INTRODUCTION - PERSONAL INVESTOR
It is a great pleasure to be here on this very important awards night and an even greater pleasure to have the opportunity to address you all about some of the issues I believe are of great importance to the financial services and investment industry and to the broader community.
Over the years Personal Investor Magazine has become a fixture for anyone wanting insightful and informative news and analysis of the finance industry and investment environment. Personal Investor has also found a place as an educational and research tool and as a source of specialist information on a range of personal finance and investment issues and trends.
I would like to congratulate Robin and his team for producing a very well regarded publication, and well read website I might add. Personal Investor is 19 years old this year, but I think we can all imagine that the readership it is serving today is a very different and very much broader one than those it was serving almost two decades ago. In Australia we have seen a boom in the demand for, and availability of, financial advice and information.
Personal investment in the year 2002 is not a matter for an elite group of wealthy investors. The ups and downs of the equities market, moves in the bond market and the performance of fund managers grace our news reports daily. Vast numbers of Australians are now taking a very keen interest in finance and investment and in the products being provided by financial services companies.
The evolution of interest in investment has been characterised by the growth in the number of Australians owning shares.
The Australian Stock Exchange's share ownership survey in 2000 showed that more than half the population owned shares, and that 5.7 million Australian adults owned those shares directly. Ownership grew rapidly towards the end of the 1990s and was matched by an increase in the exposure of Australians to managed funds, largely through the superannuation system.
The growth in personal shareholdings is a positive feature of the modern landscape and is part of the improved level of diversity of Australians' investment portfolios and general wealth creation. It does however, throw up some interesting issues in the context of recent events surrounding the corporate governance of entities such as Enron and WorldCom.
Alan Greenspan in remarks to the Stern Business School in March of this year commented that `By law shareholders own our corporations and ideally, corporate managers should be working on behalf of shareholders to allocate business resources to their optimum use...(however) ownership has become more dispersed and few shareholders have sufficient stakes to individually influence the choice of boards or directors or chief executive officers."
By contrast, fund managers have an opportunity to use their voting power within corporations to ensure that corporate manager's roles and responsibilities are appropriately discharged. If US pension funds that were exposed to Enron and Worldcom are any guide, the voting power of investors could have as much impact on corporate behaviour as many of the regulatory responses currently under consideration in the US.
ECONOMIC ENVIRONMENT
Although there can be no room for complacency, all Australians can be proud of the economic environment that has been created for investors in Australia.
Australia is one of the fastest growing economies in the industrialised world, and this growth is set to remain robust over the coming year. This is evidenced by Australia's GDP growth rate, which was 4.2 per cent through the year to March 2002, in line with the strong growth recorded during 2001.
While recent developments in global financial markets have caused some to question whether this buoyant growth can continue, it's important to focus on the strong underlying fundamentals of our economy. As the Treasurer indicated yesterday, the volatility on global stockmarkets - especially in the US - may impact on the international growth outlook. However this will only be relevant if the downturn is sustained and begins to impact on the real economy. It's still too early to tell whether the real economy will be significantly affected.
What I can say though is that regardless of how overseas stock market developments proceed, the Australian Government is proud of its record in building and maintaining a strong domestic economy. Our policies have helped sustain our economy in the face of many international challenges, and while we obviously will be keeping a close eye on the recent developments, our economy continues to hold great promise.
The business investment outlook is strong, supported by favourable fundamentals, and corporate profitability remains at above long-run averages. And Australia's labour market is the strongest it has been in over a decade, with close to one million jobs created since this Government came to office.
But getting the settings right, creating the right economic environment, is just one piece of the puzzle for investors. They also need a competitive and well regulated system in which they are well informed.
FINANCIAL SECTOR REFORM
Our financial services sector has recently undergone significant regulatory reform. It is now more responsive to the needs of both business and retail consumers.
The Financial Services Reform Act, or FSR, will give Australia a world-class regulatory regime in the financial services sector. The scope of the reforms will benefit both the Australian financial services industry and its customers. They will help ensure that we continue to grow a vibrant, flexible and adaptable finance services industry - an industry that is not hampered by confusing or inconsistent regulator approaches.
FEATURES OF THE FINANCIAL SERVICES REFORM ACT
Industry should be comforted by the move to a more uniform regulatory approach, which removes a range of regulatory barriers to the introduction of technological innovations, reducing administrative and compliance costs.
It is also true that consumers and investors will receive significant benefits from these reforms in a number of areas, including having a consistent framework for consumer protection across the financial services industry. They will also have access to efficient complaints handling procedures for resolving dispute.
But perhaps the most impressive achievement of the reforms will be to provide consumers with the information they need to understand and compare different financial products.
In framing the reforms, the Government believed one of the best ways that our financial markets can grow and reach their full potential is to ensure that consumers are fully aware and informed in relation to the decisions that they are making.
The new financial services reforms do just that.
It is important to strike the right balance between the Government legislating various rules or requiring certain disclosures by financial services providers and allowing consumers to make up their own minds. I think we've got the balance about right. To put it simply, a market with informed participants is the best mechanism for delivering a high growth, high-performance financial sector.
And that idea of informed participants and a competitive market delivering the best results is the idea behind a Government policy with which many of you would be familiar - Superannuation Choice.
SUPERANNUATION - INTERNATIONAL CONTEXT
After the family home, superannuation is the most valuable asset most Australians have. This is one of the reason debates about superannuation, and the Government's superannuation policy is never far from the news.
It is a debate that I welcome, because it pushes to the forefront of our minds the need for a culture of saving and keeps Australians thinking about their retirement and how they might prepare for it. But I thought it would be timely to talk tonight about some of the things that are often left out of the public debate on superannuation.
Australia's superannuation system is still young in relative terms, but it is becoming increasingly important. The ageing of populations through most of the developed world, and a growing expectation of retirement living standards, the issue of how to support their communities after they leave the workforce is something Government's around the world are currently grappling with.
The OECD's economic survey of Australia released in August last year, pointed to the kind of pressures Australia and other countries will be under and the need for fiscal policy prudence - pressures clearly identified by the Government's Intergenerational report.
It was pleasing to note that the OECD found Australia's "Age Pension and Superannuation systems combined, provide Australians, especially low-income earners, with replacement rates above frequently-used benchmarks." They reported that "replacement income rates are expected to rise over time, as the superannuation element matures."
Clearly many of those taking part in the public debate in Australia, while pushing for greater retirement incomes, are also representing industries that rely on funds going into superannuation for their livelihood.
THREE PILLARS POLICY
What is sometimes forgotten in the debate about superannuation is that the Government's retirement income policy is broader than the compulsory employer funded superannuation guarantee.
The Government takes a three-pillared approach to the retirement income system. Under our system, compulsory employer superannuation contributions combine with the means tested aged pension and voluntary private savings to provide retirement incomes. The system enables Australians to achieve a higher standard of living than would be provided for by the age pension alone.
But those who judge the superannuation system on the basis of whether or not it will replace the age pension are barking up the wrong tree. The Government is committed to the age pension as a safety net for those people who during their working years have limited opportunity or capacity to save for retirement.
The age pension will, for many people, be a supplement rather than a replacement.
AGE PENSION
For those people who are eligible, the age pension currently provides a maximum fortnightly rate of $421.80 for singles and $352.10 each for couples. This safety net will be maintained into the future because the pension rate is indexed and adjusted every six months in line with the CPI.
The Government has also boosted the value of the age pension in real terms by legislating to link the full rate of pension to Male Total Average Weekly Earnings. This policy has seen the value of the age pension grow in real terms by 1.19 per cent a year since 1996 and is expected to grow by one to one and a half per cent a year on average into the future.
This will come on top of the boost to pensions delivered as part of the introduction of the New Tax System. It is worth noting that due to these changes, the age pension is worth more in real terms than ever before, and will be worth even more next year, and so on.
In many cases the age pension is a supplement to other savings, inside or outside the superannuation systems. Approximately 54 per cent of individuals of age pension age are currently receiving a full rate pension, while another 28 per cent receive a part rate pension.
By 2050, when the superannuation guarantee system has fully matured, the number of Australians receiving the full pension is expected to fall to around one third. The proportion receiving no pension at all will rise to a quarter, while around 40 per cent will continue to have their retirement incomes supplemented by a part pension.
COMPULSORY CONTRIBUTIONS
Under Australia's compulsory superannuation guarantee, employers are required, with very few exceptions, to provide at least a prescribed minimum level of contributions to their employees' superannuation accounts. The rate rose to 9 per cent from July 1 this year.
The coverage of superannuation in Australia has grown significantly as a result of the introduction of the SG.
In 1986, only around 40 per cent of Australian employees had superannuation coverage. The ABS Survey of Employment Arrangements and Superannuation indicates superannuation coverage now extends to some 98 per cent of traditional employees with leave entitlements and 72 per cent of casuals.
PRIVATE SAVING
In addition to compulsory employer contributions, some employers make extra contributions on behalf of their employees. Of course, individuals can also save voluntarily for their retirement through superannuation and other savings vehicles outside the superannuation system.
More than half of all employed people over the age of 40 with taxable incomes above $30,000 have made some additional provision for their retirement.
And what is often overlooked, is the investment a large proportion of Australians have in their family home. The majority of older people in Australia are homeowners, which has a direct bearing on the adequacy of their retirement incomes by significantly reducing their accommodation costs.
Instead of making private superannuation savings compulsory, the Government encourages individuals to make what they consider the appropriate contribution to their retirement savings with a system of generous tax incentives.
TAX ON SUPER
Listening to some of the comments from those arguing for changes to the superannuation system, one would think that the Government's taxation of superannuation is an excessive and inappropriate burden.
But when you look at it in relation to income invested in a non-superannuation vehicle, you will see that the tax treatment is very much in line with the treatment of income invested outside the system, but with some very significant concessions.
Concessions last financial year were worth in the order of $9.5 billion and that will continue to grow. That is the largest single Federal Government tax expenditure.
It is the extremely valuable tax concessions available to superannuation investments that mean the Government must take active steps to ensure that super remains an income replacement long term investment and is not simply abused as a wealth creation tool.
A comfortable retirement is undoubtedly a very positive thing, and it is easy to argue for more taxpayer dollars to be poured into the system. But it needs to be remembered that reducing the taxation on superannuation even further would have a significant impact on the Commonwealth's revenue.
When proposals to provide even greater concessions on the taxation of superannuation are put forward, they should be considered in terms of how that increase in Government tax expenditure might be funded, and how it should be balanced against other key priorities such as health, education and welfare. These are serious questions. Community sentiment may well favour a greater emphasis on providing further incentives for voluntary savings but it comes at a cost to other services. What services will people need to live without now to channel more funds into their retirement?
When you look at the big picture, the question one needs to ask is, how much consumption people should forgo during their working life to provide for their consumption in retirement, and whether Governments should be foisting that decision on them.
None of us would presume that all Australians require or desire the same level of income during their working lives. Should we really be assuming that is the case in retirement? Clearly people have different expectations about how much income they will need in retirement, and how much they are willing to put away now to achieve that.
ADEQUACY
The fully implemented SG arrangements, in conjunction with the improved Age Pension after tax reform, will make the average person's financial independence in retirement more secure than at any other time in Australia's history.
Yet at the same time we are hearing cries from some who say it is still not enough. We have seen claims that retired Australians will be living in parsimony.
But with the massive growth in superannuation savings under the superannuation guarantee and improvements to the age pension, retirement incomes are higher than ever. And as the SG system matures, those incomes will improve.
It is clearly false to suggest that most retired Australians will live in abject poverty, unable to afford heating for their homes or meat on their dinner plates.
TREASURY ANALYSIS OF ADEQUACY
Judgements about whether are not retirement savings are adequate are necessarily subjective and very much dependent on ones goals. Treasury use the "replacement rate concept", which looks at the ratio of an individual's spending power after retirement to that before retirement, to assess the adequacy of retirement incomes.
Research by the Association of Superannuation Funds of Australia has indicated that the average net replacement rate from public income maintenance schemes in nine OECD countries is 53 per cent.
Analysis by Treasury has found that current Government policy will deliver substantially higher replacement rates for senior Australians, as a group, over the longer term.
In a recent submission to the Senate Select Committee on Superannuation, Treasury concluded that the superannuation guarantee, in combination with the age pension, could produce replacement rates in excess of 60 per cent for men working for 25, 30 or 40 years. This also holds true for individuals with interrupted working lives, as so often happens with women in the workforce.
For superannuation payouts alone, before taking into account the age pension, Treasury estimates the average payout is $72,000 today, and will rise to $136,000 in real terms by 2020.
Whether or not a particular replacement rate is optimal is a matter of judgement for the individuals involved, but it is generally accepted that most people will not need as much money in retirement as they do during their working lives.
Most retirees simply do not face the same costs as working age people. By and large they will no longer be repaying a mortgage, putting children through school or meeting the costs of going to work.
I would encourage all Australians to take a close look at their own superannuation savings, think hard about what they may need in their retirement, and decide for themselves if they should be putting more away now for a more comfortable life in the future.
Far from preventing individuals from putting away additional income on top of the superannuation guarantee, this Government actively encourages it. And if the Senate allows the Government to implement the superannuation package that we took to the last election, we will be able to do even more by way of encouragement.
ELECTION COMMITMENTS
At the last Election, the Government put forward the most significant package of superannuation reforms seen in recent years. This was a balanced package designed to help those with the financial capacity to save for their own retirement as well as those who could not.
Some parts of the package have already been passed by the parliament, but the Senate is still to debate some key measures including co-contributions for low income earners, a reduction in the superannuation surcharge and the introduction of choice. I want to make some comments about these measures.
The co-contribution policy will see the Government paying up to $1000 a year directly into the superannuation accounts of low income earners to help improve their retirement savings. Not only will this measure improve the level of savings for low-income earners, but it will provide greater incentives for Australians to save for their retirements when they are able.
At the same time, as promised, the Government is moving to reduce the maximum superannuation and termination payments surcharge rate from 15 per cent to 10.5 per cent over the next three years. This measure will encourage those who are financially able to make voluntary contributions to their superannuation savings and become more self-reliant in retirement.
As well as improving the amount of money flowing in to the system, the Government also wants to improve the ability of workers to control their superannuation savings by introducing choice. Not only will choice deliver control into the hands of those with the greatest stake in superannuation, the employees, but the additional competition in the system should lead to better services and lower fees from superannuation providers.
Those arguing against choice are taking a view that the people whose savings are in question should not be entrusted with decisions about where to invest it.
It is worth contrasting choice of investments for an individual's superannuation fund with the choice that surrounds the acquisition of that other significant personal asset - the family home.
The arguments against choice are tantamount to saying that because buying a home is a complex and important transaction requiring education and understanding if a good deal is to be made, we should take the choice away from individuals and let employers choose the right home for them.
I know it sounds ridiculous. We don't let employers choose our homes. We don't let employers tell staff where to bank, who to insure with or which stocks to buy. So why continue with a system where people have little say in how one of their largest assets is invested?
The other issue raised by those opposed to employees having a say in where their superannuation is invested, is how a similar policy was implemented in the UK some years ago. What they fail to take into account is the different regulatory environment we have in Australia, and particularly the recent reforms to financial services regulation which provide the safeguards, disclosure and information that are needed to successfully implement a system of choice.
CONCLUSION
These issues will clearly play themselves out in the media and in the parliament over the coming months and I am sure many of you will take a keen interest in the debate as it progresses.
I hope that I have been able to provide you with a fresh perspective and some food for thought on the issues, and I hope those of you with a keen interest do make your views known.
The future of superannuation and savings more generally is a vital one for Australia and Australians. The industry and Government face many challenges as we continue to develop the most efficient and effective system that we can.
Although the Government is in the process of implementing a creative and forward thinking package of initiatives, I can assure you that we don't intend to rest on our laurels. There is always a need to maintain a focus on whether the system is meeting the needs of Australians and what opportunities exist to improve the way our retirement income system works.
The Government will continue to promote informed and measured discussion of retirement incomes, and there is an important part to be played by industry, the media and the broader community as participants in that debate.
I thank you for your time tonight, and wish you all the best of luck when it comes to announcing our winners.