Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Building Superannuation Fund Excellence in a Dynamic Regulatory Environment
Australian Pensions and Investments (API) Summit
via video link-up to the Gold Coast
16 September 2008
Thank you for the opportunity to address the 2008 Australian Pensions and Investments Summit. Today I will be speaking about building superannuation fund excellence in a dynamic regulatory environment.
The latest available data from the Australian Prudential Regulation Authority indicates that, as at March 2008, superannuation fund assets totalled $1.1 trillion. This is more than double the asset figure of five years ago.
Growth over this period had been due to the combination of a rising level of superannuation contributions, plus several years of strong investment performance by Australia's superannuation funds.
While fund assets fell slightly during the March quarter due to recent market volatility, it is important to remember that superannuation is a long term investment.
The preservation arrangements and the compulsory nature of superannuation allow superannuation trustees to manage market volatility over time through a progressive rebalancing of their investment strategies in response to market conditions.Over the 35 years to June 2007, Australian superannuation has delivered excellent real returns of close to five per cent over and above inflation.
While Australia has a robust superannuation system there are some important challenges that lie ahead for the sector. In addressing those challenges, the safety, stability and efficiency of the superannuation system remain a key priority for the Government.
As we are all aware, the fundamental goal of superannuation policy is to enhance the standard of living for Australians in retirement. To support this policy objective, it is important to encourage a culture of saving and provide the right signals for people to contribute to their superannuation. A key element of this is ensuring that people have access to easy‑to‑understand information to help them make informed decisions about their superannuation.
Financial Services Working Group
One of the ways the Government is doing this is through the Financial Services Working Group.
The Working Group was established to facilitate the creation of short, simple and readable disclosure documents, better enabling consumers to understand and compare the full range of financial products.
The first of these simplified product disclosure statements was released by the Government for the First Home Saver Accounts.
As part of this project, I am also keen to improve Australians' access to low-cost advice about their superannuation. The Government is of the view that there is currently a large unmet need for this kind of simple superannuation advice.
On May 30 this year the Working Group released its consultation paper, Simple Superannuation Advice, which sets out several proposals that may assist in the provision of intra-product advice relating to superannuation.
The Working Group is currently seeking feedback on these proposals, as well as what regulatory and other steps we could take to help more investors receive appropriate and constructive advice.
Now a few comments on the broader governance arrangements within the superannuation system.
As I indicated in a speech to the SPAA Conference in March there are a range of matters currently under consideration in respect of the self managed superannuation fund sector. Further I indicated governance matters required consideration across all sectors of the industry – corporate, public sector, industry and retail.
Any examination should be conducted in thorough, open, transparent and highly engaged manner.
This is what I have called “renovating the house”.
I consider as that as Australia's Superannuation Minister I have a duty of care to being thinking about these issues, especially in a compulsory system that is underwritten to the extent of $70 billion in capital flows and $28 billion in tax concessions.
Default funds and awards
An efficient and effective superannuation system must include safe, high-quality default mechanisms for people who fail to make an active, informed choice.
Members of consistently underperforming funds will suffer serious detriment to their post-retirement income prospects if they remain in an underperforming fund. Lower fund returns produce lower real retirement lump sums.
Because the proportion of employees who have their superannuation contributions paid into a default fund remains very high, it is a key priority for this Government to ensure that all employees have access to well-performing default funds.
Under the Government's transitional arrangements, superannuation will continue as an allowable award condition.
This approach will reduce disruption to awards in anticipation of award modernisation. It will also maintain the ability of awards to deliver legally enforceable superannuation requirements, such as frequency of payments, minimum thresholds and the default fund system.
I have made a submission to the Australian Industrial Relations Commission highlighting the importance of the selection of default funds for inclusion in awards. I urged all the parties involved in the award modernisation process to give the matter their full consideration.
Advisory remuneration models
As the statistics I noted earlier indicate, superannuation has grown both in coverage and in significance. Indeed, 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.
Superannuation account fees substantially and directly affect final retirement income. For example, fees at two per cent of a member's account ‑ rather than one per cent ‑ could, over 30 years, reduce their final return by up to 20 per cent.
The May restructure of the Australian Securities and Investments Commission saw the creation of a dedicated financial advice team. This new “stakeholder” team will look at issues that affect the ability of investors to access financial advice. These include the disclosure of fees, risk, and any relationships which may create conflicts of interest.
I would like to see Australia move towards a superannuation system with a more sustainable remuneration model, in which fees are more competitive by world standards.
Superannuation Clearing House
However, enhancing the operation of Australia's superannuation system is not just question of improving fund performance or examining remuneration structures.
As part of our commitment to reduce the regulatory burden on Australian small businesses, the Government announced in the Budget that we will provide funding of $16 million over three years, commencing in 2009‑10, for an optional superannuation clearing house facility.
This facility, which will be contracted to the private sector, will cut red tape and will reduce compliance costs for small businesses across Australia.
The superannuation clearing house measure will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the relevant superannuation funds as selected by their employees.
This new initiative will be offered free of charge to small businesses with fewer than 20 employees. It will help business owners to manage their obligations under Superannuation Choice, including the task of checking details entered on the Choice form and distribution of contributions to the nominated funds.
Businesses which use the clearing house facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house.
To ensure that Labor's election promise to reduce superannuation red tape for employers is instituted efficiently and effectively, the Government will also consult with industry on the implementation of this measure.
Australia's Future Tax System Review
Retirement incomes are also being considered as part of the comprehensive review of Australia's tax system announced by the Government on 13 May 2008. The Review is considering the future of our taxation system and its capacity to deal with the demographic, social, economic and environmental challenges of the 21st century. It is all about helping to position Australia to deal with these challenges, and to enhance Australia's economic and social outcomes.
The Review will encompass Australian and state government taxes and interactions between the tax and transfer systems.
The adequacy of existing support for seniors and carers, and measures which could strengthen their financial security in the long‑term, will be considered as part of the Review by Dr Jeff Harmer who is a member of the review panel. Dr Harmer will report his findings related to pensions to the Treasurer and the Minister for Families, Housing, Community Services and Indigenous Affairs by 28 February 2009. The Review Panel will report their findings to the Treasurer on the other issues by the end of 2009.
The announcement of the review is timely. This year marks the 100th anniversary of the introduction of the Invalid and Old-age Pensions Act, 1908, into the Australian Parliament.
When first introduced, the pension was the equivalent of 12 per cent of male total average weekly earnings (MTAWE).
However, since 1974 the single maximum rate has been benchmarked to 25 per cent of MTAWE.
The referral of the pension design to a review of the tax and transfer system will facilitate consideration of the age pension in a broader context. The disposable income of the community is largely determined by wages, personal taxation, and means tested transfer payments.
As you would no doubt be aware, on 6 August 2008, Treasury Secretary, Dr Ken Henry, released the Treasury working group's initial report on Australia's taxation and transfer system.
The report does not include any recommendations, as these must await the Review Panel's consultative processes and deliberations.
The Review Panel has invited submissions from the public as part of the broad strategy for consulting with the Australian community. The Panel wants to ensure views and ideas from a wide cross‑section of the community are considered and urges interested Australians to take advantage of the opportunity to participate.
The closing date for submissions is Friday 17 October 2008.
These submissions will inform a consultation paper that will be prepared and released by the Panel before the end of 2008. The consultation paper will outline the key issues to have emerged and provide a basis for the further review processes conducted by the Panel during 2009, including providing a further opportunity for submissions, public meetings and direct consultations on issues and options.
Public submissions have also been invited on the pension review's background paper which was released on 11 August 2008 by the Minister for Families, Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin MP and Dr Jeff Harmer, the head of her department.
The closing date for submissions to the pension review is 26 September 2008, and I would like to take the opportunity to encourage you to participate in this consultation.
Today, I have outlined the Government's priorities for superannuation, and some of the initiatives we are working on to enhance the operation of the sector in a dynamic regulatory environment.
I have spoken about Government's plan to address governance issues more generally. I have also discussed Australia's Future Tax System Review, and the consultative work of the Financial Services Working Group to address issues of disclosure in the superannuation industry.
Given the Government's priorities towards superannuation, we will continue to progress reforms where necessary, and consult along the way.Thank you.