Firstly, let me thank you for the opportunity to open this conference on the very important issue of superannuation reform.
At a time when Australians face perhaps the most uncertain time in our history with the potential for war, a precarious stock market and the aftermath of a serious drought to contend with, some would argue that now is not the time to be rolling out changes to superannuation. I do not agree.
The Government's Intergenerational Report has really brought home the issues of an ageing population. The ageing demographic is expected to result in over one third of the population being aged 55 years or over by 2042. Additionally, over half of the population will be 45 years or older by 2042. Just reflect on those figures a moment, and I think that you will understand the position.
There cannot be many policy areas of such importance to the future economic wellbeing of Australians than their ability to maintain their standard of living in retirement.
It is a big ask. Low interest rates, low inflation, rising incomes, tax reform and exposure to global competition has led to levels of prosperity Australia only dreamed about 30 years ago.
It has rightly focused ageing and middle aged Australians on how much they will need in retirement and how best to secure it. Superannuation in its many manifestations, whether DIY, retail or industry funds or RSAs, now feature columns in the daily newspapers, specialist financial magazines, not to mention producing an army of fund managers and financial planners and advisers.
The point to make is that, with over $500 billion invested in superannuation, and representing for most Australians their second largest asset after the family home, superannuation is hugely important and the Government is concerned to ensure that the superannuation system is robust, safe and flexible and meets the needs of Australians in retirement.
Since I have been in the portfolio, the Government has focused on making superannuation more available and attractive, on strengthening the safety of superannuation and on increasing the integrity of the system. Rather than detail the long list of reforms that have been successfully implemented I have an attachment to this paper which sets out major reforms.
This morning however I will focus on what I believe will provide some stimulation for your input and discussion at this conference - that is the current policy agenda and future direction for superannuation in Australia.
To put this direction into perspective, it is important to reflect on where the superannuation system is now.
We have in place the major elements of a world class retirement income system. The fact that the World Bank has endorsed Australia's "three pillar" approach to retirement income is now old news. But how does Australia compare now?
I am pleased to say that the current Australian retirement income system compares favourably with other developed countries.
The OECD stated in their recent economic survey of Australia that our Age Pension and superannuation systems combined, provide Australians, especially low-income earners, with income replacement rates above frequently-used benchmarks. These are expected to rise over time as our system matures.
Of late, there has been much talk in the media about the performance of superannuation investments and superannuation funds over the past two years.
APRA data indicates that aggregate superannuation fund returns in Australia were minus 1.6 per cent in 2001/02. However, the seven-year average was plus 6.7 per cent.
In comparison, ASFA data tells us that US pension funds in 2002 had a typical investment decline of 10 per cent. In the UK, the average decline in 2002 was 14 per cent. This represents the worst annual return in the UK since 1974, and the third consecutive year of negative returns.
Similar results have also been recorded in Canada in 2002, where research has indicated that the average return over a number of balanced funds was minus 4.6 per cent.
This data indicates that whilst returns reflect a slump in the market in the past two years, Australian superannuation funds have produced a comparatively strong performance over time.
The indicators support the proposition that Australia's superannuation system does not need a radical overhaul in design but rather it requires well thought through measures that will provide sensible enhancements and reforms to a sound system.
This objective has seen several themes emerge in recent debate as to how to improve the system, including:
- the adequacy of retirement incomes;
- the taxation of superannuation; and
- encouraging older workers to remain in the workforce.
Each of these themes warrants a discussion in itself, but for the purposes of the limited time available, I will make some comments about tax.
TAXATION OF SUPERANNUATION
Taxation
Not surprisingly, taxation of superannuation is the theme that gets raised most frequently in discussing the reform of superannuation. True it is that, leaving to one side our policy to wind-back the surcharge, superannuation is taxed at contribution, accumulation and benefit stages, but Superannuation does receive substantial taxation concessions. In 2001-02 these concessions were valued at $9.8 billion and are estimated to increase to $10.6 billion in 2002-03. This is the largest single Federal Government tax expenditure.
Superannuation is the tax-preferred investment for taxpayers in all marginal tax brackets. Specifically, in the case of SG employer contributions, superannuation is a tax-preferred investment over a working lifetime for all taxpayers.
As you know, Superannuation contributions and earnings are taxed concessionally at a maximum rate of 15 per cent. Additionally, an individual can take their super benefit as a lump sum, which is taxed at concessional rates up to the lump sum Reasonable Benefit Limit of $562,195 for the 2002-2003 income year, with the first $112,405 generally tax free.
Contributions made by an individual from money that has already been subject to personal income tax are returned to the member untaxed, and are not counted for RBL purposes. Income stream products qualify for even more concessional tax and social security treatment with the Pension RBL limit at $1,124,384 in this financial year.
The fact is that superannuation gets a tax discount. It is significantly tax advantaged. If you were to receive your superannuation as income, you would be taxed at your marginal rate. For the average worker that is 30 cents in the dollar. If you put it into superannuation, it is half that. If that average person then put that money into a bank account, their earnings will again be taxed at 30 per cent. In a super fund its more likely to be about 8 per cent.
The bottom line is that super is simply the most tax effective way to save for retirement.
Recently, the majority of the Senate Select Committee on Superannuation recommended that the taxation of superannuation contributions should be gradually removed and replaced with an approach to taxing end benefits.
It has been suggested that the removal of the contributions tax could be financed by an increase in the benefits tax. If the overall level of taxation of superannuation were to remain unchanged then this would have a minimal impact on after tax end benefits and therefore a minimal impact on the system's ability to produce better outcomes.
This approach to the taxation of superannuation provides no real savings at all. Furthermore, it will not inject any greater equity into the superannuation system.
When proposals to provide even greater concessions on the taxation of superannuation are put forward, they have to be considered in terms of how that increase in Government tax expenditure might be funded. How should it be balanced against other key priorities such as national security, health, and welfare or are there other tax cuts would be better targeted and more equitable?
In 2002-03 Commonwealth taxation revenue from the taxation of superannuation contributions has been estimated to be $3.6 billion which includes the tax collected from Life Companies as company tax. This is a significant amount of money and any proposal to reduce the taxation of contributions would have a significant impact. You would need to have ways to meet the shortfall in the short term and be very certain that the long term benefits would outweigh the initial costs.
Although reducing contributions tax has its supporters, no-one has really indicated how it could be achieved without significant cost to the Budget.
In a recent article by Don Woolford, Labor superannuation spokesperson Senator Nick Sherry was quoted as saying that Labor's aim was to focus on a simpler and better-regulated system. In the next breath he indicated that the contributions tax rate might be cut to 11.5% for the over-40s! Clearly Labor has spent too long in the political wilderness if they can possibly believe that imposing this sort of administrative burden on superannuation funds would make the system simpler!
Surcharge & Co-contribution package
The Government has sought to provide targeted and equitable policies, such as through the proposed reduction in the superannuation surcharge and the co-contribution measures. However, despite the broad appeal of these measures Labor and the Democrats have opposed the package.
Here was a package that was taken to the last Federal election, which was fully costed in the Budget and provided benefits to a broad range of Australians.
The package would have seen low income earners increase their ability to accumulate sufficient retirement savings, and would have reduced the burden of the surcharge, which can inequitably impact older workers trying to increase their savings as they approach retirement, and women trying to compensate for broken work patterns.
Rather than provide a modest tax cut, and up to $1000 in co-contributions to low income earners, by keeping up resistance in the Senate, opposition parties are ensuring that:
- no co-contribution will be paid to low income earners;
- the much less generous existing taxation rebate will remain in force;
- no surcharge reduction will occur; and
- the existing 15 per cent maximum surcharge rate will remain.
These are reasonable measures that have been costed and are available, if the opposition parties come to their senses, these benefits can flow.
CHOICE
Of course, not all reforms will arise from new policies. For instance, the Government remains committed to enacting its choice of funds and portability policies. Choice, like many other superannuation initiatives has stalled in the Senate. But the time has come to bite the bullet on choice!Why is choice so important?
The first and most important point to make is that choice is about delivering control into the hands of those with the greatest stake in superannuation - employees.
To suggest that Australian employees are not smart enough to have control over where they invest their superannuation is a real furphy. The same employees seem to have little difficulty in operating bank accounts, investing in the share market and understanding more complex financial transactions, such as entering into mortgages over their homes or using equity in their homes as security for other spending priorities.
So why should Australians be refused the opportunity to choose the fund into which their compulsory super entitlements are paid? It should be a straightforward and basic democratic right to be able to decide where to invest your own money.
Not surprisingly reports of a recent survey by the Market Intelligence Strategy Centre confirms wide support among workers for choice and particularly for the ability to switch between investment options within a fund.
The stepped up rhetoric against choice, and the supposed danger to consumers, is difficult to sustain against the fact that many employers already offer employees limited choice of fund, allowing them to choose from a range of investment options within a fund, apparently to no ill effect.
Added to this is the fact that choice has been operating successfully in Western Australia for four years. The Government is not aware of any evidence of any mis-selling or churning of accounts. What's more, the critics of choice have not produced any such evidence either. In fact, on the available evidence, probabilities favour the view that choice is likely to meet the needs of consumers rather than expose them to additional dangers.
We also know that the compliance burden for employers can be contained. The market has evolved to keep employer costs to a minimum. For example, the largest WA based super fund operates a clearing-house for employers to make contributions efficiently and cheaply to multiple funds.
Employers that use the clearing-house need only write one cheque and provide the details of the funds of which their employees are members.
Given all the measures the Government has put in place, the mere fact that we are still having a debate about choice is in itself remarkable. The case for choice is overwhelming.
Yet still the opponents of choice say no. Apparently Labor and the Democrats believe that it is preferable to let consumers languish in a fund with high fees and charges and poor returns than focus on sensible reforms.
However, the Government does recognise that the successful introduction of choice more broadly, rests on two fundamental planks. These are education and a robust regime of disclosure.
Let me deal with these points in turn.
Education
Amidst the calls for vastly increased funding for education, it is important to note that the Government has already provided funding to the ATO to run an extensive education campaign on Choice of funds.
In the 2002-03 Budget the Government allocated $28 million to the initiative, which will allow the ATO to develop a comprehensive communication strategy to inform and educate employees and employers.
The campaign will be designed to create awareness of the initiative and to give basic information on Choice through the use of a wide range of print and electronic media.
These messages will bring home the point that just because you have the ability to choose the destination of your superannuation contributions does not mean that you are actively encouraged to change if you are satisfied with your current arrangements.
Disclosure
Let me now turn to the issue of disclosure. As you will all be aware, this topic has been the subject of an ongoing heated debate. But what has this debate really been about? Have there been clearly articulated statements identifying parts of the regime that will not work? No. Have there been any preferred alternative models put forward? No.
In fact, the choice naysayers have signed up to the anti-choice crusade and speculated about shortcomings in the disclosure regime that are more imagined than real and before it has had a chance to work.
So let me make a few comments about how the disclosure regime will actually operate.
Currently, we are in the transitional period of the Financial Services Reform Act (the FSRA). That transitional period expires in March 2004. From March, financial advisers will not only have strict, legislated disclosure requirements, they will also have to have passed a more stringent licensing regime. The recent ASIC/ACA survey of financial planners related to advice delivered without the benefit of this, new, stricter regime, being undertaken during this transitional period.
To comply with their obligations under the FSRA planners will be required to disclose, fully and completely, all of their fees, charges and commissions. Similarly, all fees and charges associated with the products they are recommending will have to be disclosed. Where a planner's advice may have a detrimental impact on the client, the planner is required to clearly explain what that might be.
In superannuation terms, that might mean that a planner advising their client to swap superannuation funds would have to clearly indicate if the ongoing fees and charges in the proposed new fund exceeded those of the client's current fund.
The Government had moved to ensure that fee structures would be broadly comparable to assist fund members in making these important decisions. The Government in February and March 2002 tabled regulations under the Corporations Act in the Senate. However the opposition parties in the Senate decided that the public didn't need this information and therefore disallowed these regulations.
Fortunately, these issues are now being worked through by ASIC and the industry and I am confident that a consensus on the detail to be disclosed by advisers will emerge in the very near future.
Fees and Charges
The question of how best to approach the issue of fees and charges is hugely important to the topic of retirement incomes. Fees and charges can have a strong impact on the value of our nest eggs.
The leads us to the question: are Australian savers getting value for money? Recent reports suggest that fees and charges range from about 0.5 per cent to 2.5 per cent of assets annually. Last year KPMG put average annual fees for retail superannuation funds at 1.46 per cent. In comparison fees and charges amounted to less than 1 per cent in the United States and were similarly lower in the United Kingdom even taking into account that meaningful comparisons may be difficult to make.
It is clear that some sectors of the industry could do with taking a long hard look at their fee setting practices. I am not tarring the whole industry with the same brush. There are, on the whole, very sound ethical and successful operators in the industry. But there is also a public perception that the focus of financial institutions is skewed too heavily towards making money for themselves and excessively rewarding departing executives rather than providing a return for investors. These perceptions need to change if public confidence is to be retained.
The Government would like to see greater competition, through choice and portability, especially given that all the evidence suggests that allowing fund members to vote with their feet will put downward pressure on fees and charges.
Capping
For these reasons, vociferous cries for the capping of fees and charges to be imposed by legislation as a condition for the passage of choice are, in my view, misguided.
Regulating fees and charges has a popular appeal but a moment's reflection reveals the weaknesses of the argument. Think about it for a moment. Super products vary greatly and fees should reflect the underlying costs of the fund and the costs of particular transactions - larger funds might be able to take advantage of economies of scale in regard to fixed costs. Smaller funds may be significantly disadvantaged. How can one size fit all? Innovation in the industry could be seriously curtailed.
Capping of fees could lead to cross subsidisation between members of funds. If fees are capped at certain levels, all funds will set fees at that level regardless of their differing approaches to investment and different risk profiles and competition would be greatly diminished.
Surely comparability of fee structures and informed choice by an investor will do more to make the industry respond than blunt measures that will snuff out innovation and product differentiation.
Portability
Together with choice, portability of funds is also an important first step towards reducing the number of superannuation accounts and hence the fragmentation of people's superannuation savings. A reduction in the number of superannuation accounts is expected to reduce the overall level of fees and charges, leading to higher retirement incomes.
Choice and portability are important initiatives that ought to be available to all working Australians to assist them in their efforts to be self-reliant. Opposition to these sensible measures is not soundly based and these measures should be allowed to pass in this session of Parliament.
CONCLUSION
In conclusion, I want to acknowledge the importance of the legal profession in undertaking and teasing out some of the finer points in the legislative framework of superannuation. Together with financial planners, you as legal advisers occupy a position of trust in the system. You are an important part of the regulatory framework as advisers to financial institutions and to individual investors in a variety of capacities and I am sure you are all, in some way or other, investors yourselves.
I commend the Law Council for its initiative in holding this conference dedicated to superannuation.
Planning for retirement is one of the most important financial decisions facing Australians. The Governments superannuation and savings policies have provided the framework for Australians to maximise their resources and to achieve their individual goals in life. We will continue to chart a course that will build the nation's collective nest egg. This will require vision, it will require courage and will require determination.
Let me leave you with a quote from King Whitney Jr., one time president of Personnel Laboratories Inc:
"Change has a considerable psychological impact on the human mind. To the fearful it is threatening because it means that things may get worse. To the hopeful it is encouraging because things may get better. To the confident it is inspiring because the challenge exists to make things better".
Ladies and gentlemen, the challenge is ours to grasp.