Information cost and member choice in the Australian superannuation industry

Abstract

This thesis examines the determinants of superannuation members’ investment choices across fund families, with a focus on the effect of information costs. Existing literature on managed funds may not be easily generalised to the superannuation fund setting given the distinct attributes and behaviour of superannuation investors. In contrast to prior research, this thesis uses an actual decision-making measure, namely, member-nominated transfers, to examine investors who have ‘made a choice’ at the fund family level. While members’ information costs are not directly observable or measurable, this thesis identifies two attributes that can reduce members’ information search and processing costs, namely, superannuation fund families’ visibility and transparency. Specifically, this thesis examines whether superannuation fund families’ marketing effort and the quality of their Product Disclosure Statement (PDS) together with their performance, can be used to attract investment flows. Based on a unique data set from the Australian Prudential Regulation Authority (APRA) on regulated superannuation fund families, the results in Chapter 4 indicate that the asymmetric return-chasing behaviour commonly found in research on managed funds does not exist in the superannuation context. The results show that superannuation investors do not actively switch to better performing fund families but they do choose to leave poorly performing fund families. A consistent positive relation is found between marketing efforts and member choice. Further analysis shows that this result is mainly driven by retail funds, and it is confined to fund families that conduct more extensive marketing. This thesis then provides evidence on the current superannuation PDS disclosure practice in Chapter 5 using readability (linguistic style) and extent of disclosure (linguistic content) under the new ‘short PDS regime’. Results indicate that, on average, industry superannuation fund families provide better PDS disclosure than their retail counterparts, in terms of both readability and the extent of disclosure. In addition, the causes and consequences of superannuation fund families’ PDSs are studied in Chapter 5 and Chapter 6. There is no significant relation between superannuation fund families’ performance and the quality of PDS disclosure. Increased investment inflows encourage superannuation families to provide more information in an easier-to-understand manner in the PDS, especially the industry families. And better quality/content of PDS disclosure can attract inflows, especially for the retail families.