Senator SHERRY (5:00 PM) —I might start by saying that at last—after three years of waiting—the government is finally allowing us an opportunity to debate its so-called choice measure. The Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 1998 is about anything but choice. This legislation is about the deregulation of the retail distribution of superannuation. It is about providing greater opportunities for the banks. It is about wrecking existing corporate and industry funds.

Senator McGauran —Union funds.

Senator SHERRY —I will take that interjection—and I will come back to that later—that you have made in your total ignorance, Senator McGauran, on this issue. It is about increasing fees, charges and commissions paid to the people who distribute superannuation products. It is about lessening the protections that, currently, members of superannuation funds enjoy in Australia. Labor supports informed choice and in particular its preferred option of investment choice.

Let me briefly outline the existing superannuation structure, particularly for Senator McGauran's edification. Australia has a number of different types of superannuation funds: so-called do-it-yourself, DIY; corporate funds, mainly big business—Senator McGauran, this impacts on them—industry funds, multi-employer funds, as they are commonly known; public sector funds; and retail funds. All except for the latter are governed by nonprofit trustee structures, and these nonprofit trustees generally tender for the administration, investment and insurance provided.

Industry funds are multiemployer funds. They have joint employer and employee trustees. Some of the employee trustees are union officials, just as some of the employer trustees are officials of various industry organisations, just as some of them are executives in the business structure of those organisations. So there is joint trustee membership. And, more importantly, for Senator McGauran's information, it requires a two-thirds vote of the trustees to make any decision. So they have effectively a joint veto over each other.

We saw the extensive spread of industry funds in the late 1980s following what is known as the three per cent productivity award superannuation case. This case required employers, in lieu of a wage increase for employees, to contribute three per cent of ordinary time earnings into what emerged as largely industry funds. At the same time, corporate funds were allowed to continue to exist. I acknowledge that, and I acknowledge generally the very good work they have done over many years.

The fund to which superannuation moneys are contributed is generally determined by industrial awards and agreements. This was for a very good reason, Senator McGauran, because at the time there was a call from business, particularly small business, that they did not want to have to pay into more than one fund. I think even Senator McGauran can understand that an employer—who might have 20, maybe 100, employees— does not want to have to pay contributions, because of the administrative cost, into separate funds. If you think that the backlash from the business activity statement was significant, you wait and see—we are not going to see this, because I understand this legislation will be defeated—what happens if this legislation is passed and small business have to start contributing superannuation contributions into many different superannuation funds.

There is a more important reason for the continuation of the current system. A feature of Australia's system is that there is extensive regulation of the retail distribution through the mechanism that I have just outlined. This is important because, generally, the administrative fees decrease as the size of a fund increases. Through the massive size of some of these funds—including corporate funds—they are able to negotiate very effective administrative charges as well as funds management fees and insurance rates, certainly far better rates for administration than we see in the traditional retail product.

There are still quite a few of these traditional retail products around. They are the real dinosaurs of the industry. These products were characterised by an individual purchasing a superannuation product and often paying the first year's contributions in commission and then often paying one, two or three per cent of future contributions as commission, supposedly to cover administration costs. That is the system that this government wants us to return to—the individual will have to go and purchase a superannuation product—and this is in the name of choice.

This system has been introduced in two countries: Chile and the United Kingdom. A former Prime Minister of the United Kingdom, Margaret Thatcher, deregulated the existing superannuation industry in the United Kingdom. Individuals had to go out and make a choice about where their superannuation contributions were to go. They had to go and buy a product. What occurred was—even amongst people who are educated, and I include in that teachers, for example, and public servants—that people were required to do this and when they went out to buy the individual products following the deregulation of the system, frankly, they got ripped off.

There was an extensive study done about this, and many of the big insurance companies in the United Kingdom were ordered to repay moneys to people who invested. Unfortunately, a very significant proportion of people do not have sufficient financial literacy to make these decisions. They pulled out of existing funds; they were convinced, often by agents on commission, to go and join an alternative product at a very significant—

Senator McGauran —How are you going to keep administration costs down?

Senator SHERRY —I have touched on administration costs and I might return to the issue for the benefit of Senator McGauran. The highest costs occur where you have a transient work force such as in the hospitality industry or casual employees—employees of that type. The cost of multiemployer funds in this country, including corporate funds, is generally about a dollar a week or $50 a year. You cannot get cheaper—it is a very effective system. Indeed, the United States with, I acknowledge, a very right-wing President Bush is examining the Australian system because the right-wing Republicans are impressed by the efficiency of the delivery of superannuation vehicles in Australia, particularly when you are dealing with compulsory superannuation applying to just about the entire Australian work force.

Deregulation was a catastrophe in the United Kingdom. And likewise in Chile. Chile introduced compulsory private retirement savings accounts under the Pinochet regime. These are characterised, again, by the requirement for an individual to go and purchase their own retirement product. There have been surveys of fees, charges and commissions which have been found to generally take 10 per cent of the contributions flowing in to these particular funds. Indeed, it is a common feature of the Chilean system that incentives are provided for employees to switch from one fund to another: free bikes, free mobile phones and the like are offered to people to switch from one fund to another. This is the outcome that this government would want to see in Australia through this legislation.

The government has stated that this so-called choice legislation will deal with the proliferation of accounts. This is a legitimate problem in Australia: we have eight million members of superannuation funds with 22 million accounts. Most Australians do not know that they can transfer and consolidate their accounts. But this government legislation does not solve that problem. The theory is that you have an individual account and you take it from workplace to workplace, but this legislation confers the power on the employer and, as an employee moves from one workplace to another, their account may not be acceptable to the employer—so it does not solve the problem.

Senator O'Brien —It is choice for the employer, not the employee.

Senator SHERRY —It is choice for the employer, as my colleague Senator O'Brien has remarked. The employer is going to resist genuine choice where an individual wants to place their money in their own fund because of the administrative costs. My personal suggestion for dealing with the proliferation of accounts is automatic consolidation at the end of each financial year, and this is achievable.

Why are fees, charges and commissions important? Why is it important to contain the cost of a private superannuation retirement system? It is very important because superannuation is not an employment generator for the agents and the retail distribution system. Its objective is to maximise the retirement income of the individuals who are part of the system. The government obviously has an important interest in maximising the retirement income of Australians, particularly given the ageing of our population.

Let me touch on that. Up until the late 1980s, superannuation was mainly the preserve of higher income earners, public servants and the like. The majority of Australians had no superannuation whatsoever. It was the Labor Party that introduced universal superannuation in the late 1980s. We are proud of having introduced universal superannuation, because it showed a vision to deal with the problems of the ageing population that are starting to emerge now and will fully emerge by the year 2020. There will be one in four people over the age of 65 by the year 2025; at the moment it is one in 10. How is this to be paid for? To a significant degree, it will be paid for by universal superannuation introduced by a Labor government in the late 1980s and the subsequent introduction of the superannuation guarantee and the extensive revision and rewrite of the Superannuation Industry (Supervision) Act 1993 which, among a variety of measures, included 100 per cent protection in the event of theft and fraud, which this government sought to water down recently and was fortunately defeated.

The interesting dichotomy of the Australian system is that retail distribution is heavily regulated but that investment takes the most liberal, if I can use that term, free market approach in the entire world. Again, that is of great interest to the American government because, under the Australian system, the trustees, subject to what is called the `prudent man' principle—excuse the sexist terminology but that is the industry terminology—have to spread the investment to ensure that risk is minimised. Subject to that, the moneys are not just invested through the Australian economy—I think about 20 per cent of the investment is overseas—but also through various categories of the Australian economy. That has served Australia well, because under that system we have seen average returns over the last 13 years that have been very impressive. This is not just in one or two funds; right across the industry with only a few exceptions we have seen extremely impressive long-term average returns. It was the Labor Party's superannuation guarantee policy and the Labor's Party's regulatory structure that have seen superannuation grow from about $40 billion in the late 1980s to $497 billion, according to the last APRA superannuation funds trend survey.

This is all about an ideological campaign to deregulate the superannuation industry. There is a common misconception, and I do believe a genuine misconception on the part of Senator McGauran—not in the case of his colleagues but in his case—that they are union funds. They are not. I heard allegations in the last election being made by the former director of the Liberal Party that these funds contributed to the Labor Party. This was checked and it was found that a big fat zero was contributed by industry superannuation funds to the Labor Party's election coffers. It was a false allegation.

The trustee system has served Australia well. The investment approach has served Australia well. We need to not be distracted by false issues that the government raises in this legislation but look at how we are going to improve on the superannuation system, how we are going to add to superannuation savings, to prepare for the ageing population. It would be very unfair to spread the cost of retirees in 20 or 25 years back to our children and our grandchildren. The requirement to increase taxes to fund this would be enormous without the superannuation. Labor have an alternative option. The option we put forward—and I am glad to see it has spread through many of the superannuation funds— is investment choice. You have a menu of investment options: you can pick equities, you can pick overseas investment, you can pick ethical investment. There are a whole range of investments, some riskier than others, some returning higher or lower. The fund member can tick a box and indicate where they want their money to go.

Interestingly, when we get to the issue of choice, very few people in funds to date have actually exercised an investment choice. The superannuation system that we have is admired by most overseas countries. They wish they could have done the same. They are facing increasing economic, social and political consequences as a result of the ageing population. I do not think Australia will be free of some of that conflict, but at least we have a firm starting base with our pension system funded from budget and our now universal superannuation system.

It is often argued in the context of choice that we should just leave it to the individual. The argument is that the individual can decide what the complex financial options are for their future. The argument put forward by Senator Kemp and others is that we will educate people to make these decisions if they do not have sufficient knowledge at the present time. Even if you could educate people, it would require a massive education campaign, and any education campaign run by this government would be in the form of a propaganda campaign, telling us how great choice is rather than actually educating people to make sophisticated financial decisions. I put a lot of faith in my pub test. I go down to the local Forth pub and people raise these issues with me.

Senator Kemp —I thought it was your local hairdresser.

Senator SHERRY —My hairdresser has raised it with me, too, Senator Kemp. He gets a general cross-section of the public through his salon. He has since retired.

Senator Kemp —Is that Stefan or Johann?

Senator SHERRY —No; it is Barry, for your information—as trivial and trite as your contribution is on this debate.

The ACTING DEPUTY PRESIDENT (Senator McKiernan)—Minister, you would be aware that interjections are unruly, and you are not in your seat.

Senator SHERRY —When the public ask about these sorts of issues, frankly, the public are lost when it comes to superannuation— not all, but the vast majority of people see the word `superannuation' and the last thing they want to be doing is sitting down and reading up on all the prospectuses and making decisions about where their money is going to be invested. All the evidence shows that is the public attitude. I would concede that you can turn some of that around. You can educate some people, but I would submit the majority of people in our community simply do not have those skills at the present time. There is a simple practical problem, too: how do you educate people who are functionally illiterate in our society? The population of employees who are functionally illiterate is about 15 per cent. That means they cannot read a road map; they cannot follow a phone book. How on earth are they going to follow the sophisticated financial prospectuses that are being offered under the government model of choice?

I would predict a total disaster with this. In some ways, if you wanted to play the devil's advocate and create mayhem, you would allow the government to pass this legislation, and we would see a very similar outcome to the one in Chile and the United Kingdom. The Labor Party are not going to do that. Our primary concern is to protect Australian superannuation savings, a well-designed system that has served this country well, and we will be voting against the second reading of the bill.