Introduction
Thank you for the invitation to address the Global Pensions Conference.
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.
Financial market volatility and Government's response
We are all well aware that the world is facing a global recession.
I'm sure I don't need to recount the chain of events which led to this situation. 2009 is shaping up as a very tough year for the global economy — and a tough year for Australia as well.
Global growth forecasts have been slashed for 2009. The IMF is now forecasting a collective budget deficit of seven per cent of GDP for advanced economies.
Australia cannot be immune from the effects of this crisis. A budget deficit is now forecast for 2008-09 of $22.5 billion, or 1.9 per cent of GDP.
The Rudd Government reaffirms its commitment to deliver budget surpluses, on average, over the course of the economic cycle.
As the economy recovers, and grows above trend, the Government will take action to return the budget to surplus.
Nation Building and Jobs Plan
In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs and invest in nation building.
That's why, on 13 February, the Australian Parliament passed the Rudd Government's $42 billion Nation Building and Jobs Plan to support jobs. And to invest in future long-term economic growth.
This is a sound strategy.
Treasury estimates that the Nation Building and Jobs Plan will support up to 90,000 jobs in 2008-09 and 2009-10. And that the initiatives in the Nation Building and Jobs Plan will boost economic growth by about ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.
The $42 billion Nation Building and Jobs Plan builds on the stimulus measures already implemented by the Rudd Government to support economic activity and jobs.
Ladies and gentlemen, with so much at stake, this is no time for political grandstanding. Nor is it a time for divisiveness and delays.
We need to act. And we need to act now.
Australians have always supported each other when the going gets tough. It is heartening to see the nation rallying together to help our fellow Australians in the fire- and flood-ravaged communities of Victoria and Queensland.
So it is extremely surprising and disappointing that the Opposition has put partisan politics ahead of the common good by refusing to support this plan.
As my Parliamentary colleague, the Treasurer, pointed out recently:
"The only guarantee here is that things will be worse if we don't act."
I can assure you that, just as we are deploying all our resources to provide the practical help that the affected communities in Victoria and Queensland need so desperately, the Rudd Government will continue to take whatever steps are necessary to support growth and jobs during these testing times.
And in the Treasury portfolio, I will continue my work of ensuring that our regulatory system operates effectively and efficiently. In developing critical regulatory reforms, I am always mindful — particularly during this volatile period — of the need for responses that are measured... far-sighted... and sound.
The credit crisis and the superannuation sector
The global financial crisis has had a significant and immediate impact on superannuation fund balances.
Despite this, our APRA-regulated superannuation sector remains robust, sufficiently liquid, and very well-regulated.
The latest available data from the Australian Prudential Regulation Authority, as at September 2008, shows total assets fell over the September quarter by $25.5 billion, or 2.2 per cent, to a total of $1.15 trillion. This is still more than double the asset figure of five years ago.
We cannot shy away from the effects of the recent financial market turbulence. But superannuation is a long-term investment.
Australians typically spend about 35 to 40 years in the workforce before they retire, and over 20 years in retirement. During that period they will experience a number of investment cycles, and there will be time for the markets to recover.
And history tells us that markets will recover over time.
Australian superannuation has proved its worth over the long haul. Over the last 35 years, on average, it has delivered very good real returns above inflation.
It is vital that superannuation members understand this long-term focus. Switching to conservative investment options or deposit products could result in short-term losses, and there may be taxation consequences. As well, adopting such a strategy would mean that members are not in the market to experience the gains when the market recovers.
So, I would encourage superannuants to seek professional financial advice before they make decisions about their situation.
While we have a robust superannuation system by world standards, some important challenges lie ahead for the sector.
In addressing those challenges, the key priority for the Government remains constant — to maintain the safety, stability and efficiency of our superannuation system.
Outline of the Australian superannuation system
Australia's population is ageing. As such, spending pressures are projected to increase in health, age pensions, and aged care.
According to Treasury's 2007 Intergenerational Report over one quarter of Australians will be aged 65 or greater by 2047. This compares to 13 per cent in 2007. In 2007 there were approximately 5 people of working age (15 - 64 years) to support every person aged 65 and over.
By 2047, this will reduce to 2.4 and the ageing population is projected to slow economic growth - real GDP per person will rise more slowly - 1.6 per cent per year on average over the next 40 years compared with 2.1 per cent over the past 40 years.
Trend – retirement in Australia
Forty years ago, the trend was that men spent 50 years in the workforce before they retired at 65 and received the pension.
Today, the time spent in the workforce has significantly decreased, with some full time workers spending as little as 30 years in the workforce.
The 2006-07 ABS survey of Retirement and Retirement Intentions for individuals aged 45 years and over shows the average age at which people intended to retire was 63 years (64 years for men and 62 years for women).
Current retirement income system
Australia has a three pillar approach to retirement income, which is considered fiscally sustainable in the context of an ageing society.
The three pillars encompass:
- the age pension (non‑contributory safety net);
- compulsory superannuation (the Superannuation Guarantee); and
- voluntary savings, including superannuation.
Australia's retirement system is consistent with the multi-pillar approach outlined in the World Bank's report Old Age Income Support in the 21st Century (2005). The report concludes that a system featuring a multi-pillar design will deliver retirement incomes more efficiently and effectively.
The Superannuation Guarantee (SG)
Before compulsory superannuation was introduced, a minority of people had access to superannuation - mostly higher income earners and public servants.
The SG was introduced in July 1992 and requires employers to make superannuation contributions to eligible employees' complying superannuation funds. The required rate of contributions gradually increased to reach 9 per cent from July 2002.
In 1986, at the start of compulsory superannuation through industrial awards, only around 40 per cent of Australian employees had superannuation coverage. The latest surveys indicate superannuation coverage now extends to almost 98 per cent of traditional full‑time employees.
Nearly all employees are able to choose their superannuation fund and move their savings between funds. Employees who do not exercise their right to choose their own fund default into funds under award provisions.
Voluntary Savings - Superannuation
Superannuation is the largest asset held by households after the family home. Total superannuation assets are valued at 1.15 trillion as at September 2008. Superannuation funds own over 30 per cent of the shares listed on Australian stockmarkets.
Australia has no requirement for employees to contribute to their superannuation fund directly but offers financial incentives for those who do.
Employee contributions (including salary sacrificed contributions) and investment earnings are taxed at the concessional rate of
15 per cent (as opposed to the marginal income tax rate of the contributor).
Self employed persons are able to claim tax deductions for personal superannuation contributions.
The value of Government tax concessions for superannuation savings is estimated at around $24.6 billion in 2008‑09.
A recent AMP Superannuation Adequacy Index report finds that, on average, Australians are contributing 13 per cent of their salaries, rather than the SG compulsory minimum of 9 per cent, to superannuation. Voluntary contributions rise significantly by age group; and AMP customers aged 60‑64 are voluntarily contributing approximately 16 per cent of their gross income, in addition to the SG.
A very generous Government superannuation co-contribution provides support to those with incomes of less than $60,342 per year as at 1 July 2008.
Individuals who make post tax contributions to a complying superannuation fund may be eligible for the maximum Government co-contribution of $1,500 per year.
The co‑contribution has proved very popular with significant take‑up among women and other groups who are typically less well provided for by superannuation.
Government's priorities for the superannuation industry
The Australian superannuation system is strong, stable and continues to deliver. But there is still scope for improvement.
Our superannuation industry has matured. And now is the time to take a close look at its operation, structure and cost.
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. Whilst issues vary from sector to sector, each has matters that require attention. Further the system as a whole both across sectors and within a sector have common operational issues, such as administration, and require attention.
And any examination should be conducted in a thorough, open, transparent and highly engaged manner.
I like to call this "renovating the house".
As an 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 balance by up to 20 per cent.
The current average of 1.25% can and should be lowered overtime to 1% or less.
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.
I continue to urge all parties to awards to give these matters careful consideration. And to work together to maximise the retirement incomes of hard-working Australians.
Superannuation Clearing House and the Lost Members Framework
In addition to broad governance reforms in the superannuation industry, the Rudd Government is 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 making sure the costs of allowing such choice 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 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 canvassed a number of possible initiatives to address the problem of lost accounts, including the possible use of an automatic consolidation mechanism for such accounts.
The deadline for submissions closed on 19 December 2008 and I hope to be in a position to make an announcement on the way forward shortly.
Financial Services Working Group
The Government established the Financial Services Working Group to facilitate 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 Financial Services Working Group has already produced a four-page product disclosure statement for the First Home Saver Accounts.
Last month, the Financial Services Working Group began consultations with industry on a new, national, margin lending regulatory regime. The new regime will include new short-form, plain English product disclosure documents.
By 1 July this year, there will be one, single, standard, national regime for regulating and supervising margin lending. This will provide much greater protection for investors as well as cost savings for product providers.
Margin lending providers will have to be licensed by ASIC and those who provide advice on margin lending will need to be trained to provide that advice. For the first time, margin lending will be properly regulated in Australia.
Investors will be informed about the risks of margin lending, as well as the potential rewards of the product — all in plain English. We have already started discussions with industry on delivering these greatly simplified documents.
It's important that investors not only receive clear advice about why a particular product or strategy is being recommended to them, but also what's in it for the person or firm recommending it.
That's why disclosures in the new short-form product disclosure statement will include all fees and charges, including the commissions paid by margin loan providers to advisers who sell the product.
Conservatively geared margin lending may have a role in a balanced investment strategy. But it's critical that potential investors are fully informed about how margin lending works in both rising and falling markets.
The new, clear disclosure regime will fill this information gap.
Henry tax review and implications for superannuation
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 a 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 an independent review into Australia's future tax system. The review has an independent panel which is being chaired by Ken Henry.
The superannuation and retirement income system are under the microscope of the review.
The review panel released a retirement income consultation paper in December 2008. This paper focussed on five possible objectives for the retirement income system.
- The system should be broad and adequate, in that it protects those unable to save against poverty in their old-age and provides the means by which individuals must or can save for their retirement.
- The system should be acceptable to individuals, in that it considers the income needs of individuals both before and after retirement, is equitable and does not inappropriately bias other saving decisions.
- The system should be robust, in that it appropriately deals with investment, inflation and longevity risk.
- The system should be simple and approachable, in that it allows individuals to make decisions which are in their best interests.
- The system should be sustainable, in that it is financially sound into the future and detracts as little as possible from economic growth.
The paper posed 12 consultation questions, designed to elicit views about whether the system could be improved to better meet these five objectives. The questions are broad in scope. They include:
- Does the retirement income system have the right structural elements to meet its objectives?
- What is an appropriate concept of adequacy, is it to deliver a minimum level of income in retirement, to replace a proportion of income earned prior to retirement, or some other alternative?
- Does the system adequately consider the needs and preferences of individuals both before and after retirement?
- What should be the role of the age pension and means testing in the future, and what impact does this have on sustainability into the future?
The review panel has been receiving submissions on these questions and is currently preparing its first report into elements of the retirement income system. This will be delivered to government by the end of March, so that government can consider the findings in conjunction with Dr Harmer's review of pension adequacy.
The Henry Tax Review will set a pathway for reform. The government is conscious that there has been a lot of change in superannuation over the last 20 years. I expect that any further changes will occur over a reasonable timeframe, and balance the need for further reform against the need for certainty.
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.