Employees' Choice of Superannuation Plan: Effects of Risk Transfer Costs

Consistent with a worldwide trend away from defined benefits towards accumulation benefits, many Australian employers who traditionally offered their workers defined superannuation benefits are closing their defined benefit plans to new members and/or offering existing members the option of transferring to an accumulation plan. There has also been a push to allow members greater choice in terms of both funds and investments. Against this background, the Superannuation Scheme for Australian Universities (SSAU) made an offer to its members in 1998 to transfer from the defined benefit section to an accumulation-style plan. Their position was that the choice of fund for employees should be a matter for the employer and the employees at the workplace or their respective representative organizations. At the conclusion of the offer period only one-third of SSAU members had elected to transfer to the Investment Choice Plan (ICP). This study seeks to explain why the majority of SSAU members chose to remain in the defined benefit plan when offered the option of transferring to the accumulation-style ICP. We propose that ‘risk transfer costs’ explain the low ICP acceptance rate. Research findings show that both those who chose to stay in the DBP and those who elected to transfer to the ICP were prepared to accept tradeoffs in their choice. DBP members were prepared to forego a higher quantum of expected benefits for greater security of benefits expected in the DBP, whereas the ICP members were prepared to forego such security and accepted higher investment risk in return for a higher expected quantum and greater control over their benefits. Differences in financial proficiency and differences across academic disciplines confirm that risk transfer costs were a key reason for the majority of SSAU members rejecting the ICP choice. Important implications arising from this study include the need for greater transparency of the risk transfer costs involved in offers of benefit structure change, such as that offered by the SSAU, and the need to incorporate compensation for such costs into the offer. Cognizance also needs to be taken of the major risk transfer cost of becoming informed about superannuation and the consequences of such costs for the Government’s intentions to mandate superannuation fund choice for all Australian workers

Public regulatory reform and management earnings forecasts in a low private litigation environment

We examine the impact of continuous disclosure regulatory reform on the likelihood, frequency and qualitative characteristics of management earnings forecasts issued in New Zealand’s low private litigation environment. Using a sample of 720 earnings forecasts issued by 94 firms listed on the New Zealand Exchange before and after the reform (1999–2005), we provide strong evidence of significant changes in forecasting behaviour in the post-reform period. Specifically, firms were more likely to issue earnings forecasts to pre-empt earnings announcements and, in contrast to findings in other legal settings, those earnings forecasts exhibited higher frequency and improved qualitative characteristics (better precision and accuracy). An important implication of our findings is that public regulatory reforms may have a greater benefit in a low private litigation environment and thus add to the global debate about the effectiveness of alternative public regulatory reforms of corporate requirements

The Impact of New Zealand’s Statutory-Backed Continuous Disclosure Regime on Corporate Disclosure Behaviour

Since 1 December 2002, the New Zealand Stock Exchange’s (NZX) continuous disclosure listing rules have operated with statutory backing. To test the effectiveness of the new corporate disclosure regime, we compare the change in quantity (frequency), quality (precision and accuracy), and timeliness (horizon) of earnings guidance in NZX disclosures before and after the introduction of statutory backing. Our results provide qualified support for the effectiveness of statutory sanctions. Disclosure frequency has significantly improved; however, a large number of material changes in periodic earnings are either not pre-empted by an earnings forecast or are only pre-empted by an earnings forecast made in conjunction with a routine announcement. In the post-statutory sanctions period, disclosure quality significantly improves in terms of forecast precision and accuracy but at the expense of a decline in forecast horizon, and many forecasts remain qualitative in nature. While these results suggest that the impact of regulatory reforms falls short of the continuous disclosure culture envisaged by New Zealand corporate regulators, the observed positive changes in managers’ forecasting behaviour have been achieved in the absence of strong enforcement action. These findings have important implications for corporate regulators in their search for a superior corporate disclosure regime

How Do Firms Manage Their Earnings Forecast Strategy? A New Zealand Study

In contrast to the trend of research investigating why firms decide to release earnings forecasts to pre-empt any expected change in earnings, our study investigates how firms manage their earnings forecast strategy once they have decided to release earnings forecasts. Using a sample of 350 NZX-listed firm years with balance date ending from 31 January 1999 to 31 December 2005 for 94 companies across the statutory-backed continuous disclosure regime, we document that firms are more likely to adopt a multiple earnings forecast (a portfolio) approach in the statutory sanctions period, particularly for the group of firms expecting favourable earnings change. We also document that these good news firms have a higher propensity to gradually update the market with good news earnings forecasts while those with bad news are more likely to immediately correct current market earnings expectations. These findings indicate that firms expecting better earnings performance are more conservative in their earnings forecasting compared to those expecting worse earnings performance. Although this asymmetrical treatment of good and bad news might not meet the corporate regulators’ objective of a continuously updated market with an unbiased approach to the treatment of information, the overall increase in disclosure frequency in the statutory sanctions period does indicate an improvement in the information flow to the capital market

Informed Superannuation Choice: Constraints and Policy Resolutions

The latest controversy to emerge in Australia’s ever-changing superannuation system is the failure of the proposed ‘member choice of fund’ legislation. While superannuation choice continues to be widely supported, the debate lacks coherent policy direction. This paper addresses the policy hiatus by developing a framework to systematically examine endogenous and exogenous constraints affecting the achievement of informed choice, members’ choice preferences and associated policy resolutions. Applying this framework, we argue that a genuine choice of fund model should cater for active and passive choice, where passive choice applies to fund members who, for various reasons, are unwilling or unable to make active choices. Appropriate education programs and standardised disclosure are identified as critical prerequisites to enable informed choice by those members who want to actively participate in the management of their superannuation savings. To protect the interests of passive choice members, we suggest the option of a government-regulated universal default fund (UDF)