Thank you for the opportunity to address the Law Councils 2009 Superannuation Lawyers Conference. Today I will be speaking about the Federal Government’s priorities for superannuation, and the direction in which we are headed to ensure the system continues to deliver for retirees and the wider community going forward.
Financial market volatility and Government’s response
We are all well aware that the world is facing a global recession.
I am 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 of $22.5 billion is now forecast for 2008-09, 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 quickly and decisively to support jobs and invest in nation building.
That is 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 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.
With so much at stake, it is paramount that the Government acts swiftly. In fact, the IMF recently urged governments around the world to get on with implementing their stimulus packages.
And that’s exactly what the Rudd Government is doing.
We are rolling up our sleeves, and getting on with the job of supporting households and businesses — and above all, supporting jobs.
We are providing over $28 billion worth of much-needed infrastructure support in the form of upgrading and repairing school buildings, constructing new homes, and providing free ceiling insulation.
From 11 March this year, Centrelink will pay the first round of about $12 billion in one-off cash bonuses to low and middle-income families and workers to further stimulate the economy. The second wave, the tax bonus for working Australians, will be delivered from 6 April.
And I can assure you that, just as we are deploying all our resources to provide the practical help that the fire- and flood‑ravaged communities in Victoria and Queensland so desperately need, the Government will continue to take whatever steps are necessary to support growth and jobs during these testing times.
The credit crisis and the superannuation sector
No aspect of the nation’s economy is immune from this crisis. The global financial downturn has had a significant and immediate impact on superannuation fund balances.
Despite this, our superannuation system remains robust, sufficiently liquid, and very well-regulated.
The latest available data from the Australian Prudential Regulation Authority indicates that, as at June 2008, superannuation fund assets totalled $1.17 trillion. This is more than double the asset figure of five years ago.
While we cannot shy away from the effects of the recent financial market turbulence, we must remember that 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. In the last 35 years, it has delivered excellent real returns of close to four per cent over and 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.
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.
Minimum drawdown requirements
The Government is conscious of the impacts of current events on all parts of the Australian population, and throughout this global financial crisis, our approach has been to plan ahead, to examine unfolding events, to act early, and to act decisively.
The Government recognises, for example, that the significant downturn in global financial markets has had a negative effect on retirees’ superannuation capital in account-based pension products. As a result, the current value of pension account balances is in many cases much lower than when the minimum annual payment amount was calculated on 1 July 2008.
Many retirees with account-based pensions have expressed concerns that meeting the required minimum draw down amount for 2008‑09 will mean having to sell assets, and realise losses, in a depressed market.
In response to these concerns, I announced, along with the Treasurer, that the Government will suspend the minimum draw down requirement for account-based pensions for the equivalent of the second half of 2008‑09. This will occur through a 50 per cent reduction in the minimum payment amounts for 2008‑09. Where the minimum has already been taken in 2008-09 this means that no more need to be taken until 30 June 2010 given the annual nature of the drawdown.
This reduction will apply to account‑based, allocated and market‑linked (term allocated) annuities and pensions.
The Government’s priorities
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.
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, or lower investment performance, have a direct bearing on final retirement income. Fees, or underperformance, at two per cent of a member’s account — rather than one per cent — could, over 30 years, reduce their final return by up to 20 per cent.
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.
Default funds and award modernisation
With this in mind, the Government is currently engaged in a range of initiatives designed to enhance the operation of the sector. Key among these initiatives is an examination of the role and performance of default funds and awards.
Default funds are an essential element in a mandatory superannuation system. They are vital for providing a safe, high‑quality default mechanism for people who fail to make active, informed choices.
On 19 December 2008, the Australian Industrial Relations Commission announced 17 new awards for priority industries and occupations. Default superannuation funds were specified in 14 of these awards.
The Commission will also allow a default fund to be any fund to which the employer was making contributions for the benefit of employees on 12 September 2008. These arrangements take effect from January 2010.
This approach maintains the status quo and minimises inconvenience for employers. The decision does not affect an employee’s right to choose the fund to which their superannuation is paid.
I consider that I have a duty of care to ensure there are safe, high‑quality default mechanisms for people who fail to make an active, informed choice. Therefore, as the Commission turns its attention to the next stage of the process, I continue to urge parties to awards to consider the performance of the superannuation fund specified in their award. To assist parties to the awards in choosing default funds, APRA will be releasing data in June 2009 on the long‑term performance of superannuation funds.
Optional CGT roll-over for superannuation funds
In the current financial climate, it is also important that potential barriers to a robust and efficient superannuation industry are minimised. Industry consolidation can assist by improving economies of scale and enabling the more efficient provision of services to members.
On 23 December 2008, I announced that the Government will provide an optional capital gains tax roll-over for capital losses that are realised from a complying superannuation fund’s merger with a large APRA-regulated superannuation fund.
This limited roll‑over will assist superannuation funds in a net capital loss position seeking to merge with other funds by preserving the capital gains tax offsetting value of the net capital loss.
I subsequently released a consultation paper providing further details about this roll‑over and invited submissions from industry and other stakeholders on the proposal’s design. I welcome industry’s participation in this consultation. Treasury received a number of submissions from industry and the Government is now carefully considering issues raised in these submissions.
The Government will also release an exposure draft of the legislation for public consultation prior to its introduction into Parliament. I encourage you to participate in this further consultation.
APRA guidelines for ESG investment factors
Despite the immediate impact of the global financial crisis, it is important that we do not lose sight of other factors affecting investments.
We are all well aware of increasing community concern about environmental and sustainability issues.
There is a growing realisation within the industry that a range of environmental, social and governance — or ESG — issues pose core investment risks.
From climate change and other environmental risks to human capital management, human rights and health and safety, local community issues to supply chains and brand reputation, a range of risks have the potential to impact heavily on the long-term viability of investments and are therefore fundamentally linked to shareholder returns.
Those companies which recognise and respond to ESG factors can be better prepared for both the risks and opportunities that the future will bring.
Through a comprehensive, evidence-based review of extra-financial risks, sustainable investment aims to ultimately improve returns and lower investment risk.
This is of particular relevance to the superannuation industry. By its very nature, superannuation is a long-term investment. Superannuation funds, perhaps more than any other group of investors, are well-placed to take advantage of the long-term opportunities, and are most exposed to long-term risks.
I understand that perceptions about the legal environment have made superannuation trustees hesitant to expressly incorporate ESG factors for investment strategies for which they have been responsible.
But in my view, the consideration of ESG factors is so critical to the long-term financial success of superannuation assets, it is an important part of fiduciary responsibilities. And as such, I believe that ESG factors should be incorporated into the investment decision-making process of superannuation trustees.
For this reason, I recently wrote to APRA, requesting that it review its guidance to superannuation funds to take greater account of ESG issues in their investment practices. I expect APRA will consult closely with industry in reviewing its investment guidelines.
The Henry Tax Review
Looking further ahead, the Government understands the need for a tax and transfer payments system that is simpler, rewards hard work and provides security for retirees.
Long-term reform is vital to achieving this ambitious goal and for positioning Australia to deal with the challenges it faces into the future. 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.
- First of all, 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 also be acceptable to individuals, to the extent 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, allowing individuals to make decisions which are in their best interests.
- Finally, the system should also 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?; and
- What should be the role of the age pension and means testing in the future, and what impact does this have on long term sustainability?
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 the superannuation sector has undergone a lot of change 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.
Today I have outlined the Government’s priorities for superannuation, and some of the initiatives we are working on to enhance the operation of the sector.
The Government is committed to ensuring that our superannuation system is safe, stable and efficient. All the more so given recent events in the global financial system.
Given the Government’s priorities towards superannuation, we will continue to progress reforms where necessary, and consult along the way.