Opening remarks
Thank you for having me here today—it's great to be here with you at the 2012Citi Pension Executive Summit. I know my colleague, Bill Shorten, was disappointed he couldn't be present but I'm very glad to be able to attend.
Firstly, let me acknowledge Citi Australia, and Minister Shorten's predecessor as Minister for Superannuation and Corporate Law and mine as Assistant Treasurer, the Hon Nick Sherry.
The summit has covered an extensive range of issues over the past days, from the operation of the superannuation system and market trends to a visit to our regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.
I wish to talk about four broad areas today: Australia's economic strengths, our focus on engaging with Asia, the importance of foreign investment to our economy, and some of the Gillard Government's important superannuation reforms.
Strength of the Australian economy
I would like to begin by noting the strength of Australia's economy. Australia has one of the strongest economies in the developed world.
Since the global financial crisis, the Australian economy has grown by around 9percent, while many advanced economies are yet to return their gross domestic product to pre-global financial crisis levels.
The unemployment rate has remained low and relatively stable at around 5percent, lower than in every major advanced economy, except Japan.
This comes on top of our country's exceptional record of job creation, with over 800,000 jobs created since Labor came to office while 27 million jobs have been lost worldwide.
The financial and insurance services sector is the largest industry sector in Australia, accounting for around 10 per cent of gross domestic product.
Over the past 10 years, financial and insurance services have been the second fastest growing industry sector in the economy, growing by an average of 5.3per cent per year, although growth in the sector has been considerably weaker since the Global Financial Crisis.
And the financial and insurance services sector employs around 430,000 people, representing around 3.7 per cent of the national workforce.
The fundamentals of the Australian economy remain strong and the outlook remains positive — including for the financial sector.
The economy is forecast to grow around trend, by 3¼ per cent in 2012-13 and 3percent in 2013‑14, outperforming every major advanced economy.
The unemployment rate is expected to remain low and inflation is likely to be well‑contained. The unemployment rate is expected to drift up to 5½ per cent by the end of 2012‑13 and remain there through 2013‑14.
Prospects continue to be underpinned by strong growth in our regional trading partners and an unprecedented pipeline of mining investment. The pipeline of resources investment is now estimated to be over $500 billion.
Nonetheless, conditions remain challenging for sectors that are not benefiting directly or indirectly from the resources boom. The high Australian dollar, unsettled global conditions, changes in expenditure patterns as consumers have become more cautious are all expected to weigh heavily on sectors such as manufacturing and retail.
Engagement with Asia
Of course, not only is Australia's economic growth strong, but we are also situated in a region of the world whose growth and development will re-define the global economy this century – that is why many call this the "Asian Century".
To ensure our policy settings are right to share in the benefits of the historic economic transformation underway in our region, the Gillard Government has commissioned a landmark White Paper on Australia in the Asian Century.
The White Paper will set out whole-of-government policy directions to enhance Australia's success in the Asian Century, as well as some specific policy initiatives for near-term implementation.
The Government has a strong interest in ensuring Australia and Australian businesses remain competitive in the face of the historic transformation underway in the region.
The Government has concluded the formal consultation phase and the Task Force developing the White Paper is currently working intensely to refine its directions and policy outcomes.
Whilst not prejudging the outcome of the paper, some of the themes which we have heard loud and clear from the consultations include the need to:
- Enhance the ability of Australians to engage with Asia through building Asia-relevant capabilities, in particular cultural literacy and language skills.
- Ensure our economic policy settings favour Australia's competitiveness, including through investment in infrastructure, and tax and regulatory reform.
- Ensure our immigration, investment and aid policies and Australia's diplomatic presence in Asia are aligned with new opportunities and challenges in the region.
- Focus on the significant opportunities arising from Asia's economic growth, particularly in providing those high-value goods, sophisticated services and high-quality foods which an expanded Asian middle-class will demand in the future.
Foreign investment
I now want to turn for a moment to the importance of foreign investment to the Australian economy.
Foreign investment plays an important and beneficial role in our economy and is crucial for Australia's prosperity. It helps drive economic growth, creates skilled jobs, and enhances productivity.
Australia has a long history of welcoming foreign direct investment that is consistent with the national interest. Foreign investment allows Australians to enjoy higher living standards now, and into the future than would otherwise be achievable.
Traditionally, Australia's inward investment has been sourced from other developed countries, historically from the United Kingdom and the United States. Recently, there has been an increase in investment from Asia — first, large parcels of investment from Japan, and now, increasingly from emerging economies such as China and India.
Importantly, foreign direct investment does not only assist the domestic firms receiving the capital injection, it has significant spillover benefits to the broader economy. It provides additional capital for economic growth, creates new employment opportunities and supports existing jobs, improves consumer choice and promotes healthy competition amongst Australia's industries.
Foreign investment has helped build the competitiveness of the economy and will continue to do so in the future.
Like many countries, though, we review foreign investment proposals on a case‑by‑case basis to ensure they are consistent with Australia's national interest.
The Government's foreign investment screening arrangements strike the right balance between protecting national interest and ensuring that Australia remains an attractive destination for foreign investors.
Superannuation reforms
Australia has high levels of national savings and even higher levels of investment. In recent years, our gross national saving has been around 24 per cent of GDP — over one-third higher than the average of G7 countries. But our national investment is around 28 per cent of GDP – around 50 per cent higher than the average for G7 economies.
While much of this investment has been productive investments in long-life projects in the mining sector which will boost future production, we remain a capital hungry nation and need to do more to boost national saving.
This is one of the reasons for the Government's recent superannuation reforms. In addition, these reforms are about improving adequacy, equity, and transparency.
I would like to outline a number of the important reforms taking place in this area.
Increase in the SG rate from 9 per cent to 12 per cent
Let's look at some key facts about demographic change in Australia.
In 2010, a 60 year-old man was expected to live past 83 and a woman past 86. In 2030, they are expected to live about 3 years longer, and in 2050, nearly 6 years longer.
There are 5 people of working age now for every person aged over 65. This ratio will drop to only 2.7 people of working age for each person over 65 in 2049.
This is why investing in superannuation is so important. Australian superannuation savings are currently worth $1.4 trillion, and are expected to be $6trillion in June 2035.
Investing in superannuation now means there will be less reliance on the age pension as baby boomers retire.
Having lifted the compulsory rate from 9 per cent to 12 per cent, Treasury project that by the 2030s the superannuation guarantee will, in aggregate, be saving $10 billion a year in age pension outlays.
The GFC and resultant market shake-out led to greater member activism and questioning of value for money, transparency, and system usability in relation to superannuation.
It was in this context that this Labor Government decided to use the proceeds of the mining boom to increase compulsory superannuation savings.
The payoff for such a decision is not immediate—we're not going to see short term political gain—but rather, the pay off will be over the longer term.
- It will add $500 billion to the pool of savings by 2037, bringing broader benefits to Australia.
- It will significantly increase the retirement incomes of many Australians over time.
- A 30 year-old on average full-time wages who retires at age pension age is expected to have around an extra $118,000 in superannuation in today's dollars.
This long-term wealth creation has a cost to the Budget, because superannuation is taxed at a lower rate than most Australians' ordinary income.
The ongoing cost to revenue due to the increase in the superannuation guarantee rate from 9per cent to 12 per cent is estimated to be $240 million in 2013-14, rising to $3.6billion per annum in 2019-20, due to the increase in the level of concessionally taxed superannuation guarantee contributions.
Proceeds of the minerals resource rent tax go towards funding this tax concession.
Over the longer term, increased superannuation takes pressure off the pension.
It takes the pressure off future generations to fund an adequate retirement for their parents and grandparents.
MySuper
With around $1.4 trillion now invested in superannuation, there is a strong public policy interest in having a safe, efficient and competitive superannuation sector to maximise the retirement incomes of Australians.
It is crucial that the superannuation system is designed to work for all members.
It must work for those who take an active interest in their superannuation.
But the system must also work in the best interests of those who, for whatever reason, do not take an active interest in their superannuation.
Of almost 12 million Australians who currently hold a superannuation account, approximately 80 per cent are estimated to have their superannuation paid into a default superannuation fund.
Clearly, it is important the system works in a way that adequately protects the interests of these members.
The Cooper review of the governance, efficiency, structure and operation of Australia's superannuation system, completed in 2010, found that, in general, fees for default superannuation were too high. While competition has worked relatively well to reduce fees for certain sectors such as large scale corporate superannuation, competition has not worked for a large number of other members.
MySuper is the Government's response to these issues.
MySuper products will replace all existing default products for all new default contributions from 1 October 2013.
MySuper trustees will have additional duties reflecting the higher level of care and responsibility they must exercise on behalf of their default members.
Central to these additional duties is that trustees of MySuper products will be required to promote the best financial interests of their MySuper members, with a particular focus on returns delivered after fees, costs and taxes.
MySuper trustees will also need to consider, on an annual basis, whether members are disadvantaged due to insufficient scale, in terms of both administrative scale and investment scale.
Fees in default products will be reduced by prohibiting commissions within MySuper products. Further downward pressure will be placed on fees by limiting MySuper products to a common set of features and fees. This will make it easier for members, employers and other stakeholders to compare performance across MySuper products.
To promote competition, information will be published on the fees, costs and returns of MySuper products on a quarterly basis.
While MySuper will provide important protections for members not actively involved in their superannuation, it will also provide a simple, cost-effective product which will allow members to delegate investment decisions to an expert superannuation trustee.
The introduction of MySuper represents a significant change for the superannuation industry, a change that recognises that good public policy demands that a compulsory superannuation system should work in the best interests of all participants in the system, whether they are active participants or not.
SuperStream
The Government is also implementing reforms to reduce the cost and inefficiency which arises from a lack of standardised data and transmission formats within superannuation. "Standard Business Reporting", a Government initiative designed to streamline and simplify business to government reporting, will provide the platform to be used for superannuation industry transactions as part of the Stronger Super reforms. Common data standards and transmission formats for superannuation transactions are estimated by the industry to save up to $1 billion.
Superannuation Roundtable
The Government is also looking ahead to the future. That's why he Government announced the Superannuation Roundtable on 29 January 2012 to consider ideas raised at the Tax Forum for providing Australians with more options in retirement and improving certain superannuation concessions.
The roundtable brings together representatives of the superannuation industry, small business, employees and the community sector, as well as technical experts and academics.
The roundtable is examining proposals to expand options in the drawdown phase, like annuities and deferred annuities, as well as appropriate offsetting savings.
Closing remarks
The Gillard Government is focused on delivering superannuation and pension reform for the long term. We are implementing policies that will ensure that we are well placed to take advantage of the challenges and opportunities of the future.
We have a growing economy, with strong fundamentals such as low unemployment, contained inflation, low net debt and a record pipeline of investment.
We are a dynamic and adaptable nation, placed in a region that will be at the centre of economic growth and development in the coming century. Australia is a country that is, and should, be optimistic about our future.
And the financial sector, and those who invest in Australia, should also be optimistic.
I thank you for the opportunity to address you today, and wish you all the best for the remainder of your summit.