I am pleased to give the opening address today at the Institute of Actuaries Superannuation Policy Forum. I acknowledge the important role that the Policy Forum provides as an opportunity to discuss superannuation and retirement income issues.
Adequacy and the age pension
Today's forum is largely directed at the issue of retirement income adequacy. Given that it is billed as a 'Super Policy Forum', and given the participants, I expect that it will concentrate on the effects that the superannuation system will have on retirement income adequacy.
But we should not forget that the primary pillar in Australia's 3 pillar retirement income system is the age pension.
The projections in the 2007 Intergenerational Report emphasize this. Chart C6 on page 112 of the Report showed that the main effect of the superannuation system will be the conversion of full‑rate pensioners to part-rate pensioners. It shows that between June 2007 and June 2047 the estimated proportions of people of age pension age who are full-raters is projected to decline from 55 to 36 per cent, for part-raters it will increase from 25 to 41 per cent and for non-pensioners the modest increase was from 20 to 23 per cent.
For people on median wages the typical Treasury projection is that the age pension will make up around half of retirement incomes in the longer term.
The Government is acutely aware that in the immediate future, the majority of seniors will be full-rate age and service pensioners who have not benefited significantly from the superannuation system.
Australia's Future Tax System Review
On 13 May 2008, the Government announced a comprehensive review of Australia's tax system to position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia's economic and social outcomes. The review will encompass Australian and state government taxes and interactions between the tax and transfer systems.
The adequacy of existing support for seniors and carers, and measures which could strengthen their financial security in the long‑term, will be considered as part of the review. The review will report its findings related to pensions to the Treasurer by the end of February 2009.
The announcement of the review is timely. This month marked the 100th anniversary of the introduction of the Invalid and Old-age Pensions Act, 1908, into the Australian Parliament by the Fisher Labor Government.
When first introduced the pension was the equivalent of 12 per cent of male total average weekly earnings (MTAWE). In his 1972 policy speech, Gough Whitlam committed the Labor Party to raise the basic pension rate to 25 per cent of MTAWE. He achieved this benchmark in 1974, and both the Hawke and Keating governments recommitted to this benchmark.
The referral of the pension design to a review of the tax and transfer system will lead to consideration of the age pension in a broader context. The disposable income of the community is largely determined by wages, personal taxation, and means tested transfer payments.
In addition to the means tested age pension, the World Bank in 1994 recommended that the other two pillars of a retirement income system be a mandatory private defined contribution pension scheme and the opportunity for supplementary voluntary private savings for retirement.
I am sure that we will hear a lot more about the gaps, overlaps and incentive traps in our three pillar system over the course of the day.
Benefit projections and calculators
The Australian system is now overwhelmingly defined contribution in nature. One of the significant shortcomings of such an approach is that very few fund members have any idea what they are likely to end up with in savings at likely retirement age.
Developing a manner of providing reasonable benefit projections and superannuation calculators could significantly improve our system in a number of ways:
- it could provide an estimate of likely outcomes at critical ages – access age for superannuation and age pension; and
- greater focus and emphasis will be placed on the long-term rate of return and the elements that impact on it such as contribution levels and total fees and charges.
In the UK the issuing of projections has seen a significant increase in fund membership awareness of the need to increase contributions.
In Sweden – a compulsory defined contribution system – the annual report to members, known as the 'red envelope' has a projection to State pension access age as a prominent feature.
Benefit projections and superannuation calculators in Australia are very limited. One significant issue is consolidation of account information. APRA statistics show 30.5 million accounts while ATO data suggest around 11 million contributors in a two year period. There will therefore be a need to consolidate account information in order to deliver a meaningful projection.
Other difficulties include our devolved trustee administration model, and certain legal difficulties under FSR.
Whilst there are a number of complex design features, assumptions and legal parameters to consider, as other countries have shown, they are not insuperable to overcome.
I am very pleased with the April discussion paper issued by the Institute 'Outstanding Issues for Benefit Projections and Online Calculations'.
Recently, I have discussed with ASIC the need to commence work in this area in tandem with the intra-product advice project in superannuation.
Accordingly, I announce that it is my intention to see universal access to projections as part of the superannuation system. Universal access to projections would provide an indicative estimate, in current dollar values, of total savings to access ages for superannuation and age pension in a simple standard format.
Self managed superannuation funds (SMSF)
The Government is currently considering the submissions that have been provided on governance issues in SMSFs.
First, I note that in looking at governance issues, I am not focussed on the SMSF segment alone.
This simply forms part of my broader focus on governance.
The SMSF segment is a robust, important and mostly healthy area of the market.
However, results of a recent ATO survey indicate that whilst the majority of the sector is well managed, a significant minority may not be. This material through my speeches and media commentary is well known, so I won't repeat it here.
Trustee responsibilities and knowledge
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.
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.
Trustees in the Australian system are the key guardians and decision-makers in our compulsory system. It is critical that they have the knowledge to undertake their duties and responsibilities in accordance with current law.
Importance of default funds
The introduction of compulsory superannuation has had a significant and continuing impact on the levels of retirement income for all Australians.
The safety, stability and efficiency of the superannuation system remain a key priority for the Government. As part of that system, safe, high quality default mechanisms are desirable where individuals fail to make an active informed choice.
If an employee does not choose a superannuation fund, the employer contributes to the default fund that they have chosen.
The employer's default fund must comply with legislative requirements and provide a minimum level of insurance cover to members.
Further, the trustees of superannuation funds have both a legislative and fiduciary obligation to make investments in the best interests of members.
This framework protects employees by ensuring employers choose a superannuation fund managed by a licensed trustee that is subject to ongoing supervision by APRA.
Under the new Government's transitional arrangements, superannuation will once again become an allowable award matter. Superannuation as an allowable award condition will reduce disruption to awards in anticipation of award modernisation, and maintain the ability of awards to safeguard legally enforceable superannuation requirements, such as frequency of payments, minimum thresholds and the default fund system.
Conclusion
It is clear that the Labor Party is the party that delivers on retirement income policy. Labor introduced the age pension that has endured for 100 years – and it will last for the next 100 years and beyond.
Labor also had the vision to complement the age pension with a compulsory superannuation system some 16 years ago now. And as you have heard we have not finished in this important policy space. The review of Australia's Future Tax System (the Henry Commission) will also examine and report on options for reform in the retirement income policy arena. This work will give early priority to the needs of our current age pensioners.
I look forward to working with the Institute and other stakeholders on this important and timely work.