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Perhaps the greatest long-term challenge facing modern economies is
how to pay for the living expenses and care costs of the elderly.
Following policy decisions made in Australia in the 1990s, a
substantial part of the pension requirements of the next cohort of
retirees will be met from savings accumulated during working years.
The effective management of these savings is crucial. If they are
invested wisely, the assets available to fund pensions and care
will grow; if not, available funds may turn out to be insufficient.
Unfortunately, there is considerable evidence worldwide that the
management of funds attracts rent-seeking behaviour by the
financial services industry which erodes much of the potential
return. Australia introduced compulsory superannuation
contributions for its working population in 1991, leading to a
proliferation of funded schemes that are largely run by the private
sector. Complexity, and many degrees of separation between fund
members and those who manage their funds, have emerged as serious
problems. Combined with weak competitive pressures and governance
systems, and insufficient legal and regulatory constraints, the
result is a system that does not serve its members well. This book
provides a detailed evaluation of the Australian experience,
highlights the extent to which the financial services industry has
extracted rents from Australian pensioners, and how and why this
occurred. Based on original empirical research, and examination of
industry reviews and relevant literature, the book demonstrates the
numerous principal-agent, conflict of interest and rent extraction
problems that have emerged in Australia. The book makes suggestions
for how these problems can be addressed in Australia, and also
provides lessons for other countries wishing to enact pension
reform.
Perhaps the greatest long-term challenge facing modern economies is
how to pay for the living expenses and care costs of the elderly.
Following policy decisions made in Australia in the 1990s, a
substantial part of the pension requirements of the next cohort of
retirees will be met from savings accumulated during working years.
The effective management of these savings is crucial. If they are
invested wisely, the assets available to fund pensions and care
will grow; if not, available funds may turn out to be insufficient.
Unfortunately, there is considerable evidence worldwide that the
management of funds attracts rent-seeking behaviour by the
financial services industry which erodes much of the potential
return. Australia introduced compulsory superannuation
contributions for its working population in 1991, leading to a
proliferation of funded schemes that are largely run by the private
sector. Complexity, and many degrees of separation between fund
members and those who manage their funds, have emerged as serious
problems. Combined with weak competitive pressures and governance
systems, and insufficient legal and regulatory constraints, the
result is a system that does not serve its members well. This book
provides a detailed evaluation of the Australian experience,
highlights the extent to which the financial services industry has
extracted rents from Australian pensioners, and how and why this
occurred. Based on original empirical research, and examination of
industry reviews and relevant literature, the book demonstrates the
numerous principal-agent, conflict of interest and rent extraction
problems that have emerged in Australia. The book makes suggestions
for how these problems can be addressed in Australia, and also
provides lessons for other countries wishing to enact pension
reform.
Adam Smith's 'invisible hand' relied on the self-interest of
individuals to produce good outcomes. Economists' belief in
efficient markets took this idea further by assuming that all
individuals are selfish. This belief underpinned financial
deregulation, and the theories on incentives and performance which
supported it. However, although Adam Smith argued that although
individuals may be self-interested, he argued that they also have
other-regarding motivations, including a desire for the approbation
of others. This book argues that the trust-intensive nature of
financial services makes it essential to cultivate such
other-regarding motivations, and it provides proposals on how this
might be done. Trustworthiness in the financial services industry
was eroded by deregulation and by the changes to industry structure
which followed. Incentive structures encouraged managers to
disguise risky products as yielding high returns, and regulation
failed to curb this risk-taking, rent-seeking behaviour. The book
makes a number of proposals for reforms of governance, and of legal
and regulatory arrangements, to address these issues. The proposals
seek to harness values and norms that would reinforce
'other-regarding' behaviour, so that the firms and individuals in
the financial services act in a more trustworthy manner. Four
requirements are identified which together might secure more
strongly trustworthy behaviour: the definition of obligations, the
identification of responsibilities, the creation of mechanisms
which encourage trustworthiness, and the holding to account of
those involved in an appropriate manner. Financial reforms at
present lack sufficient focus on these requirements, and the book
proposes a range of further actions for specific parts of the
financial industry.
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