Thank you for the invitation to be back at IFSA.
This is my third consecutive speech to your annual conference, and what a different place the world is since I first spoke to you.
The economic climate when I first addressed you 2 years ago now bears little resemblance to that which we are dealing with today.
But one thing that has not changed is the importance of the financial sector and superannuation industry to Australia.
I've spoken to you now since 2007 in 3 capacities – as Shadow Assistant Treasurer, Assistant Treasurer and now as the Minister for Financial Services, Superannuation and Corporate Law.
Each of these capacities has enabled me to share thoughts with you on the role of financial services in Australia and Australia's potential as a financial services hub.
Today, I'd like to update you on steps to promote Australia as a financial services hub, then, as this is my first speech as Minister for Superannuation, to share some observations with you about the state of superannuation.
Many nations have found that their financial services sector has been a hindrance in dealing with the global financial crisis. This has definitely not been the case in Australia.
Here in Australia, our stable and well run financial services sector, and the pool of funds developed through the super system, have helped see us through the crisis.
And, in adversity, we should be looking for opportunities. I see the potential growth of financial services as a key opportunity for Australia as the world edges towards recovery.
For several years to come, investors will be looking to nations which have withstood the current economic crisis well and view them as safe havens in which to invest and whom to entrust their money to manage.
We need to, as a nation, capitalize on this opportunity. Accordingly the Rudd Government will be continuing in its efforts to identify and minimize the barriers to Australia competing as a financial services hub. The Prime Minister told me – when he informed me that he was creating a financial services portfolio, making it a cabinet level portfolio – that he was pleased with the progress that we have made in this field so far. But he also told me that he wanted to ensure that we continue to do whatever is necessary – in cooperation with the private sector - to ensure we are as competitive as possible.
As I said in my address to you last year, that we very much saw our reduction in the withholding tax on distributions to offshore residents from managed funds as just a first – not final – step, in our efforts to make Australia a financial services hub.
The latest round of reforms was included in this year's Budget. Not much attention was given to our Budget night announcement to abolish the Foreign Investment Fund rules and instigate substantial reform of the controlled foreign company rules but let us not underestimate the importance of these reforms.
In addition, the Government announced deemed capital account treatment for gains and losses made on disposal of investment assets by MITs, something which IFSA had been very vocal about.
It was at a meeting with relevant tax specialists at IFSA's Sydney office, when we were in opposition, that I was first fully apprised of the inefficiencies inherent in the FIF and CFC regimes. What I heard at that meeting was compelling. And the arguments I heard at the meeting were included in the arguments that I used to convince the Cabinet to embrace these reforms – so never think meetings with Ministers (or Shadow Ministers, for that matter) are a waste of time.
Abolishing FIF and reforming the CFC rules are estimated by Treasury to save business, primarily in the financial sector, around $80 million per year in compliance costs. While, as I say, the decisions have not been widely commented upon as yet, I believe they will come to be seen as important steps in our efforts to ensure the tax system does not hinder Australia's competitiveness as a financial services hub.
These reforms of course, were also recommended by the Board of Taxation and the Australian Financial Centre Forum.
The Board of Taxation is very well progressed in its work on responding to the first reference that the Rudd Government sent to them, being the development of a specific tax regime for managed investment trusts. The report will be handed to the Government in the very near future and Nick Sherry as Assistant Treasurer, and I, as Minister for Financial Services, are very much looking forward to working through the recommendations.
The work of the Australian Financial Sector Forum is also very important. The Forum, of course, arose directly out of the Financial Hub Summit held in Sydney 12 months ago. The summit recommended that we need an Olympic Bid style taskforce to link the financial sector with Government to progress barriers that reduce Australia's competitiveness.
As I said, the AFCF's recommendations played an important role in Cabinet's decision to abolish the FIF rules and reform the CFC regime.
The Forum will provide a further report to me towards the end of this year on the next steps forward. I've been delighted with the work of Mark Johnson and the members of the AFCF. Their work and advice will be important in framing our next steps: building on the reduction in withholding tax rates, the reforms to Division 6C of the Tax Act, and the tax changes announced last Budget.
Of course when talking about financial services much of Australia's competitive advantage in this area arises out of the critical mass of funds and skills that have arisen out of our compulsory superannuation system.
I am delighted to have ministerial responsibility for this vitally important area. The Prime Minister's decision to make superannuation a cabinet level portfolio is evidence that this Government recognizes the value of the super system to the economy and to the nation.
Superannuation returns have, of course, taken a battering as a result of the GFC.
I have seen part of my role since taking on this portfolio, as being an advocate for super – doing what I can to reassure Australians of the long term benefits of super: benefits for them and the nation.
I've taken the opportunity in interviews, starting on the night I was sworn in, to point out that, when markets take a battering as they have in the last 2 years, superannuation will of course be affected. But it, quite literally, pays to take a long term view. Even with the poor returns of the last 2 years, we are all better off with super.
Although the median balanced investment option has shown a loss for 2008-09 of around 13 per cent, the last three months have seen positive returns.
However, as a long-term investment, designed to provide solid returns over an individual's working life and in to their years in retirement, Australians can be confident in the ability of the nation's superannuation system to help deliver their retirement income.
While global economic conditions have had a significant impact on superannuation investment returns in the last year or two – particularly for those nearing retirement – it is important to remember that over the past 35 years average real growth, that is, growth discounted by inflation, has been around 4 per cent.
The growth in Australian superannuation assets has been supported by strong inflows as well as returns.
In a comparison of international growth rates, Watson Wyatt found that, in US dollar terms, Australia's private pension assets grew faster than any other country surveyed. Australian private pension assets grew at a 10 year annual average of 13.4%, higher than the results for the US, UK, Japan, Canada and Hong Kong.
I know this comes as cold comfort for those nearing the end of their working life, who may have had to postpone their retirement. But it does pay in these difficult times to remember that, in spite of the fall, we are better off, overall, for the investments we have in super.
An example of how Australia's superannuation system has benefited the nation's economy, which is often cited, is the huge pool of savings it creates that Australians otherwise would not have.
This pool of savings not only gets invested back into the Australian economy in property and Australian shares but has also assisted Australia in weathering the GFC, by providing capital for Australian listed companies, thus taking some funding pressure off the banks at a critical time.
As you know, superannuation is currently the subject of 2 reviews - the Cooper review into governance and efficiency and the Henry review dealing with taxation and adequacy.
The natural inclination of all in the sector would be to approach these reviews with a degree of trepidation – with fear for the changes that they may recommend and the uncertainty they may create. Can I commend a different approach to you. These reviews present an opportunity more than a challenge.
Compulsory super is nearing its 20th anniversary. It is time to take stock of our system and consider what improvements can be made.
These two reviews will allow stakeholders to make their recommendations for reform. They will make recommendations to government which we will then work through these in an open and transparent manner, with a simple objective – to have a robust, adequate retirement income system which encourages long term savings in a fiscally sustainable and equitable manner.
The Cooper review has the goal of ensuring that the superannuation system operates in the most cost effective manner and in the best interests of all its members. It will consider how to maximise retirement income for Australians, including through increasing efficiencies, reducing costs and fees and lifting long-term rates of return.
I announced yesterday the appointment of Ian Martin and Meg Heffron to the Cooper review. When the two reviews are complete, I would like Australia's superannuation system to be in the position that the reform process has been conducted so transparently that everyone is clear on government policy objectives so that we have a stable policy environment for several years to come.
In other words, that the reviews and subsequent government response obviate the need for ad hoc, annual policy changes, so that governments of both political persuasions see no need to embark on further changes for several years.
My argument to you is that the reviews should not be seen as a threat to certainty but as an opportunity over the medium term for much greater certainty, for an end to annual speculation about what may or may not be in the Budget speech in relation to super, because the policy settings are accepted.
The government's approach to dealing with these reviews will be to assess the most sustainable and equitable way of promoting long term savings through super.
So I encourage you to engage with both the Cooper and Henry reviews in that spirit. They will both prove more productive with your engaged input.
I would particularly like you to engage with the Cooper Review not just about how we can make the system more efficient, but also how we can make the system simpler and more accessible for investors.
Over my first few weeks as Minister for Superannuation I have enjoyed engaging with several industry groups and companies about options to streamline administration to make the super system simpler.
We lament the high number of 'lost' super accounts – and therefore we should be conscious of making every effort to make it as easy as possible to roll super funds over.
Similarly, I've made the point that the average Australian will go to great lengths to shave a couple of basis points off their mortgage interest rate but pay little attention to their super account.
But, as a sector, the question needs to be asked, how much do we encourage engagement from consumers?
We talk of annuities and unit pricing, for example, as if they are immediately self-evident to the average super investor. But this is not the case.
As practitioners, I would welcome your feedback through the Cooper review on ways you think we can make the super system more accessible to Australian retirees.
Of course, the Cooper Review will also be examining the issue of fees and commissions. Here at IFSA, I take the opportunity of repeating, as I have said before, my congratulations to IFSA for the leadership you have shown on this issue.
Both IFSA and the FPA have shown that you are willing to be meaningfully engaged in the debate.
The work of IFSA and the FPA means that the Cooper Review has a very good starting point.
I'll be working with the Cooper Review to examine what further needs to be done (including possible legislative remedies) to eliminate conflicts of interest and perceived conflicts of interest from payment models in the sector.
Of course, the existence of policy reviews does not mean that all policy stands still in the meantime.
Another policy issue that IFSA raised with me in Opposition is the need for a more streamlined approach to product rationalisation.
The lack of a mechanism to deal with old legacy products has been a problem, for some time, for the financial services industry; particularly in life insurance.
IFSA has estimated that up to 25% of all funds under management are in legacy products. This is bad for the investor who is not getting the best return possible on their investment or access to features of newer products; and it is bad for the industry subject to huge compliance costs to maintain outdated systems at increased risk of error and fraud.
In coming weeks, I will be releasing an options paper dealing with the issue of product rationalisation.
This issue needs to be resolved. The options paper will form the basis of a round of consultation, which will better inform me of industry's view for the best way forward.
I will then want to progress the issue quickly and bring the vexed question of how to deal with legacy products and product rationalisation to a conclusion.
This is a complex area and any mechanism must have appropriate integrity measures, but I am confident that an appropriate and workable solution can be found.
In conclusion, can I thank IFSA for its engagement over the last twelve months.
Sometimes we agree, and sometimes we disagree. But I always find IFSA's arguments well considered and thoughtfully argued, and I always take them seriously.
Can I take this opportunity at a personal level, to pay tribute to the work of Richard Gilbert.
Richard has been a powerful advocate for the financial sector and therefore financial growth in Australia. He is well respected in Canberra, and it is not just because I have a soft spot for products of Western Sydney.
He will be missed, but I have a funny feeling we haven't seen the last of him.
Can I also welcome, as I have done elsewhere, the appointment of John Brogden. John had a considered and objective approach to his role as Chair of ABACUS, where we have worked closely together. I look forward to engaging his counsel in his new role.
My job as Minister for Superannuation is not to be a cheerleader for any particular part of the super industry. It is to be an advocate for superannuation investors and superannuation generally.
I will make decisions on their merits and will always have, as a guiding principle, what is best for superannuation generally to ensure that Australians, regardless of their income, can have dignified retirements.
Today, I have spoken to you about our efforts to make Australia a financial services hub, and about superannuation.
But in reality, the message is the same: that despite the challenges this is a great opportunity to embark on meaningful long term reform, and refresh and rejuvenate our savings and investment system: and to build wealth for Australians.