Thank you for that introduction. And thank you to Conexus Financial, Investment Magazine and the Australian Institute of Company Directors for the invitation to address today’s forum.
It’s a great opportunity to outline the Morrison Government’s plans for superannuation as we continue to build a stronger and more efficient system in the year ahead.
And believe me, it’s going to be a big year for superannuation – because on top of the implementation of all of the recommendations of Hayne – 90% legislated by mid-year, and all of them by the end of 2020, we have a lot of other wood to chop.
And so it should be.
Superannuation is such a crucial policy area for the future lives and wellbeing of Australians as well as for our economy more broadly. So it is vital that we keep working to make it an efficient and responsive system.
Like many of you, superannuation is a topic very close to my heart and it’s an industry I’m passionate about. My career in financial services began the same year as the introduction of compulsory superannuation, so I’ve had a front-row seat in seeing the sector grow and evolve. I’ve worked with some great people from all parts of the industry – with both retail and industry funds – I’ve worked in investment research, in business development and in policy advice, so it should be no surprise to you to hear that being the Assistant Minister in this sector is my dream job.
But as many of you may have heard me say before, while our superannuation system is something that Australians should be proud of – its origins, its operations and its outcomes – it is not perfect. We all know it.
So since day one in this job, I’ve focused on:
- eliminating duplicate accounts;
- reducing fees and unnecessary insurance premiums; and
- stopping hard-earned retirement savings languishing in the long tail of persistently underperforming funds.
And if you follow the progress of the Government’s reform agenda, you can see that we’re chipping away at these inefficiencies, one by one.
If we are to compulsorily quarantine nearly one dollar in ten of everyone’s wages – and soon to be more as the legislated rises to 12% begin in 2021 – we have an obligation to do so.
This sounds easier than it is. In a system that benefits from – indeed, which has relied upon – complacency and inertia, there is leakage at almost every step of the process.
The good news is, we’ve already plugged a number of holes, and my goal as Assistant Minister is to have this ship watertight and steaming ahead toward the best possible retirement outcomes.
Let’s recap:
Protecting Your Super
At the end of 2019, we saw the true significance of the Protecting Your Super reforms become a reality. In just six weeks, the ATO reunited more than 2.13 million lost or forgotten superannuation accounts — worth around $2.8 billion— with their rightful owners.
The costs of inactive or duplicate accounts have been an embarrassment for our system for some time. The Productivity Commission called this a structural flaw of the super system, and found that 1 in 3 accounts in the system was an unintended duplicate account. It also found these unintended accounts were eroding members’ balances by a staggering $2.6 billion per year in unnecessary fees and insurance.
In a compulsory system, that structural inefficiency, in all good conscience, could not be allowed to continue.
I’m so pleased to see our solution to cleaning up these accounts – the Government’s Protecting Your Super reforms – working so effectively.
By reuniting these lost accounts, members benefit from higher account balances and no longer face the prospect of paying multiple sets of fees.
That has helped deal with the stock of multiple accounts. But the big prize is stopping the flow that’s creating more of them. I’ll have more to say on that further on in my address.
Eligible Rollover Funds legislation
In a logical next step to the Protecting Your Super reform package, this year we’re broadening our focus to Eligible Rollover Funds – or ERFs as they’re known. Even after the recent round of ATO reunifications – which rid the system of over 2 million duplicate accounts – there remain over half a million inactive or forgotten superannuation accounts still sitting in super limbo in ERFs.
As you know, ERFs were designed to act as a temporary home for lost and forgotten super that would quickly and effectively be reunited with members’ active accounts. But we have to be honest: they have failed in that objective.
We know that some ERFs have a woeful record of reuniting members with their money, even when they have all the information to do so.
Even if they had the will to do it, ERFs simply don’t have the full suite of tools that the ATO has at its disposal, with its sophisticated data-matching technology and visibility of all contributions to every superannuation account in the system, rather than just a sub-set of funds.
With the advent of the PYS reforms and the ATO on the case, ERFs will eventually wither away. But that’s not good enough. With the ATO’s super matching engine up and running, members should be reunited with their lost and forgotten super now. And, acutely aware of their best interest duties, the trustees of the ERFs agree.
So to speed their exit, we’re introducing legislation into Parliament in the coming weeks.
It will do three things:
- Allow ERF trustees to voluntarily transfer any amount to the ATO at any time;
- Require ERFs to transfer all accounts below $6,000 to the ATO by the end of June 2020; and
- Require ERFs to transfer any remaining accounts still residing in an ERF to the ATO by the end of June 2021.
This approach is consistent with the Productivity Commission’s recommendation that ERFs be wound up within three years.
It’s also consistent with APRA’s messaging to ERFs last year, and in my discussions with APRA, they’ve confirmed they will take a pragmatic approach where possible with respect to the compliance and reporting obligations of the ERFs during this wind-up phase.
But most importantly, these practical changes will allow the ATO to reunite money with their rightful owners sooner, rather than languishing with a fund that, most of the time, the member has never even heard of.
Protecting Your Super has been an extraordinary success, and I’m pleased to say the proposed changes to ERFs are the next important step towards ensuring people have just one account which holds all of their superannuation savings.
Superannuation Guarantee Amnesty
While we’re making steady progress on making sure peoples’ lost and forgotten super all gets swept into one account, we also want to ensure that any outstanding unpaid superannuation also finds its way to that account.
This is the driving force behind our Superannuation Guarantee amnesty.
The full rollout of the ATO’s Single Touch Payroll system to encompass all businesses in 2019 – even small and micro-businesses with less than five employees – means that now for the first time the ATO has ‘eyes in’ real-time visibility over all wage and salary payments of employers.
By matching this data with near real-time reporting of contributions received by funds, the ATO can now spot issues with superannuation compliance as they occur, and we’ve given them more resources to take timely action so that these issues don’t arise in the future.
Undetected underpayment of workers entitlements to superannuation – whether intentional or inadvertent – will be almost impossible in the future.
But that doesn’t deal with the past.
That’s where the amnesty comes in. It encourages employers to come forward and pay historical superannuation guarantee debts, by waiving penalties and administration fees, and allowing the make-good payments to be tax deductible in the same way as regular super contributions are.
Let me be clear: the amnesty does not reduce employees’ entitlements by one cent, nor does it let employers off the hook.
The only person getting less out of this arrangement is the Federal Government – we are waiving our entitlement to fees and penalties. And we’re doing it because we want to see workers get any superannuation they’re owed, paid in full, plus sizeable interest on top.
Further, our Bill proposes that employers who fail to come forward during the amnesty and who are later found to have historical SG non-compliance will face very heavy penalties.
So it’s carrot, and stick.
Since the amnesty was originally announced in May 2018, over 7,000 employers have come forward to voluntarily disclose historical unpaid super.
The amnesty will run for six months from the date of Royal Assent, and Treasury estimates an additional 7,000 employers will come forward during this period.
This means that in total around $230 million of superannuation will be paid to employees who may have otherwise completely missed out.
I know there are those who oppose an amnesty for employers and want us to take a strictly punitive approach. But just wielding the stick won’t encourage employers who want to set the past right to come forward.
In fact, it encourages them to hide.
We can deal with the future via Single Touch Payroll. Let’s do our best to clean up the past, too, and make whole those employees who have missed out on what they are rightly owed.
Whether super is lost, forgotten or unpaid, our aim is to see more employees reunited with their superannuation, and to get it all in the one, high-performing fund, where it can earn the returns that will make for better retirement outcomes.
Choice of fund
With these changes, we will have put in place the infrastructure to clean up duplicate and inactive accounts after they’ve been created. That’s a good start.
But how should we remodel the system to ensure these wasteful multiple accounts don’t simply build up again?
The first step is obvious. The Federal Government must do its part, by removing a law that currently forces the creation of multiple accounts, even when an engaged superannuation saver wants to avoid it.
That’s the motivation behind the Your Super, Your Choice Bill.
This Government has always believed every Australian should be able to choose their superannuation fund. It’s the logical corollary to a compulsory super system.
Moreover, restricting choice of fund means there are workers who are forced to hold multiple accounts because their employer refuses to allow them to choose their own fund. Even where a newly hired worker is perfectly happy with their existing fund.
The Productivity Commission’s report made clear the enormous cost to retirement outcomes when members have multiple accounts, all being eroded by separate sets of administration fees and insurance charges.
What’s more – the Fair Work Commission agrees. In a judgment from last year, the Fair Work Commission rejected a proposed enterprise agreement that would have restricted the choice of Kmart workers.
Specifically, the Full Bench found:
…having regard to the general characteristics of employment in the retail industry… it is likely that a significant proportion of such casual employees have previously had other casual employment or have a second job. In that context, a choice of funds may be a benefit so that the casual employee can seamlessly remain in a single superannuation fund rather than having two or more funds arising from different jobs with all the inconvenience and additional administration costs that this involves.
We also know there are thousands of workers that are being forced into some of the worst performing default products as a result of these restrictions on choice.
Removing the law that sanctions such restrictions helps prevent the proliferation of multiple accounts and is in members’ best interests.
By addressing the root cause of account duplication, initiatives like the ATO’s proactive reunification will become less important. There will be less lost super in the system, less money lost to fees, more money for people’s retirement.
Let’s be clear. This new law will not remove the ability of workers to collectively bargain over the default super fund covering a workplace. It doesn’t prevent a default fund being specified in an award. And given the current state of inertia in the system, most workers will probably stay in that default fund.
But for those who are engaged with their super, if they are happy with their existing fund – perhaps because of its investment performance, perhaps because of its insurance, perhaps because of its lower fees – they should have the right to direct their employer’s super contributions there.
They should not have to open yet another super account, just because their employer refuses to give them any choice at all as a result of some enterprise agreement.
All the Your Super, Your Choice law will do is make unenforceable the use of this-and-only-this-fund clauses in future enterprise agreements.
This is an important, logical and appropriate change in the evolution of our industry to an efficient system that serves members’ interests above all others. The Fair Work Commission agrees. I hope I can count on the support of the sensible voices in this room to help these changes finally make their way into law.
Fees
Of course, allowing all members to choose their fund also allows all members to vote with their feet.
This is an important discipline if we are to shift the complacency in this sector which can lead to some pretty poor outcomes for members.
I’m sure many of those in this room would have seen my comments about a very large Australian super fund increasing their admin fees last week, supposedly to offset the costs of the Protecting Your Super reforms.
This fund is not alone. Many funds that receive a substantial proportion of default super contributions have increased their administration fees in recent years. I’m not picking on a particular segment – it’s an industry-wide phenomenon: industry, retail, and corporate funds have all been complicit, in a $3 trillion industry, where the flow of funds – effectively deferred worker’s wages – is compulsory.
If some funds, especially the smaller ones, are increasing their fees because they are not of a size to spread the overheads required to invest in modern systems and deal with current compliance obligations, it truly speaks to everything I’ve said recently about the need to consider merging. Increasing fees and relying on employee inertia is a lazy solution and not in the best interests of members.
But when it comes to some of the larger funds, we may need to dig a little deeper to find out the reasons behind fee increases.
If a fund that has run down their administration reserves to historical lows over recent years then suddenly hikes fees to rebuild their buffers, I take a rather sceptical view of claims that the fee increases are the result of Government initiatives aimed at protecting small super accounts. And I suspect the public will too. These claims will face scrutiny from the media, from their members, maybe from the regulators, and certainly from this government.
Heatmaps
In addition to those funds with increasing fees, underperforming funds will come under increasing scrutiny in 2020, with APRA’s heatmaps providing enhanced transparency around performance.
In cases of repeat underperformance, funds will feel the pressure to either lift their game, or leave the field.
In other words, trustee directors will have no choice but to look each other squarely in the eye and ask, ‘is our current business model really delivering the best outcomes for our members? Should we be looking to exit or join a different team?’
In terms of fund mergers or outright exits in the superannuation sector, the writing has been on the wall for some time and there has been endless industry chatter.
As I’ve mentioned in the past, the Government has done our part in greasing the skids for mergers and exits.
Legislation to make the CGT relief permanent for mergers will be introduced imminently, and with bipartisan support I can confidently say it will be in place before 1 July this year.
We’ve seen some announcements of mergers or exits in the sector over the last few months, particularly among mid-tier to larger funds, but we’re still seeing very little movement at the smaller end of the super spectrum.
With APRA’s heatmap providing nowhere to hide, perhaps we are on the cusp of significant change in the year ahead.
I hope so. I would hope that the heatmaps are enough of an indicator of expectations, because in a compulsory system, the Government has an obligation to make sure members’ outcomes are prioritised by the trustees of superannuation funds. If the Government feels that these providers of superannuation services for millions of Australians are aren’t taking action when they are persistently underperforming, as a responsible Government, it will.
Governance
Which brings me neatly to the issue of governance. And with a room full of superannuation chairs, what better place to broach the topic? If we are genuine about wanting the best outcomes for members by cleaning up the long tail of persistently underperforming funds, that’s going to require some tough conversations around the boardroom table. Particularly in some of the small and mid-tier funds.
Meanwhile, among the largest funds, with their increasing size, complexity, and indeed systemic importance, their quality of governance and skills around the board table must be top-notch.
I’ve said on many occasions I’m not here to stoke super culture wars. I’m motivated by member outcomes. And I think all of us in this room can agree with one of the Productivity Commission’s key finding that ‘All trustee boards need to steadfastly appoint skilled board members, better manage unavoidable conflicts of interest, and promote member outcomes without fear or favour’.
I know the Boards of trustees of these multi-billion dollar funds are aware of the immense responsibilities they now shoulder and the higher regulatory scrutiny they’re under in the post-Hayne era. They want to have the best brains around the table to help.
As super funds grow to tens of billions in size, many are choosing of their own accord to bring in trustee directors with skills outside their sponsoring organisations – be they industry, retail or corporate funds.
That’s a welcome and appropriate development as they reshape and right-size their boards. I expect to see that trend continue in 2020.
Default
I couldn’t leave the stage without saying a few words on the default system. I think we can all agree that for most Australians, our end goal is for them to have only one superannuation account, with good long-term performance, with all of their superannuation in it.
An effective, efficient default system will build a lower cost system.
It will help boost retirement savings.
And by making things simpler, it will boost engagement of members with their retirement savings.
A single default account is what the Productivity Commission wanted. It’s what Commissioner Hayne wanted. It’s what I want. And I suspect it’s what virtually all of you want too.
Of course, how we get from here to there is the big question.
You may have heard me say in the past that our 28-year-old compulsory superannuation system, the one I’ve grown up with in my time in-and-out of the workforce as a working mother, is a bit like a 28-year-old child that’s never left home.
Yes, as a universal coverage system, those who gave birth to it can be proud of its origins as a workplace entitlement. But like many parents who have a 28-year-old still living at home can attest, it has developed some strange habits and the odd hang-up. Like multiple accounts. Like complexity and opacity. Like high fees. Like underperformance without accountability and a bad sense of entitlement.
If we are to address these bad habits of our superannuation system, it’s time for the child to grow up and leave home. The retirement savings system no longer needs the coddling of the industrial relations system.
It’s $3 trillion dollars. It’s bigger than the ASX. It’s bigger than Australia’s GDP.
It’s big enough to stand on its own two feet.
Yes, payment of superannuation savings is a workplace entitlement, as much as payment of wages is.
But just as our bank account for our wages is not dictated by our choice of job, and we don’t change banks every time we change jobs, likewise, our choice of superannuation fund will in the future be not be dictated by our workplace.
So while I’m not going to say today where the Government will land on the question of default fund choice, stapled accounts, best-in-show and all the various other models out there, I will venture to suggest we won’t get to our desired destination of an efficient, single default while the superannuation child is still living at home.
In two years’ time our compulsory super system turns thirty. It’s time it grew up.
Closing remarks
So on that note, thank you, again, for the opportunity today. I welcome the chance to update you – Australia’s superannuation leaders – on our plans for a stronger and more efficient system in the year ahead.
I’ve covered a lot of ground this afternoon, which speaks to the packed agenda this Government has for superannuation. I haven’t even touched on the Retirement Income Review (but as I’ve said before, that’s mainly about providing a single source of truth for future policy debates, not a source of policy recommendations).
Our superannuation system is enormously important to the future of working Australians, to the current wellbeing of our retirees, and to our economy.
There are bright minds and good hearts in this room and I acknowledge the importance of your leadership and your role in delivering for members. Thank you to those who have engaged with me in the past – both collectively and privately.
Your help and contribution to our policy making has been invaluable. I know we can work together in 2020, to ensure that the system delivers even better outcomes in the years ahead.
I wish you well for the remainder of the conference and for the year ahead.
Thank you.