Introduction
Good afternoon ladies and gentlemen.
I would like to thank the New South Wales Branch of the Association of Superannuation Funds of Australia for organising this conference, and inviting me to speak today.
I am pleased to be with you to talk on the recent developments and future directions of superannuation.
Let me give you a statistical picture of the industry as it now stands.
Since the election of this Government in March 1996 superannuation assets have grown from $250 billion to $477.4 billion. Assets have grown 16.9% over the past year and more than doubled over five years.
Superannuation is fast becoming an integral part of Australian society with over 90 per cent of employees covered, and with superannuation making up the largest component of the financial assets of households.
The rate of growth in superannuation in Australia in the past ten years has been the second highest amongst OECD countries.
In 1990, superannuation assets represented 33 per cent of GDP. Today that figure stands at over 70 per cent.
Superannuation plays a vital role in Australia's financial markets. In June 2000 Australia's funds under management totalled $699 billion. Almost seventy per cent of funds come from superannuation sources.
Australia's funds under management are far higher than other countries in the region. The Singapore and Hong Kong markets are in fact substantially smaller than the markets in Australia.
Australia can rightly be proud of its superannuation industry, its growth and the public support it enjoys. However, there are areas which still need attention.
Superannuation is for many people still too complex.
In many sectors, people lack choice.
Many people also lack portability of superannuation balances resulting in multiple accounts
Let me now develop some of the themes in my statistical summary.
Growth in Superannuation Savings
There are three important elements of the Australian retirement income system which has led to this sustained growth.
The first is employer contributions. Contrary to some claims, employer contributions to superannuation are growing faster than wages.
Modeling done by the Retirement and Income Modeling Unit of Treasury has clearly demonstrated the continuing tax advantages of superannuation. After accounting for the major reductions in income and capital gains taxes introduced under the Government's major taxation reforms, compulsory employer contributions remain tax advantaged over a working life for taxpayers.
The second element is member contributions. Member contribution flows have doubled over the past three years.
Analysis by the Australian Prudential Regulation Authority shows that most of this growth is not attributable to churning or 'recycling' but to genuine additions to system assets. That is, a continuing and voluntary injection of savings into the superannuation system by fund members. This indicates that fund members have confidence in superannuation and, that they consider the superannuation system to be both strong and secure.
Overall, sustained voluntary contributions to superannuation also reflect an appreciation of the tax incentives involved in superannuation.
The third element is investment returns. The recent investment returns of superannuation funds have been very strong, reflecting in part Australia's sustained period of economic growth.
Over the last five years, returns for superannuation funds have averaged about 9 per cent real, that is, above inflation. Superannuation has been a very good investment for Australia and Australians.
Future trends are likely to be equally exciting.
Projections of Future Growth in Superannuation
An important point is that the wealth of Australians has increased significantly in recent years, superannuation has contributed significantly to that wealth.
As noted earlier, superannuation assets continue to grow strongly and form the largest single component of the financial assets of households.
The National Balance Sheets for Households show the assets of superannuation funds and life offices rising by $306 billion, or 222 per cent, between 1989 and 1999.
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 and includes strong growth in superannuation and share ownership.
As I have already noted, in June 2000 superannuation system assets totaled $477 billion. Looking ahead, and bearing in mind the continuing relative benefit of investing in super, the Retirement and Income Modeling Unit of Treasury, projects assets to reach around $700 billion by June 2005 and one trillion, that is $1000 billion, by June 2010.
The ratio of assets to GDP is projected to move from its current level of 70 per cent to reach 90 per cent by 2010 and to exceed 100 per cent of GDP by 2017.
That is, notwithstanding the increased payouts to baby boomers as they retire, the Retirement and Income Modeling Unit has projected a continuation of the high rate of growth in superannuation.
Choice
There have been very detailed negotiations between the Government and the Australian Democrats on the introduction of Choice.
I am not in a position today to make any formal announcement on Choice, however, I can say that negotiations are very close to conclusion.
While very long, these negotiations have been productive.
We have dealt with a wide range of issues and, it is my belief, that we will be in a position to announce a final outcome that will satisfy the industry, employers and employees.
The results will provide a real choice for employees.
The Government is particularly concerned to make sure that this is an informed choice and the Government will assist in making sure adequate education is provided.
It is worth restating the reasons why the Government has been working so hard to deliver Choice of Fund.
Choice is one of several key initiatives designed to promote competition in the superannuation system.
For many people, superannuation is their largest asset, or second largest after their house. Yet unlike other investments, there is no general right to choose a superannuation fund. It is unfair and unjustifiable that workers have no choice in who manages their superannuation contributions.
Choice of funds is about allowing workers to take control of their superannuation - to make their own choices and to pursue their own needs within the superannuation system.
The Government believes substantial national benefits will flow from the introduction of choice of funds. In particular, choice of funds will increase competition and efficiency in the superannuation sector, leading to improved returns on superannuation savings and placing downward pressure on fund administration fees and charges.
Choice of funds will be accompanied by enhanced disclosure requirements for superannuation and a strong education campaign.
Portability
I hope to advance the issue of Portability once the issue of Choice is bedded down.
In moving onto Portability, the Government will be consulting widely with all sections of industry.
The Government believes that, with appropriate disclosure and member information, consumers of superannuation are the best judges of their own economic well-being. As such, individuals should be able to make their own choices in superannuation and to pursue their own needs within the superannuation system.
Portability, in conjunction with choice, will assist in addressing the issue of multiple superannuation accounts. Keeping multiple accounts results in administration costs for each account and can make it more difficult for members to keep track of their superannuation entitlements.
Currently there are about 22 million superannuation accounts. That means that there are now more superannuation accounts in Australia than there are Australians!
On average there are 3 accounts per contributor, which is costly for consumers and inefficient for the superannuation industry.
Like choice of funds, portability will increase competition and efficiency in the superannuation industry delivering substantial benefits to Australians.
In this regard, portability will complement the choice of funds legislation.
Adequacy
While there is debate on how adequacy should be defined, there is no doubt that our maturing system is expected to bring about considerable improvement in the adequacy of retirement incomes for older Australians.
Contrary to some claims being made, when the 9 per cent SG is fully implemented, the average person's financial independence in retirement will be more secure than at any time in Australia's history. An individual who earns Average Weekly Ordinary Time Earnings (AWOTE) throughout a 30 year period and receives the 9 per cent SG contributions only, will have a standard of living in retirement around 77 per cent higher than the aged pension alone.
This constitutes a replacement rate of about 64 per cent of pre retirement expenditure, slightly in excess of the 60 per cent figure traditionally cited as a sensible target.
These RIM estimates correctly include the age pension and tax in the calculations, compared with some commentators who do not. Published ASFA estimates also include the age pension and tax in the calculations and, for the same circumstances, are of the same order as the RIM estimates.
After forty years of SG accumulations on AWOTE earnings, RIM estimates that a standard of living in retirement twice that from the age pension alone can be achieved. The corresponding replacement rate would be around 75 per cent.
Around seventy per cent of employees earn less than AWOTE. The potential replacement rates for such people are higher.
Superannuation Reform
The Government notes the industry's desires for a review of superannuation and retirement incomes policy.
The Treasurer has nominated Australia's saving and retirement income system as one of the Federal Government's next areas of review, but has also said that this will not occur until tax reform has been fully bedded down.
As well, the Prime Minister has indicated that the Government is not averse to simplification of superannuation. However, he has also noted that as the Government has 'done a lot on the tax front' big changes in this area should not be expected - at least until other tax changes have been absorbed by the community.
In the meantime, reforms such as choice and the splitting of superannuation on marital breakdown continues apace.
Conclusion
Today, I have outlined the impressive growth of Australia's superannuation system and the expectations for this trend to continue. As I said at the outset, superannuation plays an increasingly important role in the lives of all Australians.
The Government will continue to develop the framework of Australia's superannuation and retirement income system sensibly through progress on the important policy issues that I have discussed with you today, such as choice of funds, the treatment of superannuation on marital breakdown and the development of a savings culture.
Meanwhile, the Government is strongly committed to building on the strengths of our superannuation system and believes that listening to the views of superannuation industry representatives is an important component in achieving that goal.
I thank you for the opportunity to speak with you today.