Thank you for that kind introduction, Pauline.
I’m delighted to talk at the ASFA Conference because ASFA plays an important role in the debate about superannuation.
It sometimes seems that discussions about superannuation are all about how one section of the superannuation industry can gain a competitive advantage over another.
Frankly, more important to me are debates about how we can improve superannuation for investors and for the nation.
ASFA, as the body that represents the superannuation sector as a whole, is a vital part of that discussion.
And the current period is a crucial one.
We are on the verge of key decisions about the future of superannuation that will shape what is a fundamental aspect of our economy for a decade or more.
I notice that you have spent the last few days discussing topics such as governance and member engagement. Many of these issues are also squarely on the government’s radar.
And that’s why this time of dialogue, of consultation, of review, is so important.
We are talking about what is already a trillion-dollar savings pool. In 1992, the value of retirement savings was barely one-sixth of that size: $165 billion, or 40% of GDP. A fund with a 10% share of the market in 1992 managed just over $16 billion.
I’ve said before that, as compulsory superannuation approaches its 20th anniversary, it’s a good time to examine how we can improve a system that has served Australia well, but has not been holistically reviewed since its inception.
This is even more the case when you consider the projections for the future of superannuation.
Treasury estimates that, 25 years from now, the savings pool will have grown to $5 trillion, which will equate to 120% of Australia’s forecast GDP of $4.2 trillion.
A fund with a 10% share of the superannuation market will manage over $500 billion. The management of such a significant pool of savings carries with it significant responsibility and opportunity.
In other words, the relative importance of superannuation to the Australian economy will increase even further.
Given that superannuation has grown to be such an important asset and will grow to be even more important, it’s appropriate that we now ensure the system is as efficient as it can be; that our pool of national savings is as large as it should be.
Indeed, it is not only appropriate, it is obligatory in my view.
Government Reviews
I don't think too many people in this room would disagree with me when I talk about the importance of superannuation.
But what about the future – or, as ASFA have put it, the “new age of super”?
Governments are often accused of short-termism, of thinking only as far as the next election, if not from budget to budget. But, when it comes to superannuation, this government wants to put in place a system that will stand not only from budget to budget but for a decade or more.
The way to do that, the way to engender more certainty for the superannuation sector is exactly the process we have embarked upon.
Over the past three months, some people have suggested that it must be a difficult time to be Minister for Superannuation, when the Ripoll, Cooper and Henry reviews may stymie the capacity for action.
In fact, I have the opposite view.
This is a time of great potential for super. We have an opportunity to develop a long-term blueprint for the industry.
Rather than looking at these reviews – the Cooper review into governance and efficiency, the Henry tax review, and the Ripoll parliamentary inquiry – as potentially stifling progress, we should see them as an opportunity for bringing greater certainty to superannuation policy.
The purpose of these thorough reviews is for the Government to reach a place where our policy settings are well understood, where their rationale is well-established and where the need for annual changes to tax and other settings is reduced or eliminated.
We need a period of policy stability for super. And these reviews –with your input, and the input of other key stakeholders – are the best way to get it.
The Government response to these reviews will be guided by four key policy ambitions, against which we will assess their recommendations.
These four principles are:
- simplicity;
- efficiency;
- equity; and, of course,
- adequacy.
Simplicity and Efficiency
The questions of simplicity and efficiency are intrinsically linked.
The superannuation system has developed into a complex creature, one that is just too difficult for individuals and employers to navigate.
Things that should be easy, like rolling over funds, are simply too difficult.
We can't complain that Australians don't pay close attention to their superannuation when we use complex terms that make it hard for them to understand.
A simpler system, which is easy for the average Australian to understand, would create a greater potential for more voluntary contributions and encourage Australians to become more engaged in thinking about their retirement income circumstances.
A more efficient system, meanwhile, would not only be easier for employers to use, but would also involve lower operating costs and therefore lower fees to members.
In addition to making superannuation contributions in a more timely fashion, greater use of technology would lead to an improvement in the quality of information in the superannuation system, reducing costs and improving returns to members.
Our recent decision to equip Medicare to provide a free clearing house service to small businesses will make it easier for small employers to make their superannuation payments electronically.
I see this as an important measure, but a modest one, compared with the far greater efficiencies that the sector must embrace and the Government must do its part to encourage.
I see the clearing house as a modest first step in our efforts for a more efficient system. Requiring payments to the clearing house to be paid electronically should be seen as an initial step in the move towards a more efficient, less paper-based system.
The Cooper Review – and I know that Jeremy has already spoken at this conference – is looking closely at the efficiency of the super system.
Jeremy tells me that he has already received 117 submissions so far. I know you all to continue to interact with his review and the other inquiries and have your say.
The Cooper review has been asked to recommend ways to ensure that the superannuation system operates in the most cost-effective manner, and in the best interests of all its members.
Specifically, the review will look for ways of reducing costs and fees, and lifting long-term rates of return.
Lower fees can significantly increase a fund member's retirement income and a retiree's returns. Treasury estimates that an additional 1 per cent in superannuation fees and charges decreases the superannuant's lump sum at retirement by about 16 per cent.
In other words, if we can achieve even a small reduction in fees by improving the efficiency of the superannuation system, we can significantly increase retirement incomes over time.
Equity and Adequacy
Just as efficiency and simplicity are fundamentally linked – so, in my view, are equity and adequacy.
As I have said before, I believe that adequacy should be the minimum objective for retirement incomes.
In other words, putting aside the debate over whether a 9 per cent Superannuation Guarantee provides for an adequate retirement, we need a national discussion about whether to aim for something better than adequacy.
We need to engage Australians in a conversation about what is the best way to ensure people have enough income to enjoy their retirement and also have enough to enjoy their working life.
As I’ve said before, another related part of this national discussion needs to be equity.
High income earners saving through super grows the pool of national savings, which has many benefits for our local economy.
Yet these high income earners were unlikely to ever trouble their local Centrelink office in any event.
It is the improved retirement savings of low and middle income earners that will reduce the cost of the age pension, providing relief to the taxpayers of the future.
But it is often the low and middle income earners who get overlooked in these kinds of debates.
Tax concessions for low and middle income earners to save through super are significantly less than the concessions available to high income earners.
While the top 5 per cent of contributors make around a quarter of all concessional contributions to superannuation, 1.2 million people receive no income tax benefit on their concessional contributions.
We need to design a system that has genuine incentives built in, to make superannuation attractive to low and middle income earners.
So equity will also be a driving factor in our discussions about the eventual recommendations of the Henry review and the debate on adequacy more generally.
Benefits of super
The global financial crisis put superannuation through the wringer, battering returns and shaking the confidence of many of those who were – and are – on the verge of retiring.
Many members of your funds had taken the years of consistent positive growth for granted and seeing their superannuation shrinking – and with it, their retirement ambitions – frightened and disturbed them.
My job, as Minister for Superannuation, has partly become to explain to Australians the broad importance of superannuation –to individuals and to the economy generally.
A few weeks ago, I had the pleasure of launching an ASFA report entitled “Better living standards and a stronger economy: the role of superannuation in Australia”.
As that report emphasised, superannuation has had a far-reaching impact on the Australian economy and will continue to provide huge national benefits in the years ahead.
Our Labor predecessors’ far-sighted commitment to superannuation has meant that, as a nation, we now have the fourth largest pool of funds under management in the world.
The skills that have been built up in managing this massive pool of funds in Australia have been a vital factor in positioning this nation as a financial services hub in the Asia-Pacific.
Certainly, superannuation has given – and will increasingly give – average Australians the opportunity to enjoy a more comfortable retirement than the age pension alone would – or could – provide.
Over the past 10 years, more than $345 billion has been paid out in lump‑sum and pension benefits to super fund members. And very few of those superannuants would have been contributing to superannuation throughout their careers as the current generation of employees are doing.
Barely 20 years ago, only 46% of full-time workers and 7% of part-time workers had any superannuation arrangements. But, for the past decade, 96% of full-time workers – and at least three-quarters of part-time workers – have been making regular contributions to their superannuation funds.
This has seen the pool of funds created by superannuation grow exponentially.
These funds have been at the disposal of the Australian economy, which is one of the reasons why Australia has weathered the global financial crisis so well.
Australia’s equity market, which is the seventh largest globally, has been resilient in the face of the global financial crisis.
In the 2009 financial year, at a time when liquidity was being rapidly withdrawn from markets around the world, Australia remained an attractive place to raise capital.
Australian-listed companies raised $90 billion of equity. Investor support, including from Australian institutional investors, helped to restore the capital base of companies that together employ over 1.6 million Australians.
To put this in context: at the height of the financial and liquidity crisis, a greater proportion of the total market capitalisation of listed companies was raised in Australia than in any other major economy.
It is an achievement which would have been simply impossible in the pre-compulsory superannuation era and it underscores the link between a strong financial system and the real economy.
Concluding remarks
We have a world-leading superannuation industry. This time of review is your chance to help shape the future of the industry and ensure it continues to be the envy of others around the world and provides the best standard of living for Australian retirees.
All those involved in the industry can be proud of Australia’s ranking in the recent Mercer Global Pension Index, where our private and public pension systems were rated second in the world.
Everyone in this room wants to see super grow even stronger. From my point of view, being a Labor Minister for Superannuation means being the guardian of an important Labor legacy – a legacy which has provided more comfortable retirement incomes for so many Australians and has provided a valuable pool of savings at the disposal of the economy.