7 June 2011

Money Management, Address at the Retirement Incomes Seminar

Thank you Mike (Taylor, Managing Editor of Money Management Magazine) for that warm welcome.

It's a great pleasure to be here at the 2011 Money Management Retirement Incomes Seminar.

Superannuation - a great Australian story

Obviously, a key component of our retirement incomes is superannuation.

Superannuation is, in many ways, a great Australian success story.

While superannuation has, in some form or another, been around for more than a century in Australia, it began as something available only to white collar workers, public servants and Defence Force personnel.

However, it was not until the Australian Council of Trade Unions (ACTU) brought the National Wage Case to the Conciliation and Arbitration Commission in 1982 that Australia had award-based superannuation.

This was, of course, the forerunner to the decision by the then-Keating Government to introduce the Superannuation Guarantee in 1992 which began as a tax-deductible employer contribution of three per cent that was increased to nine per cent in stages over the subsequent ten years.

Superannuation is a proud Labor Government achievement that represents a triumph of national interest over vested interest.

Implementing big reforms like superannuation is always hard. When these superannuation reforms were proposed, there was no shortage of vested interests running scare campaigns about how the sky was going to fall in. It will cost jobs. It will make Australian businesses uncompetitive and drive jobs and industry offshore. It is a great big tax on everything, because every employer will have to pay it and they will simply pass on these costs. Indeed, it all sounds rather familiar.

If the Government of the time had not held its nerve and yielded to the scare campaigns that were waged against superannuation, we would not have the $1.3 trillion superannuation industry. We would have missed out on an opportunity to make one of the most significant structural reforms of our generation.

Even after these reforms were introduced, the 'naysayers' continued to oppose these reforms. For instance, as late as this 1995, Tony Abbott said in Parliament that;

'Compulsory superannuation is one of the biggest con jobs ever foisted by government on the Australian people.'

This statement gives you a sense of some of the hyperbole that surrounded the debate at the time, and is reminiscent of some of the exaggerated claims currently being made by Mr Abbott and his colleagues in their attempts to scuttle action on climate change by pricing carbon.

Far from the doom-ridden prophecies of the time that compulsory superannuation would destroy the economy and cost Australian jobs, the compulsory superannuation guarantee has become one of our most important economic reforms and will help to provide sustainable retirement incomes for millions of Australians as we continue to grapple with the profound challenges of an aging population.

Moreover, compulsory superannuation has created a thriving Australian industry, driving investment and creating jobs. The financial advice industry in our country has been growing rapidly. In 2009, according to ASIC, retail funds under management stood at about $515 billion, and the annual average growth rate for retail funds under management over the five years to 2009 was a very healthy 18.2 percent.

Australia now has the fourth-largest funds management market in the world1, with more than 40 per cent of those funds under management driven by the $1.3 trillion held in superannuation assets2.

It would be fair to conclude that many of your jobs have been created out of this country's previous superannuation reforms.

Stronger Super - the next steps

As you would be aware, the Gillard Government, through my colleague, Assistant Treasurer and Minister for Financial Services and Superannuation, the honourable Bill Shorten MP, is now progressing the next wave of reforms to superannuation.

In December last year, Minister Shorten announced Stronger Super - the Government's response to the Cooper Review.

The Cooper Review examined the governance, efficiency, structure and operation of the superannuation system.

In putting together its response to the Cooper Review, the Government was conscious of three key issues it identified: that fees in superannuation are too high, the failure of fund choice to deliver enough competitive pressure to reduce costs for members and the uncertainty that has accompanied changes to the system over the past decade.

Some of the key components of Stronger Super include:

MySuper, a new simple, low cost superannuation product that will replace existing default funds;

SuperStream, which is a package of measures designed to streamline the processing and administration of superannuation and make the system more efficient and less costly;

Improved oversight of the management of Self Managed Superannuation Funds; and

A range of proposals regarding the governance of superannuation funds that are designed to boost confidence in the integrity of the regulatory framework.

The Stronger Super reform package could, when fully implemented, lower fees by 40 per cent.

To a 30-year-old on average full-time wages, that would represent an increase in their retirement savings of some $40,000.

Of course, the Stronger Super reforms are underpinned by the Government's commitment to increase the superannuation guarantee from nine per cent to 12 per cent.

To that same 30-year-old, an increase of three per cent to the superannuation guarantee would mean an additional $108,000 in retirement savings.

For a woman the same age who may have her work patterns interrupted due to periods out of work to have children, this would mean an additional $78,000 in superannuation.

We will also be raising the superannuation guarantee age limit from 70 to 75, reflecting the increasing trend of workers to stay in employment longer, as well as provide an annual Government superannuation contribution of up to $500 for Australians earning under $37,000.

Financial Literacy and Retirement Incomes

The increasing prevalence of superannuation has led to more consumer responsibility for their retirement investments and a greater exposure to complex financial products.

With Australia having experienced a period of growing wealth, there has been a corresponding growth in the choice of savings and investments available to consumers.

With so much choice, consumers are encouraged to be active participants in the decision-making process around their retirement investments.

However, having the ability to choose and being confident and competent enough to make the decisions are different concepts.

Many people are finding they struggle to interpret their annual superannuation statements, let alone navigate the various products on offer.

According to the National Financial Literacy Strategy, people are generally more knowledgeable and confident about simple financial topics like saving and budgeting, but less confident about more complex topics like investing and retirement planning.

In fact, the Strategy reflects research that shows that about half of all Australians lack the necessary skills required to make informed choices when they interact with financial services.

And, almost in an ode to Donald Rumsfeld's notion of the "unknown unknown", the Strategy notes the findings of studies that show that 'people don't always know what they don't know.'

Governments and financial service providers devote a significant amount of effort to ensuring that the regulatory settings are well-balanced and that the financial products on offer cater for the needs of Australians planning for their retirements.

But an important part of making sure that these markets work effectively is having a financially literate, engaged and active Australian consumer.

Preparing for retirement should involve more than keeping an eye on your superannuation balance five years out from your 65th birthday.

Boosting retirement income requires people to engage in that preparation almost as soon as they begin their working lives, and that requires a greater level of financial literacy.

Financial literacy plays a central role in encouraging people to think about the importance of planning for their retirement from a young age, to set goals for their long-term savings and to take an active interest in the investment decisions they make and that are made on their behalf.

The Gillard Government's commitment to financial literacy

Financial literacy is an important priority of mine as the Parliamentary Secretary to the Treasurer, and an important priority for the Gillard Government.

We want people to be better informed about the choices they make so that they can take control of their financial wellbeing.

Consumers can be empowered by being better informed, and by having a better understanding of the risks and returns arising from their decisions they can be more confident about the decisions they take.

In March this year I launched the National Financial Literacy Strategy and the MoneySmart website.

Both were the product of work by the Australian Securities and Investments Commission (ASIC), which has responsibility for implementing the financial literacy agenda.

MoneySmart, for which the Gillard Government has provided $12 million in funding, replaced the old FIDO and Understanding Money websites and offers a comprehensive suite of information, online resources and useful contacts for people who want to know more about their financial health.

I think the real power of MoneySmart is that it shows people that managing personal finances doesn't have to be a daunting task. Using plain English explanations and easy-to-use online tools, MoneySmart helps people take the important first steps - like working out a budget, setting savings goals and managing debt.

A great example is Elaine, a woman I met at the launch of MoneySmart at the Broadmeadows Global Learning Centre in Victoria.

She was in her 60s and was already living on the pension with her husband. When she sat down to test out some of the resources on MoneySmart, one of the first she tried was the budgeting tool.

I asked Elaine how she found using the budgeting tool. She said, 'It's wonderful, it only took me 15 minutes to do a budget.' I asked her how this compared with her experience of budgeting in the past, to which she replied, 'Come to think of it, this is the first time I've ever made a budget.'

I have no doubt that the financial planners here today will have encountered many people like Elaine coming through their doors at various stages of preparedness for the financial challenges that lay ahead of them, not the least of which is preparing for their retirement years.

Retirement planning takes a necessarily long view. We save for our entire working lives to sustain ourselves throughout the years when we are no longer in the workforce. And while we are seeing more people working longer, we are also living longer - in 2007-09 men aged 65 were expected to live another 19 years and women aged 65 were expected to live another 22 years. This means those years in retirement are longer than ever before and the nest eggs that retirees put away are dwindling faster than many may have expected.

The job for us, therefore, is to reach out to someone like Elaine, not when they are in their 60s but when they are in their 20s, or their teens, or even when they are in primary school, so that they have the best chance of maximising their incomes in retirement by making the right choices about their finances early in life.

And the early popularity of MoneySmart demonstrates that there is a real appetite among the community to learn more about personal finances - already more than 250,000 individual users have logged on to the website and more than 10,000 people have downloaded the new MoneySmart iPhone app since it was launched just over a week ago, making it the second-highest ranking financial app on Apple's App Store.

Helping people get on top of the basics can encourage them to take the next step and look at how they can build their wealth and save for retirement.

And we believe that this is a process that should start as early as possible.

The Gillard Government is providing $10 million to ASIC to roll out the Helping Our Kids Understand Finances program, which will train 6,000 teachers and develop a range of resources to integrate financial literacy education into the Australian Curriculum.

By targeting children early in their lives, we can build better awareness of the concepts of budgeting and saving and strengthen their ability to deal with more complicated financial products, like credit, that are often linked to popular consumer items like mobile phones.

We believe that financial literacy education and the development of key foundation skills at this early stage plays an important role in achieving better outcomes for people in their retirement.

Financial advice as a key to better retirement incomes

Financial literacy is as much about realising that you might not have all the answers and that there are some financial matters that require professional advice.

We know that a large majority of people are likely to rely on family and friends for advice and information about personal finances, and that there is only a relatively small proportion of Australians who have actually consulted with a professional financial planner.

However, financially literate consumers see the value of investing in good advice, particularly when they start to look at the more complex financial products that are involved in longer-term investments, or when they want to get an objective view of their priorities for retirement.

In fact, impending retirement is a common trigger for people to seek out the services of a financial planner3.

But given the fact that we save for more than 40 years for our retirement, there are obvious benefits in having those conversations earlier in life, developing a plan for savings and investments, and sticking to it.

I note that the Financial Planning Association has been very active in their efforts to boost financial literacy and encourage people to seek advice, working closely with ASIC and tapping into the MoneySmart website.

Initiatives like the FPA's 'Ask an Expert' campaign, which allows people to submit online questions to professional financial advisors, or the ability to locate a planner in your local area from the FPA website, are fantastic ways to promote the benefits of asking for and receiving advice.

We do have to confront the fact, however that according to some quoted surveys somewhere between 60 to 80 per cent of Australians have never used a financial adviser. ASIC research shows that 30 per cent of the people who have never used a financial advisor say it is because they have a negative perception of the industry.

Clearly, the recent high-profile collapses of Storm, Trio, Westpoint and other financial service providers and the associated stories of investors losing their life-savings have only reinforced some of these perceptions in the community.

This represents a potentially huge opportunity loss for those Australians who would actually benefit from professional advice, particularly in preparing for their retirement.

The Future of Financial Advice reform agenda, which is also being advanced by my colleague, Minister Shorten, seeks to address some of these concerns by removing conflicted remuneration structures and ensuring that advice is always in the best interests of the client.

As we move to boost Australians' superannuation savings, these reforms will be an important part of our push to encourage Australians to maximise their retirement incomes.


The great challenge for us all - Governments, educators and providers of financial services - is to attract people's interest in saving for their retirement.

When families are often preoccupied with the more immediate demands on their finances, like paying off a mortgage, buying a car and paying the utility bills and school fees, it is often difficult for people to take a longer view of their financial wellbeing.

But the consequences of not making provision for retirement can be dire, and if people want to continue their standard of living after they finish working, then it's imperative that they take early, well-informed steps to set themselves on that pathway.

The Gillard Government wants to make sure that Australians are confident consumers that can take advantage of the world-class superannuation system that we have in place, seek professional advice where necessary and maximise their incomes in retirement.

I applaud the work of the financial services sector in helping to boost the level of financial literacy in Australia, and I look forward to continuing to work with stakeholders in this area.

Thank you.

1 'Superannuation Funds Management in Australia', Australian Industry Report (IBISWorld), 18 March 2011

2 'Quarterly Superannuation Performance, December 2010' (APRA), issued 10 March 2011

3 National Financial Literacy Strategy, p. 46