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

BREHENY, Mr Simon, Director, Policy, Institute of Public Affairs

BRODERICK, Mr Philip, Member, Superannuation Technical Committee, Tax Institute

COLE, Ms Nerida, Managing Director; Head of Advice, Dixon Advisory

DIAMANTES, Mr Dimitri Peter, Policy Manager, Financial Planning Association of Australia

[13:33]

CHAIR: Welcome. Thank you for appearing before the committee today. Before we proceed, I just want to let the witnesses know that Senator McAllister has to leave at two o'clock to attend another meeting. I invite you to make a brief opening statement should you wish to do so, and then the committee will ask questions.

Ms Cole : Thank you to the committee and senators for your time and for considering this very important issue. The Financial System Inquiry suggested objectives for superannuation to guide policymakers, regulators, industry and community about superannuation's fundamental purpose. Our positions have been informed by our experience with helping individuals plan for a successful retirement, and our positions have been set around the key belief that no single objective can define the purpose of super given the diverse range of personal and financial circumstances for Australians. More so, this diversity is expected to expand in coming decades, and, while not commenting on every detail on every submission, the various general views on defining the fundamental purpose of super through the primary objective are not incorrect but they are very different positions which emphasise the complexity of the task at hand.

As a consumer, your experience and your expectations of super depend on your income, your age, your gender, your partner's income, the number of family members you support and your employment arrangements, to name a few. To demonstrate some of this diversity and experience I encourage you to refer to table A on page 9 of our December 2016 submission, which shows a today's 30-year-old with 35 years to retirement, assuming an average income of $78,000, could be expected to accumulate just over half a million dollars in superannuation in today's dollar terms through the superannuation guarantee alone. But for a counterpart at age 45 or 50 today, as their current medium super balance for a woman is not significantly higher than today's 30-year-old, this group of women would have half the balance or lower and largely rely on age pension at retirement. These numbers assume continuous employment, which we know from statistical evidence is particularly difficult for women and also for mature age workers. This reinforces our view that the primary and subsidiary objectives must go hand in hand and should be contained entirely within the same section of legislation. Further, the word 'flexible' should be inserted into the first subsidiary objective to help emphasise the importance of this aspect. For example, the first subsidiary objective should read: 'Facilitate flexible consumption smoothing over the course of an individual's life'.

In addition to this important subsidiary objective we suggest the remaining subsidiary objectives can be condensed into three points which capture the key purposes and goals consumers and government are right to expect from super. The three remaining subsidiary objectives include: 'Alleviate fiscal pressures on Government from the retirement income system'; when measured appropriately, this in itself constrains concerns around the system supporting massive incomes in retirement. In addition, they include: 'Be simple and efficient, and provide safeguards, including insurance benefits'. We have inserted at the end of that objective, 'including insurance benefits'. The final subsidiary objective is: 'Be invested in the best interest of superannuation fund members'. We believe this is sufficient to encompass managing risks in retirement and is what was proposed as the third subsidiary in the original discussion paper. Thank you.

CHAIR: Thank you, Ms Cole.

Mr Broderick : The Tax Institute's primary submission in relation to this is similar to what you probably have already heard today and that is that linking the primary objective to the age pension is too low an aim or objective. The genesis of this bill coming out of the Financial Services Inquiry was really as a shield for taxpayers against constant government changes—'tinkering' as it is often called. Therefore, we need a robust barrier to protect. As it is currently drafted, you could argue that if it is a shield it is about the size of a toothpick. I do not mean to be flippant about that, but what I am really trying to emphasise is that a superannuation system objective tied to the age pension almost allows any government to make any changes because it is just such a low barrier, and anything could be seen to be concessionally taxed and therefore require or enable amendment.

Worse still, the shield could become a sword. This bill, at too low a level, could be used as a justification to make further changes to superannuation, to do more tinkering, to reduce people's trust in the system.

It should be noted that a superannuation system has to be taxed and structured in a way that encourages savings and self-reliance. It needs a system that creates confidence for people to believe in, and this sort of constant change to superannuation over the years does undermine that confidence and trust.

That brings me to what The Tax Institute believes should be the purpose. You will see in our submission that we do not actually put a purpose but rather the themes that we think should be taken into account, the context being the three pillars of the age pension, compulsory super and voluntary super—the last two being the most important, obviously, in this regard. The Tax Institute believes that the purpose of superannuation should encourage the principle of self-reliance in retirement and provide a comfortable life, but in particular in relation to the self-reliance, and therefore needs a sufficiently higher objective in order to encourage that.

The Tax Institute notes that there are a few references in the explanatory memorandum to tax minimisation and estate planning, and I wonder if that has driven the low barrier. But we certainly would not want to see that the purpose was brought down because of those two things. You can still have a higher level of protection, a higher purpose, and still bring in measures that perhaps deal with those issues if they are issues.

The Tax Institute submits that, if the bill remains in its current form, it should not pass at all. We would rather the current system without this purpose than a purpose that is too low.

Finally—although not related specifically to this measure—The Tax Institute would like to take this opportunity to note that, for future changes to the superannuation system, there be given more time to consult and implement changes. The current changes that have been implemented in recent times have not given industry bodies sufficient time to make those necessary adjustments and to really give proper consultation.

CHAIR: Thank you, Mr Broderick. Mr Diamantes?

Mr Diamantes : The Financial Planning Association thanks the committee for the opportunity to comment on the bill. While we strongly support the introduction of an objective of super backed by legislation, we do have some concerns about the proposed framework which we have outlined in our submission. The three key concerns are that the primary objective, especially, sets a particularly low bar; the framework fails to directly address the need to build trust and confidence in the superannuation system itself; and, finally, the legislation provides no mechanism for assessing its effectiveness in ensuring new legislation and regulations are appropriate in light of the objectives.

I will just briefly discuss each of those points if I may. The FPA agrees that the provision of income is an important objective of the superannuation system. However, we believe that the bar set in the bill is too low, as any amount, no matter how small, above the age pension would meet the standard, which I am sure others at the inquiry have already mentioned. The age pension provides a safety net for those who do not have enough resources to fund a modest retirement income. In our experience, most people aspire to a higher standard of living in retirement. This is why we have proposed an objective that states that superannuation should provide income and capital in retirement to provide a comfortable standard of living.

We think it is important to specify capital as well as income. This is to deal with the risk that superannuation policy will further distort people's preferences. For example, some people would prefer a lump sum to buy a new car than to receive income to pay for taxis.

Further, the superannuation system should aspire to more than simply ensuring people take responsibility for funding their retirement. We certainly do respect and support encouraging and requiring people to take responsibility for their retirement savings choices. However, we also believe that the tax and regulatory framework should give people the best feasible opportunity to save for their retirement—in other words, to give them great choices. For example, taxation discourages savings. So-called concessions that reduce this distortion can provide people with better opportunities to provide for their retirement. Similarly, building trust in the system by sticking to good policies will encourage people to save and, indeed, broader economic policies can improve opportunities by improving income and savings potential.

As others may have already suggested, we are not suggesting a rigid approach to defining 'comfortable'. In our experience, what one person thinks of as comfortable might be very different to what another person thinks, and that is largely related to what they have been used to up until they retire. But we do think that having that high-level objective is very useful because it forces policymakers and legislators to cast their mind to developing a standard rather than just free-floating. Ideally, there would be no limits on the so-called tax concessions on the superannuation environment. However, we understand the practicalities, and our proposal is a compromise between the ideal and what we believe is the low bar of the bill.

I have just a few final remarks. In relation to the statements of compatibility with the objectives of super requirement as outlined in the bill that has been introduced, we are concerned that the bill would not require a great discipline. It would not require legislators and policymakers to do much, other than to say whether or not a proposed piece of legislation is in alignment with the objectives. What we would rather is that there be some added discipline—for example, that reasons are given as to why a particular policy or why particular legislation has been put forward and how the legislation aligns with the objective.

Finally—and perhaps one of the most important aspects of our submission, in our view—we are concerned that there appears to be no mechanism for monitoring and reporting compliance with the act. We have recommended that the bill also contain provisions requiring an independent body to: periodically assess whether members of parliament and rule makers are actually complying with the objectives; to assess new legislation and regulations against the objectives; and to assess the whole superannuation system against the objectives. Assessment and monitoring could, for example, be undertaken through one or more of, say, the Productivity Commission, the Parliamentary Budget Office or perhaps public consultations coordinated by your own committee or another parliamentary joint committee. Without that ongoing assessment, we believe that the framework will not achieve its potential of actually giving people the best feasible opportunity to save for their retirement. Thank you.

Mr Breheny : Thank you, Chair and Deputy Chair and members of the committee, for inviting the Institute of Public Affairs to take part in proceedings today. In his budget speech on 3 May, the Treasurer said that:

… becoming financially independent in retirement—

free of welfare support—

is one of life's greatest challenges and achievements.

The Institute of Public Affairs wholeheartedly agrees. However, notwithstanding this philosophically sound statement, the Treasurer that evening issued a joint media release with then Assistant Treasurer Kelly O'Dwyer to announce that the government would enshrine in law that the objective for superannuation is to provide income in retirement to substitute or supplement the age pension.

Tellingly, this release also noted that the proposed objective has been an important anchor for the development of the superannuation changes included in the budget. According to section 5 of the Superannuation (Objective) Bill 2016, in Treasurer Morrison's 9 November 2016 reading speech, the government is proposing that this is now to be:

… the primary objective of the superannuation system.

Section 6 states that any subsequent legislation relating to superannuation that is introduced to parliament:

… must include an assessment of whether the Bill is compatible with:

(a) the primary objective of the superannuation system; and

(b) the subsidiary objectives of the superannuation system.

While the bill spells out the primary objective is to provide income in retirement to substitute or supplement the age pension, it also specifies that the subsidiary objectives of the superannuation system are the matters prescribed by the regulations.

The five proposed subsidiary objectives, which can be found in the explanatory memorandum, are worth highlighting: to facilitate consumptions moving over the course of an individual's life; to manage risks in retirement; to be invested in the best interests of superannuation fund members; alleviate fiscal pressures on government from the retirement income system; and be efficient, simple and provide safeguards. Although the government appears to have adopted the primary and subsidiary objectives from the final report of the 2014 financial system inquiry, it is noteworthy that the FSI actually made six subsidiary objective recommendations. The government chose to leave out the sixth, for the system to 'be fully funded from savings'.

In referring to this objective in its final report, the FSI said:

A fully funded system, as opposed to an unfunded system, is important for sustainability and stability. The system is designed to be predominantly funded by savings from working life income and investment earnings, where superannuation fund members in general have claims on all assets in the fund.

Concepts such as facilitating consumption smoothing, investing in the best interests of members and managing risks in retirement, let alone that the system be fully funded from savings, actually make a lot of sense—more sense than the proposed primary objective to substitute or supplement the age pension. Yet it is the proposed primary objective that will likely be the major reference point for the superannuation system and against which all subsequent proposals for change will be judged.

It is of gravest concern that maximising personal income in retirement is not deemed to be the primary or even a subsidiary objective of the system. The OECD has found that the net pension replacement rate for average income earners in Australia is only 58 per cent, and it is less than 54 per cent—53.4 per cent—for women, when the generally accepted benchmark in the OECD is 70 per cent to 80 per cent. Australia's 2014 National Commission of Audit reported that the proportion of retirees on a full or part pension was expected to remain at around 80 per cent over the next three decades. According to the government's own budget papers, the cost of income support for seniors was $43.2 billion in 2015, and is projected to reach $51.8 billion just four years later.

Superannuation initiatives that are implemented under the auspices of the proposed primary objective are very unlikely to help middle-income earners to significantly boost their income in retirement or to allow large numbers of Australians to move off the full or age pension. Instead of proposing that the goal of the superannuation system is merely to take the place of or to top up the age pension, the aim should be to maximise the retirement incomes of all Australians and reduce dependence on welfare payments overall.

To this end, the Institute of Public Affairs would like to offer an alternative primary objective for the superannuation system. The objective of the superannuation system is to ensure that as many Australians as possible take personal responsibility for funding their own retirement. The age pension provides a safety net for those who are unable to provide for themselves in retirement. The Institute of Public Affairs is happy to support the adoption of all six of the FSI subsidiary objectives if the primary objective is so amended. Given that a bad objective is worse than no objective at all, the second best option, and therefore the second recommendation to this committee, would be to make no change at all. Thank you.

CHAIR: Thank you very much, Mr Breheny. I should declare at the outset that Mr Breheny and I are personal friends, but that has never stopped us having a robust policy conversation in the past and will not do so today either.

Ms Cole, you said that no single objective can define the superannuation system. Do you not think then that a broad definition is better than something that is tighter and more prescribed, as we have been hearing from other submitters today?

Ms Cole : Possibly that could be the case, but our experience is that even a definition such as those being proposed by other submissions risks being too narrow to encompass the experiences that the range of people involved with superannuation as a consumer actually experience. Our concern is whether it is a comfortable standard of living or an adequate standard of living? How do you define those as is being discussed? If it is linked to the age pension, are you cutting out people who hope to get above age pension incomes as well? It is very hard to get one single definition that would cover and keep the broad population engaged or even hopefully build engagement in superannuation. When we saw the discussion paper we thought that there were a lot of really good points in there, and certainly in the subsidiary objectives, to help give some depth to what superannuation should consider and consumers can expect from that. We thought a preferable way would be to bring those into the key descriptions, rather than relying on that single primary objective.

CHAIR: So to remove the primary objective entirely?

Ms Cole : No, not to remove it entirely, but to add to it with the four subsidiaries that we spelt out in our submission.

CHAIR: Mr Broderick, you mentioned that you felt that the purpose of superannuation as it stands in the bill is an inadequate shield from changes to the system, from tinkering with the system. But you also said in your submission that you were worried that it would significantly diminish the superannuation system, which is slightly contradictory in terms. Can you expand a little bit on those two things? You have said that it is too broad at one end, but it is too narrow at another?

Mr Broderick : It is too low—

CHAIR: Too low a bar?

Mr Broderick : What if we step back and say what is the point of this? We do not necessarily need a purpose of superannuation. We do not have purposes of anything else, necessarily, in our system, so why are we doing this? It has all come about through genesis in the financial services inquiry. Submissions were made by that. The various superannuation industries are saying, 'We need a purpose because there's just so much constant change and it's undermining the confidence in the system et cetera.' That is where this notion of 'shield' that I am using comes out, on the basis that this was designed to—every time the government went to make a change, to step back a bit and say: 'Actually, what's the purpose of superannuation? Should I be making this change at all, or should I amend it so that it follows that purpose?' So the submission and what I have said today is that that should be necessarily a high bar, or a higher bar—certainly higher than the age pension. The age pension is dealt with by the age pension; the superannuation system is supposed to push people off that system.

Superannuation has two elements, of course. It has the compulsory element, which is probably the bare bones, which is more akin to the age pension, but it has also got the voluntary system. What we are trying to say here is that the combination of both of those should push up or encourage people to have self-reliance. What we want to see is that when the government is making changes, or contemplating them, to superannuation that they take them into account and say: 'Hang on, is this change necessary? Is it more change that will undermine confidence and prevent people from making contributions or prevent people from contributing to their own retirement?'

CHAIR: You were saying that you believe that one of the things the subsidiary objective should do would be to endorse the three pillars—is that correct?

Mr Broderick : That is right.

CHAIR: We have already had two conflicting definitions today of what those three pillars actually are, so I want to clarify with you exactly what you believe those three pillars to be. Obviously the age pension is part, then there is compulsory superannuation. Is the third pillar voluntary superannuation contributions, or is it all other savings outside of compulsory superannuation?

Mr Broderick : In my view it is the voluntary superannuation system.

CHAIR: Okay, so different from the ISA's definition?

Mr Broderick : Yes.

CHAIR: The Grattan Institute suggested that we should be talking about a fourth pillar, which is voluntary savings outside of superannuation. What do you think about that proposal?

Mr Broderick : I do not have a problem with that conceptually, but in relation to the purpose of superannuation? No, it should be confined to those three pillars.

CHAIR: A lot of the conversation today has revolved around the purpose of superannuation being a small and contained part of the overall discussions of the retirement income system. Do you not think that potentially the retirement income system should be aware we are discussing a lot of these issues, things like insurance? National savings was something that came up with the last witness. Those sorts of issues potentially fall under a retirement income system, as opposed to just a purely superannuation. Probably not national savings.

Mr Broderick : If we were developing an object of retirement income more broadly, then, yes, here we are talking about the superannuation system. The reason we are is because it—and the genesis for this bill, as I have said a few times—comes out of the superannuation system being the tax rules and the prudential rules and this thought or this feedback, this community angst, I guess, at changes being made to it and there being an need for the superannuation system in particular to have a purpose that makes governments think twice about making changes. There is a place for just confining these discussions around the superannuation system, but I also agree that maybe outside of this bill and somewhere else there should be a contemplation of the wider retirement and savings considerations.

CHAIR: I am going to come back to the issues of adequacy and everything else in just a moment but, Mr Diamantes, you mentioned that you believe there should be a periodic review of the system against the objective and you suggested in particular that the Productivity Commission would be involved with that. There was some discussion earlier about whether it should be associated with the Intergenerational report. Would you like to elaborate on that position?

Mr Diamantes : Absolutely. There is obviously a technical element to ensuring that legislation is compliant with the objective of superannuation, but there are also the practical, the social and the economic elements. You would need to incorporate in the legislation some sort of mechanism for allowing that social and economic consideration of how the objectives are flowing through into economic reality. If you do not do that then a big chunk of the potential benefit of this framework is lost. I would assume that most people who believe that there should be an objective think that it should flow on to real-life benefits, and there is only so much you can do by looking at the technicalities of legislation. You have to go and actually look at what is happening on the ground. That is why we believe that a body like the Productivity Commission would be well placed to look at what is actually happening on the ground.

CHAIR: That is interesting. I am going to get to the IPA in just a moment, Mr Breheny, do not worry, but I just want to ask one question about the words that both the Tax Institute and the FPA have used—things like 'a comfortable life' and 'a comfortable standard of living'. These highly subjective terms have come up in some guise from a lot of different submitters throughout this process. Do you not think that those issues of adequacy and dignity are better implicit in the age pension rather than in superannuation?

Mr Broderick : As compared to the notion of comfortableness?

CHAIR: I suppose comfort, again, is a subjective term. What is comfortable for me might be very different from what is comfortable for you. What is adequate for me might be very different to what is adequate for you.

Mr Broderick : Another term we use is 'self-reliance', which I think has a bit more objectiveness to it. Of course, there are always subjective elements about what self-reliance is. That, I guess, has a bit more of a link of not being on the age pension, of saving enough so that I can pay my way and not be a burden on the government system. That is certainly the term that I, personally, like better. But comfortableness also has a place in the sense of encouraging people to retirement and to living a retirement that they are comfortable with. That will differ with everybody.

I do not think it is necessarily a bad thing for the government to think about that, because they will have their subjective notions of what comfort is, and you might be able to get ASFA's actual definition or whatever. But I think it comes back to: I want to make a change to the superannuation system; what will be the consequence of that? Will it increase tax and reduce the amount of benefits? Will it increase complexity and increase costs? Will that affect someone ultimately having self-reliance or a comfortable retirement? I think the legislator can do that. The nature of whatever we come up with today is not going to be binding; it is a stop sign for government to say, 'Hang on; let's think about this change we are making,' giving them some guidance as to what the purpose is, and making them step back and think, 'Is it necessary or is there a better way we can do it?' I do not think it is a problem, because it is really just designed to have that thought process in the government's mind when enacting or thinking of changes.

CHAIR: What you call a low bar I call an objective, but you think that it is okay to legislate something that has highly subjective terms in it—a bill that essentially is loaded with subjective terms?

Mr Broderick : Yes—in the sense of what we are doing today or in the sense of what the bill is supposed to do, or the act, if it is enacted. I think it is okay, because it is a thought process, and the parliament and Treasury are full of very intelligent people; they can make those calls. What I would not want them to have is a very low bar—so, the age pension—because in my view the natural transition from that is that almost any changes could be made because that is a very low bar. So I had rather a higher bar. If you want to get rid of the subjective elements of it and want to make it a tighter definition, then The Tax Institute would be open to that, but what we do not want is a low bar.

CHAIR: Mr Diamantes, do you want to make some comments on the issue of subjectivity?

Mr Diamantes : I do. I will make a couple of points. A subjective bar that is allegedly higher than the very clear-cut low bar that is currently in the bill has a couple of advantages. One is: every legislator acting in good faith would know that 'comfortable' means something significantly higher than the basic standard of living provided by the age pension. So that provides a degree of objectivity. Yes of course different legislators with different ideologies are going to produce different metrics. But at least we have that starting point, which is arguably objective.

The other point is—and I agree with Mr Broderick on this point: having a standard requires policymakers and legislators to cast their minds to articulating what it is that they are trying to achieve rather than produce something in a kind of free-floating environment. So I accept your point that there is a degree of subjectivity, but I have confidence that policymakers acting in good faith are going to know what the reasonable bounds are of that flexible standard.

CHAIR: Before I pass on to Senator Ketter, I do want to talk to you, Mr Breheny, about this subsidiary objective that was in the FSI but not in the bill—the fully funded versus unfunded concept. Do you think that the reason the FSI mentioned that and why it was not brought into the bill is that excluding it allows the bill to encompass defined benefit funds as well as defined contribution—that if we had started differentiating between funded and unfunded we would have excluded a whole bunch of existing superannuation funds?

Mr Breheny : Yes. I am sure that that is probably one of the reasons why. It is not entirely clear why that has been left out. I do not think, as far as I know, that is explained in the explanatory memorandum.

CHAIR: That is the only reason I can think of.

Mr Breheny : Yes, that may be the case. The other thing that I might address that some of the other witnesses have talked about is this concept of 'adequateness' or 'comfort' or 'dignity' or 'self-reliance' in retirement. I think one of the really important aspects that I think is forgotten in this debate is the idea of replacement rates. You are exactly right, and of course these terms are subjective; that is the whole point. And the reason why they are subjective is: those replacement rates, for every individual, are going to be different, and so the level of adequateness or comfort or dignity in retirement is going to be different, depending on what your income has been leading up to the retirement phase of your life.

As I have said in the opening statement, the problem that we have in Australia at the moment is that those replacement rates at the moment are so low, at 58 per cent. If the age pension were to be the benchmark going forward for superannuation and for those replacement rates—which is essentially what this objective would put in place—that would, to my mind, significantly lower those replacement rates, or at least run the risk of significantly lowering those replacement rates. And, as the other witnesses to the committee today have said, that would set an incredibly low bar—a low bar which, no doubt, for some Australians, would lead to a situation that would be similar in retirement to what they have had during their working life but which, for the vast majority of Australians, I do not think would lead to the comfort and dignity that they have been accustomed to during their working life.

CHAIR: Can I ask you about the objective that the IPA has proposed, which is to maximise personal income as the primary objective. Obviously you must acknowledge that there is some trade-off; superannuation is already a highly concessional tax environment. While I realise that the IPA submission says, 'We will just spend less,' that potentially is not an immediate and available solution in the short term. Do you think that, while it is ideologically a great idea, it potentially is impractical?

Mr Breheny : Yes. There is an interesting mix here of pragmatic policy and ideology. Yes, you are absolutely right that the answer that we would propose to the government's spending issues is to reduce spending, but I think what we are pointing out in our submission is that the changes that have been proposed to the superannuation system should not be seen as an answer to any of those issues. While of course there are issues that Treasury is trying to resolve in trying to bring the budget back into black, making changes to the superannuation system with that as the primary objective for considering certain policy changes would, to my mind, be a mistake. I think what should be done—and why the debate around an objective for the superannuation system is a good idea—is to have in mind exactly what the objective is in the superannuation system.

Why we have some of the issues that we do, or the disagreements that people have, in the public debate about this objective is precisely because there are difficulties with the way that superannuation has come to be known. Is it a way of maximising retirement savings? Is it a pot of honey for the government to dip into to pay down debt? This is exactly the conundrum that I think is before the committee, which is: what is the purpose of superannuation? While there are other considerations going on in the background, I do not think that they should be at all relevant—not even a subsidiary objective behind changes to the superannuation system; not any objective at all. I think what should be clear is what the purpose of superannuation is and whether we can make changes to the superannuation system that enhance that objective.

CHAIR: I suppose my concern is that what you might be implying is that any changes to the superannuation system have to be revenue-neutral, and if that is the case then your objective still is not met. Just because a change is revenue-neutral and is not affected at all by government spending does not necessarily mean it is going to maximise personal income.

Mr Breheny : Yes, that is absolutely right. I would not say that making changes that are revenue-neutral should be one of the reasons why changes are made to the superannuation system. I think what should be at the forefront of policymakers' minds is that as many Australians as possible can take personal responsibility for their own retirement. That is the objective that we have put forward as being the primary objective, the alternative primary objective that we would put into this bill to replace the current primary objective that is in the bill, and I think that that is the consideration that policymakers should have at the forefront of their minds.

CHAIR: So you do not think that self-reliance is essentially implicit in the primary objective that is in the bill now: that it is there to substitute or supplement the age pension?

Mr Breheny : No. In fact, I think it works against it in a number of ways. I think the concern, as has been raised by other witnesses here today, is that it sets such a low bar that there will come a point where, very rarely, changes that are proposed to the superannuation system that do one of two things—either reduce the concessional rates or reduce the limits, or the caps, on those concessional rates—will not fall within the objective. That is the key concern.

CHAIR: Finally, one of the other things that your submission suggested is that you would rather see no bill passed at all, or no objective of the superannuation system, than an inadequate—for want of a better expression—objective.

Mr Breheny : Yes, that is right. I would much rather see the status quo remain in place than put in place a bad objective—what we would characterise as a bad objective—that sets a particularly low threshold.

CHAIR: Right. So you would prefer ambiguity to—

Mr Breheny : To an objectively bad objective, yes.

CHAIR: Thank you.

Senator KETTER: Mr Breheny, your organisation has advocated for a review of the age pension, hasn't it?

Mr Breheny : I am not aware of a specific recommendation to review the age pension, but from time to time, yes, we have talked about the age pension and changes that might be made to it.

Senator KETTER: Do you believe that the current age pension is too generous?

Mr Breheny : I do not think, within the confines of this committee inquiry, whether the age pension, at the level it is, is too generous or not generous enough is relevant to the objective of superannuation. I think one of the things that we get caught up in in this debate is the rate of the aged pension. To some extent, what happens within the superannuation system should be considered without looking at the age pension. What we are doing when we look at the age pension within the confines of the superannuation system is we are saying, 'Government lies at the heart of the superannuation system and government imperatives lie at the heart of the superannuation system', and I think that is one of the problems that we have here. Government does not lie at the heart of the superannuation system, individuals do. When we are considering changes to the superannuation system, it is not about whether or not this is going to have an impact on government spending and it is not about whether it has an impact on the aged pension, it is about whether or not Australians can have a dignified, comfortable retirements.

Senator KETTER: Ms Cole, I am just wondering whether you are familiar with the submissions of the Grattan Institute in respect of the level of superannuation savings and the significance of it in retirement incomes?

Ms Cole : Yes, we are. We have made comments in our original submission of April 2016 as well as in our December 2016 submission about our analysis of the Grattan Institute's research. In summary—much as other witnesses today have said—the statistical presentation of that data perhaps does not emphasise how the asset base that people hold outside of super is skewed into very small percentages of the population. I think we have heard some other numbers that set out, for example, that, although an average figure of approximately 60,000 per individual is allocated as being held in trust, it is actually only three per cent of households in Australia that hold trust. There are a range of other figures that we have set out on pages 3 and 4 of our submission that summarises that, and in conclusion it emphasises the importance of superannuation. That is certainly what we found in the 30 years we have been helping individuals prepare for retirement. Further, the real importance we see in preparing policy and setting policy targets is that superannuation is significantly more efficient than non-super savings. If you think about the amount of leverage that government does have to achieve good efficiency outcomes from superannuation—such as we have seen from previous reviews and from the Productivity Commission's review that is underway into super—hopefully we can continue to improve fees and improve features that individual members can get from superannuation versus saving outside of super. The likelihood of the same fees or the same features for an investment product is much more difficult to achieve.

Senator KETTER: Are you saying that you do not believe the primary objective should be to account for things like the facts that we are living longer, gender disparity and involuntary retirement?

Ms Cole : Am I saying that they should not?

Senator KETTER: Yes, should not. Are you supporting the current proposed objective?

Ms Cole : We did not have an alternative we could feel comfortable with, as I said, because of the level of diversity in personal circumstances. Either way, whether you go with the primary objective, as it is currently listed, or having the other subsidiary objectives that we have outlined encompassed within that, it is the best way forward to help give some more breadth to it; otherwise, obviously other people have made comments about comfortable and adequate and so forth. We see problems with that in terms of how you define what 'comfortable' and 'adequate' are. It is then at a level that is appropriate for the broad population. There are obviously other opportunities to perhaps work with industry around other ways that could be defined, such as improved income in retirement. That would still perhaps allow you to strip out age pensions or income from other non-super assets. But it would be good if there was more industry consensus for senators to look at this, and certainly getting bipartisan support for that objective would be very valuable as well.

Senator KETTER: There is a fair degree of consensus between the FSC and the other four organisations. There are plenty of times when they do not see eye to eye, but on this occasion there seems to be a fairly consistent approach. Has that situation changed your view at all?

Ms Cole : It has not changed our view. As I said, we can see why people have that view, but we feel that defining 'adequate' or 'comfortable' has, in itself, some limitations or issues. If that is what the Senate and the parliament decide to go with, we would still like the subsidiary objectives to be included within there. We have some concerns that some members of the public may feel that is too high, so they do not engage in super because it is not within their means to get there. Likewise, if you go too low, other people will feel,' Oh well, I'm just going to be on an age pension', and they do not engage in super either. It is very complex to get that right, and we understand that.

Senator KETTER: It is very hard to discuss the merits of different policy options unless you talk about how that policy option is going to impact on retirement saving. I note, in your submission you make reference to a sustainable retirement.

Ms Cole : Over the last few decades, in terms of measuring superannuation and judging it, even in an informal manner, one of the things that has been used is looking at the rate of the population that is on full age pension, part age pension or no age pension, or who are fully self-funded. That has been a graph and statistic that has been in the Intergenerational report for a number of reports. In the absence of other measures, that has formed some standard of the success of superannuation to help people move from full to part and then, hopefully, from part to fully self-funded. That is an option for measuring the current primary objective as it stands now.

Senator KETTER: Thank you. Mr Broderick, do you think this bill will enforce long-term confidence in the superannuation system as currently worded?

Mr Broderick : No, I do not. For the reasons I have already stated, a low bar does not have that shield effect that I was referring to, in the sense that basically any changes can be made to the superannuation system, any sort of 'tinkering' could occur, because the measuring stick is the age pension. The superannuation system, as a long-term savings regime, has to be concessionally taxed. One reason for that is that it obviously increases savings over time with a lower tax rate. It also encourages taxpayers to put money into superannuation to fund their retirement. What we want is an objective that matches that, and that is why these themes of self-reliance and comfortableness come out, because they are notions that encourage people to be self-sufficient and to save through both the compulsory and voluntary sides of the regime.

Senator KETTER: If the bill was to be enacted in its current form, would you say there is a danger that the superannuation system could be diminished as a result of that?

Mr Broderick : Again, as I said in my opening remarks, it could almost convert from a shield to a sword. It could be seen that the concessions are too high. Because the objective is tied back to the age pension and the concessions currently almost penalise people in that position, you could argue that, with a very low objective like that, it could be used against the superannuation system to further reduce the concessions, which ultimately would be counterproductive. If the superannuation regime is designed to alleviate the pension and you have a system that is encouraging reductions of concessional treatment, which ultimately lowers returns and lowers people's voluntary contributions to the super regime, ultimately leaving more people on the age pension at the end, then, yes, I think it could be dangerous.

Senator KETTER: What is your view about the place of insurance in the superannuation system?

Mr Broderick : I think life insurance is a valuable tool. Obviously, it is already enshrined in the sole purpose test in the SI(S) Act. It is certainly a valuable tool for people with lower superannuation balances in case of their untimely death to help their dependents or if they suffer some sort of terminal illness or total permanent disability. I think the superannuation system is a good place to hold those types of insurances. People have day-to-day expenses where they may not insure themselves but they are happy to use their superannuation savings, which they cannot touch otherwise. I think it is an important part of the superannuation system and should stay so.

Senator KETTER: Mr Diamantes, do you think the bill gives enough consideration to the risks that people face in the accumulation and retirement stages—things like disability during working life, those sorts of things?

Mr Diamantes : No, and the reason is that those issues are not made explicit in the proposed objective or the subsidiary objective. We would agree with Mr Broderick that insurance should be available within superannuation. There are myriad reasons. Having it as a default option means that people who might not otherwise take out insurance are nudged towards that, but at the same time we are respecting people's right to make their own choice. There are also the cash flow issues. People often do not have enough money outside the superannuation environment to fund insurance, but within super they do because of the superannuation guarantee. So we would certainly encourage insurance to be explicitly allowed for within the objectives.

Senator KETTER: What do you say should be done to improve trust and confidence in the system?

Mr Diamantes : As the other witnesses have mentioned, we think the key thing that could be done is to limit tinkering with the system and to, I guess, entrench that attitude by requiring a separate objective. In fact, in our submission we recommended that shoring up trust and confidence in the superannuation system should be an objective, and that will then require legislators and policymakers to cast their mind to how exactly that is done. In our view, as we have said, the key thing is settling on a policy and sticking to it for at least the medium term, preferably the long term.

Senator KETTER: Thank you very much. Mr Breheny, you have talked about low replacement rates in Australia compared to the OECD average. What is your view as to why that is the case?

Mr Breheny : That is a good question. Back in the early nineties when superannuation was first being talked about and implemented, I think there was a fairly clear understanding that superannuation was designed to maximise savings during your working life for the retirement phase. Almost since that time there has been a lack of understanding of or respect for that idea. We have tried to whittle the system back since that point. I think we really need to get back to that original idea—that the purpose of superannuation is to encourage people to save. The reason the concessional tax rates are in place is to make sure that people are saving. These days we have terms that are used in the explanatory memorandum like 'tax minimisation' and 'estate planning' as being things that the superannuation system is not about. To some extent those are pejorative terms, and the reason they are used is that people feel as though, somewhere, the superannuation system has gone wrong. I just do not think that is the case. I think encouraging more people to put more money aside is a good thing. I think we should be encouraging that. That is what the superannuation system was designed to do. That is what the superannuation system should continue to achieve. For those reasons we have been so strong in advocating against a reduction in those concessional rates and we are against reducing those caps that we saw put in place towards the end of last year. The reason superannuation was put in place was to maximise savings. Let us continue down that path.

One of the other problems, I think, is one of confidence. I am 29. I will not be taking anything out of my superannuation account for a long time and, in decades to come, what hope do I have of looking at a system then that looks like what it is today? I am rational about that. A lot of people of my generation think the same way. They will say, 'Why am I going to make voluntary contributions? You've got to make the compulsory contributions, but why would I top it up, given that I have no visibility at all over what that system is going to look like in 40 or 50 years' time?'

Senator KETTER: That is a pretty pessimistic outlook.

Mr Breheny : It is a bit, yes. Stop tinkering with the system.

Ms Cole : I agree with a lot of what the IPA representative just said, but certainly one of the other aspects that we find that can really make a dent in people's retirement outcomes is shocks to the system. Obviously the GFC was a major one, but other aspects such as health or needing to care for a family member where they then have larger costs outgoing and maybe their ability to work is reduced. Certainly from what we have seen personally and what we saw in the Productivity Commission's report on older working Australians is that the ability to find work from 60 onwards is a very big part of people's obstacles to saving. Often it is just not practical for people to really put large amounts into super until the kids are out of home and the mortgage is paid off, which might not be until 55 or 60. If people are then trying to really save everything from their net income at that point and they have lost their job, it is very hard to do that. So I think that is another aspect. If there was a review of the larger retirement income system, employment opportunities for mature age workers has to become part of that, because if people cannot work to save then it is very hard to make those funds last for their retirement.

Senator KETTER: You exhorted us to stop tampering with the system, Mr Breheny, but what do you say is needed to achieve the long-term stability of the superannuation system?

Mr Breheny : Frankly, I think the relatively simple answer is to stop making changes.

Senator KETTER: Surely that is what this bill is supposed to be trying to achieve?

Mr Breheny : Ironically, I guess one of the purposes behind this bill is to ensure confidence in the system, but it is yet another change to the superannuation system. Whatever the objective that ends up in this bill might be, that may become an act that will have to be interpreted by courts over time, so there will be changes to the current superannuation system coming from this bill. As I have said, ironically that kind of means that there is a potential there for confidence in the superannuation system to again take a hit. My key recommendation would be to do nothing. If an objective is to be put in place, we have presented our alternative objectives. From some of the other submissions I have read, there are some other good alternatives out there. Honestly, I think the best thing that can be done for confidence in the system and to ensure that people are in a position where they feel comfortable making voluntary contributions—because really that is the key to the success of the superannuation system—is to make no changes so that people have long-term confidence in the system.

It is very rare that you get an area of policy which has such obvious long-term consequences. There are lots of policies that will be put in place that will have an impact on someone's life next week or next year, but the superannuation system is an area of policy where we know that there are going to be impacts on people's lives 40, 50 or 60 years into the future. It is incumbent on policymakers to ensure that there are fewer changes in superannuation than there are in any other areas of policy, and that is one of the things that I hope policymakers and this committee keep in mind.

CHAIR: Thank you very much for appearing before the committee today. You are free to go.

Proceedings suspended from 14 : 34 to 14 : 48