14 October 1996 - 25 November 2001
The Future of Superannuation
Senator the Hon Rod Kemp
(delivered by Senator John Watson)
to the Small Independent Superannuation Funds Association (SISFA) Seminars 2001
I am very pleased to have the opportunity to talk to you today - a group of Australians who clearly treat saving and generating adequate retirement incomes as important issues, as indeed does the Government.
Arising from fairly humble beginnings, superannuation is now an important part of the Australian financial sector, with over 91 per cent of employees covered, and with superannuation making up the largest component of the financial assets of households.
Our superannuation system is based on strong foundations and is continuing to grow rapidly, both in size and in importance for Australia's financial markets. The area of strongest growth is in the assets and numbers of small self managed funds, the area of vital interest to you.
As the system develops and matures over coming decades, ordinary Australians will be well served by markedly improved retirement incomes.
The Australian retirement income system has developed gradually over the past century and comprises three elements:
- the public age pension and service pension;
- compulsory superannuation guarantee contributions for employees; and
- voluntary savings, such as additional superannuation contributions, or other investments in shares, directly owned businesses, real estate and financial securities.
Age and service pensions currently cost about $18 billion a year. This is equivalent to approximately 3 per cent of Australia's Gross Domestic Product (GDP). Australia has been able to better control its pension costs than many other countries, mainly because the age pension is subject to a means test and is paid at a flat rate which is not tied to an individual's earnings history.
Overall, our three pillar design and cost-effective age pension combine to give Australia one of the most sustainable retirement incomes systems in the world - and a system that is very well regarded internationally. In particular, the World Bank regards Australia's system as a model for other countries without an established retirement income system, recognising its comprehensive coverage, long term sustainability and cost effectiveness.
The other key foundation of our superannuation system is the Government's effective framework of economic management:
- This is demonstrated through its strategies of returning the Commonwealth Budget to surplus and of reducing public debt, overall contributing to a sustained period of strong economic growth.
- And the already strong framework of economic management has been taken forward
through the massive overhaul of the tax system
- Which has improved individual incentives to save but left superannuation as a good tax preferred saving vehicle (as I will demonstrate later);
- And in this year's Budget the Government has greatly reduced the tax payable by many Australians of age pension age as well as making a number of other changes encouraging saving, such as refundable imputation credits, and the abolition of both FID and the stamp duty on share transactions.
Superannuation is one of Australia's great growth industries.
Coverage of Australian workers has grown dramatically. In 1986 only about 40% of Australian employees had superannuation coverage. The recently released ABS Survey of Employment Arrangements and Superannuation gives the latest data on coverage:
- Some 98% of 'traditional' employees have superannuation coverage (with 95% receiving current employer contributions)
- for all age ranges over 20, coverage of employees is 90 per cent or more.
- About two thirds of the self employed have superannuation coverage, although only part of this group are contributing in a particular year.
Asset growth continues to exceed informed expectations, and is faster than asset growth in most OECD countries.
- The system's aggregate assets at March 2001 were $497 billion, around double the level of 5 years earlier, exceeding the levels and rate of growth projected by the Retirement and Income Modelling Unit of Treasury (RIM).
- Both as a proportion of assets to GDP and in terms of growth, this places Australia up near the top of the OECD rankings.
- In 1990 superannuation assets represented 33 per cent of that year's GDP; they now represent about 73 per cent.
The investment returns of superannuation funds over recent years have been strong, reflecting in part Australia's sustained period of economic growth.
Over the past five years, returns for superannuation funds have averaged about 8 per cent real (above inflation), which is nearly double the long term earnings rates.
However, it is also important to recognise that much of recent growth also represents contributions. The flow of member contributions is at much higher levels than indicated by trend projections and are continuing to grow strongly:
- Growing 21% over the past year; and
- Almost trebling over the past five years.
This represents a largely voluntary input of funds by Members. The fastest growth in member contributions has been in retail funds and small funds.
A special survey by the Australian Prudential Regulation Authority in 1999 indicated that most of this growth in member contributions represents genuine additions to system assets and is not churning or 'recycling'.
We can infer that the strong growth of member contributions largely represents the voluntary injection of savings into a strong and secure superannuation system and reflects member confidence in the system.
Employer contributions are also growing , but not as quickly as member contributions.
Taken as a whole, the total of member and employer contributions has grown by 48% over the past 3 years, an average annual (compound) growth rate of about 14% .
Even Faster Growth in Small Funds
The small funds sector, to which most of you contribute, is in fact the fastest growing sector of the superannuation system: :
Over the five years to March 2001:
- The number of small funds more than doubled - from about 100 thousand to 214 thousand;
- Membership of small funds also more than doubled, from 208 thousand to 433 thousand (over a period where the total number of accounts grew by about 40%);
- Member contributions to small funds grew by 330%, total contributions by 68%; and
- The assets of small funds more than trebled, from $24 billion to $76 billion,
making this the fastest growing sector of the super system:
- slightly outpacing industry funds where part of the growth has been driven by increases in the Superannuation Guarantee level to its current level of 8%.
Future Growth in Superannuation
As I have already noted, in March 2001, superannuation system assets totalled $497 billion. Looking ahead, and bearing in mind the continuing relative benefit of investing in super, the Retirement and Income Modelling Unit (RIM) projects assets to reach around $700 billion by June 2005 and one trillion ( that is $1000 billion) by June 2010.
The ratio of assets to GDP is projected to move from its current level of 73 per cent to reach 90 per cent by 2010 and to exceed 100 per cent of GDP by 2017.
This high rate of continued growth is projected notwithstanding the increased payouts to baby boomers as they retire.
RIM uses long term fund earnings rates of about 4.5 per cent above inflation for its long term projections, that is, historical rates averaging over a 25 to 30 year time frame. If the higher earnings rates from the past five years were used, the RIM projections would be higher.
RIM has not done specific projections of small funds. However, if current trends continue, it is clear that they will make up a bigger slice of this large and very important asset pie.
A Key Component - Small Self Managed Funds
So let me turn to consider small funds and the issues that involve them in more detail.
Small funds now regulated by the ATO
In 1999 the Government legislated to establish a new category of small superannuation fund with fewer than five members, called a self managed superannuation fund: for brevity I will continue to call them 'small funds' in this speech. It also provided for the transfer of the regulation of almost all of these funds from the Australian Prudential Regulation Authority (APRA) to the Australian Taxation Office (ATO).
These changes were in line with the recommendations of the Financial System Inquiry (Wallis) and reflect the Government's ongoing commitment to providing an effective regulatory framework.
Implementation of the transfer has gone smoothly, with over 95% of small funds now subject to ATO regulation. Along with this, the supervisory levy has fallen sharply from $200 per year to $45 per year.
As the new regulator of small funds the ATO has placed a strong initial emphasis on education activities and on providing tools to assist trustees in running and managing their own fund (including a new trustee guide, fact sheets and compliance checklist). It has also rationalised lodgement requirements, creating a combined return to report income tax, regulatory and superannuation surcharge information. Additionally, a publicly available Register of Complying Funds has been constructed, which will assist trustees in confirming the compliance status of a fund for roll-over/transfer purposes.
Statistics on Small Funds
The ATO has also put some resources into improving the statistical picture of the small funds under its control:
- most have 2 members (62%);
- The average balance per account is about $180,000, much larger than account balances for larger funds;
- About 70% of established funds receive an employer contribution in a given year, about 10% receive a member contribution;
- The average level of each contribution into established funds is substantial - around $30,000 for employer contributions, around $50,000 for member contributions; and
- Small funds manage almost all of their assets directly rather than through a manager, invest more in cash, term deposits and direct property, and invest very little in overseas investments.
Some Compliance Issues
The ATO's targetted approach to compliance has resulted in the identification of a number of problem funds
Identified problems generally occur as a result of the fund trustees acting on poor or incomplete advice and are not deliberate attempts to circumvent the legislation.
The ATO's preferred approach, when an inadvertent problem is identified, is to offer rectification to the trustees. Assisted or enforced regulation is only considered necessary if the trustees are not prepared to implement a rectification program or if the trustees have repeatedly and/or deliberately contravened the legislation.
In 1999, the Government also moved to strengthen the investment rules that apply to all superannuation funds. These changes were included in Superannuation Legislation Amendment Act (No. 4) 1999.
Essentially, the changes provided extra safeguards against superannuation savings being transferred into related entities. They are aimed at maintaining the integrity of the superannuation system and ensuring that retirement income objectives are met.
For the small funds sector to work well it is imperative that each trustee understands his or her duties, responsibilities and obligations.
The SIS Act contains covenants or rules that impose certain requirements on trustees and are deemed to be included in the trust deed of every regulated fund. These covenants set out the duties imposed on a trustee under trust law. They require trustees to:
- act honestly in all matters;
- exercise the same degree of care, skill and diligence as an ordinary prudent person;
- act in the best interest of the fund members;
- keep the assets of the fund separate from other assets (e.g. the trustee's personal assets);
- retain control over the fund;
- develop and implement an investment strategy; and
- allow members access to certain information.
This list of trustee duties is not exhaustive. But it does demonstrate that the Government requires that those who are responsible for retirement funds behave in a diligent and appropriate way so as to ensure that the money will still be there, when people need it, in their retirement.
Taken overall, very substantial changes have occurred in the small funds sector since 1999. Another change is coming, one that is clearly intended to be helpful. The Government is always looking to improve the system and has announced its intention to introduce a Bill to ensure that complying superannuation funds do not lose their residency status when trustees temporarily move overseas. This will proceed as quickly as legislative priorities allow. (Hopefully during the Spring sittings).
In response to this package of changes, the ATO seems to be managing its new responsibilities well. Further the customers have indicated their acceptance of the changes, with small funds continuing to grow very strongly, making up an increasing proportion of Australian superannuation.
Important of Superannuation to Australian Society
Let me return from small fund issues to Superannuation as a whole, and the important ways in which it is impacting on Australian social and economic issues. With the very wide coverage of the community, as already mentioned, we need a superannuation framework which is flexible, and allows for a diversity of situations and needs of individuals. The Government regards this flexibility as important and has introduced policies to accommodate varying social and workforce circumstances.
Significance to Households
Superannuation savings are very important at the household level. ABS data shows (funded) superannuation as by far the largest single category of financial assets of households, making up about 43 per cent, up around seven percentage points from the level of 6 years ago.
Between June 1996 and June 2000, the financial assets of Australian households grew by $410 billion. Of this, $196 billion came from growth in superannuation and insurance assets and $143 billion from growth in shares and equities held by households.
The average superannuation balance per person now is about $55,000, with a wide variation about this average depending on years of membership and level of contribution. By June 2005 this average balance is projected to increase to $67,000, by June 2010 to $80,000 and $106,000 in June 2020, all in today's dollar values. These estimates are based on quite conservative assumptions about fund earning rates.
We should note that by international standards, the Australian household balance sheet is in good shape with the ratio of household liabilities to assets at 17 ½ per cent. This underlying strength is sometimes lost on those who concentrate on the narrowly defined household savings ratio.
Superannuation also plays a vital role in Australia's Financial Markets. In March 2001 the consolidated assets of managed funds totalled $622 billion. Almost eighty per cent of these funds come from superannuation sources.
For example, in the past, many low-income women have not had access to their own superannuation plans. The Government therefore introduced a tax rebate to encourage individuals to make superannuation contributions on behalf of their low-income spouses. An 18 per cent rebate applies to contributions of up to $3000 per annum to the superannuation fund or retirement savings account of a low income spouse. (The maximum rebate is available where the low-income spouse's income does not exceed $10,800.)
The Government also considered that the previous age restrictions on superannuation contributions were unnecessarily restrictive and discriminated against individuals choosing to remain in the workforce for a few years beyond the normal retirement age.
In view of this, the Government increased the age at which individuals are allowed to contribute to a regulated superannuation fund from 65 to 70. Consistent with this, the exemption age for the Superannuation Guarantee arrangements has also been increased from 65 to 70 years of age.
Superannuation and Divorce
The Government gave an election commitment to examine the treatment of superannuation following the dissolution of marriage, with a view to increasing the options available to divorcing couples.
I am pleased to be able to inform you that the Family Law Legislation Amendment (Superannuation) Bill 2000 was passed by the parliament on 18 June 2001.
This Act amends the Family Law Act 1975 to allow a married couple upon separation to split between themselves, payments from a superannuation fund in which one of them holds an interest. If they are unable to agree, the Family Court will be able to order a payment split.
Choice of Funds
I would now like to make some comments on the Government's policy to provide choice of superannuation funds for all Australians. The Senate rejected the Superannuation Legislation Amendment (Choice of Funds) Bill 1998. The Australian Democrats and the ALP joined together to defeat the Bill. This was an extraordinarily shortsighted decision by the Opposition parties. The Government had made election commitments on Choice and the Senate decided to ignore the clear mandate that the Government had for this important policy.
The Bill was designed to provide employees with greater ownership and control of their retirement savings. Choice would have been complemented by the introduction of the new disclosure regime under the Financial Services Reform Bill and the Government had committed $14m to an education campaign to ensure workers were fully informed of their new rights.
Just this week the Australian Financial Review highlighted the fact that outsourcing of superannuation business is continuing, sometimes into expensive and even inappropriate master trusts. This is exactly the sort of thing that will continue because of the Senate's failure to support the Choice Bill. By blocking the choice of superannuation funds legislation, the Senate denied Australian workers the right to decide where their superannuation contributions go.
The Government remains committed to its choice of funds policy. It will provide greater rights for workers, will enhance competition and efficiency in the superannuation industry leading to reductions in fees and charges, and will deliver better retirement outcomes for Australian workers.
I have established today that superannuation is one of Australia's great growth industries, with a bright future. Our superannuation system is based on strong foundations, and is growing rapidly. Small Funds are clearly a growth sector and this reflects the desire of many Australians to have control over their superannuation.
Our growing Superannuation system is becoming more and more influential at both the household and economy wide levels. Importantly, as our superannuation arrangements reach maturity, the average person's standard of living in retirement will be higher than at any time in Australia's history.