Minister for Revenue and Assistant Treasurer
26 November 2001 - 17 July 2004
Speech to the NSW branch of ASFA
Senator the Hon Helen Coonan
Minister for Revenue and Assistant Treasurer
17 March 2003
WESTIN HOTEL, SYDNEY
Thank you for the opportunity to address you today. Being involved in the superannuation industry, I know you have a great interest in, and compare to contribute to, the important debates about superannuation policy.
I would like to talk with you today about some of the particular challenges we currently face in the superannuation arena. I will focus on some election commitments that have been frustrated to date and examine some of the broader issues affecting both the superannuation industry and government policy direction.
I am well aware that the environment in which superannuation funds are operating has been rather bleak in the past couple of years. Stories of low and negative returns have dominated much of the media that the industry has received.
Issues of disclosure and fees and charges have also been raised, and have given rise to a great deal of consumer concern. Superannuation has been under attack.
It is important that we work together to consider and overcome these concerns and to ensure that long term confidence in the system is not undermined or lost.
The Australian experience
The pivotal point that must be reinforced is that Australia has a world-class, well-regarded and robust superannuation system. I really don't think that this point can be emphasised enough.
All of the indicators support the proposition that Australia's superannuation system requires well thought through measures that will provide further enhancements and reforms to an already sound system.
The most recent OECD review of Australia's economy confirmed this position. In relation to superannuation it found, for example, that our three-point taxation system actually delivers results that are similar to end-benefit taxation systems. The OECD was very positive about the sustainability of our system.
Whilst superannuation fund failure or fraud is rare in Australia, those that do occur are generally splashed across the pages of the newspapers and attract significant attention. While clearly a matter of concern, and one the Government takes very seriously it seems that few people find the time to stop and ask themselves if this is a true reflection of the Australian superannuation system - particularly in light of changes proposed to make the system safer following the report of the Superannuation Working Group.
In fact, after 15 years of strong growth and exponential returns the industry is now being challenged as never before. But it is worth noting that the industry's non-investment losses have totalled less than 0.01 per cent of total assets under management.
It is disappointing that confidence-building stories like the undeniable safety of our superannuation system rarely seem to feature in discussions about super.
Instead, superannuation is often subjected to a disappointing level of negativity. And while clearly, there is room for improvement and the reform process will continue it is vital that industry and the Government work together to build a strong foundation of underlying confidence in the system.
This confidence is an absolute requirement during times of specific challenges, such as market volatility, so that consumers are not afraid to continue to invest in superannuation which is, after all, a long term investment that has seen returns of over 4.5% above inflation over the past 35 years.
Despite the current environment, the Government has still been moving forward because Australia's ageing demographic provides challenges that must be addressed and must be addressed now.
As you would all know, the findings of the Government's Intergenerational Report 2002-2003 has highlighted the need to consider the long-term implications of policies including retirement incomes policy. This is a focus of the Demographics Task Force.
We need to value the contribution of mature aged workers and extend their opportunities to stay in the workforce rather than encourage increasingly early retirements.
The ageing of Australia is something the Government has already begun to address with measures such as the phased increase in the preservation age from 55 to 60 between the years 2015 and 2025, and increasing the age up to which voluntary contributions can be made from 70 to 75.
But more must be done. I believe that there are clear opportunities available to us in the superannuation area to work to promote greater independence in retirement and to provide incentives for Australians to contribute to the superannuation system.
To this end, it is not only a raft of new policy directions that will address this need. There are already measures on the table directed to these objectives. For instance, the Government remains committed to enacting its choice of funds and portability policies.
Philosophically it is difficult to argue against the right to choose. It should be a straightforward and basic democratic right to be able to decide where to invest your own money.
Why is choice so important?
Choice is about delivering control into the hands of those with the greatest stake in superannuation - employees.
Not surprisingly reports of a recent survey by the Market Intelligence Strategy Centre confirms wide support among workers for choice and particularly for the ability to switch between investment options within a fund.
The $6 billion in "lost" superannuation suggests very strongly to me that people tend to forget about money that they have no ability to control. If people actively have some control over their own money we should see a marked improvement in the level of interest in superannuation and a heightened awareness of participating in retirement savings programs.
It is contrary to the available evidence that Australians are not smart enough to have control over where their superannuation is invested.
Yet, the same people seem to have little difficulty in comprehending, comparing, and operating a host of other financial products.
The recent stepped up rhetoric against choice, and the supposed danger to consumers, is a difficult argument to sustain. This is against the fact that many employers already offer employees limited choice, allowing them to choose their own fund or choose from a range of investment options within a fund apparently to no ill effect.
In any event, we know choice works! Choice has been operating successfully in Western Australia for four years. The Government is not aware of any evidence of any mis-selling or churning of accounts. What's more, the critics of choice have not produced any such evidence either.
The WA experience also tells us that the compliance burden for employers can be contained. The market has evolved to keep employer costs to a minimum. For example, the largest WA based super fund operates a clearing-house for employers to make contributions efficiently and cheaply to multiple funds.
Yet still the opponents of choice say no. Apparently there are some that believe that it is preferable to let consumers languish in a fund with high fees and charges and poor returns than focus on achievable reforms.
However, the Government does recognise that the successful introduction of choice more broadly, rests on two fundamental planks. These are a robust regime of disclosure and consumer education.
Let me deal with these points in turn.
As you will all be aware, the topic of disclosure has been the subject of an ongoing heated debate.
Opponents of Choice have seized on alleged shortcomings in the disclosure regime before the new regime has had a chance to work.
Given that ASFA is one of the bodies now working with ASIC towards the construction of a standardised set of definitions and a standardised form of disclosure, I may be preaching to the converted. But it seems to me that there are still people, even in the superannuation and financial services industries that have been bowled over by the rhetoric rather than challenged to make disclosure work.
Let me make just a few comments about how the disclosure regime will actually operate.
Currently, we are in the transitional period of the Financial Services Reform Act (the FSRA). That transitional period expires in March 2004.
From March next year, financial advisers will not only have strict, legislated disclosure requirements, they will also have to have passed more stringent licensing requirements. The recent ASIC/ACA survey of financial planners related to services provided without the benefit of this, new, stricter regime.
To comply with their obligations under the FSRA, planners will be required to disclose, fully and completely, all of their fees, charges and commissions. Similarly, all fees and charges associated with the products they are recommending will have to be disclosed. Where a planner's advice may have a detrimental impact on the client, the planner is required to clearly explain what that might be.
In superannuation terms, that might mean that a planner advising their client to move to a new superannuation fund would have to clearly indicate if the ongoing fees and charges in the proposed new fund exceeded those of the client's current fund.
The Government had moved to ensure that fee structures would be broadly comparable to assist fund members in making these important decisions. The Government in February and March 2002 tabled regulations under the Corporations Act in the Senate. However these regulations were disallowed in the Senate, leaving the fine detail of how to comply with the FSRA up to the industry to work out.
Suggestions that various segments of the industry will never reach agreement on what format disclosure will take, or assertions that the Government should regulate the format of disclosure, miss the point.
I don't imagine for one moment that an imposed regulatory framework for disclosure will be palatable to all industry participants. I am also certain that none of you believe a regulated solution will satisfy everybody. It would be like requiring everyone to catch a bus to their destination rather than choosing their own mode of transport.
Finally, whilst the industry is pivotal to the successful implementation of the disclosure regime, ultimately the disclosure issue is about the consumer, not about the industry. We must bear in mind that if consumer confidence abandons the industry, our long term retirement goals will be that much harder to achieve.
Let me now turn briefly to the issue of education.
Amidst the calls for vastly increased funding for education, it is important to note that the Government has already allocated $28 million to this initiative, which will allow the ATO to develop a comprehensive communication strategy to inform and educate employees and employers.
The education program will not seek to encourage superannuation fund members to change funds if they are satisfied with their current arrangements. Choice is about unlocking the door, not about pushing people through it. It is also about the empowerment of consumers and not about compulsion.
Of course employers won't be forgotten either and will benefit from an education program and additional materials that will be made available to explain their obligations.
Fees, Charges and the Capping debate.
The discussion of choice brings me to another vexed issue - Fees and Charges.
The question of how best to approach the issue of fees and charges is hugely important to the topic of retirement incomes. Fees and charges can have a strong impact on the value of our nest eggs.
Recent reports suggest that fees and charges range from about 0.5% to 2.5% of assets annually. This can be a substantial impost. Indeed, I note that Alex Dunnin of Rainmaker Information was recently quoted in Super Funds magazine as stating that the impact of fee differences over a lifetime can cost as must as one third of an entire superannuation balance.
However, cries for the capping of fees and charges to be imposed by legislation as a condition for the passage of choice are, in my view, misguided.
Regulating fees and charges does have populist appeal, but a moment's reflection reveals the weaknesses of the argument.
Think about it for a moment. Superannuation products vary greatly and fees should reflect the underlying costs of the fund and the costs of particular transactions - larger funds might be able to take advantage of economies of scale in regard to fixed costs. Smaller funds may be significantly disadvantaged.
How can one size possibly fit all? Innovation in the industry could be seriously curtailed.
Capping of fees could lead to cross subsidisation between members of funds. If fees are capped at certain levels, all funds will set fees at that level regardless of their differing approaches to investment and different risk profiles and competition would be greatly diminished.
Ensuring comparability of fee structures and informed choice by an investor will do more to create a competitive environment than blunt measures that will discourage innovation and product differentiation.
However, my comments about this matter must not be taken as tacit approval of excessive fees and charges. Industry cannot ignore concerns that have been raised by consumers and should reflect on why these concerns exist.
Whilst the industry points to external factors for downturns in superannuation investments, and of course the slump in the market is not within the control of fund managers, whether consumers get value for money for fees and charges may be open to question.
And I think that this is a question that consumers are starting to ask, especially in light of the approximately $7 billion that the industry is expected to take in fees and charges in the current financial year. Though of course this figure will be impacted by recent market volatility.
Super is tax effective.
The Government's objective for the retirement incomes system is, as we all know, to improve the living standards of retired Australians. The Government already provides significant support to achieve this objective.
The Age Pension provides a safety net for those who are unable to save for their retirement and will remain an important part of Australia's retirement incomes system into the future. The Government has legislated to maintain the Age Pension at 25 per cent of male average earnings.
The superannuation guarantee provides for a minimum level of compulsory saving for employees. The Government has recently strengthened this regime by mandating a minimum of quarterly contributions in the hope of building on the current good compliance levels. Indeed only approximately 1 per cent of employers fail to make superannuation guarantee contributions.
In addition, superannuation receives substantial taxation concessions. In 2001-02 these concessions were valued at $9.8 billion and are estimated to increase to $10.6 billion in 2002-03. This is the largest single Federal Government tax expenditure in the current financial year.
This combination of the age pension, superannuation guarantee and taxation concessions for further incentives will make the average Australian's financial independence in retirement more secure than at any other time in Australia's history as the system matures.
Of course, the ability of our retirement income system to produce sound outcomes relies heavily on the incentives provided by our taxation system but the perception of superannuation as a tax effective investment is rarely reinforced in the industry.
Surcharge reduction and Co-contribution
It is no exaggeration to say that the majority of the representations the Government receives on superannuation are about proposals to provide further tax concessions.
More specifically, proposals to provide greater concessions seem to overlook the fact that tax cuts are currently on the table, costed and ready to go.
The Government is still committed, as promised in its election statement, to reduce the superannuation surcharge rates from 15 per cent to 10.5 per cent over three years.
This reduction is a modest one. But the cost of the reduction is expected to be $50 million in 2003/04, $120 million in 2004/05 and $200 million in 2005/06.
The Government's intent is to reduce the burden of the extra charge on those whose incomes tip them into the surcharge bracket. Contrary to perceptions, those who pay the surcharge are not only high income earners.
The surcharge all too frequently impacts on women and those who have had fragmented work histories and those nearing retirement who need to catch up or top up their savings and who have limited time left in their working lives in which to do so.
It is not difficult to see that an extra charge (the surcharge) over and above the tax that everyone pays on super contributions is a significant disincentive for those who might be expected to save more for their retirement, to do so.
These are the people who can and should save for their own retirement and thereby take the burden off the pension system so that it is available for more needy retirees.
The Government also recognises that those on very low incomes may be unlikely to contribute such discretionary income as they may have to a long term goal of saving for their retirement unless there is an incentive to do so.
To that end, the Government has committed to making a co-contribution of up to $1000 to low income earners who contribute to superannuation.
The co-contribution will cost $95 million in its first year of operation, $100 million in the second year and $105 million in the third year. It replaces the far less generous tax rebate, which currently costs $10 million a year.
As you might expect, this package, to reduce the extra charge on those who can afford to save for their retirement and to provide a co-contribution to encourage lower income earners to save for retirement, was well received at the time the commitments were announced in November 2001.
It was again well received in consultations after the election, was fully costed in this year's Budget - all without demur until the package was introduced into parliament.
Labor and the Democrats opposed the package and it stalled in the Senate in November 2002.
Proposals to amend the package
The question is then, how might we break this impasse? The framework for any consideration of the package needs to address the following parameters:
The Government will honour its election commitments and watering down the promised surcharge reduction as a means of funding a differently targeted concession is not acceptable to the Government;
The co-contribution is specifically targeted at low income earners, that is those earning up to $32,500. Suggestions have been made that the co-contribution should be less generous to low income earners but extended to those on incomes of up to $60,000 which significantly alters the target group;
The third consideration is that the Budget cycle is well advanced and, without divulging information, it is well known that it will be a tight Budget. At the very least any proposed extension of the co-contribution measure would need to be revenue neutral or close to revenue neuatral.
I have appreciated the attempts by ASFA and IFSA to come up with alternatives that might appease the Opposition parties in the Senate.
As I have carefully and frankly explained at a recent meeting before recent publicity on this matter, the suggestions received so far are very similar to proposals publicly advocated by the Democrats last year.
These proposals, and variations on these proposals, have been carefully considered and costed by my Department. Alternative proposals have certainly not been dismissed out of hand.
I am advised that adoption of the most recent proposal would mean that a Budget measure worth $95 million in year one would cost at least an additional $240 million per year, and likely more, depending on the taper rates.
The reason that I have gone into this detail is firstly to acknowledge the industry bodies' efforts. It is appropriate that you bring forward and advocate for the interests of your members. It is incumbent upon me to listen to consult and where appropriate to accommodate your concerns and consider your ideas.
But I also have an obligation to the Australian people to deliver election promises and to implement them in a financially responsible way.
I accept that, at this late stage of policy development, the surcharge reduction and co-contribution may not suit the alternative ideas of Labor and the Democrats, but from an industry point of view I have not had representations until recently which suggest other than the package should be implemented as it stands.
The Australian people expect the Government to deliver the co-contribution and surcharge reduction promised at the last election. The Government stands ready to do this.
In conclusion let me emphasise that there is a need to maintain our focus on ensuring that the system is meeting the needs of Australians. We need to remain vigilant for opportunities to improve the way our retirement income system works.
I welcome debate about the future direction of superannuation, the future of savings and the adequacy of retirement incomes. It is one of the biggest challenges we face as a young nation with an ageing population.
For industry, the opportunity exists to influence and shape superannuation policy. But this opportunity requires us to work together. It is an exciting policy environment. There is much at stake and much more to be achieved as together we chart the future course of the retirement incomes system.