Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
The Future of Financial Advice in Australia
Address to the Association of Financial Advisers' Luncheon
20 May 2009
Thank you for that kind introduction.
I'm delighted to be here today to address the Association of Financial Advisers' Luncheon.
I notice that your organisation aims to provide your clients with forward-focused advice and lifelong relationships, rather than event-driven advice and historical reviews.
That is a commendable objective, and one which I wholeheartedly support. Now, more than ever, Australians need sound financial advice built on a sustainable foundation with a long-term outlook.
Economic outlook for Australia and key Budget measures
Ladies and gentlemen, we all know that we are facing the most challenging global economic conditions in eight decades. With almost all major economies now in recession, it was inevitable that Australia would be dragged into recession too.
That's why the 2009 Budget is a forward-looking Budget. One that supports jobs today by investing in the infrastructure Australia needs for tomorrow.
This strategy will position us to capitalise on the global recovery which lies ahead.
The 2009 Budget has at its core a $22 billion investment in the infrastructure our nation needs to grow and flourish in the years ahead.
Its focus is on an unprecedented push for jobs and productivity, built on the roads, rail, ports and broadband that are the building blocks for sustainable growth.
The economic stimulus in this Budget raises the level of GDP by 0.75 per cent in 2009‑10, when the economy is expected to be at its weakest.
And the measures in this Budget build on the decisive action the Government has taken since the extent of the global recession became clear. Action that has cushioned Australia from the worst effects of this downturn.
Key retirement incomes measures and impacts
In developing the 2009 Budget, we needed to be responsive to the needs of the most vulnerable members of our community, while still maintaining stability over the long term.
This is why the Government has focused on improving equity... building integrity... and helping out those people most affected by the global downturn.
I want to run through three key areas of action that stem from last Tuesday's Budget, they are on pensions, on reform pathways suggested by the Henry Review, and on superannuation measures.
First, to pension reforms.
The Government's has announced new secure and sustainable pension reforms in the 2009-10 Budget.
These reforms are designed to give pensioners increased financial security whilst also making the pension system more sustainable in the face of an ageing population and the fiscal constraints brought about by the global recession.
From 20 September 2009, some 3.3 million age pensioners, disability pensioners, carers, wife pensioners and veteran income support recipients will be receiving increased assistance thanks to these reforms.
The pension increase will be delivered via:
- For full rate singles: an increase of $30.00 a week in the base pension, and $2.49 a week in a new fortnightly supplement; and
- For full rate couples: an increase of $10.14 a week in a new fortnightly supplement.
This is a total increase in permanent annual payments of $1,689.40 for singles, and $527.20 to couples combined.
The reforms deliver on the Government's promise of long-term pension reform and will ensure that pensioners have a pension that provides them with an adequate and secure income.
The Henry Retirement Incomes Review was made public with the 2009 budget papers, and I will say more on that in a moment.
But one of its key recommendations was that the Age Pension age be gradually increased to 67.
The Government has decided to adopt the Review's recommendation on the Age Pension age with an appropriate transition period.
This is because Australia's retirement income system should reflect increasing life expectancies.
The transition period begins in 2017 where the pension age will gradually increase from age 65 at 6 monthly intervals until it reaches 67 by 2023.
The oldest person affected by this change will be 57 on 1 July 2009 – their pension age will increase to 65.5.
The full impact of the increase applies to those aged 52.5 and younger on 1 July 2009.
The Government's decision to gradually phase-in its plan for increasing the age pension age is in order to give people time to plan for their future, as well as allow women's eligibility age to catch-up with men's.
In developing these reforms, the Government has endeavoured to strike a balance between addressing the inadequacy of the single age pension, as well as improving support for couples.
Many other developed economies have made the decision to increase their pension age.
The United States, Germany, Norway and Iceland are progressively increasing their pension age to 67, and the United Kingdom is increasing its pension age to 68.
According to the United Nations, Australia has the fourth-highest life expectancy in the world. Life expectance at birth is now 83.7 for females and 79.0 for males.
When the age pension was introduced in 1909 the corresponding ages were 58.8 for females and 55.2 for males – an increase of 24.9 and 23.8 years respectively.
The Government understands the need for a tax and transfer payments system that is simpler, rewards hard work and provides security for retirees.
That's why the Government established a review into Australia's future tax system. The review has an independent panel chaired by Dr Ken Henry, the Secretary of the Treasury.
We need long-term reform to achieve this ambitious goal. And to position Australia to deal with the challenges it faces into the future.
The superannuation and retirement income system are under the microscope of the review.
As I've mentioned, the Review has delivered its report to the Government on the retirement income system which was released on Budget night.
The report supports the current architecture of the retirement income system known as the "three pillars". These are mandatory private superannuation saving, voluntary saving, and the age pension.
However, the Review found that there is both the need and the opportunity to calibrate the current arrangements to better meet future challenges. And to reform some structural weaknesses within the system.
The Review made recommendations on increasing the Age Pension age and questioned whether the current cap on the concessions was appropriate. These recommendations have been incorporated into the Budget measures I've outlined today.
In addition, the Review Panel has made several in-principle recommendations.
- reducing the complexities resulting from the interactions between the tax transfer system and the aged care sector;
- maintaining tax assistance to superannuation but improving the fairness of concessions for contributions;,
- improving the ability to use superannuation to manage longevity risk; and
- improving the public's awareness and engagement with the retirement income system.
As I mentioned, these are in-principle recommendations. The Government will thoroughly assess the findings of the Henry Review when they are fully delivered at the end of 2009.
I would again stress for everyone here, and for all of our friends in the media: there will be no consideration by the Government of the issue of increasing the superannuation preservation age until that time.
The Henry Tax Review will carve out a pathway for reform.
But of course, the Government is well aware that reform will need to be carefully and strategically planned.
Now to superannuation-specific issues.
As part of the Budget, I announced a package of superannuation measures which is consistent with these objectives while preserving our ongoing commitment to maintain the safety, stability and efficiency of our superannuation system.
Changes in the concessional and non-concessional contributions caps
From 1 July 2009, we will introduce greater equity into the system by reducing the disproportionate benefits received by high income earners who can afford to make large concessional contributions. The average income of those involved would be over $220,000 a year.
To reduce the superannuation tax breaks received by these people, the concessional contributions cap will be lowered from its current level of $50,000 to $25,000. The transitional contributions cap for those aged 50 and over will be reduced from $100,000 to $50,000.
The average account balance for a person over age 50 currently contributing more than $50,000 is a very large $890,000. Another way to look at this is that less than 2% of the community will be affected by this change in any way – that is less than 2% at the very top, making a major contribution to equity, sustainability and the future of our retirement incomes system.
Temporary reduction in Government co-contribution
As I'm sure you can appreciate, developing the 2009 Budget meant taking some tough decisions.
To deliver budgetary savings, we will temporarily reduce the co‑contribution matching rate and maximum amount payable for eligible contributions made between 1 July 2009 and 30 June 2014.
The matching rates and maximum co-contributions announced in the Budget were:
- 100 per cent for 2009-10, 2010-11 and 2011-12, with a maximum co‑contribution of up to $1,000.
- 125 per cent for 2012-13 and 2013-14, with a maximum co-contribution of up to $1,250.
In 2014-15, the Government co-contribution scheme will revert back to the current matching rate of 150 per cent, and maximum co‑contribution of $1,500.
I note that only about 20% of those eligible actually make personal contributions to attract the Government co-contribution.
Account-based pensions – reduction in minimum drawdown amounts for 2009-10
The Government is also mindful of the effects of the global economic downturn on the account-based pension portfolios of self-funded retirees.
To assist these self‑funded retirees, the Government will reduce the minimum payment amounts for account‑based pensions by 50 per cent for 2009-10.
This measure extends the drawdown relief which the Government provided in February this year for 2008-09.
Reducing the minimum drawdown amounts will help pension account balances to recover from capital losses associated with the global economic downturn. It will also benefit account-based pension holders by reducing the need to sell assets at a loss in order to meet the minimum payment amount for 2009‑10.
The 50 per cent reduction in the minimum payment amounts will apply to account‑based, allocated and market-linked pensions.
Communiqué of Principles for Superannuation
As I am sure you are all aware, late last month I released, together with peak superannuation industry bodies, the Communiqué of Principles on the Australian superannuation system.
The Communiquéincluded a resolution to examine the structure, operation and efficiency of our superannuation system.
It's noteworthy that all parts of the superannuation sector have come on board. This is a mature decision by everyone concerned. One which I'm confident will help to maintain community confidence in our world-class system.
After 20 years of compulsory superannuation, with over $1 trillion under management on behalf of hard-working Australians, it's time we examined our superannuation system. Both Government and the industry itself want to ensure that the system operates efficiently and sustainably.
One aspect of the Australian superannuation system which has concerned me for some time is the level of account fees and charges, because account fees and charges have a direct and significant impact on final retirement income.
To illustrate my point, fees at two per cent of a member's account — rather than one per cent — could, over 30 years, reduce their final retirement income by up to 20 per cent. That's a very significant difference, however you look at it.
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.
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 super 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 incomes. This means that members of consistently underperforming funds will not optimise their post-retirement income if they remain in an underperforming fund.
The superannuation system review will complement the current work of the Henry Review of Taxation to strengthen the financial security of Australians in retirement.
Financial Services Working Group
Another way that we are improving the efficiency and effectiveness of our superannuation system is by 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.
The Working Group 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.
Last year, the Government released the first of these new, short form disclosure documents — a four page product disclosure statement for the First Home Saver Accounts.
The next item on the Working Group's agenda is to look at product disclosure documents sector by sector, beginning with margin lending, superannuation, and managed investment products.
During this process, the Working Group consults closely with stakeholders through its advisory panel and conducts public consultations on a regular basis.
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.
Last year, the Working Group released a public consultation paper, entitled Simple Choices Within an Existing Superannuation Account. The paper set out several proposals that could help us to provide intra-product advice relating to superannuation.
The Working Group is analysing and consulting with industry on these proposals, and examining what regulatory and other steps the Government could take to help more investors get the kind of advice they need. I expect to announce a policy decision about this after the consultation period expires on 5 June.
We want to find solutions so that millions of Australians will be able to benefit from easier access to cost effective, simple advice about their superannuation.
Access to basic advice is crucial when people need help making choices about their retirement savings.
PJC report into financial services
As well as reforming our superannuation system, the Government is taking action on a number of fronts to modernise the regulation of our financial services industry.
I'm sure you're aware that in February this year, the Parliamentary Joint Committee on Corporations and Financial Services decided to inquire into the issues associated with some financial products and recent service provider collapses, such as Storm Financial.
The global recession has exposed the underlying problems with some financial products and financial service providers.
As part of this inquiry, the PJC is examining a wide range of issues, including the role played by financial advisers, current remuneration structures such as fees and commissions, and the current regulatory environment, including licensing arrangements, for financial service providers and financial advisers.
Further, the PJC is looking into the practices of banks and other financial institutions in relation to margin lending.
The PJC will accept submissions until 31 July this year, and will hold public hearings before this date. The PJC will report its findings by 23 November.
The Government welcomes this inquiry and I look forward to supporting the work of the PJC.
I would encourage members of Association of Financial Advisers to make a submission to the enquiry. Information is available on the Parliament of Australia website.
Consumer credit reforms and margin lending
Margin lending has also come under scrutiny as part of the major overhaul the Government is making to the regulation of consumer credit in this country.
The reforms include all consumer credit — mortgages, credit cards, and some investment lending to over 5.7 million Australian households. It also covers brokers and credit advisers.
At the moment, Australian consumer credit regulation occurs under a range of different legal regimes, including both Federal Government and State or Territory government regimes. In other words, there is currently no consistent consumer protection system throughout Australia.
Another problem is that the laws do not currently cover some of the newer, and more complex, credit products.
To overcome these problems, we are introducing one single, national, standard system to regulate consumer credit.
I expect to introduce the National Consumer Credit Protection Bill into Parliament in the next few months, and the new national regime to be in place shortly afterwards.
This will be a decisive moment. For the first time, Australia will have one, standard, national regime which applies equally to all credit consumers and all credit providers, right across the nation.
As part of the new national credit regime, margin loans will, for the first time, become subject to specific legislation designed to protect consumers from harmful lending practices.
As margin loans are generally used to finance investments in listed and unlisted securities, the Government has decided to regulate this particular consumer credit product as part of the financial services regime in Chapter 7 of the Corporations Act.
This means that margin loan borrowers will benefit from the general investor protection regime contained in that legislation.
This includes a number of important measures. For example, lenders and advisers will have to be licensed and regulated by ASIC.
Consumers will have access to independent, free and fast dispute resolution services.
And importantly, advisers will be required to only provide advice that is appropriate to the client's needs and circumstances.
As well, the regime will include a number of specific measures that apply exclusively to margin loans.
In drafting the legislation, care has been taken to draft a definition of margin loans that captures both standard margin loans, as well as non-standard structures such as those used in the past by failed entities such as Opes Prime.
This is an important point. Non-standard margin loans contained some features that many borrowers found difficult to understand. This meant that some investors suffered significant losses when the loan providers failed.
Capturing these types of margin loans within the regime will ensure that potential borrowers are properly informed about the special features of these loans and what they may entail.
Margin loan providers and financial advisers will also be covered by the responsible lending requirements.
In particular, they will need to consider the impact on borrowers who have taken on additional debt to set up a margin loan, and may have used their home as security for that debt.
Lenders and advisers will be able to provide or recommend a margin loan in these circumstances only if they are reasonably sure that the borrower can afford the loan without suffering substantial hardship.
This measure is designed to prevent the financial stress suffered by a significant number of margin loan borrowers in the wake of the recent collapse of Storm Financial.
The legislation will also clarify, for the first time, which party is responsible for notifying the client in the case of a margin call.
The Financial Services Working Group, which I spoke about earlier, will shortly release a simplified margin lending Product Disclosure Statement. The new disclosure regime will commence at the same time as the new laws.
The draft legislation was developed in close consultation with stakeholders. Including a number of industry organisations and margin lenders, who have spent a lot of time working with the Government on this issue.
I would like to take this opportunity to thank everyone who contributed to this process. I hope we can continue working together to ensure that the new regime provides a sound level of consumer protection.
Ladies and gentlemen, the Government is not only providing the immediate solutions Australia needs right now. We are also looking ahead, paving the way for a strong and sustainable future.
And in doing so, we are improving equity, building integrity and providing assistance to those most affected by the downturn.
Once again, thank you for inviting me to speak with you today.