Speech Notes for the Investment and Financial Services Association Luncheon

Introduction

• Ladies and Gentlemen
• I would like to thank the Investment and Financial Services Association for inviting me to speak at this luncheon.
• Last July, the Treasurer addressed IFSA's National Conference Gala Dinner in Melbourne. He spoke about the strength of the Australian economy. He made the point that policy is important, that it can make a difference.
• And he talked about the coherent policy framework the Government has in place and how that it delivering major gains in jobs, productivity growth and rising living standards.
• The Treasurer also spoke about how effective IFSA has been in contributing to policy development in the financial sector, a topic I will return to a little later.
• Today I would like to focus on superannuation and private savings. In particular, I want to talk about how the Government's policies are helping to increase the financial wealth of ordinary Australians and the opportunities this presents for IFSA members.
• First, however, I would like to draw your attention to the IMF Report on Australia released last week.
• The IMF directors have highlighted the economies 'extended period of non-inflationary growth and the remarkable resilience of the Australian economy in the face of the Asian crisis'.
• They also make it very clear that this strong performance did not happen by chance. It is the results of the Government's sustained commitment to sound macroeconomic policies and on-going structural reforms.
• The IMF indicated that structural reform has played a very important role in Australia's very impressive productivity growth. The IMF have also made it very clear that economic conditions remains very favourable, continuing robust growth, inflation remaining under control and a narrowing of the current account deficit.

Growth of superannuation savings

• There is no doubt that superannuation is becoming an increasingly important form of wealth creation for Australians.
• The system's aggregate assets are now around $415 billion, around double the level of 5 years ago and exceeding the level originally projected by the Retirement Income Modelling Taskforce to be reached by June 2000.
  • To date, the superannuation system has delivered more than in full and before time.
  • This is an important point. Despite the talking down of superannuation that often occurs in some quarters, including criticism of government policy, superannuation assets are actually growing faster than predicted.
• Average superannuation balances per contributor have grown strongly from about $37000 when this Government first came to power 1996 to $57000 now. Treasury has projected that these balances will grow substantially in the future.
• Our superannuation system is also robust by OECD standards. Both as a proportion of assets to GDP and in terms of growth, Australia is near the top of the OECD rankings.
  • The 1998-99 OECD Economic Survey showed that Australian superannuation assets were around 54 per cent of GDP in 1996 and that this was the fifth highest level among 25 OECD countries. Importantly, the growth of 25 per cent of GDP since 1988 was the second highest in the OECD.
• Moreover, our retirement income system is fiscally sustainable, unlike many systems overseas.
• Superannuation assets in Australia are growing strongly not just in absolute terms but also as a share of household assets.
  • National Balance Sheet data by the ABS shows that over the past 10 years, household assets in the form of superannuation and life company reserves has grown from 19 per cent of net household assets to 30 per cent.
• Future growth of super is also expected to be dramatic. The Retirement and Income Modelling Unit of Treasury projects that superannuation assets will continue to grow strongly to around $700 billion in 2005, and $1100 billion in 2010.
  • As a proportion of GDP, this is a sharp rise from about 65% of GDP now to about 85% in 2005 and 105% in 2010.
• An important point that is often overlooked is that the wealth of Australians has increased significantly in recent years.
  • Over the past 5 years (to June 1999) the net worth of households, in real terms, has grown by around one quarter.
  • This growth is about double the rate of the preceding 5 years.
  • This includes strong growth in superannuation and share ownership.
• It goes without saying that an association founded on investment and financial services would welcome rising household wealth. IFSA members have great opportunities to help Australians gain maximum benefit from this wonderful confluence of a strong real economy and rising asset prices.
  • I note that, since, June 1996, the total of funds under management in Australia has grown by $240 billion to over $610 billion. Of course, an important contributor to future private savings and wealth creation is the Government's tax reform policies.
  • IFSA has been a strong supporter of taxation reform which the Government welcomes.
  • By cutting marginal tax rates and the overall personal income tax burden, Australians will have both more willingness and capacity to save and invest.
  • As the Treasurer has said this is the big macroeconomic point of tax reform.
  • The big news on this front in the last week has been the revelation of Labor Party policy on the GST. In particular, Mr Beazley has consistently refused to rule out income tax increases to pay for his "GST rollback" proposals.
  • Let there be no doubt: Mr Beazley wants to reduce the incentives for Australians to work, save and invest. This would be bad for IFSA and bad for Australia.
• On a more positive note, the Opposition has supported the Government's business tax proposals. The Government's capital gains tax reforms will be of major benefit to Australian investors with reductions in capital gains tax for superannuation funds and individuals.

Superannuation Reform

• Before turning to the future of superannuation, I think it is worth reflecting on where we have come from.
• The Government has made a number of significant changes to the superannuation system, some of which have possibly not received the attention they deserved.
• For instance, we have increased the preservation age from 55 to 60. This has received little attention because it does not come into effect for quite some time, in fact until 2015. However, this decision will have a substantial beneficial impact on Australians' retirement savings habits in the years ahead.
• Similarly, the tightening of the preservation arrangements, including the preservation of all future contributions and earnings, will significantly improve the retirement incomes of Australians.
• The Government has also rationalised the treatment of retirement income streams for social security and income taxation purposes to promote better long-term outcomes.
• Apart from making these changes to make the system stronger, we have made the system more flexible by introducing the spouse rebate, retirement savings accounts and increasing the age to which contributions can be made. We have also made the system fairer (and thus more sustainable) by introducing the superannuation surcharge.

On-going Initiatives

• The Government reform agenda for superannuation is an on-going one.
• We are continuing to build on the improvements that we have already made.
• Rather than trying to cover the whole field of initiatives that are currently being progressed, I will speak on two major issues that are of interest to IFSA

Choice

• The Government is firmly committed to choice of superannuation funds.
• Choice of funds will deliver substantial benefits to Australians, through increased competition and efficiency in the superannuation industry.
  • I have heard representatives of the superannuation industry complain that people don't take enough interest in their super and that the Government should do something about it.
  • My experience is that people often don't take much interest in events, which they feel they have no choice over. The Government's choice of fund policy will help Australians take more interest in their superannuation by giving them more control.
  • In my view, the Government's choice policy will encourage Australians not just to take more interest in super, but to make greater personal contributions.
• Choice of fund was an election commitment of the Government in the 1996 Election campaign. The commitment was re-confirmed in the 1997 Budget Document "Savings: Choice and Incentive".
• Regrettably, the necessary legislation has been delayed due to the complete obstructionism of the Federal Opposition.
• I am pleased that the Democrats have taken a much more consumer-oriented view and are willing to negotiate on choice. Our negotiations have been continuing for some time and they have been very constructive. I believe a final resolution is not far away.
• I wish to pay special tribute to IFSA for its public support of the principle of choice of super fund. I think it is fair to say that IFSA has proven a most effective industry group in promoting its objectives.
  • On a key issue, namely whether workers would benefit in practice from choice, IFSA commissioned modelling that showed workers would benefit substantially from choice. In fact the modelling showed that a 30 per cent consolidation of accounts could save $424 million per annum.
  • On another important issue, IFSA commissioned polling that showed that consumers overwhelmingly support being given choice of fund with over 80 per cent in favour of choice. This refuted suggestions from other groups that choice was not an important issue to consumers.
• Choice of fund will be accompanied by enhanced disclosure requirements consistent with the new CLERP 6 framework.
• Choice will also be accompanied by a strong education campaign expected to use a range of media, including television.
• The education and disclosure arrangements will improve the ability of individuals to choose funds that provide the services they want, such as insurance and investment choice and to compare costs between funds.

Portability

• Another important government initiative is to provide legislative support for portability of superannuation benefits. The Labor Government did not legislate to require funds to allow portability. While many funds do provide portability, some do not. This has contributed to the large number of small superannuation balances.
  • In fact, there are now more superannuation accounts in Australia than there are Australians.
  • This is expensive for consumers and inefficient for the superannuation industry.
• Providing legislative support for portability will be good for consumers and good for the superannuation system.
• It is clear that choice and portability complement each other. Work is progressing on the full details of the Government's portability policy. Consideration will be given to the start date for portability, including the possibility of choice and portability having a common start date.

Future Directions and Conclusion

• In concluding, let me say that the Government fully supports the savings and investments industry.
• A key driver of the level of saving and investment is the level of income. One of the most important contributions the Government can make, therefore, is to have policies in place that allow for solid and sustained economic growth.
• The Government is pleased that Australia has been one of the fastest growing economies in the world since coming to Office and that future prospects are bright. Fiscal discipline and ongoing reform are vital.
• Tax reform is another important element in promoting a savings culture. A key task for the Government in the months ahead is to bed down tax reform implementation and to assure the community that Labor's scare tactics are just that tactics. Labor's policy is to reverse the income tax cuts and stunt the incentives to save that the Government's policy will deliver.
• Meanwhile, the Government is strongly committed to building on the strengths of our superannuation system – in areas such as choice - and believes that listening to the views of superannuation industry representatives is a key component of achieving that goal.
• I thank you for the opportunity to speak with you today.