Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Association of Superannuation Funds of Australia
(ASFA) National Conference
Auckland, New Zealand
14 November 2008
It is a pleasure to address the Association of Superannuation Funds of Australia (AFSA) National Conference today. I trust you have all been enjoying the conference thus far.
This morning I will be speaking to you about the Government's vision for superannuation, the 'where to next. This is an appropriate time 20 years on from the introduction of compulsory superannuation in 1987 to do so.
Financial market volatility and the superannuation sector
I do not need to remind you that financial markets are currently very volatile and have suffered substantial losses over the last few months. These developments have occurred very quickly and impact significantly on Australians' retirement savings - particularly for those close to or in retirement. The reported average negative return for the last financial year was minus 6.4 per cent. However, in times of market volatility such as this, it remains important to take a longer term view.
Despite the substantial immediate impact on superannuation fund balances due to the global financial crisis, our superannuation system remains strong. Superannuation funds in Australia are well-managed and safe. They must have comprehensive and resilient risk management procedures in place. The delegated responsibility requires them to consider risk, diversification and liquidity in managing the assets of the fund. The Australian Prudential Regulation Authority (APRA) is rigorously overseeing the industry to ensure that funds are proactively responding to market developments and operating prudently in their members' best interests.
History tells us that markets will recover over time.
Indeed, for most members, that is the point with superannuation. It has a long term focus - there is time to recover given average working lives of 30 - 40 years and retirements spanning 20 years plus.
Over the 35 years to June 2007, Australian superannuation has delivered excellent real returns of about five per cent over and above inflation.
Put another way, a dollar in a superannuation account ten years ago would have been worth $2.07 on average on 30 June 2008, or indeed, a dollar in a superannuation account twenty years ago would have been worth about $5.49 at 30 June 2008.
It is vital that superannuation members understand this long-term focus. Switching to conservative investment options or deposit products can turn volatility into real long term losses. There may be taxation consequences. It also means that they are not in the market to experience the gains when the market recovers.
I wish to acknowledge and thank all industry participants, funds, advisers, planners, for maintaining the focus on the long term. In a compulsory system Government has a "duty of care" to the system as a whole and I am pleased to reinforce this long tern focus where I can.
In acknowledging this however, some important challenges lie ahead for the sector.
The key issue for the Government is maintaining the safety, stability and efficiency of our superannuation system. I will be discussing the Government's initiatives in this regard shortly.
Government response to financial market volatility
The Government is conscious of the impacts of current events on households across the country. Therefore, throughout this global financial crisis, the Government's approach has been to plan ahead, to examine unfolding events, to act early, and to act decisively.
That is why we are working closely with other governments around the world to address the global financial crisis.
And that is why we have implemented several measures over months to strengthen growth and protect Australians from the effects of the global financial crisis.
Economic Security Strategy
One example of our decisive action is the $10.4 billion Economic Security Strategy, designed to strengthen the Australian economy and support Australian households through these difficult times.
The Economic Security Strategy will complement the Reserve Bank's recent moves to reduce official interest rates. It also builds on the measures the Government announced in the 2008-09 Budget.
The package specifically bolsters recent weaker growth in household consumption and housing, and provides much-needed assistance to Australian pensioners and families.
The package includes $4.8 billion to Australia's four million pensioners, carers and seniors, a $3.9 billion payment in support for low and middle income families, a First Home Owners Boost to ensure first home buyers will be eligible for grants of up to $21,000, and an investment of $187 million to create an additional 56,000 new training places this financial year.
Fast-tracking the nation-building agenda can secure economic activity in the short term and expand growth potential in the medium-to-long term. Accordingly, the Government will be looking to the superannuation industry to consider investing in infrastructure projects. In that context, we will be working with the industry to facilitate investment, where the business case stacks up.
The Government took the tough decisions in the Budget to build a strong surplus to act as a buffer during an economic slowdown. This is now providing the flexibility we need to respond to the dramatic deterioration in the global economy.
In my areas of direct ministerial responsibility for corporate law yesterday, I announced details of the new supervisory and disclosure regime for covered short selling and the licensing and supervision and reporting arrangements for credit rating agencies and research houses.
Further, earlier this year agreement was reached with the States and Territories for a single standard national regulation of all financial services including financial services by the end of 2010. This is a substantial work program involving some 20 per cent of the financial sector.
The Government's priorities for the superannuation industry
It is worth reiterating that our superannuation system is strong, stable and continues to deliver. Yet, there is still scope for improvement.
It is time to take a close look at the operation, structure and cost of our now relatively mature superannuation industry.
We need to consider these issues on a whole of system basis, for example, 31.7 million accounts for 11.4 million adults including 6.4 million lost, across all sectors of the industry - corporate, public sector, industry, retail, and the self-managed superannuation fund sectors.
I like to call this "renovating the house", and it is a task which I believe becomes all the more relevant in light of recent market turmoil.
Retirement income outcomes are not only determined by aggregate contribution amounts or by investment strategies. Costs including fees and charges and the investment performance of funds also have a direct and significant impact on final retirement income.
Fees and charges
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, a very significant difference by any measure.
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.
Release of consultation paper - superannuation clearing house and the lost members framework
In addition to broad governance reforms, the Rudd Government is also committed to cutting red tape and reducing costs for small businesses across Australia.
One cost facing small businesses is in meeting employee requests to have their superannuation paid into many different funds.
Whilst we are committed to the right of staff to choose their superannuation fund, we are equally committed to making sure the costs of allowing such choice does not disproportionately impact on small business owners.
In the Budget, the Government announced that it will provide funding of $16 million over three years, commencing in 2009-10, for an optional superannuation clearing house facility.
The introduction of a superannuation clearing house facility will deliver on our election commitment and will be cost free for employers with fewer than 20 staff. That means around 90 per cent of employing businesses across Australia stand to benefit. As such, the clearing house initiative will be a major simplification of the administration of superannuation payments for this critical part of the economy.
I am today announcing the release of a two part consultation paper, the first part of which covers implementation issues associated with this initiative.
Key issues raised in the paper include the division of responsibilities between employers and the clearing house in relation to Superannuation Guarantee and choice of fund, whether the clearing house facility should be contracted to a single or multiple providers, and the regulatory framework which would apply to the clearing house.
Many of you will know that I am deeply concerned at the growth in both the number and value of lost accounts on the Lost Members Register.
This growth has occurred unabated for the last decade, with initiatives such as SuperSeeker, SuperMatch and direct mail out campaigns unable to stem the growth.
Labor has committed to examining the use of an automatic consolidation mechanism for such accounts as a possible solution. The second part of the consultation paper I am releasing today canvasses several possible initiatives to address the problem of lost accounts.
I look forward to feedback from industry stakeholders and the community on these important initiatives. I am confident that by working together we can improve workers' retirement savings while minimising complexity and red tape.
The consultation paper is available on the Treasury website. The Government is seeking feedback on the issues raised in the paper by 19 December 2008.
Importance of default funds
Another way that we can improve the efficiency and effectiveness of our superannuation system is by providing safe, high-quality default mechanisms for people who fail to make active, informed choices.
Because the proportion of employees who have their superannuation contributions paid into a default fund remains very high, up to 90 per cent, this is a major priority for me.
Lower fund returns produce lower real retirement lump sums. This means that members of consistently underperforming funds will not optimise their post-retirement income prospects if they remain in an underperforming fund.
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. However there are some long term poor performing funds.
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 urge all the parties involved in the award modernisation process to give this their full consideration.
Despite some media reports to the contrary, this issue has not been rejected or dismissed by the industrial parties, and we continue to progress this issue positively. For example, I have offered to assist the parties to awards (employers and unions) to develop and recommend suitable default fund criteria to the Commission. The criteria should focus on long term performance and most importantly in a compulsory system - the best interest of fund members.
But my concern with the performance of default funds goes beyond those covered by awards. It is critical that all employees have access to well-performing default funds - this includes corporate and public sector funds
In the public sector for example, the Commonwealth will consolidate the main civilian and military boards from 1 July 2010 and has instigated a scoping study to recommend an appropriate pathway including for the way forward for the ComSuper administration function.
Self-managed superannuation funds
Another area which needs some fine-tuning is self-managed superannuation funds.
The SMSF segment is a robust, important and mostly healthy area of the market.
But as the results of a recent Australian Taxation Office (ATO) survey indicate, while the majority of the sector is well managed, a significant minority may not be. The results of the survey have received a lot of media attention, so I will not repeat them here.
But this information will help us to identify risks in the population. I would point out 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. Because so many Australians will rely on self-managed superannuation funds for their retirement income, we need to ensure that SMSFs are subject to a strong governance system.
The Government has conducted a thorough review of this sector and is currently analysing the pathway forward. And of course there a set of issues for the retail sector.
As many of you may be aware, the previous Government amended the superannuation borrowing restrictions to allow superannuation fund trustees to invest in limited-recourse instalment warrants over any asset a fund could invest in directly.
Investment in instalment warrants can be beneficial for superannuation funds if utilised as part of a well-considered investment strategy to better diversify their investment portfolios and increase capital gains from appreciating assets.
However, I am aware there has been considerable comment about the impact of the 2007 legislative changes in relation to instalment warrants and a number of issues have been brought to my attention.
The Government is closely monitoring developments in the market for instalment warrants and their impact on superannuation funds as we move through this period of volatility and we will act if necessary to address any problems.
Financial Services Working Group
As well as ensuring our super system is operating as smoothly and efficiently as possible, we need to do two things.
We need to encourage a culture of saving. And we need to provide the right signals for people to contribute to their superannuation.
An important element of this is ensuring that people have access to easy-to-understand information to help them make informed decisions, and compare the relative merits of alternative products.
This is why the Government established the Financial Services Working Group.
It is facilitating the creation of disclosure documents which are short, simple and readable. Documents which will better enable consumers to understand and compare the full range of financial products.
The Government recently released the first of these documents - a four page product disclosure statement for the First Home Saver Accounts.
As part of this project, I am keen to improve Australians' access to low-cost advice about their superannuation. There is currently a large unmet need for this kind of simple superannuation advice.
On 30 May this year, the Working Group released its public consultation paper, Simple Choices within an Existing Superannuation Account.
The paper sets out several proposals that will help us to provide intra-product advice relating to superannuation. The work is now finished and details will be announced shortly.
Publication of APRA data
APRA also plays an important role in assisting consumers to make informed decisions about their superannuation.
As the prudential regulator, APRA is well-placed to collect and publish the superannuation fund performance data it gathers from the fund income statements and balance sheets made public to members each year.
APRA publications aggregate this data at a sector level, across the industry, public sector, retail and corporate fund sectors.
Clearly, returns for industry sectors do not reflect individual fund performance. For this reason, APRA data does not provide any indication of the actual performance of a particular fund.
With the encouragement of the Government, APRA is consulting on how it could report disaggregated long-term performance and volatility data for individual funds.
This will not duplicate the work of industry research houses, which currently report at the individual fund member investment level.
By publishing this information, APRA will serve not only the public interest, but also the interests of all industry participants. Making this data public will help to ensure a fully-informed debate on medium to long-term fund performance and related issues.
APRA is currently working with superannuation funds to refine its data on direct and indirect expenses and plans to include expense data in future publications.
Australia's Future Tax System (AFTS) Review
Retirement incomes are also being considered as part of the comprehensive review of Australia's tax system announced by the Government earlier this year.
Long term reform of the tax and transfer system is a vital part of how we create prosperity, reward hard work and meet the future challenges facing Australia.
Our future tax system will also affect the decisions people make about working, saving and investing and therefore it has a significant role to play in Australia's future.
As we go about modernising the tax system for the long term, the Government's main reform priorities are to make our tax system more internationally competitive; reward hard work, by untangling disincentives caused by interactions between the income tax and welfare systems; harmonise and simplify a tax system which has become too complex; and provide certainty and security for pensioners, carers and people with disability.
From now until the review panel delivers its final report to the Government in December 2009, there will be a program of extensive public consultation to hear the views and ideas from a wide-cross section of the community.
The first round of submissions to the review closed recently on 17 October. Since then the review panel has met with some major organisations for further discussion on tax policy review priorities.
I encourage you to participate in the review and help build a fairer, simpler, more efficient tax and superannuation system to position us to deal with the major challenges Australia faces.
The pension review
As part of the broader review, my colleague the Hon Jenny Macklin MP, Minister for Families, Housing, Community Services and Indigenous Affairs, announced that Dr Jeff Harmer, the Secretary of her department, would lead a comprehensive review of the pension system. I understand ASFA took part in some of the review's public hearings on the age pension which were held throughout August and into September including a submission in late September.
It will result in long terms measures to strengthen the financial security of seniors, carers, and people with disability and will report in February 2009.
This morning I have outlined the Government's priorities for superannuation, and some of the initiatives we are working on to improve the operation of the sector.
The Government is committed to ensuring that our superannuation system is safe, stable and efficient while maximising long-term returns in the best interests of members. This is all the more important in light of recent events in the global financial system.
Consultation with industry is central to the Government's approach, and we look forward to hearing the industry's suggestions and comments in response to the two part consultation paper I have released today.Thank you and I hope you enjoy the rest of your day.