Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Super and the New Government
Speech to the Conference of Major Superannuation Funds
19 MARCH 2008
I am delighted to speak here today at the Conference. I acknowledge the important work of the Australian Institute of Superannuation Trustees and the role that the Conference of Major Super Funds plays as a forum to discuss superannuation issues. The Labor Government's support for a strong superannuation system is a key part of our overall approach to managing the Australian economy.
As Australia's first Minister for Superannuation in any government I bring together a range of areas in both Treasury and Finance. These include:
- Policy and administration, including taxation and prudential regulation, in relation to superannuation;
- Corporate governance encompassing the administration of the Australian Securities and Investments Commission and representation on the Ministerial Council for Corporations;
- The Royal Australian Mint; and
- The Australian Government Actuary.
The Government has committed to exercising fiscal restraint through a disciplined approach to spending and a hardline approach to savings. Excessive government spending contributes to demand, which can add to inflationary pressures. A comprehensive review of spending is currently working to find additional savings above the previously identified $10 billion across the forward estimates.
In his first economic speech, the Prime Minister flagged that under point two of our five point plan to fight inflation, this Government would examine all options to provide real incentives to encourage private savings.
It will be economically responsible for the Government to keep in mind its fiscal responsibility when making policy decisions over the coming year.
Labor and Superannuation
Our Government has a long history of championing the cause of superannuation for all working Australians. It was a Labor government which introduced the first fundamental superannuation reforms.
The introduction of compulsory superannuation has had a significant and continuing impact on Australia's economic health, and the retirement savings of Australian workers.
This reform extended superannuation coverage to nearly all employees. Importantly, if the Labor Government had not introduced award super in the 1980s and superannuation guarantee in the early 1990s, then it is unlikely that the majority of low‑income, casual or part-time workers in industries such as hospitality and retail would have the added financial security in retirement that they have today.
Compulsion and "duty of care"
Compulsion brings with it a strong "duty of care" by government.
Government, having rightly mandated that individuals save for their retirement, provides tax concessions, estimated in the latest Tax Expenditure Statement to be around $26.8 billion in 2007-08, and directs the concessional contributions of around $60 billion largely into the hands of private sector financial institutions governed by trustee entities. In late 2007, the total system contained around $1.2 trillion.
Superannuation is a form of long‑term savings that is not generally accessible until at least age 55. Issues such as governance, dispute resolution and compensation, safety, diversified investment and operational costs are important concerns for this Government.
It is absolutely vital in our system that trustees are well placed to minimise problems before they occur and minimise the need for regulators having to embark on sometimes onerous or intrusive oversight. Prevention is the best form of cure.
The central question for all participants in our system, regardless of their particular interest, should be: 'what is in the best interests of the member and does it maximise their retirement income?
There are a number of interlinked principles the Government has consistently outlined. They are worthwhile recounting because they will form the basis for how we examine issues going forward.
- Achieving higher retirement incomes delivered over time through a combination of the age pension plus superannuation set against a clear goal.
- Simplicity - each fund member should be able to understand at least the general features of operation of the system and the particular features of their own fund.
- Safety and confidence - features to ensure people maintain confidence that contributions will be made, that their future income is not at risk, and that they can project the income available to them on retirement; I draw a distinction between the risk from theft and fraud and market based risk in a defined contribution system.
- Choice and competition - the provision of a level of choice so that individuals can have input into selecting superannuation options that best suit their particular needs for retirement, whether it be a particular fund, investment category, lump sum or pension/annuity, or age of retirement.
There is a need to ensure a careful balance in a system which denies individuals the choice not to participate in the system but requires them to make what can be a range of complex choices within the system itself.
- Affordability - superannuation should be a cost effective savings vehicle with operating costs kept to a minimum.
- Improved incentives and equity - superannuation should be taxed in a fair and equitable manner, and the Government has committed to examining new ways to improve incentives to save, consistent with a responsible fiscal policy.
There are some further practical considerations I would add:
Increasing workforce participation
Given the recent high levels of employment and the significant skill shortages that have developed in sections of our economy, it is important to encourage Australians to participate in the workplace for as long as possible.
I am also conscious of the great pressure which fund administration systems, IT hardware and software have been under due to a number of recent policy changes, such as Better Super and the “anti-money laundering” changes.
I can assure you this is being taken into account in developing new policy and in considering other issues such as the automatic 'rolling together' of lost accounts.
Hopefully further changes can be made that further simplify the administration, operation and decision making for the entire superannuation system.
There are a number of policy areas in superannuation that are currently of interest to Government. These include:
- tax free superannuation lump sums for the terminally ill;
- the level of lost superannuation;
- the simplification of Product Disclosure Statements;
- maintaining superannuation as an allowable matter in awards;
- financial literacy; and
- the First Home Savers Account initiative.
I have also invited comments on governance issues in relation to self‑managed superannuation funds.
Tax Free Superannuation Lump Sums for Terminally Ill
On 13 February 2008 the new Labor Government introduced legislation into the Parliament to make superannuation lump sum payments tax free when paid to persons suffering from a terminal medical condition. This measure will assist in relieving financial stress which individuals and their families suffer due to their illness.
After coming to power, the Government reviewed this measure first announced by the previous Government and in response to concerns from some people who would have missed out, backdated the start date from 12 September 2007 to 1 July 2007. This is simpler and fairer for those affected.
The tax free treatment will apply to lump sum payments made on or after 1 July 2007 from both taxed and untaxed funds. Under the existing law, superannuation lump sum payments paid from taxed funds to individuals suffering from a terminal medical condition under the age of 55 are taxed at a maximum rate of 21.5 per cent (including the Medicare levy). Higher tax rates will apply to lump sums paid from untaxed funds.
In addition, on 15 February 2008, regulations were made creating a new condition of release which gives persons with a terminal medical condition unrestricted access to their superannuation benefits, irrespective of their age or whether they are working.
An issue I have been following with concern for some time is the continued growth in the amount of superannuation reported on the Lost Members Register. The Register, which uses information supplied by superannuation funds, is intended to assist individual members to identify lost super and consolidate their accounts.
Monies associated with the accounts on the register are still held by the funds on behalf of the lost members. In the ATO's latest annual report, the number of lost accounts on the register had grown to about 6.1 million, with assets totalling approximately $11.9 billion.
This is a worryingly large figure. I do note, however, the definition of 'lost member' is drawn very widely to ensure that any account which may be 'lost' is reported to the register. Nevertheless, the growing amount of superannuation identified as lost superannuation has been a significant issue over the last decade.
Lost accounts represent approximately one in five of all superannuation accounts, with an average of one lost account for every two Australian workers. This is a problem because the sizeable number of these accounts suggests many Australian workers will access less of their savings on retirement than they would otherwise receive. In addition, the number of these accounts collectively increases superannuation fund running costs.
Previous attempts to address this issue in the system have failed.
I have expressed a preference for the option of reuniting Australians with their lost accounts by introducing an automatic consolidation system, with an opt out provision, using our Tax File Number system.
Under this option, lost accounts would be automatically rolled over into a current or the most recently active account.
Simplification of Product Disclosure Statements and intra‑product advice (tools for financial planning)
I noted earlier that in allocating ministerial responsibilities, the new Government has recognised the importance of superannuation by creating the new role of the Minister for Superannuation and Corporate Law.
It is important to me that investors have access to, and understand, the relevant information with which to make decisions about their superannuation. A major issue is the quality and length of disclosure documents. With my new responsibilities as Minister, I am enthusiastic about fixing this problem and I would like to see industry providers committed to producing simple, standard and most importantly, readable financial services disclosure documents.
The Minister for Finance and Deregulation, the Hon Lindsay Tanner MP, and I, have set up a tripartite Financial Services Working Group comprised of Treasury, the Department of Finance and Deregulation and Australian Securities and Investments Commission officials. The Working Group will examine disclosure documents in a staged process to facilitate short, simple and readable documents to better enable consumers to understand and compare products. This will assist consumers in making important decisions about their financial futures.
The Working Group will also examine the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The Working Group will identify the obstacles to providing this advice, with a view to improving access to such advice for all Australians.
The Working Group will be conducting robust research and where necessary, consumer testing to develop solutions that get to the heart of the problems will be identified. I expect the Working Group will seek your involvement as part of its consultation with all stakeholders to deliver the best outcomes.
Superannuation provisions in the award system
The Government believes workers should be protected in the workplace by a strong safety net which ensures their rights and conditions are not bargained away unfairly. To uphold this ideal, the Government will introduce a genuine safety net to ensure employees are fairly rewarded for their hard work.
An important component of this safety net is the award system. Awards are a key means of ensuring workers' conditions are properly protected. The Government intends to modernise and simplify the award system to protect worker's conditions.
In 2008, the Australian Industrial Relations Commission (AIRC) will begin the task of simplifying and modernising awards. With more than 4,300 awards to be modernised, the process will be conducted as rapidly, efficiently and fairly as possible. The process will occur in an open and transparent manner, with the AIRC receiving submissions and hearing from those who will be affected by the new modern award system.
The award system will be modernised based on 10 basic award conditions so that entitlements such as penalty rates and overtime are properly protected. Superannuation is one of the ten allowable matters.
Many of you will be aware that the previous Government put in place arrangements to have superannuation cease to be an allowable matter in awards from June 2008.
Under the new Government's transitional arrangements, superannuation will continue as an allowable award matter. Retaining superannuation as an allowable award condition will reduce disruption to awards in anticipation of award modernisation, and maintain the ability of awards to safeguard legally enforceable superannuation requirements, such as frequency of payments and minimum thresholds and a default fund system.
First Home Savers Accounts
The Government is committed to assisting aspiring first home buyers to save for their first home, and encouraging private savings to help put downward pressure on inflation and interest rates. This was reflected in the Government's 2007 election commitment to introduce First Home Saver Accounts.
On 8 February, the Treasurer, Wayne Swan and the Minister for Housing, Tanya Plibersek, released a First Home Saver Account discussion paper outlining the proposed features of the accounts and how they would operate.
The Government has considerably strengthened the approach it announced in the election campaign, by boosting assistance to low income earners, streamlining the operation of the accounts through a Government contribution and improving accessibility by widening the range of account providers.
These new accounts will create opportunities for providers to develop new products to service the first home saver market.
The accounts will have a minimum period of four years before withdrawal, allowing higher rates of return to be offered by account providers. To facilitate competition on returns, providers will also be able to offer a variety of investment options.
The Government will invest $950 million over the first four years on the accounts.
The Government is working closely with industry in the implementation of accounts to ensure that they are an attractive and competitive product for both industry and first home savers and to minimise compliance costs.
The Government is currently considering submissions received from industry and the community, including AIST, in response to the discussion paper and will announce the final details of the arrangements over the coming months. Feedback has been very positive with around 120 submissions received.
Self managed superannuation funds (SMSF)
On 14 February 2008, I announced that consultation had commenced with a range of industry organisations and practitioners about a range of practices in SMSFs.
Just last week, I spoke to the SMSF Professionals' Association of Australia and I raised a number of important issues that are facing that sector.
I won't go into the same detail as I did last week. However, Government is concerned that some SMSF trustees are not as aware of their legal obligations as they could be.
Trustees must ensure that the superannuation fund operates strictly in accordance with the trust deed and statutory requirements. Trustees should possess relevant investment skills and expertise and be aware of the SISA prudential requirements relating to investments.
A recent ATO survey found:
- 21 per cent of participating SMSF trustees had 'low' or 'low to medium' knowledge of their obligations;
- 30 per cent could not explain what the 'sole purpose test' was;
- 15 per cent of trustees did not have an investment strategy;
- 25 per cent were unaware of the restrictions on the type of assets that could be acquired from related parties;
- over 30 per cent of new trustees could not provide an explanation of the sole purpose test;
- 15 per cent did not have an investment strategy;
- 25 per cent of trustees were unaware of the restrictions on the types of assets that can be acquired from related parties of the SMSF;
- approximately two-thirds of new trustees could not specify the limit on the level of in-house assets within the SMSF;
- significant overweighting of SMSF investments in cash, debt, securities and term deposits, many in excess of 35% of their total assets, well beyond the norm for a long term diversified investment strategy; and
- operating expenses to total assets are;
- 10.51 per cent for funds with assets less than $50,000;
- 2.63 per cent to 3.55 per cent for funds with assets between $50,000 to $200,000; and
- 2.26 per cent for funds with assets between $200,000 and $500,000.
This information will help us identify risks in the population. I note that the previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities and education in 2005. However, these changes were not applied to the SMSF sector.
The survey results indicate that whilst on the evidence available the majority of the sector is well managed, a significant minority may not be.
A robust governance system is needed to ensure the security of the retirement incomes of all Australians using SMSFs.
Addressing issues such as education for trustees is a way forward and I am currently seeking views on how best to address these issues.
When examining the total superannuation system and applying the principles outlined earlier to current practices and evidence, they are not just focused on the SMSF sector. To varying degrees there are governance matters that require examination across all sectors; industry, corporate, retail, and the public sector.
Since the introduction of compulsory superannuation, individual superannuation balances have grown to the point where today they represent, for many people, their most significant asset aside from the family home.
Compulsory superannuation is also providing working Australians with a more comfortable and secure retirement.
Under a fully mature superannuation guarantee (SG) system, a male worker on median wages (three quarters of Average Weekly Ordinary Time Earnings), was projected (by Treasury) to have an expenditure replacement rate of 74 per cent after 35 years of SG contributions. Following the recent superannuation reforms, which the Government supported, this projected replacement rate has increased to 80 per cent. This also assumes an average 1 per cent in fees.
At the present time the majority of Australian workers have been receiving the SG at a rate of 9 per cent since 1 July 2002. If adjustment is made for the phase in period of 15 years from 2002 until today equates to an average of 9 per cent since the mid 1990's for the current workforce. Workers who are currently age 30, and more so as age increases, will fall below this Treasury projection so that there is a gap in retirement income.
Outcomes in a defined contribution system are a product of time in the system, contribution levels, rate of return, taxes, fees and date of access.
I note a range of different organisations have analysed, commented on, and suggested possible policy options.
The possible solutions advanced are varied due to the complexity of factors I have mentioned.
In closing, I would like to thank the Institute for inviting me to speak today. I have outlined some of the Government's priorities and a number of these will primarily impact the broader superannuation population. I look forward to working with many of you in the future.