Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
The Government's Priorities for Superannuation
Address to the 16th Australian Colloquium of Superannuation Researchers
3 July 2008
Thank you for the opportunity to address the 16th Colloquium of Superannuation Researchers. Today I will be speaking about the Government's priorities and initiatives in the areas of superannuation.
Our Party has a long history of championing the cause of superannuation for all working Australians. It was Labor that introduced the first fundamental superannuation reforms.
The introduction of compulsory superannuation has had a significant and continuing impact, both on Australia's economic health and the retirement savings of hard working Australians.
Given the recent market volatility, there are some challenges that lie ahead for the superannuation sector.
The latest available data from the Australian Prudential Regulation Authority indicates in 2007, fund assets rose to a total of $1.18 trillion, an increase of 15.4% over the year, despite a fall of 0.4% during the last three months of the year.
However, it is important to remember that superannuation is a long‑term investment. Over the 35 years to June 2007, Australian superannuation has delivered excellent real returns of about 5% over and above inflation.
The preservation arrangements and the compulsory nature of superannuation allow superannuation trustees to manage market volatility over time through a progressive rebalancing of their investment strategies in response to market conditions.
The Government remains committed to encouraging a culture of saving, and providing the right signals for people to contribute to superannuation is part of the agenda for making sure Australians' retirement income expectations are met.
Benefit projections and calculators
Giving Australians universal access to projections of retirement benefits as part of the superannuation system will aid Australians meeting these expectations. The Australian system is now overwhelmingly defined contribution in nature. One of the significant shortcomings of such an approach is that very few fund members have any idea what they are likely to end up with in savings at likely retirement age.
Developing a way of providing reasonable benefit projections and superannuation calculators could significantly improve our system in a number of ways:
- it could provide an estimate of likely outcomes at critical ages – access age for superannuation and age pension age; and
- it will place a greater focus and emphasis on the long-term rate of return and the elements that impact on it such as contribution levels and total fees and charges.
In the UK the issuing of projections has seen a significant increase in fund membership awareness of the need to increase contributions.
In Sweden – a compulsory defined contribution system – the annual report to members, known as the 'red envelope' provides citizens with a projection to State pension access age as a prominent feature.
Benefit projections and superannuation calculators in Australia are very limited. One significant issue is consolidation of account information. APRA statistics show 30.5 million accounts while ATO data suggest around 11 million contributors in a two year period. There will therefore be a need to consolidate account information in order to deliver a meaningful projection.
Other difficulties include our devolved trustee administration model, and certain legal difficulties under FSR.
Whilst there are a number of complex design features, assumptions and legal parameters to consider, as other countries have shown, they are not insuperable to overcome.
Recently, I have discussed with ASIC the need to commence work in this area in tandem with the intra-product advice project in superannuation, which I will outline shortly.
Accordingly, it is my intention to see universal access to projections as part of the superannuation system. Universal access to projections would provide an indicative estimate, in current dollar values, of the total savings available at ages of access for superannuation and age pension in a simple standard format.
On 5 February 2008, the Government announced the formation of the Financial Services Working Group which is dedicated to looking at the key issues associated with disclosure.
The Working Group comprises senior officials from the Treasury, the Australian Securities and Investments Commission and the Department of Finance and Deregulation.
The over‑arching aim of the Working Group is to facilitate short, simple and readable disclosure documents. As part of this project, the Working Group has developed a concise 4 page Product Disclosure Statement for First Home Saver Accounts.
The Working Group works closely with an Advisory Panel comprised of representatives from industry and consumer organisations. Public consultation and information sessions are also held to enable broader participation in the project.
The Working Group is currently examining the issue of 'within product' or 'intra-product' advice in regard to superannuation products. The group is focused on identifying the hurdles to the provision of such advice. It will then formulate proposals to address the real regulatory hurdles — ensuring along the way that there are neither reductions to consumer protections nor any damage to the competitive marketplace for the provision of quality financial advice.
Initial soundings indicate some hurdles are not regulatory — this demonstrates there is also a role for industry in ensuring they are best placed to provide this advice.
The Working Group released a consultation paper, Simple Superannuation Advice, on 30 May 2008.
The Government wants to improve Australians' access to low‑cost advice about their superannuation. Superannuation is a compulsory investment and many Australians do not obtain any financial advice about this investment. As a result, superannuation represents a large unmet need for cost effective financial advice.
The Consultation paper sets out a number of proposals that may facilitate the provision of intra‑product advice regarding superannuation. These proposals deal with…regulatory amendments to the Corporations Act…changing the responsibility for intra‑product advice from the adviser to the licensee…and changes to the circumstances where a Financial Services Guide is provided.
The Working Group is currently seeking feedback on the proposals raised in the consultation paper, as well as what regulatory and other steps Government could take to help more investors receive appropriate and helpful advice.
Feedback is also invited about other issues surrounding the provision of simple superannuation advice discussed in the paper.
The Working Group requests comments and submissions by 15 July 2008. This will assist the Government to develop policy on advice in relation to existing superannuation investments.
Simplified disclosure with Management Expense Ratios (FHSA)
And while we are on the topic of disclosure, I do have a strong interest in finding simple ways for consumers to compare costs across a wide range of investments. One way of doing this is to require product issuers to adopt an approach based on a Management Expense Ratio or MER. By comparing the MERs of different investment options, it should be possible to determine whether a particular investment is more or less expensive than the average.
We are currently looking to use an MER type of approach for the First Home Saver Account PDS. Issuers will be required to disclose both the overall cost of an investment (in dollar terms) and the overall cost ratio (which is the average annual overall cost as a percentage of the average annual balance). Consumers will be encouraged to broadly compare the overall cost ratio for a particular FHSA against other products.
Importance of default funds
While it is important for consumers to have the necessary information available to them through the disclosure requirements, it is also important that safe, high quality default mechanisms are available where individuals fail to make an active informed choice.
The introduction of compulsory superannuation has had a significant and continuing impact on the levels of retirement income for all Australians. The safety, stability and efficiency of the superannuation system remains a key priority for the Government.
If an employee does not choose a superannuation fund, the employer contributes to the default fund that they have chosen.
The employer's default fund must comply with legislative requirements and provide a minimum level of insurance cover to members.
Further, the trustees of superannuation funds have both a legislative and fiduciary obligation to make investments in the best interests of members.
This framework protects employees by ensuring employers choose a superannuation fund managed by a licensed trustee that is subject to ongoing supervision by APRA.
Under the new Government's transitional arrangements, superannuation will continue as an allowable award matter. Retaining superannuation as an allowable award condition will reduce disruption to awards in anticipation of award modernisation, and maintain the ability of awards to safeguard legally enforceable superannuation requirements, such as frequency of payments, minimum thresholds and the default fund system.
Thus far, I have been talking about the superannuation accounts held by pro-active members. However, an issue I have been following with concern for some time is the continued growth in the amount of superannuation reported on the Lost Members Register. The Register, which uses information supplied by superannuation funds, is intended to assist individual members to identify lost super and consolidate their accounts.
Monies associated with the accounts on the register are still held by the funds on behalf of the lost members. In the ATO's latest annual report, the number of lost accounts on the register had grown to about 6.1 million, with assets totalling approximately $11.9 billion.
This is a worryingly large figure.
Lost accounts represent approximately one in five of all superannuation accounts, with an average of one lost account for every two Australian workers. This is a problem because the sizeable number of these accounts suggests many Australian workers will access less of their savings on retirement than they would otherwise receive. In addition, the number of these accounts collectively increases superannuation fund running costs.
Previous attempts to address this issue in the system have failed.
I have expressed a preference for the option of reuniting Australians with their lost accounts by introducing an automatic consolidation arrangement, with an opt-out provision, using our Tax File Number system.
Under this option, lost accounts would be automatically rolled over into a current or the most recently active account.
Members of the recently formed Superannuation Advisory Group also discussed options to address this issue at the inaugural meeting in March. I intend to consult further with the industry on a range of practical solutions to this problem that will improve workers retirement savings while minimising complexity and red tape.
Temporary Residents' Superannuation
Industry consultation has also been paramount in assisting to settle the design features of the temporary residents' superannuation measure. On 5 May this year, I released a public consultation paper on the payment of temporary residents' superannuation to the Australian Government.
Under the proposal, the superannuation balances of temporary residents would be paid to the Australian Government. The proposal was announced by the previous government with a start date of 1 July 2008. However, the Government deferred the start date for the measure to the date of Royal Assent (expected before the end of 2008) to allow time for public consultations to take place.
The consultation period has closed and 47 submissions were received from industry and from private individuals. The Government is carefully considering the feedback received before settling on the design of the measure.
Self managed superannuation funds (SMSF)
The Government is also currently considering the submissions that have been provided on governance issues in SMSFs.
Firstly, I note that in looking at governance issues, I am not focussed on the SMSF segment alone.
This simply forms part of my broader focus on governance.
The SMSF segment is a robust, important and mostly healthy area of the market.
However, results of a recent ATO survey indicate that whilst the majority of the sector is well managed, a significant minority may not be. This material through my speeches and media commentary is well known, so I won't repeat it here.
Trustee responsibilities and knowledge
I note that the previous government, supported by us, introduced the Super Safety arrangements and extensively upgraded trustee duties, responsibilities and education in 2005. However, these changes were not applied to the SMSF sector.
Because so many Australians will rely on self managed super funds for their retirement income, we need to ensure that SMSFs are subject to a strong governance system.
Trustees in the Australian system are the key guardians and decision-makers in our compulsory system. It is critical that they have the knowledge to undertake their duties and responsibilities in accordance with current law.
Superannuation Clearing House
The Government has also made a firm commitment to reduce the regulatory burden on Australian small businesses. To ensure that Labor's election promise to reduce superannuation red tape for employers is instituted efficiently and effectively, the Government will also consult with industry on the implementation of this measure.
As just one example of this commitment, we announced in the Budget that we will provide funding of $16 million over three years, commencing in 2009‑10, for an optional superannuation clearing house facility.
This facility, which will be contracted to the private sector, will cut red tape and reduce compliance costs for businesses across Australia.
This new initiative will be offered free of charge to small businesses with fewer than 20 employees. It will help business owners to manage their obligations under Superannuation Choice, including the time-consuming task of checking details entered on the Choice form and distribution of contributions to the nominated funds.
The superannuation clearing house measure will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the relevant superannuation funds as selected by their employees.
Businesses which use the clearing house facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house.
Finally, I would like to talk about an integral component of the Government's plan to position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century.
Australia's Future Tax System Review
On 13 May 2008, the Government announced a comprehensive review of Australia's tax system to help position Australia to deal with these challenges, and to enhance Australia's economic and social outcomes. The review will encompass Australian and state government taxes and interactions between the tax and transfer systems.
The adequacy of existing support for seniors and carers, and measures which could strengthen their financial security in the long‑term, will be considered as part of the review. The review will report its findings related to pensions to the Treasurer by the end of February 2009.
The announcement of the review is timely. This month marked the 100th anniversary of the introduction of the Invalid and Old-age Pensions Act, 1908, into the Australian Parliament.
When first introduced, the pension was the equivalent of 12 per cent of male total average weekly earnings (MTAWE). In his 1972 policy speech, Gough Whitlam committed the Labor Party to raise the basic pension rate to 25 per cent of MTAWE. He achieved this benchmark in 1974, and both the Hawke and Keating governments recommitted to this benchmark.
The referral of the pension design to a review of the tax and transfer system will facilitate consideration of the age pension in a broader context. The disposable income of the community is largely determined by wages, personal taxation, and means tested transfer payments.
In addition to the means tested age pension, the World Bank recommended in 1994 that the other two pillars of a retirement income system be a mandatory private defined contribution pension scheme and the opportunity for supplementary voluntary private savings for retirement.
I am sure that we will hear a lot more about the gaps, overlaps and incentive traps in our three pillar system over the course of the day.
Adequacy and the age pension
We should not forget that the primary pillar in Australia's three pillar retirement income system is the age pension.
The projections in the 2007 Intergenerational Report emphasize this. Chart C6 on page 112 of the Report showed that the main effect of the superannuation system will be the conversion of full‑rate pensioners to part-rate pensioners. It shows that between June 2007 and June 2047 the estimated proportions of people of age pension age who are full-raters is projected to decline from 55 to 36 per cent, for part-raters it will increase from 25 to 41 per cent and for non-pensioners the modest increase was from 20 to 23 per cent.
Treasury projections suggest that for people on median wages, the age pension will make up around half of retirement incomes in the longer term.
The Government is acutely aware that in the immediate future, the majority of seniors will be full-rate age and service pensioners who have not benefited significantly from the superannuation system.
Today, I have outlined the Government's priorities for superannuation, and how they might address the risks and challenges faced by superannuation and pensions funds.
I have spoken about Australia's Future Tax Review, the Government's plan to address governance issues with SMSFs, and the consultative work of the Financial Services Working Group to address issues of disclosure in the superannuation industry.
Given the Government's priorities towards superannuation, we will continue to progress reforms where necessary, and consult along the way.