FRAN KELLY:
As the global financial crisis continues to wipe millions of dollars off the face of our superannuation values, the Federal Government has decided it's time to examine the efficiency of the $1 trillion compulsory super system.
Yesterday, it announced a wide-ranging inquiry, the first since Labor introduced the compulsory retirement savings system 21 years ago.
The inquiry will examine, the structure, operation and efficiency of superannuation at a time when the fees and commissions reaped by financial planners for giving investment advice have come under increased scrutiny.
Nick Sherry is the federal Minister for Superannuation and Corporate Law, and he joins us now. Minister, good morning.
NICK SHERRY:
Good morning, Fran; good morning to your listeners.
FRAN KELLY:
Nick Sherry, why have you decided to launch an inquiry now when the Henry tax review is yet to complete its examination of the tax treatment of super?
NICK SHERRY:
Well, both examinations will be conducted in parallel. But the Henry tax review is dealing with a different set of issues. It's looking at the adequacy, inputs, tax treatment of superannuation. This examination will look at the way the system is operating. Such things as the structure of the industry, decisions made by trustees, default funds. The majority of Australians default into a fund and into an investment.
And I think it's only natural in the current circumstances, in particular, where members see their accounts going backwards, in large part because of the global financial crisis, they focus on issues such as - well where is my money invested, what sort of job are the trustees doing and what sort of fees am I paying.
FRAN KELLY:
How would you characterise your objective here, because there are no public terms of reference yet. What is your key objective? Is it - or just about restoring public confidence in compulsory super?
NICK SHERRY:
Well, the key objective is what is in the best interests of the member. What maximises their retirement savings. That is the central principle of superannuation in a compulsory system, and that's the central principle that should be achieved, frankly, in any retirement system.
FRAN KELLY:
And, in terms of that, what maximises their retirement savings, are you zeroing in on the fees and commissions reaped by the army of financial planners, because that is one area that will be scrutinised, we know that, and it is one area that it's also known that you are a little wary of, that you've been warning for some time that you're a little unimpressed with some of the high level of fees and commissions charged.
NICK SHERRY:
Well, I'm a little concerned about some other issues as well. I mean, I don't - obviously, fees are an important issue.
FRAN KELLY:
Are they excessive, in your view?
NICK SHERRY:
It's what you pay. Well, let me explain it in this context. The funds under management in super, as a result of compulsion over the last 21 years, have gone from about 50, 60 billion to over a trillion dollars. And what's interesting about the Australian system, in comparison to most other systems, is that the total fees represent about 1.25 per cent average. Now, there's obviously a range of fees. But 1.25 per cent average. And they haven't come down.
What normally happens in a compulsory system, as it grows and as it obviously has, fees come down to less than one per cent. Now, that hasn't happened, on average. And I think that is a symptom.
What the members of the panel who will conduct the examination will do is look at the fundamental causes of this. And, as I say, sure, fees are an issue, but I don't think people should believe that that's the only issue. For example, the majority of members default on investment. Is the design of the current default investment option in their best interests? And when they see the money going backwards, they're naturally asking a lot more critical questions about the way the system operates.
FRAN KELLY:
Can I stick with fees for a moment, because you talk there about that 1.25 per cent average in fees. As the amount in the super pot goes up, does it become a bit of a magic pudding, in your view, for financial advisers, and are you - as some reports suggest, are you planning to ban financial advisers from charging commissions on investment advice relating to compulsory super? Is that the end game here?
NICK SHERRY:
Well, there are a number of issues that need to be carefully examined, and I'm not going to pre-determine. And, you know, even though I've had an interest in this area for a long time, I don't suggest that I'm the only person with particular knowledge of superannuation systems and the way they operate. So I'm not going to predetermine the outcomes. It will be done in a thoughtful and thorough way, and it will be done by - collectively, by a group of people at arm's length who have very long experience in the way superannuation systems operate.
FRAN KELLY:
And is everything on the table, Minister? I mean, what about the actual notion of superannuation being compulsory in the first place, because that's being questioned by some now, given the amount of money that people have lost during this crisis. Will that be looked at?
NICK SHERRY:
Well, I've continued to emphasise, as I always have, what's important about super is not minus five or plus 15 in any particular year, it's the long term return which is five per cent.
The notion of compulsion by any government, and, frankly, Bismarck settled this more than 100 years ago. We have compulsory retirement savings, whether it's via an age pension or via superannuation in almost every country in the world, because individuals generally would fail to save for their retirement.
So what's important is - the Henry tax review is looking at adequacy in tax treatment. This examination will look at the way the system operates, efficiency, how funds are invested, who's making the decisions. Trustees, for example. It's a diverse system. Trustees, are they sufficiently educated and skilled in their jobs. They're the sort of fundamental operational issues...
FRAN KELLY:
Okay.
NICK SHERRY:
... that are very important.
FRAN KELLY:
All right, Minister, thank you very much for joining us. I guess, we'll have to wait till after the Budget to find out and talk again if there's any changes to the tax treatment of super in the Budget because some are expecting there might be.
Nick Sherry, thanks for your time.
NICK SHERRY:
Good morning.
FRAN KELLY:
Superannuation Minister, Nick Sherry.