Introduction
It is a pleasure to be with you today and to talk on the Government's superannuation and retirement income policies.
At the outset let me say this: I am a strong supporter of the superannuation industry.
An effective superannuation system is good for the individual and good for the nation.
An effective superannuation policy encourages and assists individuals to enjoy higher living standards in their retirement than they otherwise would.
And an effective superannuation policy reduces the pressures on the Age Pension system, and reduces the pressure on future generations of taxpayers.
In my remarks today, I will outline the Government's initiatives to strengthen the superannuation system to provide Australians with a world class superannuation system.
In my time as Assistant Treasurer I have often been surprised at the negative comments about the superannuation system made by some commentators. This is in contrast not only to the official data but also the frequent contact I have with practioners who report strong growth in the system.
A Sound Framework
In Australia, there is no doubt that the fundamental framework for retirement income policy is sound, indeed it leads the world in many ways.
Our three pillar approach – a means tested age pension, compulsory private saving, and voluntary superannuation savings – has been endorsed by the World Bank.
Super is growing strongly
Superannuation is one of Australia's great growth industries. Since the election of this Government in 1996, superannuation assets have grown over $120 billion to $377 billion, or around 16 per cent per annum.
Net contributions since March 1996 have averaged around $12.5 billion per annum or a billion dollars every month. Self-managed or do-it-yourself funds have shown particularly strong growth, indicating an increasing desire of people to take direct control of their superannuation arrangements a development the Government warmly welcomes.
Average superannuation balances per contributor have grown strongly from about $37,000 when this Government came to power in 1996 to about $54,000 now. By 2013 the average balance is projected by Treasury to exceed $100,000 in today's dollars and to exceed $120,000 in today's dollars by 2020. The balances of those approaching retirement are higher.
Superannuation is growing strongly not just in absolute terms but also as a share of total household assets. According to the National Balance Sheets published by the ABS, the value of superannuation assets has grown 30 per cent between 1996 and 1998 double the growth of households' housing assets. In other words, superannuation is becoming a more and more important part of the financial affairs of ordinary Australians.
The 1998-99 OECD Economic Survey showed that Australian superannuation assets were at 53.9 per cent of GDP in 1996 and that this was the fifth highest level among 25 OECD countries. More importantly, the growth rate of 25 per cent of GDP since 1988, was the second highest growth rate in the OECD behind Switzerland. Treasury's Retirement and Income Modelling Unit has projected Australian superannuation assets at over 110% of GDP by 2020.
Government Reform Agenda
While the overall three pillar approach is sound, there is no doubt that there were very real problems with the superannuation system when the Howard Government was elected to office in 1996. For instance, the superannuation system lacked choice and flexibility and superannuation tax concessions were inequitably skewed to high income earners. Therefore, the Government has put in place a considerable reform program to overcome these problems and further improve the superannuation system including, importantly, strengthening the preservation arrangements.
I would like to spend a few minutes reviewing the policy changes made to superannuation, and those in train, to put these in the context of the Government's overall retirement income policy framework.
Increased Security in Retirement: Legislating the 25% MTAWE Benchmark for the Age Pension
As I just noted, one of the three pillars of Australia's retirement income policy is the Age Pension. While superannuation and other policies are designed to reduce dependence on the Age Pension, the Government recognises that the Age Pension will continue to play a crucial role in ensuring security in retirement.
The former Labor Government had a "benchmark" of maintaining the single rate of Age Pension at no less than 25% of MTAWE. However, this was never legislated and the rate of age pension fell below this benchmark for several years during their term in Office.
The Howard Government recognised that older Australians deserved a better deal and more certainty. Despite the major Budgetary tightening we needed to achieve in our first term in Government, we legislated to maintain pensions at no less than 25% of MTAWE.
Greater Equity: the Superannuation Surcharge
On coming to Government, it was clear that the existing tax concessions for superannuation were unfairly skewed to high income earners. To address this inequity, the Government introduced the superannuation surcharge.
While this measure has been criticised by some people, there is no question that it meets its equity objective. Nor have I heard any justification of why high income earners should have continued to receive the disproportionately large tax advantages that were available before the introduction of the surcharge. While there are some compliance costs, these are a necessary part of achieving the equity objective.
On 23 March this year, I announced a number of initiatives designed to clarify and simplify the operation of the superannuation surcharge legislation.
These include the development of proposals to provide a self assessment regime for self managed superannuation funds and the removal of the surcharge advance instalment, effective immediately.
The Government is also aware of a number of technical issues that have been raised in relation to the surcharge legislation. In order to remove any doubt, amendments will be introduced to clarify these issues. The Government has been consulting with key industry and professional groups in developing these proposals and I believe these consultations have been constructive.
Greater Flexibility, Increased Choice
The superannuation system in 1996 lacked choice and flexibility. To address this, the Government has introduced – or is seeking to introduce – a range of policies.
These policies are designed to assist individual Australians to get the most out of the superannuation system and provide the right incentives for the superannuation industry to best meet the needs of superannuation members.
Low income spouse rebate
The Government believes the superannuation system should be sufficiently flexible to accommodate most people's social and workforce circumstances. For example, in the past, many low-income women have not had access to their own superannuation plans.
The Government therefore introduced a tax rebate to encourage individuals to make superannuation contributions on behalf of their low-income spouses. The 18 per cent rebate applies to a contributing spouse making contributions of up to $3000 per annum to the superannuation fund or retirement savings account of a low income spouse (although higher contributions are allowed). The rebate has been warmly welcomed and has received positive press particularly in recent weeks.
Super contributions for persons aged 65 and over
The Government also believes that the previous age restrictions on superannuation contributions were unnecessarily restrictive and discriminated against those individuals choosing to remain in the workforce for a few years beyond the normal retirement age.
In view of this, the Government increased the age at which individuals are allowed to contribute to a regulated superannuation fund from 65 to 70. Consistent with this, the exemption age for the Superannuation Guarantee arrangements has also been increased from 65 to 70 years of age.
Retirement savings accounts and Income Stream Products
The Government has also increased choice and flexibility by extending the range of superannuation products that can be offered by superannuation providers.
For example, the Government has legislated to allow banks, credit unions, building societies and life offices to offer superannuation in the form of retirement savings accounts (RSAs). RSAs are a simple, low cost product which increases choice in the market. RSAs receive the same tax benefits, and are subject to the same retirement income standards, as other superannuation products.
The Government has also made the superannuation system more flexible and coherent by removing anomalies in the means testing of retirement income streams and encouraging the take-up of new products which promote the prudent use of superannuation savings to finance retirement.
Income streams are now classified and means tested on the basis of their characteristics. This means that those products which provide an income stream for life or for life expectancy, and which meet the other requirements of 'complying' pensions and annuities for Reasonable Benefit Limit purposes, are now exempt under the age pension assets test.
These changes ensure that the social security and tax treatment offers retirees a strong and consistent incentive to use their superannuation savings to provide an income stream in retirement. These changes have been warmly welcomed as evidenced by the rapid up-take of complying income stream products.
Choice of Fund, Portability and Opting Out
One major flaw in the existing superannuation system is the lack of control Australians have over which fund is entrusted with their superannuation savings.
For many people, superannuation is their largest asset apart from their house. Yet there is no general right to choose a superannuation fund. Australians can choose the house in which they live, and make decisions about their other investments. They do not have these decisions imposed on them by their employer, or through an industrial award.
In the same way, the Government believes that individuals should be able to choose their superannuation fund. It is simply unfair and unjustifiable that workers have no choice as to who manages their superannuation contributions.
The Government is addressing this through its choice of funds legislation.
The Government believes substantial benefits will flow from the introduction of choice of funds. In particular, choice of funds can be expected to increase competition and efficiency in the superannuation industry. There will be increased pressure on funds to provide products that meet the needs of members and to reduce fund charges. We also expect that the greater "ownership" that choice will provide will increase the interest that ordinary Australians have in superannuation. Choice of fund will be complemented by improved disclosure and an effective education campaign.
Regrettably, the Federal Opposition opposes choice of fund. Nevertheless, the Government is determined to push ahead and is holding discussions with other parties to give effect to this important and overdue reform.
The Government is also committed to addressing the issue of portability of benefits between funds. This Government is therefore committed to allow, by the year 2000, employees in accumulation funds to move their benefits between funds. Portability will further increase competition and efficiency in the superannuation industry and thereby assist in reducing funds' administration charges.
To improve the flexibility and choice of superannuation arrangements for low income employees, the Government has also announced that people earnings from $450 to $900 a month from an employer will be allowed with the employers agreement to choose to receive wages and salary in lieu of employer SG contributions. Again, the Opposition has indicated it opposes this measure.
Super and Divorce
The current arrangements applying to superannuation upon marriage breakdown are quite unsatisfactory and are a legacy of inaction by the former Labor Government.
In particular, the current law creates uncertainty and inconsistency and unfairness in many cases. For example:
- often one party retains the superannuation intact but inaccessible for many years, while the other is awarded a larger share of the property but foregoes an asset that provides income in retirement; and
- the outcome can be especially unfair if the superannuation is worth considerably more than the available property but cannot be shared with the non-contributing spouse.
These problems essentially arise from the inability of parties or the Courts to divide superannuation interests.
The Government has committed itself to much needed reform of these arrangements. On 30 March 1999, the Government announced that it will implement reforms to:
- enable parties to agree to split their superannuation on marital breakdown;
- enable the Family Court to order the division of a superannuation account where the parties cannot agree; and
- empower trustees of superannuation funds to recognise and give effect to agreements to divide superannuation interests on marital breakdown.
These reforms will allow couples more choice and control in determining their own financial affairs, and the Government is confident they will be welcomed.
The reforms are well thought out and balanced, and will provide greater certainty, consistency, and fairer outcomes.
The changes announced on 30 March will be implemented in light of community views on the Government's discussion paper concerning marital property, Property and Family Law: Options for Change. This discussion paper was also released on 30 March.
Enhancing the Integrity of the Superannuation System
It is obviously very important to maintain and enhance the integrity of the superannuation system if it is to meet its objectives and have the confidence of the public. To this end, there is a range of rules imposed on superannuation funds.
One set of rules relates to prudential regulation. Prudential regulation imposes obligations on trustees in addition to their fiduciary responsibility. In the case of superannuation, a prudential framework has been established because trustees are safeguarding the retirement savings of Australians and those savings have benefited from generous taxation concessions.
In addition, special rules are imposed on superannuation to promote retirement income objectives. For example, reflecting the taxation concessions afforded superannuation, there are rules governing preservation, borrowing and other matters.
Prudential Regulation
As part of the Wallis reforms, there has been significant change to the prudential arrangements applying to superannuation. Following the Election, responsibility for prudential regulation across the financial sector lies with the Treasurer and the Minister for Financial Services and Regulation.
The Government established the Australian Securities and Investments Commission (ASIC) to, inter alia, regulate and supervise conduct, disclosure and consumer protection issues across the financial sector, including the superannuation sector. I understand you already have had a session on ASIC's role in the superannuation sector, including developments in relation to CLERP 6.
The Government has also established the Australian Prudential Regulation Authority (APRA) as the sole prudential regulator for deposit-taking institutions, insurance companies and superannuation funds. In relation to insurance and superannuation, APRA assumed the functions and powers previously exercised by the Insurance and Superannuation Commission. As well as regulating superannuation funds from a prudential perspective, APRA is also charged with ensuring that funds comply with retirement income objectives.
Under the current regulatory environment, DIY funds (excluded superannuation funds – those with less than 5 members) – are not subject to the full prudential requirements faced by larger funds. This is based on the assumption that members of these funds are capable of looking after their own interests.
However, the definition of excluded fund does not currently require a particular relationship or common interest between members, nor does it ensure that all fund members have equal influence or power within the fund. As a result the situation arises where excluded superannuation funds include members who are not in a position to protect their own interests.
Consistent with the findings of the Wallis Financial System Inquiry, a new definition of a self managed superannuation fund will be enacted to cover funds:
- with fewer than five members;
- where all members are trustees and there are generally no other trustees; and
- where all members are linked by a family or business relationship.
The new definition of a self managed fund is designed to ensure that all members of self managed funds are able to protect their own interests.
Regulation to Promote Retirement Income Objectives
As I said earlier, there are superannuation-specific rules designed to promote retirement income objectives and in recognition of the considerable tax concessions provided for superannuation.
In particular, these rules are designed to ensure that superannuation contributions are invested prudently and preserved to achieve higher retirement income and not used for so-called "present day purposes". To this end, the Government has initiated several important reforms.
First, the Government has strengthened the preservation arrangements with the aim of reducing the amount of superannuation benefits withdrawn before retirement. The preservation age will be subject to a phased increase from age 55 to 60 (starting in the year 2015).
And from 1 July 1999, all future superannuation contributions, including member contributions, and earnings will be required to be preserved. Amounts that are not preserved at that time will remain unpreserved.
Second, the Government has strengthened the integrity of the superannuation investment rules. At present, the current superannuation law imposes several investment restrictions on superannuation funds (for example, the prohibition on borrowing). However, the Government became aware that these investment rules were being circumvented by some arrangements.
Consequently, in the 1998-99 Budget the Government announced new investment rules to address these practices. An exposure draft of the legislation implementing the changes was released for public comment on 22 April.
The new investment rules will extend the coverage of the in-house investment limits. They will now apply to investments, loans and leasing of assets, that involve an employer-sponsor, a member of a fund or an associate. The changes will ensure that the rules cover associated trusts, as well as associated companies.
I also announced a significant easing of the investment rules for small superannuation funds acquiring business real property from members and their relatives, and an exemption where a small superannuation fund leases business real property to a related party. Funds with fewer than five members will be able to invest up to 100 per cent of their assets in business premises leased to members or the employer-sponsor of the fund.
This will enhance the ability of small business owners to use their superannuation savings to invest in their own business premises.
I also announced generous transitional provisions to cover particular investment arrangements that were in place before 12 May 1998. This includes allowing reinvestment of income generated from investments held before 12 May 1998. Such reinvestments will be able to continue until 30 June 2005.
Some Myths About Superannuation
There appear to be some myths surrounding superannuation that I would like to address. Every so often there are reports of a "crisis of confidence" in superannuation. This assertion simply does not stand up to the facts. Indeed, as I noted previously the facts show that the superannuation system is performing strongly. Superannuation contributions and assets have grown very strongly and are projected to continue to grow strongly. Member contributions have grown strongly and employer contributions are buttressed by the continuing increases in the SG rate to 9 per cent by 2002-03.
There are also false claims sometimes made about the adequacy of our superannuation system to provide appropriate levels of retirement income. However, research by the Treasury's Retirement and Income Modelling Unit shows that, with 9 per cent Superannuation Guarantee contributions, a single worker on average weekly ordinary time earnings for 40 years could achieve replacement rates of over 70 per cent. That is, the standard of living in retirement would be around 70 per cent of the pre-retirement standard, when taking account of part entitlement to the age pension. This exceeds the International Labour Organisation standard for an adequate standard of living in retirement.
Finally, there are even assertions made that "superannuation is no longer concessionally taxed, particularly after lower personal income tax rates are introduced under tax reform". Again this does not stand up to scrutiny, even with the Government's preferred lower personal tax rates. Hypothetical analysis undertaken by the Retirement and Income Modelling Unit shows that, regardless of income level and using the lower personal tax rates, all cases modelled receive higher benefits than would be the case without superannuation taxation concessions. For example, RIM found that someone on average weekly earnings over 40 years, would have net superannuation benefits more than 1.5 times greater than without concessions.
Let me re-iterate that we have a fundamentally good, effective retirement income system. The Government has worked hard to introduce reforms to make the system better: stronger, more flexible, more attuned to contemporary work patterns and fairer for all Australians. Some of these reforms have been completed: others are still in train. As a Government, we wish to listen to, and learn from, the views of the industry.
I hope you have enjoyed today's conference and I thank the organisers again for the kind invitation to talk with you.