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Economics Legislation Committee
Superannuation (Objective) Bill 2016

GALLAGHER, Mr Phil, Policy Adviser, Industry Super Australia

LINDEN, Mr Matthew, Director of Public Affairs, Industry Super Australia


CHAIR: Thank you both very much for appearing before the committee today. I invite you to make a brief opening statement and then the committee will ask you some questions.

Mr Linden : We thank the committee for the invitation to provide testimony on this bill. Industry super funds have a genuine and keen interest in the bill before the committee today. As members of the committee may be aware, many of the past and present leaders within our funds and among trustees and sponsoring organisations played a direct role in campaigning for, designing and operationalising key parts of the system as we know it today.

Prior to the introduction of the superannuation guarantee 25 years ago and the national wage cases that preceded it, private retirement savings were largely the preserve of company executives and public servants. The vast bulk of the population had little or no private savings to take into retirement and they relied almost exclusively on the age pension. Added to this, demographers identified that the postwar baby boom would result in a rapid ageing of the population and, with it, heightened community expectations about living standards in retirement. It was against this backdrop that mandatory super savings were introduced to provide broad-based private retirement savings to Australian workers and to offer them a better standard of living in retirement than the age pension alone could provide.

Many people point to other purposes for the system, including national savings and alleviating fiscal cost of age pensions. These were certainly put forward as arguments for moving to a compulsory funded retirement system, but they were a product of the social policy objective to deliver working people a better retirement. Twenty-five years on, and it is indeed timely to be assessing whether the system is on track for meeting the objectives which were outlined at its genesis and codifying them in law to guide future policy. At the outset, I would like to state that legislating an objective for the superannuation system has a good deal of merit. This is acknowledged broadly across the industry. However, the bill before the committee today is seriously deficient and one which we cannot offer support for.

There are five key reasons why the bill is deficient. Firstly, the proposed primary objective does not faithfully reflect the basis on which the system was established. That is, to enable Australians to enjoy a decent standard of living in retirement. Merely supplementing or substituting the age pension provides no basis to assess whether the superannuation system, in combination with the age pension and other private savings, is indeed doing what people reasonably expect of it. Just as the public expects our health and education systems to deliver high-quality care and good outcomes, it is not unreasonable that our retirement income system delivers a good retirement, with inputs and outputs measured against this.

Secondly, the proposed objective does not have consensus support as recommended by the Murray review. Almost all stakeholders and industry bodies do not support the proposed objective. For an objective to be effective and to stand the test of time, it must have consensus support.

Thirdly, the objective as drafted is inconsistent with the sole purpose test and conditions of release in the Superannuation Industry (Supervision) Act—the SIS Act. The sole purpose test and the SIS Act enable superannuation to provide financial resources to those who experience premature retirement, not just age retirement, and extreme financial hardship. It is unacceptable to have an objective that is at odds with the primary enabling legislation by tying superannuation explicitly and exclusively to the age pension.

Fourthly, the legislative architecture is flawed, because the secondary objectives are subject to regulation rather than being included alongside the primary objective in the law. As a consequence, the government of the day may set and alter secondary objectives to suit their purposes and other policy and political objectives. This could involve secondary objectives changing from one electoral cycle to the next. We are better off seeking consensus on this and having stability. During the consultation, the government argued that the national savings effects were no longer relevant, despite system assets invested on behalf of members playing an integral part in capital markets and in the efficient allocation of capital in the economy. What if policies disrupt trustee investment strategies where they are seeking to maximise risk-adjusted returns for members? What assessment will there be of the impacts on members and potential disruption of efficient capital allocation?

Finally, the objective as drafted will provide no guidance to policy development or competing policies. It is broad and vague in application and will provide no means or yardstick to assess policies. Policies that raise or undercut retirement incomes will be consistent, so long as super continues to substitute or supplement the pension. Put simply, this is a clayton's objective.

Senators: we must do better than this. Millions of Australians are depending on the system to ensure they can achieve a dignified retirement, with enough financial resources to enable them to have a reasonable degree of social and economic interaction with their communities, families and friends. This is not an excessive or lavish ask; it is what people expect and what the system should aim to deliver. We cannot understand the reluctance of the government to recognise this in the objective and, in doing so, to provide firmer grounding for assessing the merits of future policy and distribution of support. Our recommendation is that the government withdraw the bill and return to consultation with all stakeholders to find a consensus objective, as the Murray inquiry recommended.

Before concluding my remarks I wish to make a reference to one further matter relevant to the bill and to the submissions tendered to the committee. We are disappointed that proponents of a very modest objective have sought to justify their position by producing analysis claiming that superannuation makes a very modest contribution to retirement savings and income. It is our considered view that this analysis is misleading and contains managed statistical flaws. My colleague, Phil Gallagher, has undertaken detailed analysis of the ABS Survey of Income and Housing, which demonstrates quite clearly that for more than half the population across most age segments, and particularly for lower- and middle-income earners nearing retirement, superannuation is their main retirement income asset, comprising 80 per cent or more of their non-home savings.

This analysis also identifies $1.5 trillion worth of assets misrepresented for retirement by the Grattan Institute in its submission to the committee. I would be grateful if we could table this analysis as an additional document, and I would welcome committee members asking further questions.

CHAIR: Are we happy to table that? Yes. Mr Gallagher, do you have anything to add to the opening statement?

Mr Gallagher : No.

CHAIR: I will start the questioning. The term you used was that the objective of superannuation was 'fatally flawed'. This was the objective of superannuation that was originally recommended by the Murray inquiry, the financial services inquiry. David Murray, Professor Kevin Davis, Craig Dunn, Carolyn Hewson and Brian McNamee, who were all members of that inquiry, are all people well respected in the financial services community. Why do you think that people who are held in such high regard could have got this wrong?

Mr Linden : I think there were very good motivations there in identifying this as an issue and recommending that an objective be set. I recall very clearly the financial systems inquiry and I and some of my colleagues were involved in a number of key consultations which occurred throughout the various stages of that inquiry. There was no consultation on the objective of superannuation. The inquiry did not seek views on the recommended objective which found its way into the final report. As a consequence, the committee members, as esteemed as they are, did not obtain the views and perspectives of other key stakeholders in the system. If they had, they may well have landed at an objective which could obtain consensus support, which is what the inquiry recommended—that is, that an objective achieve consensus support. It has not done that.

CHAIR: I should have mentioned to committee members that I have a very vague potential conflict here. In a previous life, before parliament, I worked for Australian Super, who are closely associated with the ISA, and I worked specifically on some issues related to the purpose of super and a response to the FSI report. I had a bit to do with Mr Linden and the ISA generally during that time, and also the FSC—I probably should have mentioned that a little bit earlier—and the AIST. So we are all in it together.

You said that the definition of the purpose of super as it stands in the legislation is broad and vague, yet the words that you have used in your alternative objective are things like 'financial security', 'dignity' and 'a comfortable standard of living by reasonable community standards'. These terms are highly subjective, if not broad and vague themselves. How do you respond to that?

Mr Linden : I would not necessarily agree with that perspective. I think one of the troubles with the objective as it is currently drafted is it talks about means rather than ends. There is a need for the objective to make reference to what the ends of the system should be. That, very plainly, is what an objective is about—what is it expected to deliver? Substituting or supplementing the age pension is just a means, a course of that. Without a benchmark of some form, it is impossible to assess the relative policy merits of different proposals which come forward to government and which the government—

CHAIR: But we cannot get consensus on that benchmark. I suppose that is one of the key things that will come out today. Even those who are proposing a benchmark cannot agree on what that benchmark should be.

Mr Linden : I think most people within the industry, ISA included, make reference when considering adequacy to the ASFA comfortable retirement income standard. It is a budget standard. It is well established. We think that would provide a reasonable starting point for discussion. There are some limitations to it. However, we think it represents a reasonably good budget standard which would reflect a level of retirement spending for retirees to have a reasonable degree of social and economic participation in their communities, with their families and friends.

Ultimately, though, it would be a matter for government to consult in some detail on this question. It has not really done that to this point. We, and I think others in the industry, would hold the view that, if it did have some more in-depth consultations around this, in fact there would be a high degree of consensus.

CHAIR: If you wanted to make words like 'dignity' and 'adequacy' implicit in anything, surely it should be in the age pension as opposed to superannuation?

Mr Linden : I think one of the key things here going to the objective is that the objective itself probably misconstrues the relationship between superannuation and the age pension. It makes no reference to other private savings but all of these things, the three pillars of our retirement income system—the age pension, superannuation and private savings—in combination, provide financial resources to people to support their retirement. As it stands at the moment, the objective that has been drafted makes specific reference to and interaction with the age pension without, necessarily, any particular outcome in mind. That is a significant shortcoming.

CHAIR: If you could clarify something for me: my understanding was that private savings outside of the superannuation system were, in fact, a fourth pillar and that the third pillar is voluntary superannuation savings as opposed to compulsory superannuation savings. I just want to make sure that we are all on the same page here.

Mr Linden : My recollection—and Phil can offer his views as well—is that when I was working on the Henry tax review and we considered these issues, the third pillar included voluntary savings and also other private assets that are available to people. Would you concur Phil?

Mr Gallagher : If we go back to The World Bank averting the old-age crisis in 1993, the three pillars are defined as a means-tested age pension, a second pillar that is compulsory saving and a third pillar that is voluntary saving on top of the compulsory saving.

CHAIR: So the voluntary saving does not distinguish between superannuation voluntary saving and outside of superannuation voluntary saving?

Mr Gallagher : That is right.

CHAIR: That is interesting. I want to ask you about something you said: you mentioned the word 'decent' or a better standard of living that the age pension alone could provide and that that was the original intent of the superannuation system. My understanding is, and in fact COTA have suggested, that there is a high level of consistency between the proposed objective and the intentions of the Labor government in 1992 when it originally introduced the superannuation system. Do you have any comment on that?

Mr Linden : I would refer committee members to our submission and attachment 1 which is a detailed consultation document to the division head of the Retirement Income Policy Division on the objective. Page 9 of that, which is attachment 1, deals with the consistency of the objective with historical views on superannuation. In that we cite very clearly relevant public comments which were made by some of the key architects at the time of the establishment of the system . Very clearly those public comments included clear references to improving standards of living in retirement, responding to community retirement aspirations and delivering increased living standards above which the age pension alone could provide. I think this is quite important and it goes to maybe some misunderstandings about some of the fiscal imperatives associated with the superannuation system.

It is true that there are direct offsets to the age pension, but when the system was established—it is very clear in the public statements that were made at the time—there was a view put forward, and reflected ultimately in the final policy, that the age pension alone and the level of a publicly-funded age pension could not be increased by governments in a way to meet expectations of the community in respect to retirement income living standards. As a consequence, the superannuation system is intended to provide additional savings and, in doing that, it was expected and envisaged that it would reduce calls for increases in the age pension and reliance on the age pension in the long run. That is a very important distinction. Yes, there are direct fiscal offsets, but the overall combination of support from the age pension and superannuation and what it delivers to the community quite clearly has implications for the fiscal sustainability of the system.

CHAIR: In 1992, one problem that was addressed by the introduction of superannuation was a crisis in national savings. Indeed, the AIST in their submission have suggested that that should be potentially one of the subsidiary objectives of superannuation. What do you have to say about that?

Mr Linden : It is certainly true that at the time of the introduction of the superannuation guarantee there were concerns about the twin deficits—so, current account deficits and also public sector deficits—and the need for additional domestic savings. One of the outgrowths of the system is that it has improved the level of domestic savings. We now have superannuation assets of a little over $2.1 trillion, which well exceeds our annual GDP. We would think, however, that the national savings impacts are still relevant. Indeed, Treasury and economists as recently as the global financial crisis made reference to the fact that the presence of our funded superannuation system and pool of domestic savings alleviated the impact of the GFC, so clearly its national savings effects are still relevant and a very important part of the stock of capital within the economy that can assist in times of financial crisis.

CHAIR: But it should not be part of the objective?

Mr Linden : Our view, which we articulated in our submission, is that issues around national savings and the investment and capital market effects of superannuation should be a secondary objective, and we think it would be entirely relevant for any proposed policies to report against potential effects in that space. We think that that is quite important. That is just an outgrowth of the size of the system. Governments need to be mindful of how potential policy changes might affect the way that funds invest, the way in which they operate in capital markets.

CHAIR: I want to move on to those secondary objectives, because there does seem to be some consensus in the submissions around those secondary objectives, as opposed to the original objective, the primary objective. Why do you think that is?

Mr Linden : There are a number of secondary objectives which are proposed and outlined in the explanatory memorandum and which, as I outlined in my opening statement, the government intends to regulate on. There are instances in respect of those secondary objectives where there is not necessarily a common view. Some parts of the industry are less exercised than others about those national savings effects which you referred to. I think, though, that generally all parts of the industry would acknowledge that it is a significant pool of capital and there needs to be a secondary objective which makes reference to that and requires governments, when they are putting forward potential policies, to assess whether or not there are likely to be any significant impacts.

CHAIR: This issue of consensus concerns me somewhat. You mentioned that there is not any consensus from submitters, and that was one of the recommendations of the FSI—that we needed a consensus approach to the objective of superannuation. My concern is, I suppose, that potentially there is not consensus but only from those submitters who have a vested interest in the system, as opposed to broader stakeholders. One of our earlier witnesses—I think he might have been from Grattan—said that superannuation is there not for industry but for all Australians, and yet this lack of consensus around the objective seems to be coming from industry as opposed to the broader population.

Mr Linden : I think those in the industry, ourselves included, in terms of our views, reflect the effect of this objective in terms of the capacity of our funds to deliver outcomes for the members of our funds. So from our perspective our concerns relate to whether or not the objective will assist in relation to delivering on our members' expectations. Given the breadth of our membership, that reflects community expectations about what the system delivers.

I would disagree strongly with some of the views put by Grattan about these shortcomings in the objective being framed as an opportunity for the industry to hold out their hand for a higher level of tax concessions in the future or additional outlays. I think that is nonsense. Probably the key area of improvements in retirement incomes in our system will come about from system efficiency. There is no need in those circumstances for governments to provide additional resources. Although there is a need to increase the level of the superannuation guarantee, there is no need through efficiency for members to contribute in that regard. The onus is on the industry.

There is also the question of the allocation of existing resources. So, the assumption being—and I think it is a sound one—that the system is quite adequately supported through a combination of tax concessions and age pension, there is a live question as to whether or not the allocation of those resources is as efficient as it could be. Obviously, as part of this package of legislation, governments have put forward some much needed and long overdue reforms with respect to superannuation tax concessions, and they should be congratulated for that. It is a matter which will continue to need assessment as we consider how the system is delivering for people and to calibrate settings to arrive at a position whereby we can maximise the proportion of the population that is achieving a decent standard of living in retirement.

CHAIR: That leads to my final question. Previous witnesses, the FSC, suggested that a five-yearly review of the superannuation system and whether it was meeting its stated primary and subsidiary objectives would be beneficial, and to potentially tie that to the Intergenerational report. Is that something you would agree with?

Mr Linden : We would agree with the FSC on that. We think that would be a very sound approach. Unfortunately, for too long we have seen a range of ad hoc changes being made to the system, budget cycle to budget cycle. We are grateful that in the latest tranche of changes the government has taken its time to work through a series of changes to improve the structure and efficiency of the system. We would hope that, although there is a job to bed down those changes, there would be a period where there would be some policy stability. The idea of having a five-yearly review aligned to the Intergenerational report would be very sound for assessing whether or not the system is on track. I might ask Phil whether or not he has any further perspectives, since he was integral to the modelling underpinning the first three intergenerational reports.

Mr Gallagher : In the process of an intergenerational report, a lot of analysis is done about the relationship between progress in retirement incomes, government social expenditure, population dynamics and the situation in the population. Certainly, with the dataset generated by an intergenerational report, a review would be in a stronger position than it would be otherwise.

CHAIR: Would a five-yearly review aligned with the Intergenerational report be something you would support, even if the government's bill as it stands is passed?

Mr Linden : We would like to see a situation where we have got the objective right. We do not see a point in legislating an objective that has significant deficiencies, but the idea of having a five-yearly progress report aligned to the IGR is important. As outlined in the bill and the explanatory materials, an accountability mechanism by which governments need to assess forthcoming policy proposals against the objective is, we think, very sound in principle.

Senator KETTER: Mr Linden, I am pinching myself at the moment because it is not often that there is a measure of agreement between the FSC and the ISA; it is unusual. I should place on the record that I am a former alternate director of the board of REST Industry Super. In terms of the level of support out there for the proposed objective, apart from the FSC, I note that it in your submission you refer to a letter that you and other groups sent to the Minister for Revenue and Financial Services back in August 2016. Are the parties that signed that letter the major stakeholders in the superannuation industry?

Mr Linden : Yes, they certainly are. They include ASFA, AIST, Industry Super and SMSFs. ASFA represents both not-for-profit and retail sectors. AIST represents the not-for-profit sector broadly, including public schemes, us, industry funds and SMSFs in the self-managed sector. It is not very often that different parts of the industry come together and are as one in respect of key superannuation policies, but this is obviously a case where there was sufficient concern about the objective as it was put forward for there to be agreement that it was not the right way to go and to encourage the minister to return and have some further discussions with the industry and other key stakeholders to try to find consensus.

Senator KETTER: Are there any major stakeholders that actually do support the proposed objective?

Mr Linden : I am aware that the Grattan Institute have been very public in their support. The Grattan Institute undertake policy research across a wide range of areas. I would not necessarily say that the Grattan Institute are retirement income experts in the way that many people who have been working within the system for decades are. But, nevertheless, they have quite legitimately put forward their point of view.

The second group I understand from their submission this morning that supports it are COTA. My understanding is that during the consultation process they were not supportive of the objective. For some reason or another—perhaps they have explained it to the committee—they have changed their minds. Certainly in the substantive submissions which they made to the Treasury consultation they had the very comprehensive view that the objective as put forward was deficient.

Senator KETTER: The analysis that Mr Gallagher has tabled today really strikes at the heart of what the Grattan Institute put forward. I am just looking at page 3 of that where it says that Grattan removed deciles 1 and 2, and when one looks at deciles 3 to 7—we are talking about non-home wealth here—we are talking about a range of 88 per cent to two-thirds of non-home assets are in superannuation. So it is hard to see how Grattan could have got it any more wrong in relation to this particular issue.

Mr Gallagher : They made claims about employees without analysing employees. They made claims about retirement incomes but included in their analysis of a lot of assets which most people do not feel should be used to generate retirement incomes. In particular, those included household contents and vehicles. Presumably they are included on the assumption that you are supposed to sell your car and your fridge in order to get standard of living in retirement! They also included the assets of children and of other adults in households and have given them to the household reference person. So there are a number of distortions in this. But the main distortion is that they have not looked at people just as they approach retirement when they have built up their superannuation. They have confused the issue by looking at younger households as well. They have not looked at employees and then they mounted an argument against the superannuation guarantee, which is for employees.

Senator KETTER: Do you have concerns that the current objective might be used to justify major changes to the system, such as raising the preservation age or removing insurance from super—things that the current objective would permit?

Mr Linden : I made reference in my opening statement to the fact that with the objective as it is currently drafted there are some clear inconsistencies with core provisions in the SIS Act. I am not aware of any current proposals in relation to those areas, although there have been calls for that. The objective as it is currently drafted makes it quite clear that the purpose of the system is to substitute or supplement the age pension. When the architecture of the Superannuation Industry Supervision Act was legislated, it quite clearly envisaged a range of circumstances whereby people may access benefits from the system, including circumstances of early retirement because of illness or disability. It is quite frequent for people who are over 60 but who have not yet attained aged pension age to be in a situation where they would desperately like to continue working but are unable to do so, because either they have disabilities or are caring for others or they cannot find employment. At the moment there are a number of release conditions within the SIS Act which mean that the system can provide some flexibility to people.

There is also provisions and conditions of release to assist people in severe financial hardship, including their need for life-saving treatment. The system provides income streams for people who have suffered catastrophic injury and have been receiving structured settlements. These are quite clearly outlined, and I am quite happy to table for the committee the relevant provisions in the SIS Act concerning the sole purpose test and the current schedule of conditions of release. In putting together your report you might like to look closely at whether these provisions which are currently in the core act for the system are in fact consistent with the objective that has been proposed.

Senator KETTER: Your proposed objective talks about all Australians being entitled to superannuation, but currently there are groups which are not. Should there be a discussion about who is entitled to superannuation and should that be reflected in the objective?

Mr Linden : Again, this goes to whether the system is delivering broadly enough across the community. Unfortunately, there are gaps in the system at the moment. One which is probably a source of frustration for many people who work part time, particularly women, is that they may fail the $450 rule. That means that, if they have less than $450 of gross earnings in a month, then the superannuation guarantee need not apply to them. For instances like that, we think it is probably timely to assess whether those particular provisions are still relevant. You would be aware, of course, from another inquiry that we have drawn attention to the fact that there seems to be quite widespread underpayment of the superannuation guarantee and obviously that affects its coverage and adequacy. There needs to be some flexibility in the system of people's retirement savings to deal with a range of circumstances that they may find themselves in. As a point of practicality or as an aspiration, we think that is an important thing to aim for. For the purposes of the government assessing policy, I think probably they would be focused on assessing whether or not the policy settings are assisting to maximise the proportion of the population that is obtaining a decent standard of living in retirement.

Senator KETTER: A large number of the submitters put emphasis on the fact that there should be an outcomes dimension to the objective. But the Chair's questioning has quite rightly pointed to the fact that, currently, we have a range of different phrases used such as 'dignity in retirement', 'adequacy', 'comfortable standard', although there is some more specificity about that. Are you confident that stakeholders could reach some agreement about wording that goes to the issue of outcomes for superannuation, which could go into the objective?

Mr Linden : I think so. In relation to the correspondence which you referred to previously, the key organisations which were signatories to that letter were, at least at that point in time, quite prepared to suggest that there is agreement around the following objective: to provide an adequate income to ensure all Australians achieve a comfortable standard of living in retirement, supplementing or substituting the age pension. I think that, if there was some greater willingness from the government to engage with the industry on this and recognise that the objective should have reference to outcomes, what the system is intended to achieve—there is obviously discussion around the specific words—most of the industry is quite united on the idea that there needs to be some references to what outcomes the system should reasonably be delivering.

Mr Gallagher : It is important to realise that retirement does not just happen for age retirement reasons. Many people retire early because of disability. Therefore, group insurance has a role in the system. Structured settlements have a role in the system. Age retirement is, in actual fact, something that fewer people are achieving. At age 64—one year before age pension age—only 40 per cent of people are still working. Most of the population retire before they become eligible for the age pension. Although life expectancy is increasing, disability-free life expectancy is increasing very slowly such that two-thirds of the increase in life expectancy is spent in a disabled state. The age pension is really focused on the employability of the population—the extent to which people can be employed as they get older—rather than on the fact that they only have a number of years to live. So focusing just on age pension per se is a very narrow concept in terms of retirement overall.

Senator KETTER: Mr Gallagher, leading on from that, do you think that the objective should give more thought to how people manage risk in the accumulation phase, bearing in mind that we have talked about these sorts of factors such as state of health? How should the proposed objective pick up those sorts of issues?

Mr Gallagher : I think that, clearly, it has to recognise that retirement is broader than age retirement. The other thing that needs to be recognised is that the objective of the system has always been better income in retirement. If you go back to 1989 and look at the joint statement of the Deputy Prime Minister and the Treasurer at the time, it was about better income in retirement. That was the document which gave rise to security in retirement and the superannuation guarantee in 1992. It was at that point that Australia made the choice to go with a funded system to supplement the age pension rather than a higher age pension. This current objective does not reflect something that has had bipartisan agreement, in my view, for a long time.

CHAIR: Just to add to that point: do you not then think that we should potentially separate out the objective of the retirement income system, or the retirement system, from the objective of superannuation? The types of issues that you are talking about here—and some of our other submitters have mentioned things like insurance—are broader than just superannuation. Would it not be better to put them under a different, perhaps broader, umbrella?

Mr Linden : I would probably emphasise what Phil mentioned before, and that is that, consistent with the current SI(S) Act, there are a range of circumstances where retirement might occur. The SI(S) Act is quite clear on this in terms of the system being limited to that and very exceptional circumstances in terms of financial hardship. I think the key issue is that the objective needs to provide some recognition of the fact that the system provides some flexibility in terms of retirement instead of being so tightly tied, necessarily, to age retirement.

Senator KETTER: Do you think potential benefits of proper risk management such as insurance are properly considered in this bill?

Mr Linden : I think probably not, for the reasons that I have explained. There are a range of different risks that, obviously, trustees of the fund are managing over time, including the risk that contributing members might not continue to be able to contribute through insurance benefits, if they suffer injury, disability or for some other reason they cannot work. At the point of retirement, of course, they are managing complex risks—and increasingly so—in terms of development of retirement income products in respect to managing longevity and market risk.

Implicit in that is that trustees are thinking about the extent to which the system can maximise income for members in retirement and whether or not that is in accordance with their needs rather than the current objective, which is very narrowly focused on just supplementing or substituting the age pension. There are a vast range of circumstances that someone can be in where income is supplementing or substituting the age pension. We think there needs to be a greater focus and a better benchmark developed to assess competing policies.

Senator KETTER: In your submission you talk about investments being in the best interests of members but that government might also play a role if investment provides positive externalities or public good. Could you elaborate on that.

Mr Linden : This is probably a reflection of what I said before. In the course of maximising risk-adjusted returns for members, trustees, of course, invest widely in the economy in a range of different areas of the economy and through different vehicles. There are positive effects which come from that. Many economists point to the fact that our funds, in particular, are significant investors in infrastructure. There are obviously economic benefits that flow from that.

As I mentioned before, it is important that there is an assessment made of potential policies as to whether or not they might affect or impede the way that trustees invest on behalf of members. Relevant considerations in respect of that would be whether or not they might reduce the range of available assets which a trustee might invest in, whether or not they might lead to lower risk-adjusted returns for members, whether those changes would potentially disrupt capital markets, and whether they would lead to a lower level of investment, particularly in some areas where other benefits accrue. Even though they are not central to the system, they are relevant things to consider when thinking about policy.

Senator KETTER: In your submission you talk about a review of the retirement income system. I am interested in your views about whether the policy settings across super, aged pension and other assets are consistent at the moment. If not, what should be looked at?

Mr Linden : I think that, notwithstanding significant improvement in targeting tax concessions, primarily in superannuation arising from the reforms in the last budget, we and many others in the industry were disappointed that there was not a more holistic view of our retirement income system and whether or not the different components of it were cohesive in the way that they operate and help to achieve system objectives.

An example is: we and others have been concerned about recent changes in the age pension asset test because of their potential interactions with superannuation, and other savings as well, which means that savings incentives are significantly diminished, or there are perverse incentives for retirees to spend or dissipate assets quite quickly in order to bring them down under particular thresholds. That is a clear example of where, in fact, a more holistic retirement income review, and one which considers the role of work for people in retirement, would, we think, be quite a valuable thing—something which considers, for instance, aged care in the context of our retirement income system. There are very significant costs that we all know about in health and aged care, and they are only going to increase going forward. Are the system settings calibrated for that?

It probably, too, in our view, affects considerations around adequacy. If governments are going to move in the future, as they have been, increasingly towards private provision of aged care, for instance, then that probably has implications for superannuation adequacy and other matters. We think a broad ranging retirement income review, which considers all these factors and how the different parts of the system fit with each other, is very important.

CHAIR: Thank you very much, gentlemen, for appearing before the committee today. You are free to go. May I apologise on behalf of Senator McAllister, who had to leave early. She asked me to pass on her apologies.

Mr Linden : If I could, I might have mentioned, in response to a question, the relevant provisions in the SI(S) Act of the sole purpose test and conditions of release, which I offered to table. Would the committee like a copy of that?

Senator KETTER: That would be useful, yes.

CHAIR: I am happy to accept that.

Proceedings suspended from 12:02 to 12:31