JOURNALIST:
Senator, were you surprised by the comments of President Bush prior to the G20 meeting when he said "the crisis was not a failure of the free market system?" and secondly once the dust settles on the global financial crisis, does the government intend to fulfil a long-term objective of increasing employers' compulsory super contributions given the damage the crisis has done to super accounts?
MINISTER SHERRY:
Let me start with the second issue first. This government has given no commitment, in fact we have specifically ruled out increasing the employer 9% SG. We gave an election commitment to that effect and it stands and will stand despite the current circumstances with the negative rates of return.
In respect to the comments by President Bush I saw some of them prior to the G20 meeting. I think in the current context of the issues exposed by the world financial crisis, particularly the problems we've seen in the States, the effective co-ordination across a range of areas around national and international regulation and supervision, the issues being addressed in respect of credit rating agencies, I think inevitably there will be significant changes to the structure and nature of regulation in the States.
I think it's far too early to know how that will end up having to pass through Congress but inevitably I think there will be much greater international co-operation across the relevant regulatory agencies. I think it is evitable if you look at what happened with US sub prime, the transmission of financial instruments instantly around the world, highly complex financial instruments, I think it is inevitable as we've done in Australia, that there will be a move towards national regulation. We'll have that in Australia by the end of next year but I note that in Europe, Canada and the US they don't have national regulation of their financial markets. It's still significantly dispersed amongst their states or provinces and in the European case of course, European and national law.
So I think there is going to be an inevitable shift towards national regulation of financial markets and I think it's important that that occur and secondly, I think inevitably there will be a shift towards greater international co-ordination. I think formal international regulation is still a long way away but I think inevitably it's the way the world is headed.
Financial services – there is no boundary. Effectively there is no boundary. Electronic transmission of highly complex investment instruments has well illustrated what has occurred in the modern world.
JOURNALIST:
Just a question on the margin lending issue you forwarded to CAMAC. In your speech you suggested there might be some downside to disclosing the trigger price because it is a target for short sellers but I'm just wondering whether you can flesh out that idea because I'm not quite sure what the point would be if there wasn't full disclosure to investors of what the trigger price was for the margin loan. For instance, directors when they buy or sell shares disclose the price at which they are doing that. I also wonder whether there is scope in that inquiry to look at broader issues around a director's finances. Their debts may not only be margin loans, there may be other obligations that they are under that could have an affect on whether they have to sell shares. Is there scope for the inquiry to look at that? And while I'm at it, executive remuneration, Kevin Rudd in this venue here identified that as an issue. Have you had any advice back from APRA on how that can be controlled in financial services and what's the timeframe on acting on that?
MINISTER SHERRY:
Well the last issue, executive remuneration, no I haven't received any advice on that matter yet. APRA is still finalising its deliberations. The second issue, I actually think you have a good point. Other forms of remuneration, I think maybe are worth considering so I'll certainly take the suggestion and I'll have a look at that issue in the context of other forms of financial activity.
Margin lending – look it's too early. One of the reasons I've referred the issue is that there's been some controversy around the trigger point activity and the impact that has had on a number of financial institutions, particularly earlier this year. The purpose for referring the matter to CAMAC is to get some greater clarity around whether we can better supervise and disclose this issue and the activity that occurs. I mean that will be CAMAC's responsibility to look at all the circumstances and whether or not we need to change some of the practices that currently exist. Certainly margin lending has caused some difficulties for some entities as we saw earlier this year, much broader difficulties for the entity as a whole as distinct from the particular problems it caused for the individuals. Unfortunately perhaps, the individuals didn't quite understand the impacts on themselves as individuals, and perhaps they didn't understand what the impact would be on the corporate entity to which they had some significant responsibility. So CAMAC can resolve that issue and any areas that need possible reform.
JOURNALIST:
Australians have watched their superannuation returns tumble in recent times and I guess that things are going to be bad for the next year or so, I'm just wondering if the government or the Treasury has done any sort of modelling or calculations to work out how much extra this is going to cost the country in terms of pension payments?
And the other question that I was going to ask, just on the review that you've announced today, obviously margin lending and rumourtrage are issues that have been around for at least the last year, and this is something that you've referred to a six month review and there has been some criticism that the short selling review is only going to get a few days. I'm just wondering if you can distinguish why the one will take six months, and the other inquiry's only going to get a few days?
MINISTER SHERRY:
In fact, the short selling legislation that was released last week had two inquiries. I announced an initial exposure draft about four or five weeks ago and that had followed a three month consultation, so that was inquiry one.
And the second consultation over that four or five week period between the initial exposure draft and then the final piece of legislation. That was a second inquiry. Now the Liberal opposition want to refer it off to a third inquiry. Well, that's their call, but I make the point that they have been critical of us having inquiries, that they want a third one in respect to this issue. I think the issues around short selling in our community have been very well debated and analysed over the last six months. We've had the two inquiries, but I think what's important is we've come to a conclusion and we proposed to take action.
It's perfectly legitimate to have an inquiry provided that there's an outcome. And there is an outcome in this case. In respect to the superannuation negative returns, rate of returns, and the impact on pension payments I referred in my speech and I think I've done this, not just in the last year because of negative rates of return, but consistently in the last 20 years in my public policy comments.
I've always referred to the long term nature of superannuation fund returns. 5 percent real, and I do so on the basis of experience but that's also the way Treasury does it. When Treasury examines the long-term superannuation growth in the context of the intergenerational report, they use a real rate of return of an average of 5 percent. That's the assumption they make, and they are spot on. They are spot on. Because that is what history has shown us is the most reliable and accurate figure. Therefore, as Treasury, in my view quite rightly, has used that consistent figure of a long term average of plus 5 percent real, that is the figure they would include in their intergenerational forecast for example. They don't vary their forecasts to include minus 6.4 per cent in one financial year and a plus 15 percent in another financial year. They have been consistent and they've been been consistently right in using an accurate figure of 5 percent. Therefore, given that's the basis for long term forecasting, in terms of the long term forecast on pension payments as a consequence of market fluctuations in superannuation in respect to that issue, there would be no impact.
JOURNALIST:
You've joined us to talk about the long-term view and I think that's terrific, as I've got a long term question. There's an entire self serving industry forever telling us that compulsory contributions of 9 percent aren't enough to enable us to support ourselves properly in retirement. Are they right?
MINISTER SHERRY:
In part that goes to the earlier question, about the adequacy of 9 percent compulsory contributions. Firstly I would make the point that the Henry Tax Review will be looking at the issue of retirement incomes. Excluded from that is the Better Super, over 60's tax free super.
But as is well known the priority is an examination of the level of age pension. Now this is a very complex set of issues and I'm not saying that because I want to, I can give you a very lengthy answer about this issue. Retirement income has two parts, two elements to it. It has the basic state pension which is a flat payment, to which for most Australians we have now added an income-related compulsory superannuation and obviously some make voluntary contributions as well. So mostly it's two parts and in terms of the adequacy of compulsory super contributions, whether they are adequate or not, the first issue that is going to have to be settled now is the level of the age pension. Because you can't come to a conclusion about the adequacy of 9 percent super until you've come to a conclusion about the adequacy of the aged pension and Ken Henry's review will come up with some recommendations to Government on that early in the New Year.
But not withstanding that, I'm a great one for doing this thoroughly. Lets look at what the actuarial position is, what is it that an Australian needs to live on in retirement comfortably? Now actuaries say to me that approximately two thirds of pre-retirement income, at age 65. That's what you need, approximately two thirds. And that's premised on most Australian's owning their own home. That's why it's so important to deal with the issue of the age pension. Now the other complexity is that the aged pension is a flat payment, so as your income is higher, as your income goes up, it clearly is less proportionally. It's of greater value to a low income earner than a high income earner. Therefore, in any theoretical actuarial modelling, the level of super contributions over and above the age pension would need to increase, as a percentage depending on the income you earn. It gets more complex. You've then got to add the difficulty of time in the system. And in the defined contribution system as many are who are currently retiring and you've only had 9 percent contributions since July 2002, it actually hasn't made a lot of difference to you. If you're in the system for 35 years it makes a massive difference. So, when you look at all of those factors, it's a very complex conclusion. I'll be making a submission to the Henry Tax Review, because he's been the individual with others who have been tasked with this job. It's a complex issue. And that's why I'm not confident that the 15 percent across the board solution that Paul Keating has advocated very publicly for many years is the correct solution. I think that we need to look in a very detailed way at what is the right level of contribution; and the first base is to settle the issues around the level of the age pension. That's first priority.
JOURNALIST:
My question is about your efforts to stamp out rumourtrage. You mentioned some simply shocking examples, could you share those with us and also for those of us in this industry know many rumours can be difficult to prove or disprove, how do you do that? And also you said you would be making a submission to the Henry Review. Are you the only Treasury Minister who'll do that and will you make your submission public?
MINISTER SHERRY:
Well I don't know what my colleagues will do, and whether or not the submissions are to be made public. Ken Henry can make that call.
On the issue of rumourtrage, you're right, it isn't easy to prove rumours. But as to specific instances, some of these issues may have some follow-on consequences, may have some follow-on consequences so I don't want to refer to particular stories that have been relayed directly to me by company executives and company secretaries. Can I just say this, in that period after Lehman Brothers, when we saw enormous market turmoil, great uncertainty. The level of irresponsible stories, rumours etc that were floating around in the Australian markets significantly increased. And look in all the material that was given to me and ultimately of course, ASIC have the regulatory responsibility for dealing with these matters. But in all the material given to me, at least some of it was deliberate targeting of sound businesses. There has been a lot of debate about it, about some entities that have been subject to short selling for example that have since ceased business or are in the process of winding up. But when you have a position when sound businesses are targeted and I would accept by a very small number of hedge funds, you have to act, you have to act in the national interest. And we faced a situation in that week, I think of September 28th where that level of activity significantly increased and could have threatened sound businesses given the short selling activity that was going on.
And the other factor of course as most other countries around the world were shutting their doors to short selling, we had to act as well. If we'd left our door open, as some had argued, again I don't think that would've been in the national interest and I think we could've seen a truly very serious situation on that Monday after the 28th when the markets reopened. And frankly I wouldn't have wanted to have waited around to gather the evidence as some have continued to argue to this day as to what would have happened. If covered short selling and naked short selling hadn't been temporarily banned. You're right, these aren't easy issues to investigate and prove. And in normal market circumstances, frankly most of the stories, people would have just shrugged their shoulders and laughed or think it's just nonsense. We didn't face those circumstances in that week and we've seen incredible volitity in the markets since January. Volatility the likes of we've never seen, even going back in 1987 when the markets dropped dramatically, we didn't see the ongoing volitity and the level of comment and rumour during that period. So, I think the decisions were taken in the best interests of the country and the national interest. I accept that it is not easy to track down and prosecute offenders in this area but we're going to give it our best effort and ASIC will carry that responsibility and I do think we need to do more in this area. Because some of the stories aside from being personally very distressing for those individuals, also have the potential to undermine a sound business and whilst in terms of markets and what happens on the markets, and behaviour and some of the entities that we've seen disappear in the last 6 months, fair call. When it gets to the point where there are sound businesses and it's not a fair call, I think government has a responsibility to act.
JOURNALIST:
Can I just take you off topic, Minister, but to a topic I also told you I have some expertise in. And that is gambling. Correct me if I'm wrong, but I'm told that –
MINISTER:
Is that really a shift from the market?
JOURNALIST:
Debatable. But I'm told that one of your first jobs was in a casino in Tasmania. As Opposition leader Kevin Rudd spoke of his concerns for about the costs of problem gambling and some of your cross bench Senate colleagues are keen to make some changes to tackle what they see as a scourge of problem gambling. Do you share those concerns that Mr Rudd voiced in Opposition and do you think the Federal Government can do anything, can act on this?
MINISTER:
Well you're right, my first four years of working life were at Wrest Point Hotel Casino, better give them a plug, it was a great place to work and I enjoyed the times. It was Australia's first casino. I was a night cashier and auditor, that's where I learnt to pour over figures and work out balances. I have to say at times the combination of gambling losses and alcohol and some of the other things you'd see were not particularly pleasant. Of course what was interesting in that era, Wrest Point didn't have poker machines it only had table gambling. It had a game of chance called ‘Lotto'. I might be sticking my neck out here, I don't like, personally I do not like machine gambling. I don't like it. I think it has serious detrimental impacts in society. Gambling is an accepted part of the social norm in Australian society, probably more so than any other society. But I do think there is an argument the more you expand the forms of gambling, surely there is some transfer of one area of gambling to another, but there is a social impact. And for that reason I have never been keen on poker machines in particular. And I have to say other than buying the odd raffle ticket at a local social function I learnt never to gamble as well. So, in that sense I can relate to some of these experiences. I find going into gambling parlours and seeing, you know early in the mornings, for example elderly people gambling. I find that particularly distressing. So, it's not my policy area, I hope the Government can do more about this. I don't suggest specific solutions but it's always an issue that despite my first four years of working life and earning a crust working at Wrest Point, its always deeply concerned me.
JOURNALIST:
We've had quite a few first year assessments already and I expect we are going to get a quite a few more over the next couple of days.
Bob Hawke was one this morning, with some advice for Kevin Rudd, basically saying he should let his Ministers a bit more rope. Do you agree with that and do you think Kevin Rudd has been overly controlling?
MINISTER:
In the 10 years that I have known Kevin, since he came into the Parliament, I don't think Kevin has changed in any sense. He is highly knowledgeable, wanting to learn more and very demanding of people - and I think justifiably - who advise him or communicate with him about anything. And I think that's a good thing. Particularly in the current circumstances that we face, that are very difficult economic circumstances, I think it is only right that we have a Prime Minister that is so keen on the detail and getting across every area of government policy. He is incredibly focused, I think his work ethic is very well known. I have never seen a leader of a political leader work as hard as he does and ask as many questions as he does and he's done the same with me on a very regular basis. I think that's a really great thing in a leader. Decisions are made. If you look at the last year and what decisions we've made around meeting our election commitments and in handling the various aspects of the financial crisis, I think it's all been handled very very well. I think in large part that's down to Kevin's attention to detail and his interest in policy and wanting to know all of the particular issues and the angles that are important. Not just in the circumstances of ‘normal' government if you like, but in the current extraordinary circumstances. I certainly have never found it personally difficult. In fact, I enjoy it. I enjoy discussing superannuation with him. We certainly discussed short selling and naked short selling and covered short selling. We've been up and down that one. For him to have the capacity to get across those issues and understand them, I think again it's great to have a leader that can do that in these circumstances.
JOURNALIST:
One of the compelling awarenesses which is upon us as we work our way through the Global financial Crisis and responses to it is that in the Australian domestic situation we were to a considerable extent advantaged by the level of our regulation going into the crisis. As you work your way through it now, as a Government, and as we look at the responses we have seen at the domestic level for major economies, China, the USA and responses across the EU, as we look at the institutional responses across G20 and we'll see APEC is coming this week and IMF. What's the predisposition that's emerging within the Government, you and your colleagues, about the level of regulation as we come out of this, will it need more? Was it about right? Or is it likely that we are going to need less?
MINISTER:
Well I think I used the terminology or the phrase, making a strong system stronger. And I note that it's not about the level of regulation it's about better regulation. And I think the best example I can give is the transfer of powers from the States and Territories to the Commonwealth. The remaining 20 percent of financial services regulation in this country is moving into single national regulation. Single standard regulation. Now on one argument that's an increase in the regulator power of the Commonwealth, but it's being transferred from the States and Territories to the Commonwealth, so it is an increase in the Commonwealth's regulatory oversight. But it's a transfer and in carrying out that transfer I would argue that there is an inherent simplicity. It's much better to have a single standard set of rules in financial services than have six states and territories trying to regulate in a national single economic financial services market. So, as I say, at first reading that's an increase in Commonwealth power and regulation, but effectively it's a transfer.
There's one other issue that I've long complained about which is the disclosure regime for financial services. The theory is that you protect and inform consumers by issuing them with very lengthy and Latin-like documents and they'll sit down in a rational way and read all this stuff and understand it and then make an informed decision. Well it hasn't worked.
I mean that's an example of an extraordinary level of regulation, if you like, that frankly has been largely I think a waste of time. Therefore, much of the focus in that area has been cutting down that documentation to a simple standard format and frankly I would much rather have people read and be able to understand the key features say, in financial services and the key decision and the key risks, than giving them everything in a 100 page document where there's little chance they will read and understand any of it.
So, I think that is another example of where you can have better regulation and supervision that is actually less rather than more, and is more meaningful to people. So that's what I mean by better regulation. Certainly the issue of covered short selling, there is an increase in regulation there. I think we need to have a realistic look at where there are gaps in our regulatory and supervisory roles, and there aren't many in Australia. I think I would argue very strongly that the regulators, APRA, ASIC, the ATO in the areas it has responsibility for, Treasury, I think they've done a very very good job.
You look at the issues that other countries are grappling with and what's happening there and I think we have to look at it in that context given the current circumstances. I think our regulators are doing a very very good job in these circumstances.
People say well maybe they should've done this and that a bit earlier, they could've stopped this and that. But if the regulators were doing a year ago what they are doing today, they would've had massive outcries and complaints about regulatory intrusion. So I think we've both got the rules and the structures pretty well right in Australia and at the regulators themselves. ASIC has completed a major internal overhaul at management level. They carried out, to their credit, their own internal, well they had an external assessment, and they've had a considerable overhaul of their management. And again I think that's part of a good regulatory system. You can self criticise, self analyse and take action so all in all I think its been a very good performance by the regulators in particular when you look at what hasn't happened in Australia. As distinct from what has happened internationally.
SCHOOL STUDENT:
Hi, I'm Luke from Mt Barker High school in South Australia, my question to you is, as a young adult attending school and working part time, can you recommend the best super fund for me to join?
MINISTER:
Thanks, Luke for the most perceptive question of the day! I could give you a recommendation, yes, but if I did so publicly I think it would fall in the category of specific advice which would be illegal. General advice, my advice to you frankly is, well I don't know where you work, that would probably determine the default fund I suspect. Have a good look at the fees, as a percentage of your contributions, and in your case I don't need to advise you, but you can think really really long term! You've got about another 40 years in the workforce and then probably by the time you get to retirement, you've probably got 40 years in retirement. You'll live for a century and it's that long term rate of return and you'll see other cycles I suspect. Thank you for the question.