I really appreciate that warm welcome and I am delighted to be here for ASFA's Melbourne briefing.
There are CEOs, CFOs, directors and general managers here today. We have insurance and investment specialists; legal counsels and policy advisers.
It is a remarkable mix and a reflection of the growing importance of superannuation — which, it should be said, will not diminish with the passage of time.
You only need to look to last year's Intergenerational Report to see this.
By 2055, the number of Australians aged 65 and over is projected to more than double, while one in every 1,000 people will be 100 or older.
This last figure is truly remarkable given that in 1975 this was one in 10,000.1
At the same time as this, however, the number of people aged 15 through to 64 for every person aged 65 and over will be 2.7.2
Right now, that number is 4.5. And 40 years ago, it was 7.3.3
A transforming industry
This shows the importance the superannuation system will have for everyone over the next 40 years. And with growing importance comes transformation.
That is something we have already seen over the last 50 years.
Back in 1962, when ASFA was first established, superannuation was a cottage industry. While there are no figures for this time, we know that in 1972 only 32 per cent of workers were covered by superannuation.
It was also around this time4 that 70 per cent of Australians who were of retirement age were receiving the age pension.
By the Bicentenary in 1988, superannuation's reach had extended to 51 per cent of employees, and this would grow further with the introduction of the Superannuation Guarantee in 1992.5
Four years later, when Prime Minister John Howard formed government, superannuation assets were worth $245 billion6, or about 46 per cent of Australia's Gross Domestic Product (GDP).
And by the end of his period in office, in 2007, those assets had ticked over the $1 trillion mark — or 108 per cent of GDP.
A-grade system
Today, superannuation is a $2 trillion industry — and it is projected to reach $9 trillion by 2040.7
Its growing importance is undeniable, both to our financial system and to the millions of Australians who will rely upon it.
Australians deserve an A-grade system — a system that works for them so that they have the best possible outcomes in retirement.
This is very much the Government's aim, and while I'm here today I want to walk you through several policy areas that we are focusing on to deliver that aim.
Objective of superannuation
Now there has been a great deal of discussion about the future of superannuation.
As you know, the Government agreed with the Financial System Inquiry that a clear objective for superannuation is important.
It is important for a number of reasons.
It will provide a means to measure competing superannuation proposals.
It will provide a framework for discussions about fairness, adequacy and sustainability in the system.
And it will guide policy-makers, regulators, industry and the community about the fundamental purpose of superannuation.
So with that in mind, today I am releasing the Government's proposal on "The objective of superannuation".
The Government accepts the FSI recommendation that the objective of the superannuation system is "to provide income in retirement to substitute or supplement the Age Pension".
In other words, superannuation has a very practical focus – it should be used to increase self-sufficiency in retirement.
It's not intended to be support for the accumulation of wealth that can be passed down to subsequent generations.
That said, the consultation I am announcing today will allow superannuation industry representatives — and the community more broadly — an opportunity to provide their own views on the objective of superannuation. I'll host a roundtable on 18 March with key stakeholders.
An objective for superannuation that is agreed and enshrined in legislation will help provide greater long-term confidence and policy stability.
By focusing on the purpose of superannuation, Australians will have more confidence in the system and know that we are all working towards the same goal.
Choice of fund and transparency
That issue of confidence is also why we are pursuing two important, common-sense changes: choice of fund and transparency measures.
These are both hot-button issues given that the Government expects to introduce legislation on both in the coming sitting week.
On the matter of choice, our position is very clear: employees should, if they want, be able to choose the superannuation fund that receives their compulsory employer superannuation.
We want people to be able to make choices about their retirement income. We want them to be active in making decisions about their future.
Frankly, extending choice is really a no-brainer. And by not allowing choice by forcing people to be in multiple funds, it will mean some Australians will have less retirement income.
Let me underline that with an example.
Say you are one of the many young Australians working hard to get yourself through university. You work part-time in a clothing store, and do a bit of casual work in a café on the side.
Both of your jobs are covered by enterprise agreements that require your superannuation be paid to different funds. You've got no choice — you are effectively paying two sets of fees; two insurance premiums.
Your experience is not unique.
You are one of many workers unable to choose where your money is going due to enterprise bargaining agreements or workplace determinations.
In Australia, it is estimated that this is around two million employees without choice of fund.
Now there is nothing necessarily wrong with the funds in question. But that is not the fundamental issue.
The issue is that hard-working Australians are being disadvantaged.
Some Australians who are juggling multiple jobs — who have moved potentially between jobs — are also juggling multiple accounts with multiple fees and multiple charges.
They can't make some key decisions about their retirement income — and what's worse is that duplicate fees and insurance premiums will reduce their superannuation balances.
It's not right.
The world has moved on since the rules surrounding choice were introduced. It is now much easier for employers to deal with employees choosing their own funds.
So in December the Government released exposure draft legislation to expand choice of fund — and next week we will introduce legislation to the Parliament to expand choice to more Australians.
We estimate that these changes will make it possible for up to an extra 800,000 workers to choose the fund that receives their compulsory employer superannuation.
Of course, there are barriers to extending choice for all employees. The Murray Inquiry recognised this, saying the Commonwealth cannot instruct changes to some state awards or agreements.
Furthermore, exemptions from choice for employees in some defined benefit schemes, public and private, will also be retained. Various submissions to the inquiry pointed out there are special considerations for members of those schemes because of the way they are funded.
That said, these are largely historical issues as most defined benefit funds are closed to new members. Additionally, the exemptions that apply to the funding arrangements of certain state and federal defined benefit public sector schemes will be maintained.
By doing this, we can ensure the current treatment for existing members of defined benefit funds will continue.
Let me turn now to the issue of transparency.
Going back to my example, you are now 10 years older. You've finished university and have been working full-time as a surveyor for several years.
You haven't thought about superannuation during this time, but after some prompting by an older and wiser relative you decide to do some research.
It turns out that you would like to learn more about different fund options and how they invest members' savings.
But when it comes to finding this information, you hit a brick wall. A lot of the information you want is unavailable, and what you do manage to find is hard to understand.
You give up, like many Australians.
It's understandable. But it should not be the case.
The Government wants to avoid situations like this, that it is why we will also be introducing legislation to improve transparency. This was one of our election commitments in 2013. Members will be able to see where their funds are invested.
In addition, the changes will help ensure that Australians are able to better understand and compare the performance of superannuation funds across the industry — including returns and fees.
So overall, we will require the disclosure of portfolio holdings and the introduction of dashboards for 'choice' products that will lay out key information that can be compared like for like.
These are essential changes. Greater transparency is critical to the efficiency and operation of a successful superannuation system. And with improved understanding, awareness and engagement across the community, it will also lead to greater accountability and greater competition.
Governance reform
Another hot-button issue at the moment is governance reform.
As I said earlier, the superannuation industry is dealing with very large sums of money — money that is critical to the retirement savings and retirement income of ordinary Australians.
That is why we need to make sure that we have world-leading standards of oversight for those funds.
Not middle-of the road. Not average. The world's best.
What exists now is largely what existed 20 years ago, which is why the Government is currently negotiating its governance reform bill in the Senate.
We want to see governance arrangements that reflect the industry as it is, not as it was.
Funds today are larger and more complex. They make more diverse investments; they are less closely linked to particular companies or industry sectors. Instead, many are competing with one another for funds from across the workforce.
Finally, with more fund members exercising choice, directors who are appointed by employer and employees groups are less likely to represent the broader membership of public offer funds.
The Government's bill will modernise board structures, requiring at least one-third independent directors including an independent chair on superannuation trustee boards. And it will apply across the superannuation sector: to corporate, retail, public sector and industry funds.
If passed, and we expect it will be passed, this would be a win–win for both boards and their members. It will increase the diversity and expertise of directors and it will also increase director accountability.
Increasing the number of independent directors is all about protecting people's retirement savings. The Government has an obligation to get the settings right, given that we require people to contribute to their superannuation.
And most importantly if we change these governance arrangements, the interests of all members would be represented.
It is not only the right thing to do: it's also standard across many similar sectors such as banking, insurance and ASX-listed companies.
That is why we have received positive feedback on our proposal from so many different corners. For example, in recent weeks support has come from the former Treasury secretary Ken Henry, well-known businessman David Gonski, and Women on Boards executive chair Ruth Medd, to name just a few.
Competition and efficiency
Let me turn now to the Government's plans for competition and efficiency.
As many of you would be aware, a few weeks ago the Treasurer and I released our Terms of Reference for the first two stages of a Productivity Commission review — a review that will look at the efficiency and competitiveness of the superannuation system.
This will be a genuine, much-needed look at the entire superannuation system.
We want to make sure the superannuation system is as efficient as possible, to help Australians meet the economic and fiscal challenges of an ageing population.
And we want the industry to improve its business practices — to strive to do better; to be better.
The recent Murray Inquiry told us that the superannuation industry does need to lift its game.
And we are putting that challenge to the industry.
Murray told us that between 2004 and 2013, fees only fell 20 basis points and yet the size of the average fund increased more than twelve-fold.
So can the industry do better?
The Government is tasking the Productivity Commission to examine and answer this, and many other questions.
The Commission will undertake a thorough, independent and frank analysis of how the system is performing, and what can be done to deliver the best outcomes for members and retirees.
Within nine months, the Productivity Commission will release criteria to assess the efficiency and competitiveness of the superannuation system.
Within 18 months, the Productivity Commission will develop alternative models for a competitive process for allocating default fund members to products. By developing the models ahead of time, it means the Government can implement a new model immediately following the completion of the review, should we decide there is a case to do so.
The last stage of the review will be the assessment of the efficiency and competitiveness of the superannuation system as a whole. This will be sometime after 1 July 2017.
This will be a robust review, with a great deal of consultation. And given ASFA's bird's eye view of the superannuation sector, I look forward to its contributions, thoughts and ideas, along with many of you in this room today.
Default funds
At this point I should also mention our plans for default super.
Even as the Productivity Commission review takes place, the Government will still be looking for ways to improve the efficiency and competitiveness of the current system.
We want it to be working in the best interest of members, not just funds.
That is the motivation behind changes to default super.
To explain, let me return you to the life journey that we were on earlier.
You are now older, wiser and approaching retirement. Like most employees, you have had your money placed in a 'MySuper' product.
Currently, trustees of all MySuper products are held to higher standards. They must be authorised to offer a MySuper product by APRA, and must act to promote the financial interests of their MySuper members.
But the Government wants even higher standards. We want to help secure your retirement future by improving the quality of all MySuper products.
Only superannuation funds that provide a quality MySuper product should be allowed to offer a default product. They should be held to account for what they do with your money, so you can feel confident your retirement income is being managed well.
The Government also wants to make sure trustees offer default products with you, rather than your employer, in mind. Superannuation fund trustees should not 'induce' employers to choose a default superannuation fund for their employees, which is actually in their own interests.
In this way, you have the best chance of receiving a fund that is in your best interests and not only in your employer's interests.
Finally, the Government wants to make sure that the main regulator of superannuation funds, APRA, has the tools it needs to promote the safety of your superannuation.
The Government intends to roll out measures to improve the quality and integrity of MySuper products and superannuation funds as soon as possible. We expect these changes will then be considered as part of the Productivity Commission's review.
Flexibility
The final policy area I would like to discuss today is flexibility.
Australia's superannuation system has lots of rules. As superannuation professionals, you know that better than most.
When the Government called for submissions last year as part of the Tax White Paper process, we received numerous suggestions on how we can make the system more flexible.
And what I can tell you is that we are carefully working through each of them.
One that particularly interests me is what we can do to help those who have taken time out of the workforce — perhaps to raise a family or to care for a loved one — to help them to build their superannuation balances.
We know that people who do this can experience lower lifetime incomes, lower superannuation contributions and lower retirement balances.
And most of these people are women.
According to the latest ABS figures, the average superannuation balance for men is around $135,000, while for women it is around $83,000.8
The Government has heard a range of suggestions on how we can bridge this gap. They range from superannuation on government payments, to more flexible contribution rules to facilitate catch-up contributions.
The challenge for us now is how we can target changes to where they will make the most difference to savings behaviour and retirement incomes.
Concluding remarks
To conclude, I want to say that the Government believes it is time the debate around superannuation shifted.
For too long, the debate has been focused around the industry, for the industry.
The Government believes it is time that this changed — to instead focus on the many everyday Australians who rely on superannuation for their retirement income.
We want Australians to have a superannuation system that works – that works for them so that they have the best possible outcomes in retirement.
To do this, the framework cannot simply be 'good enough'. It must be A-grade.
That is why the Government is pursuing the range of reforms I have spoken about today, and why we will continue to do so until we achieve our aim.
So thank you again for welcoming me today, and especially to Pauline Vamos for your kind invitation to speak.
I know that Pauline will be stepping down mid-year after more than eight years in the job, and I want to acknowledge her important contribution to the superannuation industry over this time and wish her the very best.
Finally, I look forward to working with all of you, and hearing your ideas, in the coming days, weeks, months and years ahead as we improve superannuation for Australians.
Thank you.
1 Chapter 1, 2015 Intergenerational Report: http://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2015/2015%20Intergenerational%20Report/Downloads/PDF/04_Chapter_1.ashx
2 As above.
3 As above.
4 http://www.aph.gov.au/binaries/library/pubs/bn/eco/chron_superannuation.pdf
5 http://www.aph.gov.au/binaries/library/pubs/bn/eco/chron_superannuation.pdf
6 APRA Insight Issue 2 2007 publication
7 2015 Intergenerational Report
8 Table 25, Latest ABS data: Gender Indicators, Australia, February 2016