Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Recent Developments in Superannuation
Address to the Association of Superannuation Funds of Australia Luncheon
10 APRIL 2008
Thank you for the opportunity to address the Association of Superannuation Funds of Australia on the topic of recent developments in superannuation.
Our Government is 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, under point two of our five point plan to fight inflation, the Prime Minister flagged that this Government will examine all options to provide real incentives to encourage private savings.
The Prime Minister has also quickly taken the initiative overseas, in advocating the creation of a global early warning system to prevent a repeat of the recent global credit crisis, as well as setting up a Treasury review of equity derivatives and short selling. This is a far-sighted approach not seen from the previous Government.
The Labor Government's fiscally conservative approach and support for a robust superannuation system is a key part of our overall approach to managing the Australian economy.
Our government has a long history of championing the cause of superannuation for all working Australians. It was Labor that introduced the first fundamental superannuation reforms.
The introduction of compulsory superannuation has had a significant and continuing impact, both on Australia's economic health and the retirement savings of hard working Australians.
This reform extended superannuation coverage to nearly all employees. Importantly, if the Government had not introduced the superannuation guarantee arrangements in the early 1990s, most low income, casual or part-time workers in industries such as hospitality and retail would not have the added financial security this has brought to their retirement incomes 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.
The latest available data from the Australian Prudential Regulation Authority for 2007 indicates fund assets rose to a total of $1.18 trillion, an increase of 15.4% despite a fall of 0.4% during the last three months of the year.
However, some fund members will be concerned that the current market volatility will mean their superannuation fund will experience poorer returns. Equally, funds may fear that these short-term fluctuations will make fund members more sensitive to their fund's performance and more willing to switch funds.
The ability of employees to choose their superannuation fund indeed gives them the freedom to switch to another fund. A significant amount of switching could put the liquidity of an unprepared fund at risk.
However, trustees are now better placed to manage the risks arising from market volatility than they may have been in the past, as they are now required to have risk management strategies and plans in place. Risks to the investment strategy would include those that may arise from sudden market moves, including the risk of members switching away from the fund.
Superannuation is a long-term investment. Over the long term, 35 years, Australian superannuation has delivered excellent real returns of about 5% over and above inflation to 30 June 2007.
Different investments have varying degrees of volatility and no single investment asset always performs better than others do. This means that diversified portfolios usually provide more consistent, less risky, returns.
The preservation arrangements and the compulsory nature of superannuation allows superannuation trustees to manage market volatility over time through a progressive rebalancing of their investment strategies in response to market conditions.
As superannuation is a long-term investment, people continue to benefit from their investment returns for many more years after they retire. When they receive their fund statements this year they need to look, not just at the yearly rate of return but to the more important five to seven year rate of return that should also be included in the statement.
I've asked the Australian Prudential Regulation Authority to ensure that funds have adequate liquidity and the Australian Securities and Investments Commission to ensure that funds adequately inform their members about their returns.
First Home Saver 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 commitment was reflected in the Government's 2007 election policy to introduce First Home Saver Accounts.
On 8 February 2008, the Government released a discussion paper outlining the proposed features of First Home Saver Accounts and how they will 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 the 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 ASFA, in response to the discussion paper and will announce the final details of the accounts over the coming months.
Superannuation Guarantee (SG) Late Payment Offset
The Government has moved quickly to introduce into Parliament Tax Laws Amendment (2008 Measures No. 2) Bill 2008 which will amend the superannuation guarantee law to provide fairer treatment to employers who make contributions after the due date.
The Bill will ensure that late contributions count towards the required superannuation payments of an employer, and so employers will not have to pay the same amount twice.
The prompt actions of the Rudd Labor Government clearly differentiate us from the previous Government, who did not fix this growing anomaly over the previous 11 ½ years.
Under the pre-existing superannuation guarantee law, employers are required to make contributions at least quarterly on behalf of their employees. Employers who fail to make the required payment by the due date will have to pay the SG charge to the Tax Office. The SG charge includes the unpaid (or shortfall) amount.
Currently, this means that an employer who makes a late contribution directly to their employee's superannuation fund instead of the Tax Office, is considered to have not paid at all. In effect the employer is being forced to pay the amount twice.
The Government is committed to reducing unnecessary burdens on small businesses while at the same time ensuring workers receive their superannuation entitlements.
The offset will be available to employers from the date of Royal Assent, including employers who have been assessed with the SG charge before this date, if their charge remains unpaid.
The Tax Office will continue to impose penalties and interest on employers who fail to make their contributions on time to ensure that there continues to be a strong incentive for employers to comply with their SG obligations. The interest imposed is payable to employees to compensate them for the lateness in receiving their SG payment.
Tax Free Superannuation Lump Sums for Terminally Ill
On 13 February 2008 the Rudd 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.
I am pleased to note that we have backdated the start date on this initiative. After coming to power, the Government reviewed this measure first announced by the previous Government. In response to concerns from people who would have missed out, we have chosen 1 July 2007 as the start date. This is simpler and fairer for those affected.
Self Managed Superannuation Funds
Earlier this year, on 14 February 2008, I announced that consultation had commenced with a range of industry organisations and practitioners about a range of matters of relevance to self managed superannuation funds (SMSFs).
First, I note that in looking at governance issues, I am not focussed on the SMSF segment alone. This simply forms part of my broader focus on governance. The SMSF segment is an important part of the broader superannuation market, and it is on the whole a robust, sound and healthy area of the market.
However, results of a recent Australian Taxation Office (ATO) survey indicate that whilst 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.
The Government is concerned where individuals are subject to aggressive marketing, and may be persuaded to establish a SMSF without being aware of their role and responsibilities, and without appreciating the costs involved. This concern is not directed at any particular segment providing advice to the SMSF market.
Trustee responsibilities and knowledge
In the ATO survey I just mentioned, the ATO found that 21 per cent of participating trustees had a 'low to medium' or 'low' knowledge of their obligations. This suggests a need for further education for trustees.
From the same survey, the ATO also found that over 30 per cent of new trustees could not provide an explanation of the sole purpose test, and more than 15 per cent did not have an investment strategy.
Additionally, 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 and approximately two-thirds of new trustees could not specify the limit on the level of in-house assets within the SMSF.
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.
I am aware that some industry organisations are putting greater emphasis on training for their members. Some are introducing mandatory requirements for ongoing education.
Fees and Charges
Many new SMSF trustees say they believe running their own fund enables costs to be minimised, so funds are more efficiently managed. However, costs are incurred for the establishment of the fund as well as the ongoing administration and operation. Arguably, those who wish to enter into SMSF arrangements are not fully aware of the fees and costs likely to be incurred.
ASIC has been drawing attention to this issue through the FIDO website by encouraging people looking to establish their own SMSF to consider whether they will be contributing sufficient assets to produce a better result than a suitable low cost alternative fund.
As ASIC points out on its website, and has emphasised in Senate Committee hearings, the cost of setting up and complying with the rules generally means that you need $200,000 or more to put into your SMSF for it to be competitive. In comparing SMSF fees and costs by fund size, generally the smaller the asset size of the fund, the greater the ratio of operating expenses to total fund asset size.
The latest figures from ATO annual return data show that the ratio of operating expenses to total assets:
- is 10.51% for funds with assets of up to $50,000, and
- ranges from 3.55% to 2.63% for funds in asset ranges between $50,000 to $200,000.
- drops to 2.26% for funds with assets between $200,000 and $500,000.
Very worryingly, the trend from 2004 to 2006 is for an increase in the ratio of expenses across these levels, and this data is likely to understate the actual costs as it does not include all expenses, such as some non-deductible fund establishment costs.
ATO data also shows that approximately 30 per cent of SMSFs currently have less than $200,000 in assets.
The ATO states in its booklet 'DIY Super - It's your money … but not yet' that funds with low asset values can have diminished potential to generate returns due to their operational costs. Funds with low asset values may not have a sufficiently diversified portfolio of assets, subjecting members' benefits to increased risk. The ATO also advises that funds with low asset values are sometimes used for early access.
It is important that those recommending an SMSF provide effective disclosure, to ensure that those who wish to establish an SMSF are familiar with details such as the financial and time burdens and the amount of money they need in the fund to make it viable.
The current penalty regime for SMSFs appears to limit the ATO options for addressing non-compliance.
Generally, the application of penalties for non-complying trustee behaviour comprises the imposition of civil and criminal penalties. Penalties of this nature can be costly, time-consuming and harsh.
With this in mind, should our penalty arrangements be better targeted to achieve the intended results? It should be noted that trustees are already jointly and severally liable but tax concessions apply only if they comply with their superannuation law obligations.
The ATO has advised me that they will continue to provide advice to support professionals and trustees through the non-binding public rulings regime.
Peak Superannuation Advisory Group
I have established a Peak Superannuation Advisory Group to provide me with ongoing and direct links to the superannuation industry and to act as a direct sounding board for the Government on superannuation issues.
The Group has met once so far – on 3 March 2008 in Parliament House, Canberra. Our first meeting was very useful in fulfilling its purpose of providing a high-level perspective on superannuation issues. I anticipate that it will complement the important and continuing broad stakeholder consultations undertaken by the Government from time to time.
Membership of the Group is drawn broadly from academia and the superannuation industry with membership selected for their knowledge of the industry. Members participate in their personal capacities and not as representatives of any particular institution or organisation.
The Group draws on a wealth of experience in the superannuation industry. The Group will aim to meet three times a year.
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. Consequently, accounts which are inactive, but not 'lost', are inadvertently included on 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.
Members of the recently formed Superannuation Advisory Group also discussed options to address this issue at the inaugural meeting in March. I intend to consult further with the industry on a range of practical solutions to this problem that will improve workers retirement savings while minimising complexity and red tape.
Financial Services Working Group
As with every big industry, the financial services sector has a number of significant issues that need to be addressed. In particular, investors must have access to, and understand, the information being provided to assist them in making informed decisions.
The complexity and length of disclosure documentation is of significant concern to Government, with some documents being 100 pages or more and unreadable to most people. As Minister for Superannuation and Corporate Law, I am determined to fix the problem. I am committed to seeing that industry providers produce simple, concise, and, perhaps most importantly, readable financial services disclosure documents.
In February, I announced the tripartite Financial Services Working Group, which has been established by me and the Minister for Finance and Deregulation, Lindsay Tanner. The Working Group is comprised of officials from Treasury, the Department of Finance and Deregulation and the Australian Securities and Investments Commission.
The Working Group's mandate is to determine the best possible approach to delivering short, comparable financial product disclosure documents.
The group will examine disclosure documentation in a staged process. As a first step, the Working Group is working on the development of a short and simple Product Disclosure Statement for First Home Saver Accounts.
It is also examining the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The group will identify current obstacles, the removal of which will facilitate improved access to such advice for all Australians. A consultation paper is being finalised and will be released in the near future.
I am confident that the Working Group will provide innovative solutions to some chronic problems. A large part of its success will be due to its close consultation with interested stakeholders, both industry and consumer, through an Advisory Panel that was formed in March for this purpose, on which ASFA is represented.
Meetings of this Panel to date have been valuable forums for informing the ongoing work of the Working Group.
There is a lot going on in superannuation right now. Today, I have outlined our recent achievements, and some current issues of concern to the Government.
I have also spoken of the Government's broad consultations like first home saver accounts, SMSF governance, as well as consultations through the Peak Superannuation Advisory Group and the Financial Services Working Group.
Given our priority towards the goal of a decent minimum retirement income for all Australians, the Government will continue to progress reforms where necessary and to consult along the way.