CATHY VAN EXTEL:
Treasurer Josh Frydenberg, he joins us on Breakfast, good morning.
JOSH FRYDENBERG:
Good morning Cathy.
CATHY VAN EXTEL:
Now, the poor performance of the super sector is costing members something like $4 billion every year. The Productivity Commission says you can start fixing that by adopting these 31 recommendations, will you do that?
JOSH FRYDENBERG:
Well, we'll properly consider this report and what we have said is that we'll await the Final Report from the Banking Royal Commission because they've looked at the conduct of the funds and the performance of the regulators, so their findings will be relevant to our final response to this report.
But the Productivity Commission should be congratulated on this landmark report, it's been three years in the making. We have a $2.7 trillion superannuation system that is growing and there is a big idea at the heart of this report, namely, that the default system should revolve around the member not their workplace and that the current system is anachronistic, costing members, as you say, up to $4 billion per year.
CATHY VAN EXTEL:
You mentioned that you're waiting for the Final Report of the Banking Royal Commission, but of course, we do have an election looming, are you willing to make a commitment that voters will know what you have in mind for their retirement savings before you go to the polls?
JOSH FRYDENBERG:
Well, voters already know that we have legislation before the Parliament that unfortunately, Labor is blocking and that the Productivity Commission in this report has endorsed; legislation that will make a real difference...
CATHY VAN EXTEL:
But the Productivity Commission is actually arguing for much greater reform than what you're proposing. I mean, the suggestion in this report is really that we need to overhaul the default system. Are you willing to commit to that?
JOSH FRYDENBERG:
Well, we are going to provide a final and formal response to this report, we will do that before the election. But in terms of the immediate priorities as well, we have legislation before the Parliament which is very important to getting the members' best interests advanced, in particularly this idea around allowing younger members to opt-in to insurance policies in their super.
That would give 5 million members the opportunity to choose and would save them up to $2 billion a year as well. We're also wanting to increase the powers of APRA to revoke mySuper authorisations. We want to create civil and criminal penalties for trustees, something that is going to be very important. And we want the ATO to be able to consolidate inactive accounts.
And for the life of me, I can't understand why the Labor Party seems to be blocking these important reforms endorsed by the Productivity Commission.
CATHY VAN EXTEL:
Treasurer, can we talk about the specific recommendations from this final report of the Productivity Commission? This idea of best in show, which would be a top 10 of strong performers that people would be able to immediately choose from, its, I guess, a recommendation that I imagine is likely to be fought tooth and nail by the super sector, whether it's union-backed or retail.
Would you be willing to take on the sector on this?
JOSH FRYDENBERG:
Well, obviously there are a range of views and as you say, a range of vested interests and the point about this report, it's not targeting industry funds, it's not targeting retail funds or unions. What I'm saying…
CATHY VAN EXTEL:
Do you like the idea of a top 10?
JOSH FRYDENBERG:
Well, I think there is merit to this idea that we can ensure that the better performing funds are taken up by more members, because what the report did find is that right now, it's a lottery for members as to the quality of the funds.
If you're in a fund that happens to be in the top quartile performing funds, compared to somebody who's in the bottom quartile of performing funds, that could be a $500,000 difference to you in retirement, over the course of your working life and that's pretty significant.
We've also seen higher fees in Australia compared to our international counterparts…
CATHY VAN EXTEL:
In fact, I saw a report somewhere that suggests some households, in fact, are paying more on super fees than they are on gas and electricity.
JOSH FRYDENBERG:
Well, there's about $30 billion worth of super fees over any particular year and just a half a percentage point, Cathy, in lower fees could be worth $100,000 to someone in retirement.
So, I think what the Productivity Commission report has identified are some significant structural flaws in the system, they also point to the multiple accounts people have and these are unwanted and unwarranted multiple accounts costing members about $2.6 billion every year.
We have 10 million unwanted and unwarranted accounts. So, what they are suggesting is that people only default once and that is certainly an idea that deserves very serious consideration.
CATHY VAN EXTEL:
So, going back to this recommendation around a top 10, the argument that is being put forward, is that it could in fact squeeze smaller funds out of the market.
Is there a risk here that it could, in fact, reduce competition, or do you see because they will need to perform better, it will enhance competition?
JOSH FRYDENBERG:
Well, I think it will enhance outcomes for members, which is ultimately our focus. I'm not interested in the politics of the industry, I'm interested in the outcomes for the 15 million people across the country with superannuation.
And there is a problem with subscale funds. What the report did identify is that there are 93 APRA approved funds that have under $1 billion of assets and when they have such a small amount, that's relative of course, amount of assets, they can't get the economies of scale.
And if the 50 smallest funds merged with the 10 biggest funds, then this would be worth $1.8 billion in additional savings to people with super. So, I think this is again merit in that proposal.
CATHY VAN EXTEL:
I'm wondering though, if you're seeing smaller funds being squeezed out of the market, how that sits with the Liberal Party's beliefs on free markets and competition?
JOSH FRYDENBERG:
Well, we certainly believe in choice and that is something that we're encouraging and obviously we strongly support the self-managed super fund because that plays exactly into that philosophical divide between us and the Labor Party, who indeed, want to tax the self-managed super funds a lot more.
But what we need to do is maintain choice, enhance competition and ensure that we get the best outcomes for members because that's going to be our number one focus.
CATHY VAN EXTEL:
So, the Productivity Commission in recommending this top 10 has suggested that it should be decided by an expert panel which could be made up of people from the Reserve Bank, perhaps the Reserve Bank Governor, or the Chair of the ACCC.
Given the kind of, high financial stakes that are involved here, can a panel be trusted to be truly independent, whether they're choosing between retail and union funds?
JOSH FRYDENBERG:
Well, there'll be very specific criteria that you do need to examine when deciding what are these best 10 funds, and that is the performance of these funds over a period of time, the fee structures, the governance, the skill sets, they're quite prescriptive, the Productivity Commission in their suggestions. But like I said…
CATHY VAN EXTEL:
So, it sounds like you're comfortable with that recommendation?
JOSH FRYDENBERG:
Well, what I am saying is, I think this is a landmark report, an enormous amount of work has gone into it over three years by independent economists and indeed by the preeminent economic advisory body to the Government in the Productivity Commission.
But we will respond formally once we've considered this report in detail, but also considered the Royal Commission. So, I am not going to pre-empt the final findings of the Productivity Commission in any way, other than to say it is deserving of serious consideration.
CATHY VAN EXTEL:
Would any of this be necessary if the regulators, APRA and ASIC had done a better job of ensuring that the super funds were actually doing the right things by their members? That they were member focused?
JOSH FRYDENBERG:
Cathy, I don't think it's mutually exclusive. I think what the Productivity Commission has done is identify the number of serious structural flaws in the system per se, which can be rectify with some of the proposals that they've put forward.
At the same time, they say, as you've just pointed out, the regulators APRA and ASIC could focus more on issues of conduct, could focus more on the trustees' behaviour and be a bit more effective in their view, in ensuring that they put the interests of members first, not the interest of funds first.
CATHY VAN EXTEL:
Another recommendation from the Productivity Commission is for an independent inquiry into the entire retirement income system, not just super, but also pensions and how they both impact on the budget. Will that be held before the next increase in the Superannuation Guarantee, which I think is scheduled for 2021?
JOSH FRYDENBERG:
It is, it's scheduled for the 1st of July 2021, but as you know these increases are already legislated. And the Productivity Commission is not saying that these increases shouldn't take place, but what they are saying is that there should be a review to look at the impact of both the budget and the retirement savings.
And again, we will consider this recommendation from the PC in the context of our final response.
CATHY VAN EXTEL:
Are you favourably disposed though, to a broader independent inquiry?
JOSH FRYDENBERG:
Well, again, let me discuss that with the Prime Minister and my Cabinet colleagues and get some further advice from my Department, Treasury, and obviously talk to stakeholders and the industry because we want to ensure one thing, namely a better outcome for the 15 million people who have their funds in super, which is so critical to their quality of life and retirement.
CATHY VAN EXTEL:
Treasurer, can we talk about the economy more broadly? You're handing down the budget in April, ahead of the election, which the Prime Minister says will be in May.
Earlier on Breakfast, we heard from the economist at Fitch Solutions. They're suggesting that the global slowdown means that you're now going to struggle to deliver a surplus next year. Is your forecast of $4 billion surplus already out of date?
JOSH FRYDENBERG:
No. We are very committed and will deliver a surplus…
CATHY VAN EXTEL:
Will it be a $4 billion surplus?
JOSH FRYDENBERG:
The expectation is it's going to be a $4.1 billion surplus, which is an increase from what was forecast at the last budget, of $2.2 billion and it's coming off the back of strong growth.
The Australian economy is growing at 2.8 per cent, faster than the G7 countries, other than the United States; we've got the spending growth down to its lowest level in 50 years, we've had more than…
CATHY VAN EXTEL:
Yeah, but we heard earlier that the concern is around the retail sector and the slowing down there, and what could that mean to the broader economy?
JOSH FRYDENBERG:
Just to finish Cathy, what we are seeing is strong fundamentals domestically, both in the growth but also we've reduced spending significantly from what we inherited from the Labor Party, we've created 1.2 million new jobs and we've now got the lowest proportion of working age people on welfare in 25 years.
That all being said, there is some cold headwinds in the global economy, particularly some of the trade tensions we've seen, some of the rising debt levels, the impact to the normalisation of US monetary policy and increasing interest rates.
We're watching all that very closely. We're also watching the credit dynamic in the domestic economy and seeing how that plays out. So, by no means are we saying it's an easy ride globally or domestically, but what we are saying is that the economy is in good shape as a result of some very important and difficult decisions that the Government has taken. There's no…
CATHY VAN EXTEL:
Okay, so, if we see these cold headwinds getting colder that we've got more signs emerging of an economy slowing, could the Prime Minister be tempted to go to a March election and not wait until May?
JOSH FRYDENBERG:
Well, the Prime Minister has been very clear that I'll be delivering a budget on April the 2nd, this will be an important economic document, laying out our economic plan and following through on the very strong numbers we saw in the Mid-Year Economic and Fiscal Outlook, and that the election will be held some time after that.
CATHY VAN EXTEL:
Thanks for joining us today.
JOSH FRYDENBERG:
Good to be with you.