Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
The Government's Priorities in Superannuation and Financial Services
Speech to the Institute of Actuaries Financial Services Forum 2008
19 May 2008
Thank you for the opportunity to address the Institute of Actuaries Financial Services Forum on the Government's priorities and initiatives in the areas of superannuation and reform of financial services.
Our Government is committed to exercising fiscal restraint through a disciplined approach to spending and a hardline approach to savings. This commitment was demonstrated through the first Rudd Government Budget introduced by the Treasurer last week. Excessive government spending contributes to demand, which can add to inflationary pressures.
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 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 Party 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.
Given the recent market volatility, there are some challenges that lie ahead for the superannuation sector.
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% over the year, 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 utilise portability and select a superannuation fund for contributions gives them the ability to switch their savings to another fund. A significant amount of switching could test the liquidity of an unprepared fund.
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. 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 have 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.
Financial Services Working Group
As with every large industry, the financial services sector has a number of significant issues that need to be addressed.
One of these is the quality, complexity, length and range of disclosure documentation. I have been a long-term critic of this approach. Latin-like documents do not provide necessary information to inform and protect consumers.
As the Minister for Superannuation and Corporate Law, I am committed to seeing that industry providers produce simple, short standard and — perhaps most importantly — readable financial services disclosure documents. Documents that pass my personal gauge of effectiveness — the "Burnie Pub Test".
I consider a financial product disclosure document to be effective if it can be easily understood by the average person, in the average pub, in an average community, like the city of Burnie in my home state of Tasmania.
Back in February, I announced the tripartite Financial Services Working Group, which was established by myself 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.
As a first step, the Working Group is exploring the development of a concise Product Disclosure Statement for First Home Saver Accounts.
It is also looking at identifying hurdles to the provision of "within product" or "intra-product" advice in regard to superannuation products.
It will then formulate proposals to address the real regulatory hurdles.
Our initial soundings indicate some hurdles are not regulatory. This demonstrates there is also a job for industry in ensuring they are best placed to provide this advice.
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 large and small.
I expect that the Working Group will take these into account in its forthcoming work. The next public information session is expected to take place on 30 May and I would encourage you to participate.
A consultation paper on intra-fund advice will be released shortly.
Forecasting of benefits and calculators
The Australian system is now overwhelmingly defined contribution in nature. One of the significant shortcomings of such an approach is that very few fund members have any idea what they are likely to end up with in savings at likely retirement age.
Developing an accurate forecasting and calculator will significantly improve our system in a number of ways:
- it will provide an estimate of likely outcome at critical ages – access age for superannuation and age pension; and
- greater focus and emphasis will be placed on the long-term rate of return and the elements that impact on it sch as contribution levels and total fees and charges;
In the UK, for example, the issuing of forecasts has seen a significant increase in fund membership awareness of the need to increase contributions.
In Sweden – a compulsory defined contribution system – the annual report to members, known as the 'red envelope' has a forecast to State pension access age as a prominent feature.
Forecasting and calculators in Australia are very limited mainly because of our devolved trustee administration model, but also because of legal difficulties under FSR.
Whilst there are a number of complex design features, assumptions and legal parameters to consider, as other countries have shown, they are not insuperable to overcome.
I am very pleased with the April discussion paper issued by the Institute 'Outstanding Issues for Benefit Projections and Online Calculations'.
Recently, I have discussed with ASIC the need to commence work in this area in tandem with the intra-product advice in superannuation.
Accordingly, I announce that it is my intention to see universal forecasting as part of the superannuation system. Universal forecasting would provide an estimate, in current dollar values, of total savings to access ages for superannuation and age pension in a simple standard format.
Regulation of financial services
On the subject of protecting investors, we also need to ensure the local financial services market remains strong, particularly in the area of providing consistent and robust consumer protection.
Proposals are in hand to address a number of problem areas, including, most importantly, the regulation of consumer credit.
We have seen the global effect of easy access to credit and we need to ensure domestically that access to finance is governed by appropriate regulation to protect our market and consumers as best we possibly can from the difficulties currently being experienced elsewhere.
I'm sure nobody will be surprised to hear that, according to the Productivity Commission's report, Review of Australia's Consumer Policy Framework, released on 8 May, credit use has risen rapidly over the last 20 years.
Residential mortgages make up the largest sector of consumer credit, accounting for an estimated 86 per cent of all consumer loans.
However, we have also seen some disturbing events recently as a result of certain margin and stock lending practices. These problems, while only affecting a minority of margin lenders, need to be addressed.
Further, we currently have no comprehensive national approach to credit-related financial services, including margin lending. Credit is mainly regulated by the States and Territories through the Uniform Consumer Credit Code.
Given the number of different jurisdictions involved, it's no surprise that current regulation is in part patchy and inconsistent.
Not only that, but it does not do enough to prevent undesirable behaviour, including problems with predatory lending and inappropriate advice.
Australia needs a financial services regulatory structure for the 21st century, one which provides the highest standards of conduct, product disclosure and advice at a national level.
Simple, standard and consistent regulation can only be achieved at a national level by one government rather than by six states and two territories.
The Commonwealth and the States are united in their commitment to turning this situation around – and there have been some key milestones achieved recently toward fulfilling this commitment.
Firstly, in its report, the Productivity Commission has been clear in its recommendation that the Commonwealth take over regulation of credit. Further, COAG recently agreed in-principle to the Commonwealth assuming responsibility for regulating mortgage credit and advice as well as margin loans, with a view to reassessing the regulation of other credit arrangements in due course.
These statements and agreements are key steps toward delivering an effective national system for regulating consumer credit.
And it's from here that the gritty work begins.
To start the process, I have developed a Green Paper seeking comment on a number of high level points.
The imminent Green Paper will ask stakeholders to provide their views on a number of important issues relating to the regulation of consumer credit as well as other financial services, including margin lending.
Consultation comments from this process will be critical to shaping the development of the new regime.
I encourage your views and participation in providing feedback to the Green Paper.
Another key priority in the financial services field is the introduction of a product rationalisation mechanism. This will help move customers out of outdated managed investment products and into modern ones.
Such rationalisation can potentially benefit everyone involved. The operation of legacy products imposes costs and risks on both the industry and investors.
However, transparency and fairness must be of paramount consideration in developing a mechanism to protect the interests of investors.
In April, Treasury convened the first meeting of the product rationalisation Expert Panel. There have been two meetings since that inaugural meeting. Various important issues have been raised including what role the regulators will play; what form the approval mechanism will take; and how the no‑disadvantage test will look. These discussions are currently progressing in a positive manner.
These meetings will be continuing into the near future, with upcoming meetings currently scheduled to discuss the particular taxation issues that must be addressed in order for the product rationalisation mechanism to be commercially viable.
It is hoped that, through the Expert Panel process, a consensus may be reached among the various stakeholders as to each of these and other important issues. Based on this consensus a detailed product rationalisation proposal could then be developed, which would be made available to the wider public for comment.
I would like to take this opportunity to publicly thank the Institute for its continuing participation on the Expert Panel. Your contribution to this discussion has been both practical and considered and I look forward to your continued involvement throughout this process.
The Working Group also consults with a wider universe of stakeholders. An initial public information session was held in Sydney on 29 February which was attended by over 40 stakeholders from industry and consumer organisations. I opened this event, and am confident that the information provided by myself and Working Group representatives has been helpful to stakeholders in understanding the scope and purpose of the Working Group's projects.
More importantly, the session also provided an opportunity for participants to put forward their views and issues, and I expect that the Working Group will take these into account in its forthcoming work.
The next public information session is expected to take place on 30 May and I would encourage you to participate.
Self Managed Superannuation Funds
On 14 February 2008, I announced that the Government had commenced stakeholder consultations on several issues relevant to self managed superannuation funds (SMSFs).
The previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities, and education. But these changes were not applied to the SMSF sector.
Because so many Australians will rely on self managed super funds for their retirement income, we need to ensure that SMSFs are subject to a strong governance system.
Trustees in the Australian system are the key guardians and decision-makers in our compulsory system. It is critical that they have the knowledge to undertake their duties and responsibilities in accordance with current law.
The SMSF sector is, on the whole, a robust, sound, and healthy area of the market. But a recent survey conducted by the Australian Taxation Office highlighted some problems with a significant number of minority trustees.
The survey found that 21 per cent of participating super trustees had a "low to medium" or "low" knowledge of their obligations. Over 30 per cent of new trustees could not provide an explanation of the "sole purpose test". And over 15 per cent did not have an investment strategy.
This is a worrying state of affairs. I am particularly concerned about cases where people have been targeted by aggressive marketing tactics, and persuaded to establish an SMSF without being fully aware of their role and responsibilities, and the fees and charges they are likely to incur.
It is important that financial advisers who recommend an SMSF provide effective disclosure, to ensure that people who wish to establish an SMSF are familiar with details such as the financial and time burdens, and the amount of money they will need in the fund to make it viable.
First Home Saver Accounts
I will now turn to one of the key initiatives of the Government to address the issue of housing affordability.
The Government is committed to introducing First Home Saver Accounts. Through a combination of low taxes and Government contributions, these accounts will provide a simple, tax effective way for Australians to save for the purchase of their first home in which to live.
The Government undertook an extensive consultation process on the proposal and received over 150 submissions. The Government thanks all individuals, businesses and organisations, who participated in the consultation process.
The Government has listened to industry and the community, and in response to the issues and suggestions raised during consultation, the Government is making a number of changes to improve the benefits to average income earners and reduce complexity and compliance costs.
In particular, the changes address a number of key concerns. The Government will:
- ease the criteria to open accounts by removing the $1,000 upfront contribution, allowing individuals to open an account without having existing savings;
- improve the benefit of the arrangements for average income earners by replacing the Government contribution schedule based on individuals' marginal tax rates with a flat Government contribution of 17 per cent for all individuals;
- increase the attractiveness of accounts and reduce compliance costs for providers by removing the $10,000 annual contributions cap and replacing it with one overall account balance cap of $75,000 (indexed to AWOTE); and
- allow accounts to form part of a deceased's estate (rather than requiring the balance to be contributed into superannuation).
The Government has decided that public‑offer licensees will need to offer accounts under a separate trust structure from their existing superannuation trust; and banks, building societies and credit unions will need to calculate the income earned by First Home Saver Accounts separately for taxation purposes and be taxed on this income at the entity level.
The requirement for a separate trust preserves the integrity of the superannuation system for retirement savings.
The Government has also decided to delay the commencement of the legislation until 1 October 2008. This will give account providers time to develop products that meet the legislative requirements which will be in place by 1 July 2008.
I will now briefly mention other announcements in the Budget, which honour some of the Rudd Government's commitments.
Review of Australia's tax system
As part of the Budget, the Government announced a comprehensive review of Australia's tax system to create a tax structure that positions us to deal with the demographic, social, economic and environmental challenges of the 21st century.
Australia's hard-working taxpayers are entitled to a tax system that is as fair and efficient as possible, and this review will help to achieve that goal. The comprehensive review will sweep up the pension system, and retirement incomes more generally, and look at a number of issues to do with the interrelationship between taxation and retirement incomes.
Superannuation Clearing Houses
As evidence of the Government's commitment to reducing the regulatory burden on Australian small businesses, it announced in the Budget funding of $16 million over three years for an optional superannuation clearing house facility which will be available from 1 July 2009.
There is no doubt that a prosperous small business sector equals a prosperous economy.
Removal of discrimination against same-sex couples
As announced by the Attorney-General, Robert McLelland, on 30 April this year, the Government will be delivering on its election commitment to remove discrimination against people in same-sex relationships, and their children, from a wide range of Commonwealth laws, including superannuation, and other programs.
The Government will begin introducing legislation in the current sittings of Parliament with most reforms to commence soon after the legislation is passed. All of the changes are expected to be implemented by mid-2009.
Temporary Residents' Superannuation
On 6 May this year, I released a consultation paper on the payment of temporary residents' superannuation to the Australian Government. Under the measure, future superannuation contributions and existing balances of temporary residents will be paid to the Australian Government.
This measure was announced by the previous government with a start date of 1 July 2008. However, the Government will now defer the start date to the date of Royal Assent (expected before the end of 2008) to allow consultation on administrative issues. The Government is currently seeking feedback on the consultation paper by 26 May 2008.
Peak Superannuation Advisory Group
Finally, earlier this year I 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 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, including a representative from the Institute, Mr John Maroney. The Group will aim to meet three times a year. The next meeting will be in Brisbane on 10 June.
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, as well as consultations through the Peak Superannuation Advisory Group and the Financial Services Working Group. I have also discussed recent Budget announcements such as the First Home Saver Account.
Given our priority towards superannuation and financial services, the Government will continue to progress reforms where necessary and to consult along the way.