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Thursday, 5 December 2002
Page: 7348

Senator WATSON (7:33 PM) Senators would be aware that in the wake of the 1997 Wallis report, Australia's financial systems underwent a major restructure and rationalisation. APRA was created to look after the prudential side of things while ASIC concentrated on disclosure and consumer protection measures. Responsibility for small self-managed super funds was transferred to the Australian Taxation Office. In August 2001, the Senate Select Committee on Superannuation presented its first report on the regulatory framework. The report was one of three that we presented in the last parliament on prudential supervision and consumer protection for superannuation, banking and financial services. The committee found that the current arrangements were complex and confusing. It found that more needed to be done to improve the awareness of the roles of the regulators, especially the need to clarify the respective roles of APRA and ASIC. The committee also recommended streamlining the entry point for consumers and others by having a one-stop shop with respect to regulatory and consumer affairs.

We also found that, while ASIC was operating efficiently and effectively at the time, there was scope for APRA to improve its performance as the major prudential regulator, especially in the regulation of small to medium superannuation funds. Thankfully, there has been some improvement by APRA, which is now emerging. But what has been surprising is that, given the high-powered composition of the APRA board, this competency and skill has not shown itself in the day-to-day operational performance of APRA either at the fund level or in the level of advice given to government about closing deficiencies. For example, it took a government commissioned report from an APRA board member to produce recommendations that should have flowed earlier and automatically, I believe, from the board to the government. With the collapse of Commercial Nominees, our concerns were unfortunately justified. Commercial Nominees was an APRA approved trustee for three public offer superannuation fund entities and about 500 small superannuation funds with fewer than five members. CNAL engaged itself in inappropriate investments, cosy deals, non-arms-length transactions, failed to adequately disclose its investments to members and engaged in inappropriate management procedures.

With other corporate collapses such as HIH, the role of the regulator has come increasingly under closer scrutiny. My committee was pleased that the government has acted to provide financial assistance to those small APRA funds which lost money through the collapse of Commercial Nominees. We are now concerned to achieve a degree of justice for small self-managed funds regulated by the ATO. Apparently, they are not covered by the protection of the theft and fraud provisions of the SI(S) Act, but we are hoping that the government will give consideration to claims for an act of grace payment under the FMA Act, the Financial Management and Accountability Act. The most disappointing aspect of all our inquires into this matter has been the stubborn attitude of the bureaucrats who believe that the problem lies with the investor in that it was their investment choice and, therefore, their investment risk. I find this hard to comprehend coming from people who have a responsibility for regulation. There is not much point in having laws if they are not appropriately overseen.

A report on the opportunities and constraints for Australia becoming a centre for the provision of global financial services contained some significant recommendations aimed at promoting Australia's competitive advantages. These recommendations included maximising the opportunities for Australia to become a centre for the provision of global financial services, improving the efficiency with which Australian financial services can be delivered and so improving Australia's potential to become a global financial services centre. This report achieved a high degree of acceptance in the business community, and I am pleased to say that the government has supported most of our recommendations. We now look forward to some government initiatives.

The Senate Select Committee on Superannuation is currently examining whether the current arrangements for superannuation will be adequate under the present taxation regime to address the retirement income and aged health care needs of Australians. This has been a very wide-ranging inquiry covering all aspects of superannuation as well as social security and health issues. Initially the committee received what appeared to be irreconcilable evidence from Treasury on the one hand and ASFA on the other about what a member could expect to receive as retirement income. ASFA provided the committee with an income figure of $19,000, while Treasury considered that the income should be more like $28,000 in the same circumstances.

The committee needed to reconcile these differences, so it commissioned a report from the Institute of Actuaries. The report showed that expressing retirement incomes in dollar amounts is not as useful in the adequacy debate as the net of tax replacement rate. The replacement rate is the percentage of the final year net salary to the first year of retirement net age pension and income stream payments, expressed as a ratio. This ratio, especially for actuaries, is easily capable of comparison with a retirement target for any person. We are told that this ratio is more relevant to the debate because to some extent the replacement rate avoids the timing effects of inflation and wages growth on dollar amounts, which can muddy the water.

Under choice, funds will need to keep more cash on hand to pay out transferring members, particularly if choice is associated with the other factor, which is going to be subject to some regulatory changes to enable people to consolidate their accounts—this is called `portability'. Asset consultants should be advising trustees in the choice environment that they might need to revise their asset allocation ranges with a higher rating for cash. As we all know, cash will underperform other assets in most circumstances, so this will act as a break on fund returns at a time when returns are under very close pressure.

A further dilemma for investment managers in a volatile stock market is the timing of investment decisions in a falling market leading to higher cash holdings. If cash is held for too long, the trustees could well be in breach of the fund's trust deed. Currently we have approximately $540 million in superannuation assets. This figure will grow to $1.7 billion by 2020. It seems to me that much of that growth will be invested more traditionally through chasing up prices for the top 50 or 100 or so stocks on the Australian secondary market or flowing overseas, where up to 25 per cent of Australian superannuation assets for some funds are currently invested.

This does little for the rural economy, for innovation and for job growth. It would be better if there were a steady flow of superannuation assets that could be invested by trustees in long-term adding projects, such as infrastructure and venture capital—projects that actually boost growth and consequently improve the lot of all Australians. I do not want these remarks to be interpreted that we should be directing how superannuation funds should be invested—far from it—but I draw to the attention of senators and listeners the dilemma that we have in Australia that much of our export income is earned in rural areas but finds itself deposited in city or overseas accounts.

I recently spoke with one of Australia's top directors who in an earlier life had experience in the funds management industry. He believed that there should be an inquiry into the efficiency of the funds management industry. That led me to a report by Paul Myners on institutional investment in the United Kingdom. The report has raised a number of issues related to the adequacy of fund governance, the competencies of trustees and the adequacy of the disclosure regime for fund managers. However, it should be noted that the UK is well behind Australia in its regulatory framework. It is one of the goals of my committee to keep Australia at the forefront of world's best practice. I was disturbed to read a report issued, I think, by the chartered accountants Deloittes which showed that about 28 per cent of funds did not have a corporate plan.

On a related issue, I recently expressed my concern at the outrageously generous performance bonuses, share options and other benefits paid to some senior company executives. Given the size and importance of superannuation investments in corporate Australia, I believe that trustees now have a special responsibility to their members to ensure that potential retirement benefits are not eroded through such practices, particularly when these rewards are not matched by superior performance by the CEO. Today we are seeing a lot of that non-performance. Perhaps the time has come for chairs of superannuation trustees to start directing their investment managers about issues such as the automatic re-election of underperforming members of boards. (Time expired)