Learning Center
Plans & pricing Sign in
Sign Out

changing business culture


									Aon Consulting


Nelson: share plans to change business culture

Nelson: share plans to change business culture 1,4-5
Dr Brendan Nelson’s plans for the ‘new superannuation’

Legal updates


The risks of reward 3
Checking the fine print of income protection plans for employees

Self-service takes off
Dr Brendan Nelson


If the 1990s were about getting a handle on superannuation, the next decade is likely to be about employee share ownership. Parliamentary inquiry chairman Dr Brendan Nelson speaks to Wavelength about his plans for the ‘new superannuation’. Denise Knight reports.
A comprehensive package of reforms is expected to be announced by the Federal Government in the next 12 months that will encourage companies to offer their employees the opportunity to buy shares. And it won’t be just for executives. Employee share ownership plans (ESOPs) will be for everyone. Late last year, the House of Representatives’ committee on employment, education and workplace relations, chaired by Dr Brendan Nelson, tabled its long awaited report Shared Endeavours. It is the most detailed examination into ESOPs ever undertaken in Australia. It came up with 45 recommendations that, according to Nelson, aim to create a culture of employee share ownership and “to curtail the inappropriate use of share plans for aggressive tax planning”. Nelson says the response to the report—in most circles—has been positive. “I think the report is a very good balance between integrity and compliance measures on one hand and on the other, recommendations which seek to liberalise ESOPs and are intended to make them more attractive.”

Self-service promises to revolutionise employee benefits management

The eye on investments


How to profit from the falling market

ALP report—dissenting
However, the report does not have bipartisan support—something that business is pushing for, given that an election is due by the end of 2001. The ALP members of the committee, while agreeing with some of the general concepts, opposed a number of recommendations and produced a dissenting report. Not surprisingly, Nelson is disappointed by this outcome. “It is just so critical to the future of the economy that the major political parties agree on the fundamentals to build an employee share ownership culture.”
continued on > 4

Grant Sandstrom’s twin preoccupations


Webview Contacts

8 8

By Frank Argent


Strong year

Super and divorce: draft regulations released
The proposal to allow superannuation assets to be split on divorce has moved a step closer. The Federal Government has asked for comment on draft regulations to both the Family Law Act and SIS Act. Issues include how to value defined benefits or non-vested accumulation benefits, retirement income policy considerations (taxation and preservation), the effect on trustee responsibilities and constitutional and administration matters. Features of the draft regulations include: that the husband and wife have the power to make a split best suited to their needs. Binding agreements may be made at any time. If the couple cannot agree, the Family Court can decide. The trustee would need to provide information for the couple to determine how they wish to split the benefit or trade it off against other assets. The trustee must also notify both parties when a benefit is payable so they can decide what they want to do. The actual split is not made until the benefit becomes payable. Accumulation funds may transfer out the non-member spouse’s entitlement. A non-member spouse’s benefit is preserved. The order of transferring ‘split’ benefits will be: first—unrestricted non-preserved, second—restricted non-preserved and third—preserved. Both parties will have access to the normal RBL (unless they already have a higher transitional RBL). Finally, each party will be taxed on the whole of the actual benefit received. The criminal code requires trustees to have a ‘reasonable belief’ that management of the fund is in order. Trustees must provide evidence that they plan ahead and have established adequate systems for control, supervision, monitoring and reporting of their agents and delegates.

Major technology-based developments and strong, positive feedback from our clients—that now include Boeing, Merrill Lynch, Sun Microsystems and Franklins— see us well placed to continue our robust performance into 2001. Our latest technology innovations have been well received. The recent introduction of LINK software means we automatically update and process contribution information, which is essential for the smooth application of our new IT solutions, ebenefits and online banking. We are delighted with our result in the recent Australian Superannuation Advisory Services survey of superannuation administrators, which indicated that 94 per cent of our clients are happy with the service we provide. This is an excellent result given the often complex and problematic nature of super administration. But we don’t intend resting on our laurels; we’re planning to redouble our efforts in the coming months to ensure that our satisfaction rating grows even higher this year.

ASIC gets super involved
Since July 1998, ASIC has taken on some important regulatory functions—including trade practice issues—formerly looked after by the ISC. ASIC has proposed that action be taken against a major industry fund for false and misleading conduct. In this case, the industry fund’s insured death and TPD benefits were significantly different from the benefit advertised to members.

Finalisation of the Corporate Law Economic Reform Program (CLERP 6) is now unlikely before the Federal election later this year. The delay has been caused by constitutional issues and the refusal by some states to hand over the necessary powers to the Commonwealth.

Unpaid super entitlements
Proposed changes to the Superannuation Guarantee will mean quarterly rather than annual payments from employers. There is currently no proposal to give unpaid employer contributions higher priority in the distribution of assets of insolvent employers.

Assets test policy
A House of Representatives committee has asked the Federal Government to reconsider its decision to include super assets in eligibility assessments for Newstart payments for people over age 55. ASFA observed that “these mature-aged members are required to sacrifice their retirement savings without a future opportunity to add to retirement savings if they are unable to find full-time work again”.

Focus on trustees
Stewart Fotheringham

With superannuation assets now topping $454 billion in Australia, super trustees are coming under increased scrutiny. The Financial Sector Regulation Amendment Act (No.1) was proclaimed on 21 December 2000 and will apply the criminal code and enforce strict penalties under SIS. Requirements include that trustees have significant knowledge about superannuation and about their role and responsibilities. They are also required to engage appropriate advisors.

Frank Argent is Head of Aon Consulting’s Legal Services.


The risks of reward
An income protection plan is a valuable extra in the employment package, but not if the insurer can arbitrarily cancel the contract. Michelle Innis reports.
A company that signs up for the wrong insurance protection plan may find itself committed to paying claims from its own coffers, according to Rhonda Virtue, Head of Group Risk Practice at Aon Consulting. “Increasingly, we are seeing union representatives bring salary continuance insurance plans to management as part of enterprise bargaining,” she says. “They want to give something extra to employees and this seems to be an attractive option, because it provides employees with a predetermined level of their salary should they be off work for any length of time.” Rhonda Virtue However some plans HEAD OF AON CONSULTING’S GROUP RISK PRACTICE are unsustainable and even worse—as far as employees are concerned—can be cancelled at the end of the term at the discretion of the insurer, regardless of the fact they are part of a salary agreement, leaving workers without insurance cover. So while the notion of salary continuance insurance is a positive one for workers, what’s in the contract is very important for management, which is required to be a party to any insurance contract signed on behalf of employees as part of an enterprise bargaining agreement. become more attractive. But because not all policies are what they seem, good advice is essential. Aon Consulting only supports non-cancellable contracts, says Virtue, thus avoiding any contracts that can be arbitrarily cancelled at the whim of the insurer.


Unreasonable conditions
Unilever Human Resources Manager Roger Hood had real concerns about the ‘pre-existing conditions’ excluded from some policies, and sought advice from Aon on selecting the right salary continuance insurance policy as part of the company’s enterprise bargaining negotiations. “One insurance policy we looked at had a list of pre-existing conditions which could easily have ruled out many people,” he says. “For instance, say at some time you had high blood pressure and had been advised by your doctor to continue to take half an Aspirin a day as treatment. If you subsequently suffered a stroke, the insurance company might consider this a reason for not paying your claim.”

“To the untrained eye, it all looked ok, but we wanted the best for our employees and so we sought advice.”
Roger Hood – HR Manager, Unilever
“Another policy would only pay claims made during the early stages of pregnancy and those were the weeks when statistically it was extremely unlikely that anything would go wrong which would result in a claim.” “To the untrained eye, it all looked OK,” Hood says, “but we wanted the best for our employees and so we sought advice”. Rhonda Virtue, who has specialised in group salary continuance risk for ten years, says Aon is active in its pursuit of the best options for clients and their staff, and this includes ensuring that legitimate claims are paid as quickly as possible. Michelle Innis is a freelance writer.

Flawed offers
“A lot of these contracts offer up to 100 per cent of salary paid for two years, which is clearly unsustainable,” says Virtue. “These contracts also frequently have a list of exclusions which unreasonably limit the claims that can be made.” In the 1980’s, when the government, unions and employers agreed to sacrifice direct wages increases in return for superannuation increases, salary negotiations were far less complex than they are today. With enterprise bargaining now covering a range of salary extras in addition to super, salary continuance—or income protection insurance—has


Nelson: share plans to change business culture
continued from > 1

Nelson concedes the report includes recommendations to Government that may be seen as controversial. But he is confident that a policy will be developed and announced sometime over the next year. “What I would like to see is a comprehensive approach to building an employee share ownership culture which takes it into the lives of working people in both listed and unlisted companies, big and small,” he says. And what would be the impact if, say, all the recommendations were implemented? “A decade from now share plans would be as commonly understood in the workplace as superannuation,” says Nelson. “We would see a change in the culture of business as it would encourage succession planning and employee buyouts.”

“A decade from now share plans would be as commonly understood in the workplace as superannuation.”
Dr Brendan Nelson Not a substitute for super
According to Nelson, share plans should not be considered as alternatives to compulsory superannuation. However their development is no less important than establishing a superannuation savings scheme. “Whatever changes are made, the design of the system must ensure the integrity of the tax base and the equitable distribution of public incentives,” he says. The Australian Employee Ownership Association has been lobbying for legislative changes for many years. Executive Consultant Gary Scarrabelotti says the Nelson report is a great achievement. He says it reflects, in principle, the association’s key policy positions. “But we do have problems with some of the solutions to structural and legislative impediments in the system,” he says. Aon Consulting’s Tim Dwyer believes the report heads in the right direction. “Above all, a clear and simple system is needed to foster a culture of employee share ownership. From a client’s perspective,” says Dwyer, “one of the issues is the confusion over the potential regulatory effect on share plans and on compensation strategies”. “When you are talking about the way that you reward people, you really do need clarity and simplicity,” he says. “Our desire is that both political parties come up with a clear policy as we move towards the next election.” Scarrabelotti is pleased the report recommends the relaxation of the ‘five per cent’ rule, which currently limits the number of shares that a single employee may hold. He says this would particularly help small and start-up companies to establish ESOPs.

Big test ahead
But Scarrabelotti believes the big test is going to be getting rid of the current 10 year limit on tax deferral, as well as taxing the ‘growth’ of deferred shares at capital gains tax rates. While the report does, in principle, advocate this change, Scarrabelotti says other recommendations effectively gut the proposal. “The Nelson report advocates taxing ‘gross’ at CGT rates while, at the same time, discounting the value of the capital gains.This is a classic tax claw-back and one that corrupts the savings impact of the Nelson inquiry’s most important proposal,” he says. Central to the push to expand ESOPs to a wider group of employees is Division 13A of the Tax Act. According to the report, Division 13A is the most desirable mechanism for share plans and recommends a number of measures “designed to entrench—but improve—the operation of both tax ‘exempt’ and ‘deferred’ plans”. Dwyer is enthusiastic about the recommendation. “The fact is that you cannot currently secure the benefits of Division 13A without meeting a number of onerous conditions imposed by the legislation,”

Tim Dwyer

“This is a classic tax claw-back and one that corrupts the savings impact of the Nelson inquiry’s most important proposal.”
Gary Scarrabelotti


Nelson report at a glance
Some of the main recommendations include:

he says. “It is a solid platform from which to develop employee share ownership in Australia. By utilizing the existing provisions of Division 13A, we have been able to demonstrably assist clients with the structuring and management of their employee ownership strategies.” Another recommendation that has broad support is “the preferential tax treatment of shares acquired under ESOPs when transferred to a registered super fund or sold for retirement”.

scrapping the 10 year limit on tax deferral, allowing liability to be paid when shares are sold levying the higher marginal rate of tax only on the discounted value of shares or options, with capital gains tax levied when shares are disposed of increasing the current $1,000 tax-free threshold for share plans removing the five per cent limit which caps the number of equities that a single employee may hold concessional taxation on proceeds of share plans reinvested in superannuation, or sold for retirement providing emerging sunrise industries with specific preferential tax treatment for a defined start-up period consideration of a cap on the amount of salary executives can sacrifice through share schemes clarification and extension of the ATO’s power to deal with aggressive tax minimisation arrangements establishing an Employee Share Plan Regulatory Agency creating model share plans for small and unlisted companies enacting a single piece of legislation which draws together the various laws that currently apply to share schemes reviewing share plan prospectus arrangements greater disclosure of the value and extent of share plans in annual reports.

“Over time you’ll see more and more employees investing in their own employers.”
Tim Dwyer
But both Dwyer and Scarrabelotti are concerned about the proposal to place the responsibility for regulation of share plans with the tax office. “Given the ATO’s mismanagement of its private ruling system, especially in relation to ESOPs, the ATO is not the right place for this agency,” says Scarrabelotti. “A better proposal might have been to establish an independent agency governed by a board representing the ATO, ASIC, ASX and well as employer and employee representatives,” he says. “Ultimately though, a simple and clear overall design framework will be critical,” says Dwyer. “Clients will then be quite prepared to embrace ESOPs as a legitimately sustainable compensation strategy. Over time you’ll see more and more employees investing in their own employers,” he says. Denise Knight is a freelance business journalist.

For copies of the report Shared Endeavours contact the Committee Secretariat on 02 6277 4573 or visit For information on existing employee ownership opportunities contact Tim Dwyer at:


Self-service takes off
The advantages
access at any time information is available in real time

Self-service promises to revolutionise employee benefits management, and both employers and employees stand to gain. Gayle Bryant reports.

The emergence of self-service is yielding dividends for HR and payroll departments. It is significantly reducing the amount of repetitious processing involved in keeping financial records up-to-date. And aside from productivity savings, the news is that employees—both current and prospective—are also information is current and readily enthusiastic about self-service. available—all company brochures Self-service for employees is an established practice in the United States that is can be included now catching on in Australia. Employees are given electronic access to their financial details via the internet or the company’s intranet. Each person has an the ability to educate members online individual member identification number and password that they use to access up-to-date information on superannuation and financial planning. less paperwork for the payroll office Research from the US shows that one of the main issues for employees portals can be set up for other is ensuring they have a secure financial future ahead of them and that they are products—such as financial on track to achieve their financial goals. Employees value a sense of control planning—that can be on-sold over their financial affairs and they want independent, easy access to their financial details. as members’ understanding of The research also indicates that members want access to their personal financial superannuation grows, the ease and information 24 hours a day, seven days a week. And that any alterations they accessibility of online service makes make, such as changes to investment choice, are effected immediately. Increasingly, the employer look more attractive. employees are demanding online service as a minimum standard for their conditions of work. Within Australia, all major companies are likely to be offering their employees self-service within 12 months, according to Grant Sandstrom, who heads Aon Consulting’s IT solutions practice. Sandstrom oversees the operation of Aon Consulting’s self-service product, ebenefits, which was “Within Australia, launched last year. He says that soon, offering employee self-service will all major companies are not be seen as a competitive advantage for companies; it will become likely to be offering their the standard. There are, however, some challenges for companies introducing selfemployees self-service service. “One of the first steps is to realign the business processes,” says within 12 months. Sandstrom. “Instead of reconciling superannuation accounts only once a year, systems and processes need to be configured so that members’ Self-service will not be a contributions are loaded and ready for viewing by members within hours competitive of being received.” Sandstrom says that re-engineering a company’s systems and processes will become the standard.” can also provide new opportunities for members to compare different Grant Sandstrom products and services.
the ability to get instant responses to queries rather than waiting until the end of the financial year

Gayle Bryant is a freelance business journalist.
For more information
To find out more about self-service and Aon Consulting’s ebenefits solution, contact Grant Sandstrom at

self-service: when employees are given electronic access to personal financial details held by their employer or service provider via the internet or company intranet. portal: a ‘gateway’ to the internet. A portal can be a search engine or a directory web page. Examples include Yahoo!, ninemsn, and Excite. Businesses can set up a portal as a gateway to different business areas and products. real time: immediate action by the system when a member alters their details online.



Short selling is a valid method of diversifying and managing risk says Aon Consulting’s SIMON IBBETSON. In the first in a series of articles on alternative investment strategies he explains how short selling operates.


How to profit from the falling market
Most investors buy stocks in the hope that the share price will rise over time and yield a healthy profit when those shares are sold. But few Australian investors—including fund managers—take full advantage of the opportunity to make a profit when share prices fall. This can be done by implementing an investment strategy known as ‘short selling’. Short selling involves selling shares before you own them, or ‘going short’ in market jargon. It doubles the investment universe available to fund managers, providing a much larger pool of stocks from which to choose when looking for healthy returns as well as increased diversification. Short selling is used extensively in the United States and United Kingdom where markets are deeper and more liquid, and there is greater emphasis on a variety of investment choices. In the past, Australian stockmarket researchers have frequently identified overvalued stocks during their search for undervalued companies. But they have generally ignored the investment potential of short selling.

Risks can be managed
Although selling short can result in considerable losses, the risk is reduced if properly managed. In any case, the risks involved in short selling are very different from those involved in holding long positions only. Short selling is not a ‘timing call’ that reflects a view on where the market is heading. It is a means of offering all fund managers greater diversification. After all, diversification is the greatest risk modifier of all. Simon Ibbetson is Head of Aon Consulting’s Investment Consulting Practice.

Short steps

The first step in a short selling strategy is for the fund manager to identify ‘overvalued’ shares. The shares may be overvalued for a number of reasons including poor management or there may be changes in the economy that are expected to have a negative impact on the company’s share price. The fund manager then borrows the shares from a stock lender, and pays a fee for the loan of the stock. For example, the shares in XYZ company may be trading at say, $1.80 each and are sold into the market at that price. The proceeds from the sale are banked and the money earns interest at the ‘cash’ rate of return.

When the share price of XYZ has fallen to what the fund manager believes is fair value for the shares, say $1.50 in this example, the fund manager enters the market and buys the shares which are then returned to the stock lender. In this example, the profit from selling short is 30 cents a share less transaction costs. These costs include the fee charged by the stock lender and brokerage fees for buying and selling the shares. Profits would also include interest paid on funds invested at the cash rate.




Geoff Colman Level 20, 201 Kent St Sydney NSW 2000 GPO Box 534 Tel: 02 9253 7100 Fax: 02 9253 7101

Making waves
Water works as a metaphor for technology—it’s everywhere, it’s essential for survival, there’s more of it because of global change, and it’s in perpetual motion—which perhaps explains Grant Sandstrom’s twin preoccupations. He spends his days devising innovative technology solutions for Aon Consulting and then retires to the beach.

Steven Gaffney Level 9, 468 St Kilda Rd Melbourne VIC 3001 GPO Box 3004 Tel: 03 9867 8011 Fax: 03 9867 7913

Chris Kidd Level 3, 196 Wharf St Spring Hill QLD 4004 PO Box 882 Tel: 07 3839 6922 Fax: 07 3839 6494

Chris Hagan Qantas House, MacGregor St Port Moresby PNG PO Box 479 Tel: 675 321 1177 Fax: 675 321 4959

It’s about implementing those improvements from a process perspective as well as from a technology perspective.” One of the new developments Sandstrom oversees at Aon is ebenefits. [See page 6 Self-service takes off.] So far, Sandstrom says, “we’ve had excellent feedback. There’s less paperwork for our clients, and an enormous increase in the image of the client in terms of the members. It’s also more efficient for us because we can spend more time servicing clients rather than working on transaction-based issues.” When he’s not introducing new technology at Aon, Sandstrom can be found wherever there’s water. “I’ve always lived near the beach and Dad’s been a lifesaver since he was a kid,” he says. “I’ve been through the voluntary surf club and I still participate in the Rescue and Rescusitation event. But I’m on long-service from the club, so I don’t do a lot of patrols, although we train each weekend and compete every second weekend. “We did quite well in the State championships last year,” he adds, “and I think we’re a good chance of getting a gold or silver this year”.

Mike Murphy 02 9253 7787

Surf’s up! Grant Sandstrom (middle) with fellow award winning team members.

Louise Kanis/Jenny Ward 02 9253 7500

Tim Dwyer 02 9253 7206

Craig Petersen 02 9253 7209

Rhonda Virtue 02 9253 7248

Richard McNamara 03 9867 8011

Simon Ibbetson 02 9253 7753

Frank Argent 02 9253 7208

Chris Kouteris 03 9867 8011

He was hired as Systems Controller six years ago, with a brief to develop IT for the business. Then there were 30 or so full-time staff and only a handful of PCs. Today, Aon employs over 240, and the technology has grown with the company. “We started by developing an infrastructure whereby everyone had a PC and was working off a system of some description, with software tailored to their job position,” Sandstrom explains. “Then three or four years ago Aon began acquiring companies—Bain Hogg, Alexander Brown & Partners, and recently TASG and the live wire group. As a result we’ve been integrating existing systems and structures from those organisations— taking the ‘best of breed’ and building on them.” With Aon’s staff located as far afield as Port Moresby, Sandstrom says his team is concentrating on business systems. “We analyse the business to understand how we can improve it using technology. We’ve already introduced a lot of technology,” he says, “and the hard work for us over the next couple of years will be improving the business processes that go along with technology so we get the full benefit of those particular roll-outs.

Managing human capital
As the world becomes smaller and access to global markets expands, competition to recruit and retain skilled employees is becoming a primary focus for businesses of all sizes. The benefits of a well-managed workforce are many, but one thing is clear: when employees are encouraged to improve performance that can mean better shareholder value. To discover how US companies are creating work environments that foster an innovative business culture, log onto and click on the link The Benefits of Effectively Managing Human Capital.

Steven Gaffney 03 9867 8011

Aon Consulting Pty Limited

ACN 002 288 646

Independent Services to Trustees and Employers since 1962. The material in this newsletter is believed to be accurate and reliable but no responsibility is taken for any opinion expressed or any errors or omissions.

To top