Thank you, everyone, for that warm welcome — it’s wonderful to be with you for the Superannuation Opportunity Forum.
Today is an opportunity for reflection.
Superannuation, as most of you know, is a two-trillion dollar — and growing — industry.
But even more important than that undoubtedly impressive figure is this: superannuation, in large part, determines how most Australians are able to live for about one-third of their lives.
That reality means the continued sustainability of the system is critically important. And it makes your role, as custodians of the retirement funds of millions of Australians, of enormous consequence.
Few other Australians can say that they have such far-reaching effects on people’s later lives.
That is both a privilege and an enormous responsibility — especially as we mandate it – that is, we force people to defer a percentage of the amount they earn today, to provide for them when they retire.
It means our superannuation system must have the highest possible governance standards.
It means providing individuals with choice about their fund.
It means increased transparency to make that choice meaningful.
It means competition to ensure that members get the best and most cost effective product.
And it means an end to the cosy kickback deals that abuse members’ money – such as was highlighted by the Trade Union Royal Commission.
In short, our superannuation industry needs to look to the future.
Familiar challenges
Let me underline that point with a bit of history.
It was in 1908 that the Deakin Government established the old age pension in Australia.
It was a move that had enormous significance — then, obviously, but also for the current political and policy debate.
At that time the life expectancy for men was 55, while for women it was 59. Few Australians at that time were likely to reach the age 65 pension milestone.
Indeed, in 1911 it was only about 4 per cent.
Despite that, however, it was still means tested and character tested. And it had to be — even then, the government was struggling to pay for the scheme’s limited reach.
The challenges of those times resonate today.
Last year’s Intergenerational Report showed that by 2055, the number of Australians aged 65 and over will more than double, while one in every 1,000 people will be 100 years or older.
At the same time, the number of people of working age for each person aged 65 years and over is decreasing.
This dynamic will put pressure on our retirement income system — a system that today includes the age pension, superannuation and other savings.
It will also burden younger generations with increased taxes to pay for the retirees of today – and then their own retirement in the future – if we do nothing.
Superannuation reform package
So it’s clear that these are new times, but not unfamiliar challenges.
As in the past, the Government must think in new, innovative ways so our retirement system, particularly superannuation, remains strong.
That is what the Turnbull Government is delivering. We have looked at the challenges and we have welcomed them as opportunities.
We have today an opportunity to modernise our retirement income system, to make sure that it works for everyone.
To ensure the tax concessions that apply to superannuation are sustainable, and that the system has overall integrity.
To ensure the system is flexible, accommodating the wide range of working arrangements and patterns people follow across their lifetime.
And that is what we have delivered with our superannuation reform package.
So today I want to take the opportunity to break down some of the detail of that package, and touch on a few other important areas.
Objective of superannuation
I’ll begin with the objective of superannuation.
Despite its critical importance, there has never been a clear, legislated objective for superannuation.
This has meant that it has been too easy for different governments to make ad hoc changes to the superannuation system — and, ultimately, undermine confidence in it.
That is why the Financial System Inquiry — a root-and-branch review of the financial system — recommended that the Government enshrine in law the objective of superannuation. That is, ‘to provide income in retirement that substitutes or supplements the Age Pension’.
It means we now have a clear definition of what our superannuation system is intended to do — and what it is not intended to do.
I believe that this clarity will promote confidence in the system overall, and provide a framework for evaluating future changes.
That said, of course, I am conscious that some stakeholders wanted the objective to include concepts like ‘adequacy’ or ‘comfort’ in retirement. This included ISA.
But as David Murray, who headed the FSI, recently said, to include these very subjective words would "open the way to constant political interference".
That is why the Government has ultimately decided that a simple, unambiguous objective, without subjective concepts, is the best path forward. However, we have made note of the importance of the other concepts in the bill’s explanatory memorandum.
Flexibility of the system
Let me now turn to the flexibility measures in the package, which will help people to save for their retirement.
Australians are hardworking and aspirational. And the Government does not want to put a handbrake on that aspiration when it comes to saving for retirement.
For instance, we know that people have very different work patterns.
Some might have multiple jobs and several careers across their lifetimes. Others might take breaks from work to look after children or to care for an elderly parent.
As it stands, the system offers little in the way of flexibility for these Australians. It is structured in such a way that favours higher income earners who work full-time — without breaks — for the entirety of their working life.
And that must change.
Now, since you’re all experts, I thought that rather than listing the system’s current limitations in an abstract way — and how we intend to fix them — I’d instead use an example.
We’ll call her Sarah.
Sarah is thirty-two and runs and owns her own baby clothing business from home as a sole trader. She also works part-time in the hospitality industry while raising two children.
‘Busy mum’ doesn’t even begin to describe her situation.
At the moment, Sarah has a superannuation balance of $25,000. And over the last year she has earned about $20,000 in her hospitality job, including a $1,900 superannuation contribution from her employer.
In addition to this, Sarah has made $60,000 from her business — giving her an assessable income of $80,000.
So, what does the current system hold for Sarah?
Well, she would not be able to make deductible personal contributions from her business income because she receives more than 10 per cent of her income from employment.
Not only that, because her employer does not offer salary sacrifice, she would not be able to make any voluntary concessional superannuation contributions.
In other words, Sarah’s only concessional contributions would be the superannuation guarantee on the one quarter of her income that comes from wages.
Furthermore, because she can’t make voluntary concessional contributions, she also can’t reach a rate of contributions anywhere near the superannuation guarantee rate of 9.5 per cent— let alone exceed it.
However, under the Government’s changes, Sarah’s outlook in 2018–19 is a lot brighter than it is today.
For instance, Sarah would be able to make a $10,000 personal contribution and claim a tax deduction for it.
This amount will then be taxed at 15 per cent in the fund, rather than her marginal tax rate of 32.5 per cent, making the contribution concessional.
From 1 July 2017, the annual concessional cap will be $25,000. This means, Sarah will have unused concessional cap space of $13,100, which is available to carry forward for up to five years starting from 1 July 2018.
Additionally, because her superannuation balance is below $500,000, Sarah can contribute up to $38,100 in concessional contributions the following 2019–20 financial year. Because Sarah’s business income varies significantly from year to year, this will allow her to make larger contributions in the ‘good’ years when she can afford to.
It’s a big change — and an important change for the many hard-working Australians who are in similar situations to Sarah.
They are the Australians who come to mind first when I say that I want a superannuation system that works for everyone.
There are more flexibility changes, of course — and I don’t have sufficient time run through them all today.
But before I move on, I want to flag a couple of numbers to show the reach of these changes.
By removing the 10 per cent rule, this alone will improve the superannuation balances of more than 800,000 Australians.
The one-third of hospitality workers and around half of farm workers who don’t have salary sacrificing arrangements — and therefore are limited by this rule — will have a door opened for them.
Meanwhile, the unused concessional cap carry forward, to take effect from the 1st of July 2018, is expected to be used by around 230,000 people in the 2019–20 financial year alone.
And, it is worth noting that this measure will be available to anyone with a balance of less than $500,000 – that was over 14 million individuals in 2013-14.
It could include mums; dads; carers; those who’ve taken extended leave because of illness; and those whose circumstances have changed, such as where children are no longer at school and those expenses can be redirected.
These numbers I have mentioned are worth reflecting upon.
It is amazing then, that Labor is opposing these very measures citing affordability to the Budget, at the same time they are trying to punch a bigger hole in the budget with tax cuts for Swedish backpackers.
Efficiency and competitiveness
So that brings me to another topic I wanted to cover today: the superannuation system’s efficiency and competitiveness.
It is critically important that Australians have a superannuation system that is efficient and competitive — and one that is focused on improving after-fee returns for members.
Given the size and significance of the Australian superannuation system, even small improvements to the efficiency of the system can have a very large impact on the wellbeing of Australians in retirement.
That is why the Government has tasked the Productivity Commission to review this area.
This process is, as you are no doubt aware, currently underway. We expect the final report for stage one will be completed this week, which will present criteria to be used for the purpose of assessing the efficiency and competitiveness of the superannuation system.
A draft report for stage two will be released in the first half of 2017, outlining possible alternative models for a formal competitive process for allocating default fund members to products.
The final stage, stage three, will see the Government task the Commission to conduct a full review into the efficiency and competitiveness of the superannuation system.
This will draw on the criteria developed through stage one, and follow the full implementation of the MySuper reforms on 1 July 2017.
It is an important process — and long overdue. It will be the first comprehensive review assessing the efficiency and competitiveness of the entire system.
Superannuation governance
Now, two weeks ago at the annual ASFA Conference I said that it was the Government’s intention to continue progressing non-taxation superannuation legislation that was previously before Parliament.
This includes improving superannuation governance.
As I noted earlier, Government policy compels Australians to divert nine and a half percent of their wages to save for their retirement. This has created an industry that is currently worth over two trillion dollars, and growing. And yet, governance standards for superannuation funds under the law are lower than for banks and life insurance companies.
In recent times there has been much focus on poor practices in some of the financial services sector including the significant impact on consumer outcomes – and there should be. However, we cannot ignore examples of questionable arrangements that have gone on in some parts of the superannuation industry.
Almost 12 months ago, a Bill to legislate higher standards of governance for the superannuation industry was deferred by the Senate pending the outcome of a review into governance arrangements in respect of Not for Profit superannuation funds and to propose a best practice Governance Code for such funds. This review, led by Bernie Fraser, was due to report in April this year.
It seems that this review has disappeared into a black hole.
My question for you all today is, are you serious about lifting governance standards in this sector or do you want to cling to outdated practices which do not reflect the size; the scale; nor the enormous importance of this industry?
It may be timely to me remind you of just one example that came to light during the Trade Union Royal Commission where the Assistant State Secretary of the Transport Workers Union was paid by TWU Super, for just two and a half days work as a “Superannuation Liaison Officer”. For this, he received $93,000.
What is particularly concerning about this example is that under questioning during the Royal Commission it was acknowledged by this individual that the arrangement wasn't in the best interests of those people who had contributed to that Superannuation Fund.
It is no longer credible for people to protect such cosy deals and lower governance standards, given what is at stake is confidence in the system and the retirement savings of millions of Australians..
That is why the Government remains committed to reforms that will lift superannuation funds to at least the same standard as other financial services organisations like banks and life insurance companies. We will reintroduce our Bill to require trustee boards to have a minimum of one-third independent directors, including an independent chair.
So as we turn our minds to this important piece of legislation, I look forward to working collaboratively with you all.
In particular, I look forward to hearing what became of the Fraser Review on not-for-profit superannuation fund governance.
Insurance in superannuation
Before I finish, I want take this opportunity to mention my interest in the work of the recently established cross-industry ‘Insurance in Superannuation’ working group.
Insurance provided to members through superannuation is an important part of the system and it is critical that it is consistent with the overall objective of superannuation and is fit for the future.
It is trustees who have the obligation to balance the offering of insurance inside superannuation with the potential erosion of member’s balances.
So, I am confident that with your active engagement in this group these issues will be taken seriously and we will see practical recommendations on how the industry can take proactive steps to improve the current system.
Concluding remarks
I want to finish by again thanking you for the opportunity to speak today — and to wish you the very best for the remainder of this forum.
As I said at the beginning, few industries have such far-reaching effects on people’s later lives.
That is why you — and the Government — must always have one eye to the future.
The retirement system has always faced challenges. And it is important that, together, we look at those challenges as opportunities.
Australians deserve a modern superannuation system — one that is sustainable, flexible and fair.
This is our opportunity as a Government – and yours. Thank you.