SUBJECTS: Cooper Panel report into superannuation, MySuper, SuperStream, self-managed superannuation and the arts, politician's superannuation, industry funds.
NEIL MITCHELL:
What we're talking about here is going to touch pretty much everybody in this country, potentially; because superannuation is touches everybody in this country and there's a good principle to it: if you've got your own superannuation, you've got a good superannuation system, then you will not need to live on the pension; which is better for the taxpayer and also better for you, because you've got more money available.
The Government yesterday, announced accepting a large – well accepting some – of the recommendations from a review on superannuation; describing it as a superannuation revolution, which means it touches everybody; a revolution that touches everybody – a bit of Che Guevara about it. On the line, the Minister for Superannuation, Chris Bowen. Good morning.
CHRIS BOWEN:
Good morning Neil.
MITCHELL:
A hundred and seventy-seven recommendations. How many will you take on?
BOWEN:
Well, we'll work those through but I said that I'm very attracted to many of them. We haven't actually formally responded. I just released the Report yesterday for some public exposure, but this is about dragging the superannuation system in to the 21st Century. It's about modernising it, making it more efficient and getting those costs down; those fees down, which eat away at people's retirement incomes over their working life.
MITCHELL:
So when will the changes be – what changes you do accept – when will they be implemented?
BOWEN:
Well, it'll take some time. They're quite substantial and many of them will need legislation; and that's not likely to happen of course, until next year. So you'd see, perhaps, legislation happening next year to take affect in 2012 to give the industry time to adjust.
MITCHELL:
So if re-elected – and I'm assuming there'll be an election before next year – but I assume you wouldn't even get this through before an election, would you?
BOWEN:
I'd be hoping to give an indication of our response and say more about where we stand on these things; but in terms of legislation and implementation, then no, very little would happen before any election.
MITCHELL:
Okay. Now, the key change is what?
BOWEN:
Well there are two key changes that are recommended here, and I might just take a quick minute to talk you through them. Firstly, there's as I say, the efficiency of the superannuation system. There's too much paper floating about, there's cheques being written, it's not electronic enough, and it's very inefficient in its management and costs are very high. So we need to shake that up and modernise that.
And as a part of that, we need to put people back in contact with their lost superannuation. Neil, there's billions of dollars of lost super out there: people who've simply lost their accounts. They've changed employers and haven't changed their old superannuation fund.
MITCHELL:
And how do you do that?
BOWEN:
Well, the main way that we can do that is to give the superannuation funds access to Tax File Numbers, so that they can get people back in contact. Could you imagine you're a superannuation fund: somebody's stopped paying into your fund, because they've changed jobs, then that person might move house, and you've got very little chance of finding them and saying, 'hey you remember you've got $40,000 in your super account here?'; and people just lose touch with it. That's money that just goes to waste, frankly.
MITCHELL:
So Tax File Number goes to the funds. We can trust them with that?
BOWEN:
We'd need to have, obviously, some privacy restraints in there – which we will do. We're talking with the Privacy Commissioner about it, but I think it's in nobody's best interests to be losing all this money – it's not in the nation's best interests and not in the individual's best interests.
MITCHELL:
Righto.
BOWEN:
So that's one part of the reform. The other is called My Super which is about a low-cost fund which would provide basic protection to people who aren't engaged in their super. As you said, very clearly, a lot of people don't engage in their super, particularly when they're younger. I'm sure we've all got people in our families we can think of, that might be in their early twenties, working hard, either saving for a family or saving for a good time and a holiday et cetera but not focused on their retirement income. For people like that, we need a low-cost basic account which will give people some peace of mind that there money's not going to eaten away for by high fees over their working-life; that there's some pretty firm obligations on the directors and trustees of those funds to make investment decisions in the best interests of those people.
MITCHELL:
So who would run those that?
BOWEN:
Every fund in the superannuation industry would be able to offer one of those funds and there are already a lot of low cost funds out there.
MITCHELL:
Okay, and would that be regulated? If it's a low-cost fund, you can't charge more than X, Y, Z.
BOWEN:
Yes, to classify yourself as a My Super account you'd need to make those criteria and to be a default fund, in other words, to be the fund that you go into if you don't make a choice – that's nominated by an employer – then you'd need to meet those criteria; to be a My Super account.
So, if you, are interested in your super and you feel you're qualified to make decisions that's fine, you don't need to be in a My Super account; you can choose your own, you can do whatever you want, you can enter into investment options, you can even go all the way to having a self-managed super fund. But if you're not in that category and you'd like that basic fund; then that'd be available to you and that'd be the default fund that you'll go into unless you choose…
MITCHELL:
But the only difference is that this fund, is you've got their fees capped, have you?
BOWEN:
Yeah, you'd have your obligations on the trustees and directors; they'd need to justify the level of fees, they'd need to justify their scale…
MITCHELL:
But don't they do that already? Any fund will justify their fees to you.
BOWEN:
Well, but this would be more onerous on those particular default funds. There'd be other requirements so that they'd need to regularly assess – every year – whether they're big enough to provide adequate returns and adequate efficiency….
MITCHELL:
But you're not going to guarantee returns?
BOWEN:
No. No but the obligation would be on the trustee and the director to be able to maximise those, at low-cost; and that would be a fairly significant change for that part of the market.
MITCHELL:
Sorry, what do you mean by 'maximising at low-cost'?
BOWEN:
Maximising the returns at the lowest possible fee.
MITCHELL:
But that's what any fund tries to do.
BOWEN:
It's what they try to do Neil, but what we don't have is a basic default fund which is the mandatory option for everybody unless they choose to get out of it.
MITCHELL:
But what's the benefit in this fund? That's what I can't gather. If I go to any fund – any number of funds – now, they'll say 'lowest possible fees, highest possible returns'. How is this my, your, this fund different?
BOWEN:
They will need to be able to show the regulator, APRA, that they had very low fees, to be able to be classified as a default fund. At the moment, yeah sure everybody says to you, 'we'll give you as low a fee as we can'; but they vary substantially across the market. And if you want to be regarded as a default fund; so a fund that people's money goes into unless they make a decision not to, then you need to justify and meet those criteria.
MITCHELL:
So, will you cap fees or not?
BOWEN:
This is something I need to work through with the industry. We've just released those recommendations yesterday. I'll sit down with the industry about how we can make this work best, but I'm not going to go through the detail just at the moment. I've released the recommendations, I've been consulting with the industry about the detail of how we make it all work, and I'll do that again over the next couple of weeks. I'll have more to say about it over that period.
MITCHELL:
Two examples: if I'm a 22 year old starting out in the world, how does it help me these recommendations that you're accepting?
BOWEN:
Well, if you take the recommendations together – that's the SuperStream, the efficiency, and the My Super; the work that the Treasury's done shows that you'd cut your fees by about 40 per cent and that would mean, for someone on average weekly earnings – a little bit older than your example – in their thirties, and by the time they come to their retirement there'd be another $40,000 in their account.
To put that another way Neil, as you'd know we've recently moved to increase the Superannuation Guarantee from 9 per cent to 12 per cent. This would add another 1 per cent, in effect and in terms of the income that you have in retirement. Another 1 per cent on top of that, just by making it more efficient and getting those fees justified and down.
MITCHELL:
And what about somebody like me, in their 50s with their own fund. What does it do to me?
BOWEN:
You've got your own self-managed fund?
MITCHELL:
Yep.
BOWEN:
The changes there are fairly minimal. The Cooper Review found that self-managed funds work reasonably well. There are some changes around the amount or type of investment that you can enter into.
MITCHELL:
No more artwork?
BOWEN:
That's a recommendation but obviously I'd need to work that through. The recommendation is 'collectibles'.
MITCHELL:
No more old cars?
BOWEN:
Old cars and coins and things like that – there are some pretty exotic examples out there. The reason for that Neil is very simple: superannuation gets an attractive tax-rate; and if some people are using it to invest in pictures to put on their wall and getting an attractive, very attractive, tax-rate compared to other people who go out and buy their art just out of their after-tax income, there's an equity issue there.
MITCHELL:
But I don't think you can actually get your super fund to buy you pictures and then just use them yourself, like you can't get your super fund to buy you a holiday house and use it yourself.
BOWEN:
Well there are some mechanisms that people do employ to do different things. Now, I recognise that this is controversial in the art industry and the art world in particular. I'm not wedded to any particular outcome; I'll work those recommendations through.
MITCHELL:
You talk about retirement forecasts. So you can ring up your super fund and say at age 30 and say, 'what will I get when I'm 65?' How can you do that, you don't know what's going to happen? Unlike politicians, we don't have defined benefits.
BOWEN:
Well, I don't have a defined benefit either Neil.
MITCHELL:
Well all your mates have.
BOWEN:
I'm under the new scheme. I'm under the same superannuation as every other public servant, just to be clear.
MITCHELL:
But it's a guaranteed fund isn't it? Unlike the rest of us.
BOWEN:
No, mine's not. Mine's defined contribution like every other public servant.
MITCHELL:
Yeah, but not like rest of us in the real world who live with the vagaries of the markets.
BOWEN:
Yeah, it's exactly the same.
MITCHELL:
You've got a great one; just give us your deal.
BOWEN:
But it's exactly the same Neil.
MITCHELL:
Oh it is not.
BOWEN:
It's not a defined benefit scheme for MPs elected after 2004, and I'm in that category. It's just the same; we make our contributions and the market determines our retirement outcome when we leave.
MITCHELL:
Oh, okay.
BOWEN:
The same as everybody else. But to your question – to get back to your question, we got sidetracked there for a minute – one of the recommendations, and I think this is a key one as well, goes to the definition of 'investment options'. Now, when you look at your fund, you can have a conservative investment option or a balanced investment option or a growth investment option. You look at that and you think, 'well I think I understand what that means', but every fund has a different criterion, so what might be 'growth' in one fund might be 'balanced' in another fund. When you try to work that out by simply looking at websites it's going to be very hard, so they've made recommendations about a much clearer way of expressing that, which I'm very interested in pursuing.
MITCHELL:
Unions won't like this, on some of the recommendations; because there are few rorts going on in the union movement around some super funds aren't there?
BOWEN:
No, I don't think that's…
MITCHELL:
That's unfair, you're right; but they are doing deals with certain companies.
BOWEN:
Well they do, but that's perfectly appropriate where they go to employers and say, 'why don't we increase the super here, and we'll take a smaller wage increase'. I think that's a good thing, I'm all in favour of that. Industry funds are represented 50 per cent union or employee representatives, and 50 per cent employer representatives. The Cooper Review hasn't recommended that that change. It made some other recommendations around directors and trustees which, again, I'll sit down with the superannuation sector and work through.
MITCHELL:
Thank you, Chris Bowen, Minister for Superannuation.