16 December 2008

Launch of Australia Institute - Industry Super Network Paper

Note

'Choosing  not to Choose'

Good morning.

It is a pleasure to speak with you today at the launch of 'Choosing Not to Choose". This discussion paper, a joint initiative of The Australia Institute and the Industry Superannuation Network, deals with one of the most important features of our superannuation system.

I'm talking, of course, about default superannuation funds. I have had a fair bit to say this year about default super funds already.

May I congratulate the Industry Super Network — not only for its efforts in relation to default super funds, but also for its important work as an advocate for superannuation in the wider community.

The Australia Institute has undertaken an important public policy debating role in producing this paper with the Industry Superannuation Network and its efforts are appreciated.

We are all well aware that the world is facing the most significant upheaval in global financial markets since the Great Depression.

This has sparked increased interest from superannuation fund members about how their fund has been performing.

In these challenging times, it is more important than ever to ensure that members of the public are kept informed about what is happening to their superannuation. And to ensure that they have the knowledge and confidence to make informed decisions.

Lost Super

One of my most important policy priorities this year has been to address the issue of lost superannuation. There are 6.4 million lost accounts totalling $12.9 billion Australia-wide. The total number of lost member accounts rose by 315,325 or 5.2 per cent between 2006/07 and 2007/08.

The Rudd Labor Government recently released a consultation paper canvassing the options for its promised superannuation clearinghouse for small business - to help small businesses handle payments to multiple super funds on behalf of their employees easily and cost effectively.

As part of the same project, the Government canvassed the possibility of an auto roll mechanism using tax file numbers to re-unite people with their lost superannuation.

I am keen to hear from the industry for their ideas on how this might work.

Lost superannuation is an area where a default solution is an obvious solution for the many individuals who don't make an active choice.

I am also pleased to acknowledge a discussion paper produced by the Association of Superannuation Funds of Australia (ASFA) on modernising superannuation fund administration.

In fact, I am pleased to acknowledge the efforts of many other industry organisations and providers for their views and inputs over the past 6 months or so. These efforts are all appreciated.

Importance of default funds

Default superannuation funds are an essential element in a mandatory superannuation system. They are vital for providing a safe, high-quality mechanism for people who fail to make active, informed choices.

The long-term performance of these funds is critical. But unfortunately, not all default superannuation funds make the grade.

It is of great concern to me that the long-term underperformance of default funds occurs across all sectors of the superannuation industry including industry, corporate and public sector funds.

This is of concern because the proportion of employees who have their superannuation contributions paid into a default superannuation fund remains very high — up to 90 per cent.

Lower fund returns produce lower real retirement lump sums. Even a small difference in the performance of a superannuation fund over an employee's working life can have a considerable impact on their retirement income.

This is why I have been encouraging both employer and employee representatives to ensure that their default superannuation fund arrangements give Australian workers a fair deal.

Award modernisation and default funds

Earlier this year, I made a submission to the Australian Industrial Relations Commission on the inclusion of default superannuation funds in awards. I urged the Commission to ask all parties involved to consider the performance of the superannuation fund specified in their award when conducting consultations for the award modernisation process.

The award modernisation process is a valuable opportunity to consider the appropriateness of the default superannuation funds specified in awards. The Commission released a statement in September this year in which it indicated that it is prepared to accept a fund, or funds, as default superannuation funds in awards agreed to by the parties, provided that the fund meets the relevant legislative requirements.

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.

Publication of APRA data

The Australian Prudential Regulation Authority plays an important role in meeting the need for high-quality information to increase our understanding of the industry, and help us make informed decisions about superannuation.

As the prudential regulator, APRA is well-placed to collect and publish the super fund performance data it gathers from fund income statements and balance sheets made public to members each year.

APRA publications currently aggregate this data across the industry, and across the public sector, retail and corporate fund sectors.

Clearly, returns for industry sectors do not reflect individual fund performance. For this reason, APRA data does not provide any indication of the actual performance of a particular fund.

With the encouragement of the Government, APRA is consulting on how it could report disaggregated long-term performance and volatility data for individual funds. APRA recently released a consultation paper on this issue. Submissions can be made before the consultation period ends on 23 January 2009.

This will not duplicate the work of industry research houses, which currently report at the individual fund member investment level.

APRA is currently working with super funds to refine its data on direct and indirect expenses. It plans to include expense data in future publications.

By publishing this information, APRA will serve, not only the public interest, but also the interests of all industry participants. Making this data public will help to ensure a fully-informed debate on medium-to-long-term fund performance and related issues.

Ensuring that good quality, long-term comparable data is available on the performance of superannuation funds will assist both employer and employee groups to make well-informed decisions about the selection of default funds for employees.

The Australia Institute/Industry Super Network paper

It's fair to say the Government considers policy inputs from a wide range of sources but is always grateful for contributions to a debate on a particular issue. In that vein, the discussion paper authors Josh Fear and Geraldine Pace make some important points in the debate about default funds:

  • Because superannuation is compulsory, it should not come as a great surprise that most fund members do not actively 'choose" a super fund. However, these members are entitled to be in a default fund that will deliver solid long-term returns.
  • The paper also repeats a point I have been making consistently this year - namely that the average fee across the super system has not fallen as assets have grown, remaining at around 1.25 per cent of funds under management across the super system.

These costs include the level of commissions on compulsory super assets.

Conclusion

Ladies and gentlemen, in conclusion, I would like to emphasise that issues surrounding the selection of default superannuation funds warrant careful consideration for the reasons I have outlined today.

In fact, the idea of having default solutions in a compulsory superannuation system warrant careful consideration.

A book on my Christmas reading list is called 'Nudge' by Cass Sunstein and economist Richard Thaler. This is about the new science of choice architecture, that is, "nudging" people in beneficial directions without restricting freedom of choice. One example of this is in providing default solutions.

I would like to re-state the Government's ongoing commitment to ensure that our super system is safe, stable and efficient.

This is all the more important in these turbulent times. Thank you once again for the opportunity to talk with you today.