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Transcript of interview with Fran Kelly: ABC PM: 28 June 1994: [superannuation funds]

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FK Ralph Willis, the biggest change here is the one affecting small individual super accounts. Will all those small accounts now end up being managed by the Tax Office?

RW No they won't. Essentially the funds will have to make a choice now with their existing small accounts, and there are something in the order of one to two million of them, whether they are going

to continue them. If they continue to keep them then they will have to provide a protection to the members that the value of them won't go backwards, they won't be able to charge them in fees any

more than they earn in interest. Or alternatively, they will have to close those accounts and send them off to an eligible rollover fund which is an account where they won't erode and the future contributions would then go to the Tax Office where the amount would be accumulated. The Tax

Office is not going to run a superannuation fund, it would simply accumulate the amounts from the employers which the employers are obliged to pay under the Superannuation Guarantee until there

was enough in the fund for it to go back to the superannuation fund of the employees choice and not erode because the interest earnings on it would be enough to overcome any charges that would be

made against it.

FK So if many of the super funds do decide to opt out of managing the small accounts, does that mean that will be a large slice of their business out the door, can we expect to see some super funds disappear because of that?



RW The funds will have to make a choice and that is going to be difficult for some of them to manage the smaller ones, we think, that there will be pressure on them to merge and we have

provided a capital gains rollover. In other words, freedom from capital gains tax on merging to encourage them to merge and not be tax disadvantaged or dissuaded from doing so. That will mean we will get lesser funds, bigger funds operating in the system that's probably good for the efficiency of the system. So we are looking at a system which is going to be much better for the people who currently face the fact that, many of them, that their accounts, the contributions made on their behalf by employers through superannuation funds don't give them a lasting benefit because of the charges that are made by the fund for the administration exceed their interest and they just simply have their amounts erode. That's particularly important I might say for part time and casual workers, many of whom are women.

FK There is currently hundreds of millions of dollars sitting in small super accounts across the many funds, unclaimed. What will happen to that money, will that go to the Tax Office?

RW Lost accounts will be able to be sent off to eligible rollover funds as I mentioned before. Those funds will look after those amounts and if someone can be found for them then eventually they will be returned to them.

FK Otherwise all that money is just left sitting there?

RW In future we will have much less of this problem, we hope, through use of the tax file number.

We are greatly encouraging the use of a tax file number on a voluntary basis, it will be up to people to decide whether they want it used or not but if they do allow it to be used it will greatly help to ensure that we don't have lost accounts and that the monies can be accumulated on their behalf and

returned for their benefit when they retire.

FK The banks are angry that you didn't allow them to start up super savings accounts. Vince Fitzgerald recommended you look at it. Why did you end up cutting the banks out of it?

RW The banks are not cut out. The banks have been offering superannuation for quite some time

now. You can walk into any major bank now and start up a superannuation account. It is just that it

is not directly on the banks books, it goes through a life insurance company, a subsidiary or associate

of the bank, but the Banks are at pains to stress that this is all very simple and easy to do and you can

do it any bank and you can pay in through automatic teller machines and the money that is put in these accounts often comes back to the banks. In some cases, in the case of one major bank it all has

to be put into bank deposits. In others there is a choice between bank deposits, or a managed fund, a alanced fund which would invest in a variety of things including stocks and shares. So the banks are dot missing out on superannuation. What they want however is to get the right to run superannuation directly on their own accounts without the need to go through a trust arrangement like the rest of the



industry, and in that way get some kind of competitive advantage. I don't see it as competitive neutrality but rather a competitive advantage for the banks and I don't think that that is appropriate.

FK They are saying your policy though is and-competitive and that it is at the urging of the ACTU who has its own vision of union controlled super funds.

RW I don't think it is a matter of the urging of the ACTU. The ACTU and the superannuation

industry generally have not been supportive of the banks getting into the industry on this basis but as

I stressed they are already in the business. They all make great play of the fact that they have these simple superannuation accounts that you can open at any branch.

FK On another matter, Treasurer, the markets are all over the place again today and reports are that they are convinced that official interest rates will rise after the inflation figures come out on July 27th. Can you rule out a rise that soon?

RW I don't think it is helpful to be predicting exactly when or when not we will see an interest rate move. I mean there is just far too much in the way of speculation about these sort of things already.

What we have made clear is that we will want to see some clear evidence that there is some inflationary pressure in the system before we increase interest rates in Australia. Now to do so in the absence of inflationary pressures just simply means that we are doing something which is going to be

quite damaging to the domestic economy because we are tackling inflation before it needs to be tackled, dampening the level of activity before it needs to be dampened. And that is just simply I don't think a very sensible move for us to make. Now I have made it quite clear that at some stage of

the economic cycle we will expect that we are going to have to move interest rates. Interest rates are

something that the Government must use as part of its armoury against inflation. And we are simply not going to be put into a position where we are seen as having to be found guilty if there is an increase in interest rates. If we increase interest rates it will be to try to benefit the economy to

ensure that we have a controlled expansion of the economy and not one which leads to an inflationary boom and bust situation.

FK But given the activity we are seeing on the markets now, activity that wasn't calmed by your words over the weekend, what more can you do to convince the markets that a rate rise won't be necessary in the near future, that the fundamentals aren't in place yet to require a rate rise, other than give them their one percent or half per cent rise?

RW Today bond rates came down quite a bit.

FK It has been all over the place, up and down.

RW Well, it has been down significantly, then back a bit then down again during the course of the day. Now I think that we obviously don't want to be too captivated by the daily movements but there has been this trend upwards and it is stemming not from anything to do with the Australian economy



but because on a world basis, and particularly in the United States there is concern about inflationary pressure as the United States economy, which is in a more advanced stage of the cycle than us, is starting to see some evidence of inflationary pressure emerging. Now it may well make sense for

there to be rising interest rates in the US, it doesn't make sense for that to automatically translate here. What you see happening is as soon as the bond markets move in the US one way or the other there is an automatic reciprocal action here in Australia, as though the Australian economy is just an

offshoot of the American economy. It is not.

FIC Aren't we at a point now though where the markets are gambling that the US Reserve will lift rates again to try and protect the US dollar and if they do that the rate differential between rates here

and rates there will disappear and then you will be forced to raise interest rates won't you?

RW It won't disappear. We have already got quite high real interest rates compared to the United States. I mean, our official rates are higher than the US and our inflation rate is lower, so we have got higher real rates than the US and that's a highly relevant consideration. So it doesn't mean that if the US was to move its rates again that we have to move here. But obviously over time, the more increases there are around the rest of the world, that's a factor that has to have some impact on Australia. But essentially, we would want to be assured that what we were doing was for the benefit

of the Australian economy and that is most appropriately done to start to block off inflationary pressures that might be emerging. There is no sign of them whatever at the present time as I made

very clear in the speech to the banks last Friday night,

FK Treasurer, thank you.