2 December 2008

Association of Superannuation Funds of Australia - Canberra Luncheon

Note

'A Portfolio Update'

Introduction

Thank you for the invitation to address this ASFA luncheon today. 

Today, I would like to talk to you about the Government’s broader priorities for superannuation and our ongoing efforts to ensure the Australian financial system is flexible, modern and strong, particularly in the current economic climate.

Market Volatility

I don’t need to remind you that financial markets are currently very volatile and have suffered substantial losses over the last few months.  These developments have occurred very quickly and impact significantly on Australians’ retirement savings, particularly for those close to, or in retirement. 

Median superannuation fund losses in the 12 months to 31 October were -17.6 per cent.  However, in times of market volatility such as this, it remains important to take a longer-term view. 

Despite the significant immediate impact on superannuation fund balances due to the global financial crisis, our superannuation system remains world class. 

Superannuation funds in Australia are well managed and safe.  They must have comprehensive and robust risk management procedures in place.  Our law requires trustees to consider risk, diversification and liquidity in managing the assets of the fund. 

APRA is rigorously overseeing the industry to ensure that funds are proactively responding to market developments and operating prudently in their members’ best interests.

History tells us that markets will recover over time.

Indeed, for most members, that is the point with superannuation.  It has a long-term focus.

There is time to recover from market volatility given average working lives of 30 - 40 years and retirements spanning 20 years plus. 

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 $1.85 on average on 31 October 2008, or indeed, a dollar in a superannuation account twenty years ago would have been worth about $5.49 at 30 June 2008.

It is vital that superannuation members understand this long-term focus.  Switching to conservative investment options or deposit products can result in the realisation of short-term losses.  There may be taxation consequences.  It also means members are not in the market to benefit from the gains when the market recovers.

Governance of Super Funds

Some important challenges lie ahead for the Australian superannuation system.  The key issue for the Government is maintaining the safety, stability and efficiency of this system.

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.

Any examination should be conducted in thorough, open, transparent and highly engaged manner.  I will have more to say about this shortly.

Leading by example, the Government itself has fundamentally rethought its own superannuation administration arrangements by taking another look at the development of its Comsuper administration platform and initiating a scoping study to examine options for reform.

The Government has also decided to consolidate the main civilian and military superannuation trustee boards, including our best efforts to include AGEST, into a single Board by 1 July 2010.  The new consolidated Board will have some $24 billion in assets to invest.  This will provide economies of scale through additional pricing power that will benefit member returns.

Superannuation Clearing House and the Lost Members Framework

In addition to broad governance reforms in the superannuation industry, the Rudd Government is also committed to cutting red tape and reducing costs for small businesses across Australia.

One cost facing small businesses is in meeting the requests of employees to have their superannuation paid into many different funds.  Whilst we are committed to the right of staff to choose their superannuation fund, we are equally committed to ensuring the costs of this don’t disproportionately impact on small business owners.

In the Budget, the Government announced that it will provide funding of $16 million over three years, commencing in 2009-10, for an optional superannuation clearing house facility.

The introduction of a superannuation clearing house facility will deliver on our election commitment and will be cost free for employers with fewer than 20 staff.  That means around 90 per cent of employing businesses across Australia stand to benefit.  As such, the clearing house initiative will be a major simplification of the administration of superannuation payments for this critical part of the economy.

On 14 November, I announced the release of a two-part discussion paper, the first part of which covers implementation issues associated with this initiative. 

Key issues raised in this area include the division of responsibilities between employers and the clearing house in relation to the Superannuation Guarantee and choice of fund, whether the clearing house facility should be contracted to a single or multiple providers, and the regulatory framework which would apply to the clearing house.

Many of you will be aware that I am deeply concerned at the growth in both the number and value of lost accounts on the Lost Members Register.  The latest available data indicate that some 6.4 million accounts with a value of $12.9 billion are currently lost.  These are disturbingly large numbers.

This growth has occurred unabated for the last decade, with initiatives such as SuperSeeker, SuperMatch and direct mail out campaigns unable to stem the growth.

The second part of the discussion paper released on 14 November canvasses several possible initiatives to address the problem of lost accounts, including the possible use of an automatic consolidation mechanism for such accounts.

I look forward to feedback from industry stakeholders and the community on these important initiatives.  I am confident that by working together we can improve workers’ retirement savings while minimising complexity and red tape.

The discussion paper is available on the Treasury website.  The Government is seeking feedback on the issues raised in the paper by 19 December 2008.

Default Funds

In assessing the superannuation system it is important that we understand that individuals in a compulsory system fall into two distinct categories, namely those who do not wish to make active decisions – those who so-called “default” – and those who do make decisions in some way, usually after taking some kind of advice.

Looking at those who default, the majority are in good long-term performing funds, but a minority are not and fee levels are a major contributing factor to this.

Clear performance criteria need to be developed on default fund selection in the coming year.

Again this is to maximise long-term returns in the best interest of the member.  As many of you will know I have written to the Australian Industrial Relations Commission to offer my assistance in the development of appropriate default fund criteria, and I have repeated this offer direct to peak employers and to the ACTU.

Intra-product Advice - Financial Services Working Group

As well as ensuring our super system is operating as smoothly and efficiently as possible, we need to do two things.

We need to encourage a culture of saving.  And, we need to provide the right signals for people to contribute to their superannuation.

An important element of this is ensuring that people have access to easy‑to‑understand information to help them make informed decisions, and to compare the relative merits of alternative products.

This is why the Government established the Financial Services Working Group.

The Working Group is facilitating the creation of disclosure documents which are short, simple and readable.  Documents which will better enable consumers to understand and compare the full range of financial products.

The Government recently released the first of these documents — a four-page product disclosure statement for the First Home Saver Accounts.

The next item on the Working Group's agenda is to look at product disclosure documents sector by sector, beginning with superannuation.

I am keen to improve Australians’ access to low-cost advice about their superannuation.  There is currently a large unmet need for this kind of simple superannuation advice.

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 help us to provide intra-product advice relating to superannuation.

The Working Group is analysing these proposals, and examining what regulatory and other steps the Government could take to help more investors obtain the kind of advice they need, and I expect to announce a policy decision in this regard very soon.

ASIC – Temporary Relief

Recently ASIC provided temporary relief to superannuation fund trustees to provide limited guidance to their members.  This is a practical solution to the need for guidance and information at the present time of economic uncertainty. 

It does not pre-empt the Working Group but it does demonstrate the importance of ASIC providing clarification to enable superannuation funds to provide simple, low-cost advice to their members.

ASIC temporary relief will enable superannuation fund trustees to provide valuable information on the relative return and volatility characteristics of different types of investments, such as guaranteed bank deposits and market-linked long-term investments. 

The measure will assist members to better understand the implications of switching or transferring their superannuation investments at the current time.  Those implications include the possible crystallisation of investment losses, loss of insurance benefits, and taxation consequences.  The response from industry has been extremely positive.

Henry Tax Review

The Government understands the need for a tax and transfer payments system that is simpler, rewards hard work and provides security for pensioners, carers and people with disability.

Long-term reform is vital to achieving this ambitious goal and for positioning Australia to deal with the challenges it faces into the future – and that is why the Government has established the review into Australia’s future tax system.

Both superannuation and the retirement income system are under the microscope of the review.

On the back of the first round of community input, the review panel is currently preparing its first consultation paper for public release at the end of this year. In the first half of next year the review moves into intensive consultation mode and will seek the views and ideas of Australians.

The paper will pave the way for more consultation. You will have opportunities to raise views at public meetings, express ideas and suggestions in submissions and work with the review team.

I encourage you to get involved and help us build a fairer, simpler, more efficient system.

Review of Credit Rating Agencies and research houses

The global financial crisis has prompted universal consensus for improved regulation of rating agencies.  Their role has come under scrutiny due to their involvement in providing inaccurate ratings of structured financial products in the lead-up to the US sub-prime crisis.

The Rudd Government is prepared to take decisive action to upgrade the supervision of credit rating agencies to promote and maintain confidence in our financial system.

Following a review on 13 November, I announced significant reforms to the regulation of credit rating agencies and research houses. 

Under the reforms, ASIC will require rating agencies to have an Australian Financial Services Licence.  This is to ensure that our financial system meets the highest standard of regulation.

Credit Rating Agencies will also be required to issue an Annual Compliance Report.  The report will outline in detail to ASIC how they have complied with the recently updated International Organisation of Securities Commissions Code of Conduct Fundamentals for Credit Rating Agencies.

ASIC will also strengthen its oversight of research houses and require them to comply with an annual compliance report.  The compliance report will cover management of conflicts of interest and the procedures, methodologies and assumptions that result in research house advice.

By requiring rating agencies and research houses to report annually on the quality and integrity of their ratings processes, conflicts of interest management and responsibilities to the investing public and issuers, the Rudd Government is boosting the integrity of our financial system.

I want to thank AFSA for its contribution to the review.  Representatives from your organisation met Treasury and ASIC officials as part of the review.  Your views and insights were very welcome. I trust that you and your members will find the new regulatory requirements beneficial.

Short Selling

In another initiative to ensure the continued integrity, fairness and transparency of our markets ASIC introduced a temporary ban on short selling, with limited exceptions. 

ASIC recently announced that it had lifted the ban on short selling of non-financial securities, subject to disclosure requirements.  The ban on short selling of financial securities will remain in place until at least 27 January 2009. 

In addition, the ASX amended its authorised product list to prohibit individuals from entering into “naked” short sale transactions that are not otherwise allowed by the Corporations Act.

While I believe that appropriately regulated and disclosed covered short selling has a role in the effective operation of markets, it is a prudent decision to restrict it at a time of heightened market volatility.

To further ensure the integrity and transparency of our markets, the Government has introduced legislation to require the disclosure of covered short sale transactions on Australian financial markets. 

The Corporations Amendment (Short Selling) Bill 2008 establishes a disclosure framework for covered short sales. 

The Bill also bans naked short selling subject to ASIC’s ability to grant exemptions from this prohibition. The Government foresees the ASIC exemptions may allow some non-speculative naked short sales to ensure the ordinary operation of the market.  In addition, the Bill provides certainty about the powers of the ASIC to regulate short selling.

The Government will finalise the regulations in consultation with industry and other stakeholders over the coming months.  This will ensure all views are taken into account as part of establishing the requirements.

Conclusion

In conclusion, I would note the current period of financial turbulence poses considerable challenges for government, the superannuation industry, and the financial sector more generally.

The Rudd Government response to these challenges is based on responsible economic management and ongoing international cooperation.  Where necessary, the Government has acted early and decisively.

The Government believes the Australian superannuation system is robust by world standards.  The Government is committed to ensuring this system remains safe, stable and efficient while maximising long‑term returns in the best interests of members.

Thank you again for inviting me here today.