I welcome the invitation to speak to the conference today and acknowledge the important role SPAA has had in building a professional culture amongst its members and in supporting professionalism in the industry.
As Australia's first Minister for superannuation in any government I bring together a range of areas in both Treasury and Finance. These include:
- Policy and administration, including taxation and prudential regulation, in relation to superannuation;
- Corporate governance encompassing administration of the Australian Securities and Investments Commission and representation on the Ministerial Council for Corporations;
- Financial literacy;
- The Royal Australian Mint; and
- The Australian Government Actuary.
Fiscal Responsibility
The Government has committed to exercising fiscal restraint through a disciplined approach to spending and a hardline approach to savings. Excessive government spending contributes to demand, which can add to inflationary pressures. A comprehensive review of spending is currently working to find additional savings above the previously identified $10 billion across the forward estimates.
In his first economic speech, the Prime Minister flagged that under point two of our five point plan to fight inflation, that this Government would examine all options to provide real incentives to encourage private savings.
It will be economically responsible for the Government to keep in mind its fiscal responsibility when making policy decisions over the coming year.
Labor and Superannuation
Our government has a long history of championing the cause of superannuation for all working Australians. It was a Labor government which introduced the first fundamental superannuation reforms.
The introduction of compulsory superannuation has had a significant and continuing impact on Australia's economic health, and the retirement savings of Australian workers.
This reform extended superannuation coverage to nearly all employees. Importantly, if the Government had not introduced the superannuation guarantee arrangements in the early 1990s, then it is unlikely that the majority of low and middle income, casual or part-time workers would have added financial security for their retirement incomes today.
Since the introduction of compulsory superannuation, individual superannuation balances have grown to the point where today they represent, for many people, their most significant asset aside from the family home.
Compulsion and "duty of care"
Compulsion brings with it a strong "duty of care" by government.
Government, having rightly mandated individuals to save for retirement, provides tax concessions, estimated in the latest Tax Expenditures Statement to be around $26.8 billion in 2007-08, and directs the individual savings of around $60 billion a year largely into the hands of private sector financial institutions governed by trustee entities. In late 2007 the total system contained around $1.2 trillion. Superannuation represents long term savings that are not generally accessible until at least age 55. Issues such as governance, dispute resolution and compensation, safety, diversified investment and operational costs are important concerns for this Government.
It is absolutely vital in our system that trustees are well placed to minimise problems before they occur and minimise the need for regulators having to embark on sometimes onerous or intrusive oversight. Prevention is the best form of cure.
The central question for all participants in our system, regardless of their particular interest is - what is in the best interests of the member and maximises their retirement income?
Principles
There are a number of interlinked principles the Government has outlined over the past few years. They are worthwhile recounting because they form the basis for how we examine issues going forward.
- Achieving higher retirement incomes delivered over time through a combination of the age pension plus superannuation set against a clear goal.
- Simplicity - each fund member should be able to understand at least the general features of how the system works and the particular features of their own fund.
- Safety and confidence - features to ensure people maintain confidence that contributions will be made, that their future income is not at risk, and that they can project the income available to them on retirement; I draw a distinction between the risk from theft and fraud and market based volatility or risk in a defined contribution system.
- Choice and competition - the provision of a level of choice so that individuals can have input into selecting superannuation options that best suit their particular needs for retirement, whether it be a particular fund, investment category, lump sum or pension/annuity, or age of retirement.
There is a need to ensure a careful balance in a system which denies individuals the choice not to participate but requires them to make what can be a range of complex choices within the system itself.
- Affordability - superannuation should be a cost effective savings vehicle with operating costs kept to a minimum.
- Improved incentives and equity - superannuation should be taxed in a fair and equitable manner, and the Government has committed to examining new ways to improve incentives to save, consistent with a responsible fiscal policy.
There are some further practical considerations I would add:
Increasing workforce participation
Given the recent high levels of employment and the significant skill shortages that have developed in sections of our economy, it is important to encourage Australians to participate in the workplace for as long as possible.
Administration overload
I am also conscious of the great pressure which fund administration systems, IT hardware and software have been under due to a number of recent policy changes, such as Better Super and AML for example.
I can assure you this is being taken into account in developing new policy and in considering other issues such as the automatic 'rolling together' of lost accounts.
Hopefully further changes can be made that further simplify the administration, operation and decision making for the entire superannuation system.
There are a number of policy areas in superannuation that are currently being considered. These include:
- tax free lump sums for the terminally ill;
- first home saver accounts;
- maintaining super as an allowable matter in industrial awards;
- simplification of product disclosure documents;
- the level of lost superannuation; and
- a clearing house facility for employer contributions.
Today, I wish to cover some of these issues as well as the governance of SMSFs.
Tax Free Superannuation Lump Sums for Terminally Ill
On 13 February 2008 the Government introduced legislation into the Parliament to make superannuation lump sum payments tax free when paid to persons suffering from a terminal medical condition. This measure will assist in relieving financial stress which terminally ill persons and their families may suffer due to their situation.
After coming to power, the Government reviewed this measure first announced by the previous Government and in response to concerns from some people who would have missed out, backdated the start date from 12 September 2007 to 1 July 2007. This is simpler and fairer for those affected.
Simplification of Product Disclosure Statements and intra product advice
It is important to me that investors have access to, and understand, the relevant information with which to make decisions about their superannuation. A major issue is the quality and length of disclosure documents. With my new responsibilities as Minister, I am enthusiastic about starting to fix this problem and I would like to see industry providers committed to producing simple, standard and most importantly, readable financial services disclosure documents.
The Minister for Finance and Deregulation, the Hon Lindsay Tanner MP, and I have set up a tripartite Financial Services Working Group comprised of Treasury, the Department of Finance and Deregulation and Australian Securities and Investments Commission (ASIC) officials. The Working Group will examine disclosure documents in a staged process to facilitate short, simple and readable documents to better enable consumers to understand and compare products. This will assist consumers in making important decisions about their financial futures.
The Working Group will also examine the issue of “within product” or “intra-product” advice in regard to superannuation products. The Working Group will identify the obstacles to providing this advice, with a view to improving access to such advice for all Australians.
The Working Group will be conducting robust research and where necessary consumer testing to develop solutions that get to the heart of the problems identified. I expect the Working Group will seek broad involvement as part of its consultation with all stakeholders to deliver the best outcomes.
Advice which assists members to make informed decisions about their significant investment in a superannuation fund is of paramount importance. It is my aim to assist in accessing that advice. In particular, once a member has made a decision with regard to the superannuation fund they are informed and comfortable with, I consider it important that their investment in that fund works in the best possible way for them.
Lost Superannuation
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, is intended to assist individual members to identify their superannuation and consolidate their accounts.
Lost accounts represent approximately one in five of all superannuation accounts, with an average of one lost account for every two Australian workers. Previous attempts to address this issue in the system have failed.
The Government is carefully examining appropriate steps to rationalise the register. I have expressed a preference for the option of reuniting Australians with lost accounts by introducing an automatic consolidation system, using Tax File Numbers, into the current or most recently active account, with an opt out provision.
Unfortunately, time does not permit me to outline in detail all of the other areas of important work underway that I listed earlier.
Self managed superannuation funds
Now I will turn to SMSF governance issues and areas of concern. On 14 February 2008, I announced that consultation had commenced with a range of industry organisations and practitioners about a range of matters of relevance to SMSFs.
The Government is concerned where individuals are subject to aggressive marketing, and may be persuaded to establish a SMSF without being aware of their role and responsibilities, and without appreciating the costs involved. This concern is not directed at any particular segment providing advice to the SMSF market.
Growth of SMSFs
In 1995 there were around 97,000 SMSFs (technically 'excluded funds' at the time). When the Australian Taxation Office (ATO) took over SMSF regulation in 1999 there were 187,000 SMSFs. By December 2007 there were over 370,000 SMSFs.
The SMSF sector holds around $300 billion of the total $1.2 trillion in assets.
Possible reasons for this growth include: a desire for control by the member of their superannuation, especially in regard to a demand for a wider range of investments and saving money on fees; dissatisfaction with larger fund performance; and perceptions about the lower cost of SMSFs compared to other superannuation vehicles. A further reason for the growth in SMSF accounts could be advice given by accountants and financial advisers favouring SMSFs.
Trustee responsibilities and knowledge
The current registration process for SMSFs involves trustees completing a form where they elect to be registered and then submitting that form to the ATO.
Trustees must also ensure that the superannuation fund operates strictly in accordance with the trust deed and statutory requirements. Trustees should possess relevant investment skills and expertise and be aware of the SISA prudential requirements relating to investments.
In a recent survey, the ATO found that 21 per cent of participating trustees had a 'low to medium' or 'low' knowledge of their obligations. This suggests a need for further education for trustees.
From the same survey, the ATO also found that over 30 per cent of new trustees could not provide an explanation of the sole purpose test, and more than 15 per cent did not have an investment strategy.
Additionally, 25 per cent of trustees were unaware of the restrictions on the types of assets that can be acquired from related parties of the SMSF and approximately two-thirds of new trustees could not specify the limit on the level of in-house assets within the SMSF.
This information will help us identify risks in the population. I note 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.
I am aware that some industry organisations are putting greater emphasis on training for their members. Some are introducing mandatory requirements for ongoing education.
I welcome these developments and would be interested in your views as to whether SMSF trustees would benefit from a broadening of these processes to include what they need to know to undertake their role in a complete and responsible fashion.
In addition to tests such as the sole purpose test, there are a number of legislative rules which detail key areas of responsibility for an SMSF trustee. These rules include having an investment strategy and making and maintaining investments on an arm's length basis.
The latest data shows a significant overweighting of SMSF investments in cash, debt, securities and term deposits, many in excess of 35% of their total assets, well beyond the norm for a long term diversified investment strategy. Generally it is funds with a balance of less than $200,000 that show this characteristic.
Against this background, are the current investment rules sufficient to address the increasingly sophisticated financial investment instruments being marketed to SMSFs?
The recent debate concerning the use of instalment warrants shows that sophisticated financial investment instruments are increasingly being marketed to SMSFs. I also note that SMSFs had a high exposure to Westpoint, which raises risk and diversification issues.
It is the responsibility of the Government to monitor this area and we will continue to keep a close watch on the marketing of any sophisticated products to SMSFs.
Early Access Scams
Superannuation is generally 'preserved' in a fund or retirement savings account until retirement from the workforce after age 55. Schemes exist that seek to encourage people experiencing financial difficulties to access their superannuation early. These schemes may be promoted by advertising or by word of mouth.
One of the main integrity concerns with SMSFs is the risk that benefits may be accessed prior to preservation age through financial arrangements purporting to be an SMSF. The ATO advises that as the total value of assets in SMSFs grows, the likelihood of SMSFs being targets of scams increases. These scams include promoters of dubious investment schemes and promoters of illegal early release schemes.
The ATO is working closely with ASIC to discourage unlicensed or unscrupulous advice and scams and to stop rogue promoters. Such rogue promoters who are detected by the ATO are referred to ASIC and may face prosecution. Promoters of such arrangements often target people whose superannuation balances are comparatively small, who are often under financial pressure or whose lack of experience or financial sophistication makes them easy prey. Promoters who are convicted face severe penalties and possible imprisonment.
Penalties
The current penalty regime for SMSFs appears to limit the ATO options for addressing non-compliance.
Generally, the application of penalties for non-complying trustee behaviour comprises the imposition of civil and criminal penalties. Penalties of this nature can be costly, time-consuming and harsh.
With this in mind, should our penalty arrangements be better targeted to achieve the intended results? It should be noted that trustees are already jointly and severally liable but tax concessions apply only if they comply with their superannuation law obligations.
The ATO has advised me that they will continue to provide advice to support professionals and trustees through the non-binding public rulings regime.
Role of advisers, auditors and disclosure
Currently, accountants are exempt from licensing under the Financial Services Reform Act 2001 (the FSR Act) in order to provide advice to their clients on a decision to acquire or dispose of an interest in an SMSF. The FSR Act provisions are found in the Corporations Act 2001 (Corporations Act).
This exemption began in 2004, when the previous government inserted a new Corporations Regulation, allowing recognised accountants to advise their clients on setting up an SMSF without requiring accountants to be licensed under the financial services reform licensing requirements.
The regulation provides a carve-out from the licensing requirements that apply to everyone else if they want to advise on the establishment of an SMSF. Unsurprisingly, major industry bodies opposed this.
So currently we have a situation where accountants can advise on setting up SMSFs, which is half the equation. However, unlicensed accountants should not provide advice on the relative merits of establishing an SMSF compared with other products, nor can they advise the trustees of the SMSF on what to invest in. This is the other, important, half of the equation.
A related issue concerns disclosure in relation to SMSFs. Currently, there are situations where prospective SMSF trustees are not receiving the information that they need to make a well-informed decision on whether to set up an SMSF.
The ATO estimate that there are approximately 14,000 auditors actively involved with SMSFs. With over 370,000 funds it is clearly impossible for the ATO to audit all funds on a regular basis.
Auditors play a crucial role in the regulation of industry, particularly with the provision of Auditor Contravention Reports to the ATO. Yet approximately 63 per cent audit 10 funds or less per annum.
Fees and Charges
Many new SMSF trustees say that they believe running their own fund enables costs to be minimised, with the result that funds are more efficiently managed. Costs will be incurred for the establishment of the fund as well as the ongoing administration and operation of the fund. However, arguably those who wish to enter into SMSF arrangements may not be fully aware of the fees and costs incurred by an SMSF.
ASIC has been drawing attention to this issue through the FIDO website by encouraging people looking to establish their own SMSF to consider whether they will be contributing sufficient assets to produce a better result than a suitable low cost alternative fund.
As ASIC points out on its website, and has emphasised in Senate Committee hearings, the cost of setting up and complying with the rules generally means that you need $200,000 or more to put into your SMSF for it to be competitive. In comparing SMSF fees and costs by fund size, generally the smaller the asset size of the fund, the greater the ratio of operating expenses to total fund asset size.
The latest figures from ATO annual return data show that the ratio of operating expenses to total assets:
- is 10.51% for fund with assets of up to $50,000, and
- ranges from 3.55% to 2.63% for funds in asset ranges between $50,000 to $200,000.
This ratio drops to 2.26% for funds with assets between $200,000 and $500,000.
Very worryingly, the trend from 2004 to 2006 is for an increase in the ratio of expenses across these levels, and this data is likely to understate the actual costs as it does not include all expenses, such as some non-deductible fund establishment costs.
ATO data also shows that approximately 30 per cent of SMSFs currently have less than $200,000 in assets.
The ATO states in its booklet 'DIY Super - It's your money … but not yet' that funds with low asset values can have diminished potential to generate returns due to their operational costs. Funds with low asset values may not have a sufficiently diversified portfolio of assets, subjecting members' benefits to increased risk. The ATO also advises that funds with low asset values are sometimes used for early access.
It is important that those recommending an SMSF provide effective disclosure, to ensure that those who wish to establish an SMSF are familiar with details such as the financial and time burdens and the amount of money they need in the fund to make it viable.
Conclusion
Some of the issues I have covered today, in indicating the Government's priorities over the coming year, will primarily impact on the broader superannuation system.
Whilst on all the evidence available the majority of SMSFs operate well there is a significant minority that may not.
When examining the total superannuation system and applying the principles outlined earlier to current practices and evidence, they are not just focused on the SMSF sector. To varying degrees there are matters that require examination across all sectors; industry, corporate, retail and the public sector.
I would be pleased to receive representations and suggestions from both individuals and representative organisations on any of the issues that I have raised today.