s retirement expectations without big increases in taxes for those still working,” said the head of the Oz Treasury department.

“This is not going to happen for another 20 years, but we need to start planning now”.

“Ok”, said the Treasurer,“What does your department suggest?”

“Well, we are proposing that the government of Oz should mandate a compulsory retirement scheme, fully funded by employer contributions of (say) 10 per cent of all wages. We can gradually make the current government pension means-tested, so the pressure is taken off the Oz Budget as people start to retire with their own retirement account. Our projections show that, if we start now, we should be able to minimise the future budgetary impact. If we delay much longer, it will be too late to act.”

“Hmm …,” said the Treasurer. “But how are we going to manage the accumulated funds? It will require a whole new bureaucracy.”

“We are not suggesting that the government should manage the new scheme,” said the head of the Oz Treasury department.

“If you hand management over to the private sector, you will be able to get the benefits and efficiencies of competition among fund managers. The managers will drive prices down as they compete for the huge amounts of cash this system will generate. Plus, does your government really want to run the risk of being blamed if money is lost or investments perform poorly?”

“You are right,” said the Treasurer.“As a government, we are committed to the principle of private enterprise – especially if it helps us avoid losing office! However, I still have a question – how are we going to decide which fund managers will get the job? Surely we will just be opening ourselves up to the same risk if we select particular managers?”

Leave it to the market

At this point, the assistant to the department head piped up: “That’s easy – we just leave it to individuals to pick their own fund from the range of approved funds available on the existing market. You will probably want to set up a regulatory framework to keep out crooks and incompetent managers, but otherwise you can leave it to the market.”

“That’s all very well for you to say,” said the Treasurer, “but we have young people starting their first jobs, not to mention plenty of people with little financial knowledge. How are they going to be able to understand what is on offer, much less make a choice? We at least have to provide a ‘default’ fund for those who can’t be bothered – and I suspect that will be most of them!”

“Perhaps we could get the employers to nominate a default fund?” said the assistant.