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Economics Legislation Committee
06/02/2017
Superannuation (Objective) Bill 2016

BRIGGS, Mr Blake, Senior Policy Manager for Superannuation, Financial Services Council

HANSELL, Mr Allan, Director of Policy and Global Markets, Financial Services Council

CHAIR: I now welcome representatives from the Financial Services Council. Thank you for appearing before the committee today. I invite you to make a brief opening statement should you wish to do so, and then the committee will ask you some questions.

Mr Hansell : The Financial Services Council welcomes the committee's inquiry into the Superannuation (Objective) Bill 2016. The FSC supports the bill's overarching purpose to enshrine the objective of superannuation and welcomes the consultative approach taken by the government as it has implemented the Financial System Inquiry recommendation. The FSC notes that the bill is the product of consultation between the FSI and industry, followed by government consultation on the FSI's recommendations and now scrutiny through this inquiry. We support enacting a clear and concise statement of the objective of superannuation. There is a broad understanding of the objective of the superannuation industry amongst the public and stakeholders. However, this understanding does not always reflect legislation affecting the superannuation system. The FSC would expect that prescribing the definition in the legislation should help to overcome this disconnect.

The FSC is of the view that a clear statement should not require the support of subsidiary objectives. Subsidiary objectives are likely to be subjective and open to interpretation, and this is inconsistent with the purpose of a clear overarching objective. We do not support the proposed objective as it is defined in the bill, as it emphasises whether or not a superannuation consumer is reliant on the aged pension. We believe the objective should reflect the fact that most consumers aim to save for an adequate level of income in retirement based on their personal circumstances, rather than to become less reliant on the age pension. This is a key feature of the system. Contributions are a proportion of wages, and retirement income should also be a proportion of your income over your life. The FSC supports the objective being enshrined in standalone legislation rather than existing law, as it provides a reference point for all future changes to superannuation, tax or social security policy. Superannuation and tax legislation can be quite complex and technical and, while the objective would operate at a higher level, it is not intended to inform the interpretation of technical regulations, but to influence policymakers and legislators.

Finally, the FSC supports a requirement for a statement of compatibility to be made in relation to future bills that relate to the superannuation system so as to ensure that the prescribed objective may have an influence on future superannuation reforms. A statement of compatibility is a feature of other federal laws, in particular human rights legislation. It would place responsibility and accountability on the relevant minister to demonstrate how any reforms would strengthen the superannuation system against the prescribed objective.

CHAIR: Thank you very much, Mr Hansell. Mr Briggs, do you have anything to add?

Mr Briggs : I have no further comments.

CHAIR: I want to start with something in your submission that I found very interesting. You have suggested that the objective of superannuation should essentially enshrine the objective of the individuals within the system, as opposed to the system itself. Every other submission, I think, tends to focus on the objective of the system, and here you have written about the objective of individuals within the system. Can you expand on that at all?

Mr Briggs : I might step in quickly. The FSC represents superannuation funds, life insurance companies, fund managers and the like. The view of our membership, more broadly, is that the first purpose of the system is to deliver retirement income for individual people, and the system as a whole is the composite of those individuals' contributions of individual super fund consumers. Our focus has always been on what retirement income is delivered to the people who participate in the system, not whether the system is working well for the corporations that sit within it or the government policy that sits over the top of it because, of course, they are subservient to the primary purpose of the individual consumer.

CHAIR: My concern is that using the word 'adequacy' is highly subjective, and indeed you have said here that 'superannuation consumers aim to save for an adequate retirement based on their personal super circumstances.' Previous witnesses before the committee today have spoken about, potentially, adequacy and dignity being part of the aged pension system as opposed to the superannuation system. What do you have to say about that?

Mr Briggs : That is obviously one of the main points of contention about how you do define this and there is certainly not a single set of views. The FSC has always defined adequacy as 62.5 per cent of pre-retirement income up to a certain threshold of sustainability, which is twice times the average weekly ordinary time earnings. We do not think that is particularly subjective. We think that you can measure that quite clearly. It links to wages growth and it links to a proportion of people's income when they retire, and a lot of Treasury's estimates of the cost of the system are underpinned by those sorts of factors. The reason we use that measure is that a Senate select inquiry about 10 or 15 years ago decided that an adequate retirement income was around 60 to 65 per cent, so we simply use a midway between those two points. We think that is a more compelling measure of adequacy than things like the ASFA comfortable standards, which are basket-of-goods related, or what other organisations, such as the Grattan Institute, try to do, which is talk about trying to average off different assets inside and outside super, including things that are very difficult to be monetised, such as household items. So, we prefer that. It is, I guess, slightly more subjective because adequacy does have an angle, which is individual perception, but at the end of the day we think that there are some pretty strong benchmarks for what adequacy means in a public policy sense, so we think that would be the right way to go.

CHAIR: I suppose my major concern is that even those submitters that would like to see the term 'adequacy' or its equivalent enshrined in the objective of superannuation cannot agree on what adequacy actually means, so, to simplify it, surely it would be better to remove 'adequacy' from the definition entirely.

Mr Hansell : I do not think that there is anything particularly wrong with the definition the government has put forward, as far as it goes, but I think in the context of the objectives, given that they do not necessarily bind or overrule existing superannuation legislation or taxation law, we have pretty much formed the view that the objective is more of a guide than a recipe. From that perspective, we believe that the objectives should be an aspirational goal. It is like: if we shoot for the stars and hit the moon, that is not a bad outcome, right? As I said, it is a guide for future government policy; it is a guide for policymakers into the future. We are not saying that this must be achieved in every piece of legislation. I think what the objectives should be is an aspirational goal.

CHAIR: One of the things in your submission that I was really pleased to see was that you suggested a periodic review of the system against the objectives. You also suggested perhaps that periodic review aligning with the Intergenerational report. That is something that I have spoken about a lot in the past. Even if the objective that the government has proposed were adopted would you still like to see that periodic review every five years potentially tied to the Intergenerational report?

Mr Briggs : The original recommendation of the FSC to the FSI was that the periodic tinkering, through either tax or other policy settings, did have an impact on confidence. We do see it turn up in contribution amounts. Yes, we would like to see a periodic review and we do see the IGR as a vehicle for doing that. It is a five-year cycle; that is a nice gap. It enables the government of the day to build up a policy evidence base for any future changes.

The issue then becomes: it would be giving more teeth to the objective than what is currently recommended in this bill. So the bill is saying: 'Here is the objective of super, and the minister must make a statement of compatibility with any future legislation.' That is great. The FSC supports that. It does not yet say: 'And if we do a five-year IGR against the objective, then how is it stacking up?' So what we have not contemplated is a scenario where this bill goes through unamended and then the IGR proposal is introduced and it is tested against the objective which we have some concerns about.

Senator KETTER: Mr Hansell, I wonder if you are being overly charitable in your opening statement when you say, I think, that you welcome the government's consultative approach, because some have been a bit critical of that particular approach and, in particular, the failure to achieve a broad consensus on an objective—which is hugely important; if we are going to have an objective which stabilises policy in coming years, then that is pretty fundamental—and also given the fact that the government adopted the FSI proposal and has not moved after this consultation exercise. So would you like to elaborate on your views about the level of consultation?

Mr Hansell : We are realists, I guess. We are in a democracy. I do not know if it is going to be possible all the time to achieve bipartisan approaches on some of these issues. I think it is what it is. We have landed where we are. I think the government has consulted. Is it perfect, from our perspective, in terms of where we are landing? No, it is not. As I said, we have put forward the view that we think it would have been an opportunity to be, as I said, much more aspirational in terms of how we see the objective for the system. But we are where we are today.

Senator KETTER: Do you think the government has listened to the stakeholders, including you?

Mr Hansell : Certainly the government has been aware of our views for a very long time. Governments need to balance the views of different stakeholders. I do not really have visibility of that process, so I cannot really comment.

Senator KETTER: What would you say to the Grattan Institute's claims that many or most people are saving more outside of super?

Mr Hansell : I have seen various figures around the industry produced by different associations. My own observations would be that I just do not think that stacks up, to be honest.

Mr Briggs : I think the important point to be made is this. There is the old saying: 'There are lies, damned lies, and statistics,' right? Certainly you can compile people's data on savings to show a whole raft of different things. What I think the Grattan Institute has sought to do is to try to throw as much as possible into the bucket of outside-super savings and say: 'Look at all this wealth. Therefore, super is a fairly minor part of the retirement system. And do not put as much onus on super as we currently do.'

That is just the wrong way to look at it, for two reasons. One is that we have a superannuation system because people were not adequately saving pre universal super and before that, and so you had to get over that psychological heuristic where people focused on the short term and did not adequately save for the long term. Yes, they may have had some other assets. Some people might have been long-sighted and saved a bit more for their retirement. But the reality was: people were not saving enough. And I think even Grattan recognises that superannuation means people have more retirement savings than they otherwise would. I certainly know the RBA has made that finding, and I put a lot more stock in their research.

The other point I make is that the difference between savings inside super and outside super is that you can access your savings outside super whenever you want. So, yes, you may have built up some savings, but if something occurs over the course of your life—you get an illness; you want to buy a property; you want to go into some sort of investment scheme—you can consume those savings in the mean term, and, whilst that may contribute to savings over the long term, it could also be squandered. What superannuation is doing is saying, 'Anything outside super, you can consume that throughout your working life or you can save it, but super is solely for retirement.' And it is about saying that if people were not putting enough away just for their retirement and I think Grattan does not put enough weight on the distinction between what is solely for retirement and what can be consumed elsewhere.

Senator KETTER: Do you have a view about the Grattan Institute claim that most Australians are okay, based on their current age pension and superannuation guarantee savings?

Mr Briggs : We have not tested their statistical analysis, so I would not like to comment on the quality of their analysis, but I think it is wrong to look at age pension income and say, 'They are okay getting part pension part super, therefore let's not change anything,' because the whole point of being aspirational about the system is that you get as many people as possible down the means testing curve towards not receiving the age pension at all and hopefully becoming self-funded retirees. Starting from the basis that, if you put together a bit of government support here and a bit of private savings there, most people are okay is just the wrong way to think about the superannuation system.

Senator KETTER: Would you say that the objective in its current form is helpful in making decisions about different policy options?

Mr Hansell : From our perspective, it is a start. As I said before, we would have preferred an objective that was much more aspirational in terms of what we're trying to deliver in terms of an adequate retirement income for people within the system.

Senator KETTER: I will put to you a proposition I think I put to Mr Yates: you could have a proposition to halve the $100,000 per annum non-concessional contribution cap or halve the $500 LISTO and both proposals would still result in superannuation supplementing or substituting the pension. What guidance does the objective provide in relation to those policy changes?

Mr Briggs : It becomes a matter of the degree to which it substitutes or supplements. I think that is implicit in the wording in that the system is intended to push people down that scale of means-tested eligibility for the age pension. My interpretation of the objective is that it does inform those sorts of deliberations about at what point should different thresholds, caps, supplements or tax benefits kick in, taper off and stop. It is because it is about reducing reliance on the age pension. I think the point that we have made is that this singular focus on age pension eligibility is the issue with it, not the degree to which you are eligible for the age pension.

Senator KETTER: Are you concerned that the current definition might be used to justify major system changes, such as raising the preservation age?

Mr Briggs : It would have to inform all potential system changes—that is the whole purpose of it. Would it be used to justify? To the extent that any potential reform to the system aligns with the proposed objective, then that helps make the case for those reforms, because you can show it has that impact on the desired outcome of the system. From our perspective, if you are looking at the outcomes for the consumers, if it helps deliver that outcome for the consumer then that policy stacks up against that objective.

Senator KETTER: What about the provision of insurance through superannuation? What does the objective say about that?

Mr Briggs : Sorry, are you asking us to test these policies against the objective as it is currently drafted?

Senator KETTER: Yes, the current draft.

Mr Briggs : Okay.

Senator McALLISTER: If I can also clarify, because I am interested in this same point: by narrowing, as the draft objective does, the relationship to one between super and the age pension, do you risk, perhaps inadvertently, screening out a range of features that have been characteristic of super over the last 20 years, like insurance and some of the provision for early retirement or permanent disability, some of those other income-smoothing effects, and that are currently features of the system but do not seem to be recognised in the objective as drafted?

Mr Briggs : Okay, I understand. The overarching point to make is that the superannuation system is hugely complex, and if you were trying to come up with an objective that dealt with every aspect of it you would end up with a hugely complex objective. In relation to insurance in particular, there are several different ways to derive income from superannuation. One is the money that you contribute in, you save up and you draw down on in retirement; another is to draw down on insurance benefit should you meet the contractual obligations in the insurance policy that you have through superannuation, such as a health issue or life insurance. I do not think it precludes insurance nor says anything negative about it, because insurance is an entirely legitimate and well accepted way of providing an income for someone through their retirement should they need to call on their insurance—and long may that be the case. But I would caution against trying to craft an objective which takes into account all the nuanced aspects of the system, because we would end up in a position of incredible complexity.

Senator McALLISTER: The follow up is: the age of access for superannuation is different to the age pension age. We have an objective before us that tightly links super to the age pension. Is there a risk that that then underwrites a change to the age of access for super, which all the evidence suggests is presently being used by a cohort of people to deal with unemployment, underemployment, workplace injury and a range of things in that 55- to 65-year-old age range?

Mr Briggs : I should make it clear that the FSC's policy is that the preservation age should be higher than it currently is. The reason for that is twofold. One is that the gap between the pension age and the preservation age that you identified creates a situation where people draw down their super quicker than they otherwise would, because they do not have any age pension to supplement it, which leaves people worse off in retirement; the other, and I think the Grattan Institute has taken quite a close look at this, is that as a very broad principle—excuse my language here—poorer people tend to have to work to 67 because they know they do not have enough to retire on while wealthier people retire at 55 to 60 because they think they have enough. Putting aside the fact that a lot of those people do not actually have enough if they live for a long time and end up on the age pension anyway, it is—what is the term?—punitive on lower income people to have the preservation age as low as it currently is.

The FSC does support increasing it, but still retaining a gap of some sort with the age pension age. That being said, to the extent that a higher preservation age helps achieve the sort of objective that is in the bill at the moment, then, yes, that may help make the case for a higher preservation age. But is that the purpose of it? No, I do not think so; I think that is drawing a pretty long bow. But also would that be a negative thing? Well, if the policy evidence stacks up, then that is the sort of debate and deliberation that having an objective of super should be stimulating, and that is the sort of debate that we as an industry want because we want evidence-based policy. We should closely consider these things before we have any changes to the system.

Senator McALLISTER: It does not risk prejudging some of those questions?

Mr Briggs : The opponents to a higher preservation age say, no, it is bad for some cohorts of people because they cannot stay in the workforce, they do not have the requisite skills because of the structural change in the economy and the like. If that evidence stood up to scrutiny, then it would actually be against the objective as it is defined. The objective as it is drafted may actually help make the case against a higher preservation age if there is evidence for it.

Senator McALLISTER: Thank you, Senator Ketter, for letting me interrupt; I appreciate it. I will not ask any further questions.

Mr Hansell : Can I just add to what Blake said? I just want to reiterate a point I made earlier: as far as we can see, the objective, as I said, is a guide; it does not appear to be a recipe in that it is going to bind the government to ensure that the objective is strictly consistent either with existing law or with new law. I would expect that, no matter which government is in power, there will be times when the minister of the day routinely provides a report on the objective being not met, being partially met or being fully met. I just wanted to add that observation.

Senator KETTER: I was trying to tease out to what extent the current objective is an adequate guide to policy development in the future, to avoid the chopping and changing that we are all trying to avoid. How does the current proposed objective help us to manage the other risks that we have, such as health care, aged care, insurance during the working phase, and other unforeseen events? Does this definition give enough attention to managing those types of risks, in the accumulation phase and in the retirement phase?

Mr Briggs : I think the reality, as I said before, is that, should you try to craft an objective which is multifaceted in that regard, you would end up with something incredibly complex that does not provide clear guidance to policymakers. By having a singular, high-level objective you measure any policy changes in those areas against that high-level objective. Should you try to craft something more complex or with more subsidiary objectives, then, by the very nature of the superannuation system, they are sometimes internally or inherently in conflict. That may not be particularly helpful for policymakers.

Senator KETTER: Is the bill, as currently drafted, going to provide the policy stability that you think is important?

Mr Briggs : I think it would assist policy stability. Is it the be all and end all? No. To be frank, it comes down to the stakeholders—including organisations such as ours—to hold the relevant government and minister of the day to account against the objective as it is stated. The teeth in this are the teeth that it gives third-party organisations to act in the best interests of consumers.

Mr Hansell : And at the same time we will continue to push some of these other aspirational themes that that we have suggested.

CHAIR: Do you think that a lot of the issues we have discussed today—things like the preservation age and insurance—fall more under the objective of the retirement income system as opposed to the superannuation system, which is a subset of the retirement income system?

Mr Hansell : I think the two are inherently linked.

CHAIR: The Grattan Institute were talking about, essentially, a fourth pillar, which was voluntary savings outside superannuation. That is something that we rarely discuss, and yet it is an integral part of the retirement income system. Do you think that, potentially, those types of issues should fall under an even broader banner?

Mr Briggs : The point that I would make is that we do not have a singular, cohesive retirement income system national policy. Yes, it is made up of its component parts—someone's private savings, someone's superannuation savings, someone's family home and people's insurance coverage—but I think that having a discussion about a retirement income system should not be used to devalue the importance of the superannuation system, because, by and large, superannuation is the most important pillar in the retirement income system. The average punter would not consider the two as separate: they think about their retirement; they think about their superannuation. So the way the Grattan Institute talks about it, I think, is seeking to demote the role of superannuation as separate from what it was intended to do.

CHAIR: Do you think that the objective, as it stands, inexorably links superannuation to the age pension, but superannuation and the age pension are not the only forms of retirement income?

Mr Briggs : I think that they do not have to be the only forms of retirement income; there are some private savings, but the level of that is not significant enough to be relied upon by policymakers.

CHAIR: Senator McAllister, did you have any further questions?

Senator McALLISTER: No, I committed to not asking them.

CHAIR: You do have a little bit of time up your sleeve, because our next witnesses are not here yet.

Senator McALLISTER: One of the things that interests me is that substitute or supplement, which are the two terms in the objective as are currently drafted, present opposing policy prescriptions for some of the key questions that we are asking in superannuation. I worry that that is one of the weaknesses when it is formulated without reference to this kind of external standard about what the aspirational goal is of the system as a whole. Is that something that worries you? Your comments on that would be useful.

Mr Briggs : I am trying to think about examples where substitute or supplement are in conflict. When you think about it purely about aged pension eligibility, they are fairly complementary, in my view. It is about pushing you down that means-testing scale for the aged pension, so supplementing the aged pension is the amount by which you go down that means-tested scale; and substitute is the point at which you fall off the end, because you are self-funded. So perhaps it is the way I see the system but I see those two as complementary and the impact that has on other features of the system such as what sorts of services does your fund provide for the administration fees that are charged and hence the lower balance that you have because of the fees but the other valuable services that are provided. Yes, there may be a degree of tension there and that is not explained by the bill about how policymakers should trade that off. But, at the end of the day, by focusing on the retirement income that you receive from the system when you retire, I think you can still evaluate: was that service worthwhile against this income that you will receive when you reach 67, 55 or whenever it may be?

Senator McALLISTER: I am thinking most keenly about aged pension interactions. There is a well-established narrative that the origins of superannuation lie in seeking to provide a more comfortable retirement than the aged pension might have otherwise offered for a large group of people. Substituting in one reading could suggest just substituting—just replacing—and there are certain groups of people for whom their additional savings at the moment within the superannuation sector actually do not materially increase their outcome because of the way that—and that is always going to happen in any means-tested arrangement. I am just thinking about how useful this substitute or supplement idea is, if it is not linked to an external outcome.

Mr Briggs : That is true. If I understand the way you are talking about that, I think we largely agree: the superannuation system was always designed to—I will rephrase that. For a large cohort of Australians at the moment, they were always going to receive some degree of aged pension. They are probably still going to receive some degree of aged pension, but their standard of living in retirement will be higher than it otherwise would be because they will get the aged pension plus their superannuation savings, which may be relatively modest. However, when the aged pension is only providing $20,000 or $30,000, depending on whether you are single or a couple, and you have an actual $5,000 or $10,000 a year on top of that because of super, that is a relatively modest balance but it is a meaningful difference in the quality of your retirement.

Senator McALLISTER: And you described that as supplementing the aged pension.

Mr Briggs : Exactly. So I would describe it—

Senator McALLISTER: That example cedes a super supplement on the aged pension.

Mr Briggs : To the extent that there is a bit of tension there with the idea of substituting therefore there should be a degree of removal of the aged pension or removal is good, then I think we would have concerns there. The objective of the system is not just what the Grattan view of the world is: that there is money flushed around everywhere, and we should only think of super as a cost to government. We think of super as the highest standard of living individuals have in retirement, and that quality of life improvement does not always have a monetary value and should not always be slated back to tax expenditures.

Senator KETTER: I want to turn to the proposed definition you put forward, which is:

To deliver dignity and independence for all Australians in retirement by providing replacement income that is adequate to provide a comfortable standard of living.

One of the criticisms we have heard from previous witnesses this morning is that we need to look more holistically at the system rather than just purely at superannuation. Your objective provides those standards, so would you talk us through why you think your proposed definition is superior.

Mr Briggs : The first point is the aspirational point that we make. Adequacy is a reflection of having the quality of life in retirement that an individual consumer would like to achieve and that is reflective of their pre-retirement income. As I said, we measure it as 62.5 per cent of your pre-retirement income, up to or capping off at about twice AWOTE. So that is captured in there. Replacement income is that focus on providing income that replaces what you earn during your working life, and so it has its grounds in the employment and the wages system, maintaining that quality of life and smoothing your consumption between working life and retirement. And it has, as I said, that aspirational element of encouraging policymakers and individuals to not resign themselves that people have to retire on a modest age pension. I do not want to be too derogatory about people on the pension, but it is not much, it is hard to live off and superannuation is there to try to alleviate that. It is about recognising that people are better off when they can supplement or get beyond that.

Senator KETTER: The IPA have put to us that having an objective that does not assist the process is actually a worse outcome and that having no objective is better than having a poor objective. What do you say to that?

Mr Briggs : We disagree with that. The accountability is important and that will span across all future governments. I think that is an important stick for the industry to have and for consumers and retirees to have. I also think that the objective is good but not perfect. As our director of policy, Mr Hansell, has said, we are somewhat supportive of the government's definition but feel that it has its own issues. It is about getting the best objective that cannot always accommodate every circumstance but helps provide that shining light for policymakers.

Senator KETTER: So you do not share the concern that, as it is currently framed, the purpose could be narrowly interpreted by future governments as a justification for winding back access to the age pension?

Mr Hansell : No, we do not, on the basis of what I mentioned earlier. The objective, as I said, will be something that government will reflect on in establishing new legislation; but, as I said, from time to time there will be governments that either fully comply with the objective or partially comply with the objective or do not comply with it at all.

Senator KETTER: I am not sure how you come to that view when the word 'substitute' is clearly in the proposed definition and it seems to be neutral as to the ultimate outcome. How do you have any confidence that a future government could go down the track of reducing the age pension, based on the current proposed objective?

Mr Hansell : As I said, this is an objective and I do not believe it will necessarily hogtie this government or any future government in terms of whatever outcomes they wish to deliver at any particular point in time.

Senator KETTER: Therefore, it is probably of very little use. You use the word 'hogtie', but we are looking for guidance. We are looking for policy stability over a period of time.

Mr Hansell : As I said, the accountability is there. The government needs to report on its performance against the objective. That will feed into the public debate. It will be reported on and there will be transparency around what is happening, and associations such as ourselves will form views and make views known to government and other players in the political arena.

CHAIR: My concern with your interpretation of an alternative objective of superannuation is the number of subjective terms that it uses. 'Dignity' is a subjective term, 'independence' is a subjective term, 'adequacy' is a subjective term and 'comfortable standard of living' is a subjective term. All of these things mean something different to every person in this room and beyond. Do you not think that that then becomes a toothless objective?

Mr Hansell : No, I do not. As I said before, we want to try and aim high here because it is an objective and it is aspirational. I think that we have landed in quite a good place here in that it does achieve that aspirational view.

CHAIR: My concern with aspirations is that they feel good but they might not achieve all that much.

Mr Hansell : As I said, I think we need to aim high here—you shoot for the stars and hit the moon. If we start with a high aspiration and achieve half of that, that is a good thing.

CHAIR: Thank you very much for coming here today and presenting to the committee. I now welcome representatives of Industry Super Australia.