Ladies and Gentlemen.
It is a great pleasure to join you in Melbourne today to discuss a matter of increasing importance - for each of us individually, and for Australia as a nation: Financial Security.
As a future policy direction, financial security for all Australians sits squarely with the big themes of the third term Howard Government, namely our national security, our economic strength and our social cohesion.
Financial security in its broader sense embraces the strength and stability of financial institutions, prudential regulation, competitive financial markets, employment opportunities, national savings and retirement incomes.
However, in talking about financial security today I propose to focus on what is emerging as a fundamental requirement for Australians and that is, financial literacy.
It is an unassailable proposition that the ability to make informed judgements and to take effective decisions regarding the use and management of money is a vital skill for all Australians.
A lot has been said about the so-called shortfall in superannuation savings of the mass of baby-boomers teetering on the edge of retirement.
Even more has been said about whether younger generations - the Gen X and Y monnikered types - can ever dream of owning a home or saving an adequate amount to enjoy a comfortable retirement. These issues go to the heart of financial literacy.
The Youth versus Age debate is hotting up as young people come to realise that not only will they have to fund their own retirement, they will be the ones helping to fund the baby-boomers' twilight years.
Perhaps science fiction writer John Sladek said it best when speaking of the future he said:
"The future, according to some scientists, will be exactly like the past, only far more expensive."
An empirical snapshot of an expensive future indeed was delivered in the Government's first Intergenerational Report released as part of last year's Budget.
The report projected that by 2041-42 the proportion of the population aged over 65 would be double the current levels. As a result, Commonwealth Age and Service Pension payments could be expected to rise from 2.9 per cent of GDP in 2001-02 to 4.6 per cent of GDP in 2041-42.
Also by 2041-42 the retiring population will have had a lifetime of accumulating super under the superannuation guarantee regime.
However, financial literacy will undoubtedly play a role in whether these future retirees, currently aged 30-plus, will equip themselves for a comfortable retirement through savvy savings and investment strategies rather than rely only on compulsory superannuation and the Aged Pension.
Clearly, financial literacy and a better understanding of how to manage money is critical to better risk management, an improved savings culture and the long-term retirement needs of a greying Australia.
Having sufficient retirement income for most of us requires an early start but a major hurdle is how to target young people, particularly those aged 18-24, who were found to have the lowest financial literacy levels in the recent ASIC discussion paper on Financial Literacy in Schools.
As the Chair of the Dusseldorp Skills Forum, Jack Dusseldorp, said in his paper `How Young People are Faring: Key Indicators 2003':
"The issue of how Australia equips its youth to make the transition to full social and economic independence touches every teenager, every parent, every teacher and most employers and unions."
ASIC recently released a paper on literacy in schools which states: `it is important money management begins at an early age, so every school leaver has the necessary basic financial skills to become confident and informed consumers in their work and personal life".
The ANZ adult financial literacy survey 2003 showed significant gaps in financial knowledge.
55 per cent of super fund members claimed to know little about the fees and charges applying to superannuation and only 37 per cent of respondents had actually worked out how much they needed to save for their retirement.
More alarmingly, 16 per cent of the adult population spend all their income as soon as they get it and do not plan for the future. Only five per cent claimed to have no difficulty managing their finances.
Most significantly the survey found a strong correlation between levels of education, socio-economic status and financial literacy.
According to the ANZ survey the lowest levels of financial literacy were associated with those who left school before Year 10, those unemployed or in unskilled work, those with incomes below $20,000 per annum and those with low savings levels. This may not be surprising.
What is surprising however is a recent survey conducted by Halogen Private Wealth Services indicates employees spend as much as 27 hours a month worrying about financial issues ranging from poor returns on superannuation to job security.
97 per cent of respondents said they had some form of financial stress yet only five per cent of employees apparently had any form of financial plan.
The majority of respondents said increasing payments to their mortgage was their only form of saving and the survey found the average 22-year-old has more cash flow than the average 72-year-old.
A clear impact on business productivity, some employers are taking matters into their own hands and helping to educate their employees about financial matters.
The benefits are obvious - relieve the employee of their immediate financial anxiety, make productivity gains and reap the rewards of having financially literate workers.
Increasingly there is an onus on policy makers, financial institutions and advisers to educate the Australian public about the market place and empower them to take control of their financial future.
The OECD in commenting on Australia's school to work transition as part of its 2003 Economic Survey, found that `the employment disadvantage of poorly qualified school leavers, compared to their better educated counterparts is somewhat above the OECD average'.
While the news is certainly not all grim, a glance at respondents to the ANZ financial literacy survey on their understanding of superannuation do throw up some figures that give cause for thought.
Both industry groups and the Senate Select Committee on Superannuation recognise that education is the key to improving individuals' ability to plan and save for their lifestyle today and their retirement tomorrow.
The Investment and Financial Services Association (IFSA), reinforces this view in its paper `Retirement Incomes and Long-Term Savings: Living Well in an Ageing Society':
"Education, information and quality advice are critical to the achievement of Australians' expectations of their retirement incomes."
On any view, financial literacy, or the lack of it, is on the political radar.
Clearly, efforts are already being made to address the issue of financial literacy in a number of policy areas, but recent thinking on these matters suggest that more can be done.
Many young Australians leave school seemingly with limited formal knowledge about managing their money or basic financial transactions such as buying a car, paying off a loan, managing credit, or getting insurance.
With the wide range of investment options available and 30 year low interest rates, how many of our nation's investors really understand risk versus return, or what is a safe level of debt?
On the retirement front, whilst there are undoubtedly savvy retirees who understand how to make the most of their retirement incomes and there are robust regulatory safeguards against exploitation, financial illiteracy poses a threat to maximising the benefit of retirement savings.
The benefits of being financially savvy should not be for the fortunate few. Widely available and well targeted financial education is basic to our financial security and social wellbeing.
Overseas Experience
In looking at the issue of financial literacy, it is interesting to examine the overseas experience, which can reveal that in Australia we have a lot to be thankful for.
In America the Fannie Mae Foundation found that between 10 and 12 million households in the US have no relationship with a traditional bank or savings institute and instead rely on cheque cashiers and payday lenders to access their money.
A report to the US Senate, Banking, Housing and Urban Affairs Committee in 2002 pointed out that while many factors lead unbanked households to rely on excessively priced financial services, poor choices is a leading reason.
The committee report found that as a result, greatly increased financial education for lower-income households, particularly those living in distressed urban and rural communities, is essential.
To help address the issue, Financial Literacy programs for high school students are compulsory in four US states and provided as an option in several other states.
The Jumpstart program brings together key stakeholders from education, government and the financial industry to lobby for the inclusion and implementation of financial literacy programs in state curricula.
Similarly in the UK the Personal Finance Education Group program is a compulsory part of the national curriculum for 11-16 year old students and is included as part of a compulsory citizenship program.
What is Available in Australia?
Addressing the need for financial literacy in Australia has not been ignored. A recent scoping study by Treasury has shown a wide and diverse range of existing programs.
Within the Australian Government sphere, the largest financial literacy program is the Financial Information Service, or FIS, run by Centrelink in the Family and Community Services portfolio.
There are about 120 FIS officers throughout Australia helping Australians to plan and take charge of their finances at no charge.
Much of the information provided is delivered through face to face interviews and seminars.
On average, the Financial Information Service conducts around 73,000 interviews, provides seminars to around 70,000 participants and responds to more than 200,000 phone calls each year.
FIS provides advice on choosing a financial planner, dealing with retrenchment and termination of employment, superannuation, financial issues association with aged care accommodation and Commonwealth pensions.
The Australian Securities and Investment Commission (ASIC) is also active in helping consumers who are making financial decisions.
ASIC assists consumers with a free-call information line and provides an online information service, known as Fido.
State and Territory agencies such as the Department of Fair Trading also provide information on consumer and financial issues, as well as hands-on assistance through financial counselling services.
The financial industry itself provides support including teaching material used in schools. Teaching resources you may have heard of include `Dollars and Sense' by the Commonwealth Bank and `Dollarsmart' by the Financial Planning Association.
On the theme of financial literacy and schools, ASIC's discussion paper recommends the establishment of a financial literacy institute to champion financial literacy in secondary schools.
The proposed institute would be an independent, non-profit body made up of representatives from regulators, as well as the financial, education and community sectors.
The institute would provide teachers with approved financial literacy resource material and professional development.
The ASIC discussion paper points out the costs of financial illiteracy can be huge - illustrated by the $800 million in losses to consumers over the last three years revealed by ASIC's investigations into prospectuses and scams.
Alan Greenspan Chairman of the US Federal Reserve says it best: "An informed borrower is simply less vulnerable to fraud and abuse".
ASIC is asking industry, consumers and interested parties to comment on the proposals outlined in their discussion paper. I would encourage any of you with an interest to provide your feedback on this important issue.
The Way Forward
With all these disparate programs already available or in prospect, the question is where are the gaps?
In my view, the commitment to helping Australians become a more financially literate country would be immediately assisted by political commitment across party lines to present Government measures allowing consolidation of superannuation accounts and an education campaign to complement choice of superannuation investment.
Consolidation of Superannuation - Portability.
The debate about portability of super funds has been punctuated by scare tactics and the self-interest of a tag-team of opposition parties and interest groups.
However, a measured and balanced look at the arguments reveals it is simply about allowing people to move their money when they change jobs.
Portability will help address the issue of multiple superannuation accounts and fees which can eat away at an employee's retirement benefits. At the moment, on average, every Australian worker holds more than two and half superannuation accounts.
Currently, people are immobilised in funds chosen for them and those denying them choice and portability are using financial illiteracy as a reason for it staying that way.
These arguments about delaying portability and choice because of low levels of financial literacy start to sound like the old chicken and egg adage.
It is hard to believe in this day and age that anyone could seriously defend a system of compulsion that prevents people investing their own money where they choose.
Already an estimated 30 per cent of Australians are given a choice between super funds and can decide the type of fund or investment strategy that works for them.
But all Australians should have that right to choose, not just the fortunate few.
And given that portability is already widely available, particularly in retail funds, without apparent ill-effect on consumers, you would have to ask whether those opposed to portability are motivated by self-interest as opposed to genuine concern.
It is time to end discrimination against those consumers who are not able to move their money when they change jobs. It is unfair and inequitable that they should continue to incur fees and charges on multiple accounts.
Claims that choice and portability will result in a proliferation of accounts just don't stack up. The fact is, the more accounts a person has, the more likely that fees will add up and, on this basis, there is a greater incentive to consolidate accounts.
Lack of member control over superannuation benefits has taken its toll. It has led to the alienation of $7 billion from its owners where superannuation funds have lost track of members.
Having portability and being able to choose a superannuation fund will encourage people to take a greater interest in their retirement savings and to vote with their feet if they're not satisfied.
Financial Services Reform
A robust disclosure regime will result in more informed consumers and a more competitive, dynamic and member-focused industry.
Importantly, the Financial Services Reform Act 2001, which takes full effect on 11 March 2004, will change the environment in which financial products and advice are marketed and provided to consumers.
The standards bar will be higher than it has been before.
FSR requires all providers of financial products and advice, including superannuation funds, to be licensed. To qualify for a licence, financial service providers must meet high standards of conduct and must provide their customers with relevant and easy to understand information throughout the life of a financial product.
If something does go wrong, consumers will have access to a range of relief mechanisms including cooling-off provisions, and for retail clients, access to complaints handling and compensation schemes.
ASIC has been working with industry to assist consumers to identify key information to compare funds.
Choice
Arguments against choice of superannuation fund largely rely on the financial illiteracy argument for maintaining the status quo.
It is a curious contradiction that somehow the risks to consumers of having a choice within a robust disclosure regime outweigh the disadvantages of being trapped in a poorly performed fund and having no choice.
But as part of the Government's reform package and in addition to the FSR requirements, $14 million has been allocated for an education campaign for employees and employers to support the Choice initiative.
Choice of funds will simply allow Australians to choose the fund into which their superannuation guarantee contributions are paid.
Far from emulating the UK Choice campaign slogan of `change is good', one of the key messages of the campaign will be informing consumers that they may be no need to change their superannuation. In fact, many may come to the conclusion it is in their best interests to stay where they are.
Choice of funds legislation will be debated in the House during the September sittings but opposition parties are sticking to their political agenda of denying Australian's choice. They have also made it clear that even the portability regulations will be disallowed. Some have said that portability should not precede the choice legislation but significantly those concerned about portability also oppose choice.
In my view the merits of consolidating multiple superannuation accounts, saving on multiple fees and charges, and putting people in control of their own savings are so blindingly obvious it is a national disgrace that these fundamental reforms are blocked by rank political opportunism.
Like American sprinter Jon Drummond they are lying on the track in the path of progress and ordinary Australians are the losers.
Conclusion
The Government is giving close attention to determining the best way to improve financial literacy across the community especially, but not exclusively, through the prism of financial security in retirement.
Financial literacy more broadly involves many cross portfolio and agency interests to be consulted.
Whatever the forward program might be, an overarching approach embracing business, educators, the financial sector and government is likely required and that's where CEDA will be a valuable contributor to what I hope will be a vigorous debate on how best to promote national financial literacy.
The capacity to budget, save, invest and understand risk are core financial skills. This is beyond argument.
But appetite for risk will vary depending on personality, personal circumstances, age and stage in life.
The success of Australia's retirement income policies will be enhanced by the capacity of individuals to understand financial products , to save and to plan for their future - that is, to be financially literate.
And it is relevant to note that superannuation is not the only egg in the nest of retiring Australians.
Many have investments in real estate, in voluntary super and in equities which will enable a more comfortable retirement than just compulsory super and the aged pension.
The challenge is to maximise and grow what is available now to improve the prospects of all Australians.
Many of those reaping the benefits of financial education today could have been in a much better position if they had that knowledge from a much younger age.
From the information available, there are several target groups that would benefit from better financial information.
Literacy programs need to be carefully differentiated so that those most in need can be effectively targeted.
The UK appears to be one of the few countries that has seriously looked into the possibility of financial literacy for older people and those contemplating retirement.
What has emerged from recent UK surveys is that information about retirement and pensions needs to be given during people's working lives and that employers can take some responsibility for ensuring that employees attend pre-retirement courses.
Closing the gaps in our financial knowledge and assisting Australians to better manage their money simply has the capacity to enhance the lives and opportunities of all Australians. For these reasons, financial literacy should be for everyone, not just for the fortunate few.