TONY JONES, PRESENTER:
Here is an interview with the Minister for Superannuation, who announced the review today.
Senator Nick Sherry, thanks for joining us.
NICK SHERRY, MINISTER FOR SUPERANNUATION:
Good evening.
TONY JONES:
OK. What are the terms of reference for the review?
NICK SHERRY:
Well, what I released today was a communiqué from eight leading superannuation organisations, with offering differing views, I'd have to say, who accept that it is time to have a hard look at the operation of the superannuation system. We're 21 years into a compulsory system. And I think, importantly, we had negative rates of return last year and we're likely to have negative rates of return again this year. And so there are a lot of issues about the way the system is operating that members, whether fairly or unfairly, are now complaining about, and it is time to look at how the system's operating. And again, the communiqué indicates that the focus should be what is in the best interests of the member that maximises their retirement income.
TONY JONES:
OK. So what are the terms of reference?
NICK SHERRY:
Well I'll be releasing the terms of reference shortly, together with the people who will make up the panel to conduct the examination of the system.
TONY JONES:
Will the review be examining fees and commissions paid to the small army of salesmen who are employed by the profit-based superannuation funds?
NICK SHERRY:
What is interesting about our system and does cause me concern is that the assets under management have gone, with compulsion, from about $50 or $60 billion 20 years ago to just over a trillion dollars today. And fees of a proportion have been running at about 1.25 per cent. Now, they haven't come down. So as the industry's grown, the fees have remained static. Now all the international ...
TONY JONES:
So you're saying they're taking too much profit?
NICK SHERRY:
Well what I'm suggesting is that there are some issues here that we need to look at the way the system's operating. The important thing about fees is that if you have a five per cent long-term rate of return, after you paid one or two per cent fees, those fees reduce your retirement saving very significantly by the time you get to your, say, 60s. And why aren't the fees coming down? Why don't we have lower fees in a compulsory system? Now we know from international experience that as a system grows, and we've got one of the largest systems in the world, fees come down. It hasn't happened in Australia. And ...
TONY JONES:
Too greedy, are they?
NICK SHERRY:
Well, there are inefficiencies in the system. The operation of the system needs a fundamental examination, and what's important is fees are a symptom. What the examination will look at is how we can improve the operation of the system. Fees are an important aspect of it.
TONY JONES:
OK. Let's look have a look at the other aspect, the one I mentioned earlier. The not-for-profit industry super funds say that as an absolute minimum the Government must ban all commissions on super contributions. Is that going to be part of the review? Will that be up for grabs?
NICK SHERRY:
Well that's their view. There's no doubt that's been a contentious issue for a long period of time. But I just caution about simplistic solutions to what are very complex sets of issues and I'm not going to prejudge the outcome. What I've indicated to the various industry organisations is, sure, you can make suggestions about how to improve the system, but have a look at your own backyard as well. What is interesting about our superannuation system, whether it's self-managed, industry, corporate, public sector, retail, is there are some funds that are long term poor performers. There are some funds in every sector. So we're going to have a hard look at what is the cause of this long-term poor performance.
TONY JONES:
OK. But let's just go back to the commission issue, because the not-for-profit sector is obviously thinking that this is altering the way in which these funds operate. In other words, the people who are taking commissions are not operating on behalf of their clients, but on behalf of a profit-taking institution. And, they're asking the question, should they not be operating on behalf of their clients, and should that be in fact mandated that they do?
NICK SHERRY:
Well, what will happen - anyone is free, any individual or organisation, to put their particular views about how the system should be reformed to the panel of experts. And I'm not going to prejudge the outcome. Fees is an important issue - there's no doubt about that. Conflicts of interest. But there are some other issues, too, that I think have been highlighted as a consequence of the financial crisis and the negative rates of return, that are worrying, they're seriously worrying a lot of people. For example, most individuals in our system, or the majority, default on investment. Now, it's difficult to explain to people the concept of a long-term rate of return - volatility, their accounts have been going backwards. Should we have a better-designed default investment option? Do we need to improve the education, knowledge and understanding of trustees? We've devolved our system to trustees to make the decision - can we make improvements there? We have 6.3 million lost accounts in our suspension system.
TONY JONES:
That was a subject of a different review, however.
NICK SHERRY:
But this illustrates the fact that after 21 years of operation, it's time to have a look at the way this system's operating.
TONY JONES:
OK. Are you prepared to look at the whole notion of whether it's a good idea to have compulsory superannuation, or is that not up for grabs at all?
NICK SHERRY:
No, look, compulsion has been long established, whether it's through an aged-pension system or through a compulsory superannuation type system. Individuals generally fail to save for their retirement. The debate about compulsion was essentially settled by Bismarck back in the 1880s when he established the first-aged pension. It could only be done via compulsion. What is important is the way the system operates, what the efficiencies are and the fees, and then the other set of issues are what the level of contributions and tax treatment are going to be.
TONY JONES:
Well, exactly - the tax treatment's fundamental. And I was just about to ask, can any serious review of the superannuation system be undertaken without actually knowing what the tax arrangements are going to be? Because it's widely forecast those tax arrangements will change.
NICK SHERRY:
Well the Henry tax review has been looking at what I'd broadly describe as the inputs and the tax treatment of superannuation. So we will in parallel be looking at the inputs, tax issues that the Henry review highlights and identifies.
But the Australian system has never been examined in the way it's operated. Now that's quite unusual. In other countries, when you establish a compulsory system, as we did 21 years ago, you actually spend a lot of time looking at the design features. Now over the last 21 years, there've been ad hoc changes to the way the system operates. And so it's a good time, I think, 21 years in, to have a look at the constant changes that have been made, and see how they're affecting the operation of the system.
TONY JONES:
OK. A final question - does the Government take the view - do you take the view, in fact, that the way the tax system operates within super is inequitable? That it actually gives a benefit to the rich that it doesn't give to the poor?
NICK SHERRY:
That's an issue for the Henry tax review.
TONY JONES:
Do you have an opinion?
NICK SHERRY:
Well, there's certainly an issue that's been highlighted by the Henry tax review which I think's very valid and that is for low-income earners, there's effectively no tax advantage, in fact some are tax disadvantaged because the 15 per cent contributions tax is higher than their marginal income tax. So that's already been highlighted by the Henry tax review. But these operational issues and the costs and the fees are critical to the way the system delivers. Because as I've said, one or two per cent off into fees, effectively reduces your long-term savings by about a quarter, by about a quarter.
TONY JONES:
But the thing that has the most impact are the tax arrangements, because we know the impact that has on high income earners - they can get a huge amount of tax benefit from the super scheme as it currently operates. As you say, low income earners - no benefit, maybe even negative benefit. Should that change?
NICK SHERRY:
Well that's an issue for the Henry tax review. Inputs, tax treatment, level of contributions and the efficiency and fees of the system all have a significant impact on the final retirement income savings of Australians. And the government in a compulsory system has a duty of care, and that duty of care centres around maximising the benefit in the best interests of the members. And what's pleased me, to the credit of the various different organisations who often don't agree on issues in the super system, is they've recognised via the communiqué today it is time to have a look at the system and maximise the benefit to the members for their savings for their retirement.
TONY JONES:
OK, Nick Sherry, we'll have to leave you there. We thank you very much for coming in to explain that to us.
NICK SHERRY:
Thank you.