Good afternoon.
First, I would like to thank Rice Warner for inviting me to address your “Super Highway… to where?” workshop.
Today, I’ve been asked to speak about the Government’s priorities for superannuation. Nothing would give me greater pleasure. On a personal level — as everyone who knows me is aware — superannuation is something of a passion for me.
On a professional level, as the Australian Minister with responsibility for superannuation, indeed the first Australian Minister to have portfolio carriage for the whole sector, I am determined to ensure that all employees have access to well-performing superannuation funds.
In addition, I consider that my Ministerial role brings with it a duty of care to ensure the safety, stability and efficiency of our superannuation system. This is particularly so as we have a compulsory system that is underwritten to the extent of $70 billion in capital flows and $28 billion in tax concessions.
Size of superannuation system
Despite the significant immediate impact on superannuation fund balances due to the global financial crisis, our superannuation system remains robust, sufficiently liquid, and very well regulated.
The latest available data from the Australian Prudential Regulation Authority (APRA) indicates that, as at June 2008, fund assets totalled $1.17 trillion.
This is more than double the asset figure of five years ago.
So let me put these short term impacts into a more rational context than some others have chosen to do in recent weeks.
Data from superannuation industry research house SuperRatings for the 2007-08 financial year showed superannuation funds had median losses of 6.4 per cent. Further falls in equity markets in over the last few weeks suggest this year is also shaping up as a tough one for superannuation funds.
History tells us that markets always recover over time.
Indeed that is the point with superannuation – there is time to recover given average working lives of 30 - 40 years and retirements spanning 20 years plus.
Superannuation is now a dominant financial asset and a significant item on the household balance sheet. Indeed, individual superannuation balances have grown to the point where, for many people, they represent their most significant asset aside from the family home.
The preservation arrangements and the compulsory nature of superannuation allow superannuation trustees to manage market volatility over time through a progressive rebalancing of their investment strategies in response to market conditions – this is without doubt one of our systems greatest comparative strengths.
In addition the regulator (APRA) has been conducting comprehensive liquidity stress testing of the more than 600 super funds that it regulates. APRA’s findings are very clear – funds are sound, well governed and well positioned to deal with the stresses in the system and indeed could withstand much more severe circumstances.
Over the 35 years to June 2007, Australian superannuation has delivered excellent real returns of about five per cent over and above inflation. Put another way a dollar in a superannuation account ten years ago would have been worth $2.07 on average on 30 June 2008.
I am committed to working with industry to leverage that wealth into the best outcomes for hard-working Australians in retirement.
Government’s priorities for the superannuation industry
While the Australian superannuation system is strong, stable and continues to deliver, there is still scope for improvement.
It's high time we took a long, hard look at the operation, structure and cost of our superannuation industry.
We need to consider these issues across all sectors of the industry — corporate, public sector, industry and retail, as well as the self-managed superannuation fund sector.
And any examination should be conducted in thorough, open, transparent and highly engaged manner.
I like to call this “renovating the house”.
Fees and charges
For example, superannuation account fees have a direct bearing on final retirement income.
Fees at two per cent of a member’s account — rather than one per cent — could, over 30 years, reduce their final return by up to 20 per cent, a very significant difference by any measure.
I would like to see Australia move towards a superannuation system with a more sustainable remuneration model, in which fees are more competitive by world standards.
Importance of default funds
Another way that we can improve the efficiency and effectiveness of our superannuation system is by providing safe, high-quality default mechanisms for people who fail to make active, informed choices.
Because the proportion of employees who have their superannuation contributions paid into a default fund remains very high, up to 90 per cent of employees, this is a key priority for me.
Lower fund returns produce lower real retirement lump sums. This means that members of consistently underperforming funds will not optimise their post-retirement income prospects if they remain in an underperforming fund.
Under the Government’s transitional arrangements, superannuation will continue as an allowable award condition.
This approach will reduce disruption to awards in anticipation of award modernisation. It will also maintain the ability of awards to deliver legally enforceable superannuation requirements, such as frequency of payments, minimum thresholds and the default fund system.
I have made a submission to the Australian Industrial Relations Commission, highlighting the importance of the selection of default funds for inclusion in awards. I urged all the parties involved in the award modernisation process to give this their full consideration.
Despite some media reports to the contrary, this issue has not been dismissed by the industrial parties, and we continue to progress this important issue positively.
But my concern with the performance of default funds goes beyond those covered by awards. It is critical that all employees have access to well‑performing default funds.
In this context APRA will be releasing a consultation paper shortly on the publication of long term performance, at the fund level, of all funds regulated by APRA.
Financial Services Working Group
Another priority is ensuring that Australians have access to easy-to-understand information to help them make informed decisions about their superannuation.
One of the ways the Government is doing this is through the Financial Services Working Group.
As I’m sure many of you would be aware, the Working Group was established to facilitate short, simple and readable disclosure documents, to better enable consumers to understand and compare the full range of financial products.
In particular, I am keen to improve Australians’ access to low‑cost advice about their superannuation. There is currently a large unmet need for simple superannuation advice.
The Working Group has already produced an easy-to-understand, four-page product disclosure document for the First Home Saver accounts. Its next projects are to develop simplified product disclosure documents for superannuation and managed investment products.
On 30 May this year, the Working Group released its public consultation paper, Simple Choices Within an Existing Superannuation Account. The paper sets out several proposals that may facilitate the provision of intra‑product advice relating to superannuation.
The Working Group is currently analysing these proposals, and looking at what regulatory and other steps the Government could take to help more investors get the kind of advice they need.
Benefit projections and calculators
Another way that we can help Australians to better understand and maximise the benefits of superannuation is by giving them universal access to projections of retirement benefits as part of the superannuation system.
These projections would provide an indicative estimate, in current dollar values, of the total savings available at access ages for superannuation and age pension in a simple, standard format.
One of the shortcomings of our largely “defined contribution” super system is that very few fund members have any idea of how much they are likely to end up with in savings when they reach retirement age.
Providing benefit projections and superannuation calculators could significantly improve our system.
Not only would they provide an estimate of likely outcomes at critical ages, but they would also highlight the long-term rate of return, and the elements that affect it such as contribution levels and total fees and charges.
Many other countries have seen the advantages of benefit calculators and projections.
After projections were issued in the UK, there was a significant increase in awareness among fund members of the need to increase contributions.
In Sweden — which has a compulsory defined contribution system — the annual report to members, known as the “red envelope”, provides citizens with a projection to State pension access age as a prominent feature.
But here in Australia, benefit projections and superannuation calculators are very limited. One significant issue is the consolidation of account information. APRA statistics show 30.5 million accounts, while ATO data suggests around 11 million contributors in a two-year period. Clearly, the industry will need to consolidate account information in order to deliver a meaningful projection.
There are several complex design features, assumptions and legal parameters to consider. But as overseas experiences have shown, these obstacles are not insurmountable.
Lost members and inactive accounts
An issue I have been following with concern for some time is the continued growth in the amount of superannuation reported on the Lost Members Register.
The Register, which uses information supplied by superannuation funds, was introduced to help individual members to identify lost super and consolidate their accounts.
According to the latest figures from the Australian Taxation Office tabled in the Parliament and published today, the number of lost accounts on the register has grown to 6.4 million, with total assets of $12.9 billion.
This is a disturbingly large figure.
While the definition of “lost member” is very broad, the growing amount of superannuation identified as lost has been a significant issue over the last decade.
Lost accounts represent about one in five of all superannuation accounts, with an average of one lost account for every two Australian workers.
The sheer number of these accounts suggests that, when they retire, many Australians will be able to access less of their savings than they are entitled to.
Another problem is that the number of these accounts collectively increases superannuation fund running costs.
Attempts by the previous government to address this issue failed.
My preference is to reunite Australians with their lost accounts by introducing an automatic consolidation arrangement, with an opt-out provision, using our Tax File Number system.
Under this option, lost accounts would be automatically rolled over into a current or the most recently active account.
Members of the recently-formed Superannuation Advisory Group discussed options to address this issue at their inaugural meeting in March.
I will consult further with the industry on a range of practical solutions to this problem. Together, we will develop a solution to improve workers’ retirement savings while minimising complexity and red tape.
Superannuation Clearing House
The Government has also made a firm commitment to reduce the regulatory burden on Australian small businesses.
As just one example of this commitment, we announced in the Budget that we will provide funding of $16 million over three years, starting in 2009‑10, for an optional superannuation clearinghouse facility.
This facility, which will be contracted to the private sector, will cut red tape and reduce compliance costs for businesses across Australia.
This new initiative will be offered free of charge to small businesses with fewer than 20 employees. It will help business owners to manage their obligations under Superannuation Choice, including the time-consuming task of checking details entered on the Choice form and distribution of contributions to the nominated funds.
The superannuation clearinghouse measure will allow an employer to pay their contributions to a single location. The clearinghouse will then distribute them to the relevant superannuation funds selected by their employees.
Businesses which use the clearinghouse facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearinghouse.
The clearinghouse will be available from 1 July 2009. We will, of course, consult shortly with industry before we implement this measure.
Self managed superannuation funds
Another area which needs some fine-tuning is self-managed superannuation funds.
The SMSF segment is a robust, important and mostly healthy area of the market.
But as the results of a recent Australian Taxation Office survey indicate, while the majority of the sector is well managed, a significant minority may not be. The results of the survey have received a lot of media attention, so I won’t repeat them here.
But this information will help us to identify risks in the population. I would point out that the previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities and education in 2005. However, these changes were not applied to the SMSF sector.
Because so many Australians will rely on self managed super funds for their retirement income, we need to ensure that SMSFs are subject to a strong governance system.
The Government has conducted a review and is examining the view put forward.
Australia’s Future Tax System review
Before concluding my address this morning, I would like to update you on the current review of our taxation and transfer system, chaired by the Secretary of the Treasury, Dr Ken Henry.
This review is the most comprehensive examination of our tax system in over 50 years.
Long-term, forward-looking reform of the tax and transfer system is a vital part of how we create prosperity, reward hard work and meet the current and future challenges facing Australia.
Our future tax system will affect the decisions people make about working, saving and investing. So it has a significant role to play in Australia’s future.
In modernising our tax system for the long term, we have several priorities.
We want to boost Australia’s productive capacity, and build prosperity in an increasingly competitive global environment.
We want to reward hard work by removing complex disincentives.
We want to streamline, simplify and harmonise a tax system which has become far too complex.
And last, but by no means least, we want to provide certainty and security for pensioners, carers and people with disabilities.
The review panel will conduct a program of extensive public consultation to hear views and ideas from a wide-cross section of the community.
The first round of submissions to the review closed yesterday. The review panel will consider the feedback, then meet with several major organisations to further discuss tax policy review priorities.
These submissions and discussions will inform the development of a paper to be released for public consultation by the end of this year.
The paper will outline the key issues which have emerged and form the basis for further activities in 2009. These will include more opportunities for public submissions, public meetings and direct consultations on issues and options.
I would encourage you to contribute to the review.
To help us build a tax system which is fairer... simpler... and more efficient.
And to help us better deal with the major challenges facing Australia.
The pension review
As part of the broader review, my Parliamentary colleague Jenny Macklin, the Minister for Families, Housing, Community Services and Indigenous Affairs, announced that the Secretary of her department, Dr Jeff Harmer, would lead a comprehensive review of the pension system.
The pension review will report in February 2009.
It will produce long-term measures to strengthen the financial security of seniors, carers, and people with disabilities.
In the meantime, however, as announced by the Prime Minister yesterday, the Government will be making one off payments to all categories of pensioners from 8 December.
Conclusion
Ladies and gentlemen, as you can see, we are progressing reforms to the superannuation system on several fronts. We are carrying out this work diligently and thoroughly with the best interests of members uppermost in our thinking. This is particularly important in the midst of the current crisis in world financial markets – possibly the worst scenario since the Great Depression! In these circumstances every dollar in member accounts in a compulsory system is important.
Australians whose retirement income depends on their superannuation deserve no less.
Thank you.