I am delighted to deliver my second speech as the Assistant Minister for Superannuation, Financial Services and Financial Technology.
I feel like I'm back on my old stomping ground. In the 20 years of a life before politics, I worked in banking, finance, funds management and investment and superannuation. And in my new role as Assistant Minister, I intend to take a practical approach drawing on that experience.
For this portfolio it is a privilege indeed to have worked in both retail and industry superannuation, which gives me a unique perspective on superannuation and its intricacies, histories, complexities and vagaries.
On entering the Senate I was appointed as the Chair of the Senate Standing Committee on Economics where I had the opportunity to not only scrutinise legislation but also hear from regulators and stakeholders about the challenges they face in a rapidly changing financial economy.
I am honoured to be a part of the Morrison Government's economic team. As an integral part of our plan for a stronger economy, we are continuing to restore trust in the financial system and deliver better consumer outcomes.
And on that note, today, I will focus my remarks on one of the largest sectors of the financial system, superannuation, and specifically our plans for self-managed super funds.
Superannuation
My mother always told me that a lady should not reveal her age, but unfortunately I'm certain you will be able to work it out for yourself when I tell you that Australia's superannuation system is the same age as my professional life.
I started working in 1992 – the same year that compulsory superannuation was first introduced. Twenty-seven years on, and Australia's super system is around $2.8 trillion in funds under management or around 145 per cent of Australia's GDP, and there are more than 15 million Australians with a superannuation account.
The sheer size of these numbers – the volume of money – can make your head reel. And there is no shortage of people with bright ideas as to how that the superannuation system and its mandate can be fashioned to build a "better" nation.
But when legislating we must remind ourselves to put awe-inspiring aggregates and industry ambitions aside. We must never forget the most important foundation – the touchstone – of Australia's compulsory superannuation system: savings belong to members.
The purpose of superannuation is very simple – the system is there to generate savings that will provide members' income in retirement – income that will either be in addition to, or instead of, the Age Pension.
As a government, our first obligation must be to deliver better member outcomes – more money in retirement. So our focus must be on improving the efficiency of the system, lowering costs and promoting informed member choice and competition.
It falls to government to steadfastly maintain this focus for the sake of future generations. That sounds lofty, but it is actually practical.
We know that normal people experience financial myopia - a short-sightedness where someone in their early 20s or 30s simply can't imagine what life will be like - or what wealth will be needed - in retirement.
So it's hard to make the most optimal decision. And for that reason, it is incumbent on the Government to make sure the compulsory system - where nearly $1 in $10 is quarantined for as much as 40 years - is working in the best interests of members - first and foremost. That will always be my priority in this portfolio.
Self-Managed Superannuation
Now, so much of the conversation that government has around superannuation is about the disengaged. Default super, opt-in insurance, low balance fees etc. While we are ideologically not in the business of paternalism, as I said, in a system where the government compulsorily quarantines nearly $1 in $10 dollars that you earn, it is beholden on that government to ensure that those who are vulnerable, young or simply disengaged are protected and looked after.
But equally in a compulsory system, it is imperative that we facilitate an alternative that allows the individual to determine exactly where and how their money is invested. This is the essence of choice - an efficient, competitive, fair, simple and well-functioning system, no matter how engaged you are.
For those who are more engaged in the superannuation system, SMSFs give members control over their money to accumulate an adequate balance and ensure a comfortable retirement.
Self-managed Superannuation Funds are a significant and growing portion of the superannuation industry, holding $746.6 billion of assets – equating to 27 per cent of total superannuation assets. SMSFs also have higher rates of contributions than other funds with total contributions to the sector increasing by 21 per cent over the five years to 2016, compared to 16 per cent growth in total contributions across all superannuation funds.
But the complexity and administrative demands of running an SMSF have slowed the growth in new funds. In fact the commencement rate for news funds is at a 10 year low.
The Coalition has always believed that SMSFs are an integral part of the superannuation ecosystem. As part of supporting SMSFs and reducing costs for members, the Government announced in the 2018-19 Budget that it would be reducing red tape for Superannuation Funds from 1 July 2020. These measures will be especially valuable for SMSFs, which don't enjoy the economies of scale of larger funds.
The Government will allow superannuation fund trustees with interests in both the pension and accumulation phases during an income year to choose their preferred method for calculating exempt current pension income (ECPI). Similarly, the Government has also announced it will remove the requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase.
It is our hope that these changes will make life easier for super fund trustees, and lower their cost of compliance.
Also in the 2018-19 Budget, the Government announced changes to the SMSF annual audit requirement for eligible SMSFs to move to a 3 yearly-audit cycle. The Government has undertaken extensive public consultation on this measure, and the outcomes of the consultation are currently being considered.
Disappointingly, we were unable to secure bipartisan support for our legislation to increase the maximum number of members of an SMSF from four to six, and thus this measure was removed from Treasury Laws Amendment (2019 Measures No 1) Bill 2019. This would have enabled families with up to four children to be part of a single family super fund. It remains government policy to enact this important change, and it will be progressed in line with the Government's legislative priorities.
Despite this small setback, you can see that the government has a demonstrated commitment to nurturing the development of the self-managed super sector. We want to make it easier for those who are actively engaged in the management of their retirement savings to maximise their returns, while maintaining compliance and minimising red tape.
Superannuation challenges
Returning to superannuation more broadly, there are several well-documented challenges with the way our superannuation system is operating.
The Productivity Commission report said the superannuation system as a whole has served Australians reasonably well, delivering solid investment returns and providing significant flexibility and choice in how members' balances are invested and drawn down.
Yet the report found a number of structural problems in the system and concluded that the prevalence of unintended multiple accounts, pockets of entrenched underperformance and the sheer complexity of navigating the system have eroded members' trust in the system as well as their balances.
The Financial Services Royal Commission also uncovered disturbing deficiencies in the conduct within some financial institutions.
Both the Royal Commission's recommendations and the PC's recommendations lend weight to many reforms that the Government has been pursuing in superannuation.
This includes measures in the Protecting Your Super package and the Member Outcomes reforms passed by the Parliament prior to the election.
Royal Commission
The Government has committed to taking action on all 76 recommendations of the Royal Commission, and in some cases is going further than Commissioner Hayne prescribed.
This includes 15 recommendations, and one additional measure, specifically for the superannuation industry.
Importantly, Commissioner Hayne recommended clarifying ASIC and APRA's regulatory roles and powers in superannuation, with ASIC becoming the primary conduct regulator.
Other recommendations include protecting members by clarifying and strengthening the anti-hawking provisions and limiting the deduction of advice fees.
So far we have passed legislation to fully enact two recommendations of the Financial Services Royal Commission relating to superannuation.
The Government is continuing to address the remaining recommendations and will be consulting with relevant regulators and industry throughout the year.
Productivity Commission Inquiry Report into Superannuation: Assessing Efficiency and Competitiveness
There is some cross-over with the Productivity Commission's landmark report - a report that presents a large body of analysis and recommendations that propose fundamental changes to the superannuation system.
In fact, the report contains 31 recommendations. Several of the recommendations endorsed existing government policy and recently passed legislation.
Some of the PC's key recommendations include:
- one default superannuation account for each person – echoed by Commissioner Hayne;
- elevated outcomes tests for all APRA-regulated funds to remove persistently underperforming products;
- an independent superannuation member advocacy body; and
- changes to the role of the regulators.
With specific reference to Self-Managed Super Funds, the PC found that SMSFs add to the competitive nature of the superannuation industry. In other words, all super members benefit from the presence of SMSFs, and they provide a competitive pressure that helps to keep big funds in check.
The Productivity Commission found that large SMSFs earn broadly comparable returns as APRA-regulated funds, however members of smaller funds may bear relatively higher costs and low net returns. This is an issue I know is of concern to industry and I encourage you to look at ways to lift returns for all SMSF members.
Our approach
The Government has prioritised its response by focusing on the PC's recommendations that overlap with the Financial Services Royal Commission.
For example, the Government has accepted the recommendations to realign the roles of the superannuation regulators and to make ASIC the lead conduct regulator in superannuation, and the recommendation that people should only have one default account.
We are also considering the PC recommendations for improving outcomes for default members.
Legislation
The Protecting Your Super and the Member Outcomes reforms also address several of the PC's recommendations. Unfortunately, the Government was unable to gain support for all the measures in the Protecting Your Super package, and the excised measures have been reintroduced in the Putting Members' Interests First Bill. These measures are consistent with another PC recommendation, and the Government remains steadfastly committed to these vital changes. The Bill will require superannuation funds to only offer insurance on an opt-in basis in relation to accounts of new members who are 25 years old, or accounts that have balances below $6,000.
Reviews
Consistent with the PC recommendations, the Government commissioned a capability review of APRA, which is nearly complete.
And the Treasurer has stated publicly we are 'positively disposed to a review of the retirement income system as recommended by the Productivity Commission.'1 The Government will provide further information about the Review in due course.
Closing remarks
So you can see there is much going on – and that is only in one part of my portfolio. Don't get me started on FinTech – we'll have to save that for next time.
But it's clear even from our discussion today that this is a crucial time for financial services in Australia and every person in this room will play a part in shaping the future of this vital industry.
A lot is happening already and a lot more needs to happen, because financial services are the arterial veins of our economy.
A strong financial sector – where consumer outcomes drive progress and where credit is accessible to those who wish to invest and employ – builds confidence and sustains the economic growth that benefits all Australians.
I believe we have cause for optimism - there are bright minds and good hearts in this room, and indeed in the industry more broadly. I thank those here today who are playing their part in building a more prosperous nation.
And let me thank the SMSF Association once again for hosting today's forum - and to everyone here for the opportunity to update you on some of the priorities we see in the superannuation system.
As Assistant Minister, I look forward to meeting with you and your constituents as all these and other issues continue to unfold.
[QUESTION TIME OF ~5 MINS]
Thank you again, and enjoy the rest of the Investor Expo.
1 - https://www.afr.com/news/policy/tax/retirement-incomes-face-review-20190524-p51qsi