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Unlocking the door on superannuation: address to Australian banking and finance magazine.

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Address to Australian Banking and Finance Magazine

12 September 2002


Thank you to for your interest in the dynamic issue and trends that are shaping the superannuation system of the future.

Those of you in the financial services and banking industry, will know that Australians are becoming increasingly aware of the need to invest, the need to plan for the future and the need to be financially well informed. In fact, those of you in the financial services and banking industry have an important role to play - a responsibility - in helping people understand the way they can invest their savings and make the most of their financial opportunities.

There is a growing realisation of the importance of retirement planning and saving for the years ahead. Australians increasingly recognise that they are likely to live longer and that the difference between a basic standard of living in retirement and a comfortable one is largely in the hands of each of us.

The claim that most Australians are not interested in their super or where it is invested is a myth. It is true that many Australians want and need more information about what is for many the second largest asset they own after their family home. The Government understands and supports this desire of Australians to understand their finances more and secure their financial future.

As bankers and financial professionals, I am sure you also appreciate that the Government must be aware of the medium and long term implications of retirement income and superannuation policy on the Budget bottom line.

The Intergenerational Report released by the Government assesses the long term sustainability of government finances over the next 40 years, and shows that Government policies need to be adjusted now if the next generation is to avoid harsh tax burdens.

The Intergenerational Report tells us that population ageing is expected to increase the proportion of the Budget spent on the Age Pension from the current 2.9 per cent of GDP to 4.6 per cent by 2042. The policy challenges of the ageing demographic should not be underestimated.

However, I am pleased to say that so far as retirement income policy is concerned, Australia is well placed to face the challenges compared to many Western countries. This is principally because the Aged Pension is means tested but there are also other important reasons.

The OECD's economic survey of Australia released in August last year found that Australia's " Age Pension and superannuation systems combined, provide Australians, especially low-income earners, with replacement rates above frequently-used benchmarks ." They reported that "replacement income rates are expected to rise over time, as the superannuation element matures ."

Current Reforms

This is all good news. Australia has a world-class superannuation system, but there is more that can be done to improve it.

As most of you would know, the Government is currently working to implement a significant package of superannuation reforms.

The package is designed to encourage a culture of savings among all Australians. It includes measures which will assist those with the greatest capacity to save for their own future and those who are less able to do so. It proposes that employees should be able to determine where their superannuation contributions are paid.

The package requires employer superannuation guarantee contributions to be made more often to allow greater compounding and to help protect workers' savings. It assists those who are self employed to save for their retirement, it assists married couples to share their superannuation contributions and it moves a step closer to breaking the nexus between superannuation and employment.

As part of this package, the Government is investing an additional $28.7 million over four years to undertake an education campaign to ensure that employees, employers, superannuation funds and their members understand the changes, and to enable the ATO to properly administer them.

Some of the elements of the package have already been implemented with 1 July 2002 commencement. Others are still `work in progress'.

Key measures, including the Government co-contribution for low-income earners of up to $1,000, a reduction in the superannuation surcharge, and the introduction of choice, are yet to be passed by Parliament.

Choice and Portability

A fundamental plank in the Government's plan for the future of superannuation is to give individuals choice in where to invest their retirement savings.

Choice will deliver control into the hands of those with the greatest stake in superannuation - employees. It will inject greater competition into the system, leading to better services and lower fees from superannuation providers.

The mere fact that we are still having a debate about choice is in itself remarkable. The case for choice is overwhelming.

Choice has twice been introduced into Parliament and been opposed both times by Labor and the minor parties in the Senate.

Following lengthy negotiations with the Democrats last year, an agreed model for choice was developed. However, at the last moment, the choice bill was defeated in the Senate in August 2001.

This is tantamount to saying that Australians are not informed enough or intelligent enough to choose their own investments.

How patronising! We don't let employers choose which shares or securities employees invest in, it's a matter of choice. Why restrict super?

In a robust democracy Australians expect to be able to choose where to invest for their retirement and to be able to access sufficient information to make an informed choice. They don't expect to have their superannuation benefits trapped in a poorly performing fund and to have no right to choose another fund.

What is even more iniquitous is that some people already have choice! Those employees given choice by employers can select a fund that meets their needs. Funds have varying investments and return profiles from which people can choose. There are also so called `ethical' funds which select certain types of `ethical' investments as well as self-managed super funds.

Moreover, we know that choice works!

Choice of funds has been operating in Western Australia for four years and has been a real success. There is no evidence of the mis-selling or churning of accounts that occurred in the UK. This shows the maturity of the Australian market when compared to other markets that experienced problems when choice was introduced.

The WA market has evolved to keep employer costs to a minimum. For example, the largest State based superannuation fund operates a clearing-house for employers to make contributions efficiently and cheaply to multiple funds. Employers that use the `clearing-house' need only write one cheque and provide the details of the funds of which their employees are members.

While choice has been successful in the WA market, the United Kingdom experience and that of Chile was different. In these countries, choice was introduced into a system and where the consumer protection regime and disclosure requirements were not as strong as in Australia. Choice in the UK was also accompanied by an advertising campaign encouraging people to change funds. Not surprisingly, there were difficulties.

There are, I believe, two fundamental planks that will underpin successful implementation of choice. These are education and compulsory disclosure. As I have said, the Government will be providing $28.7m to the education and administration of choice over four years. In addition, the Government has worked consistently to put regulatory measures in place to ensure that consumers will be well informed.

In contrast to overseas experience, the Howard Government will focus on consumer education and awareness and the need for individuals to carefully consider their options and their financial goals. By introducing choice, the Government is not trying to drive people out of their existing superannuation fund. We are simply unlocking the door. We are not expecting the world to change overnight. We are giving those people who wish to move to a new fund, the chance to do so. We are simply giving people a CHOICE.

The obstacles

Despite the fact that choice makes good sense, there is the strong possibility that the Government's Bill may, again, not receive support in the Senate.

Labor has indicated it will support choice but on several conditions. Conditions that one industry representative has described as "a potential administrative nightmare".


Labor wants caps on fees and charges. The Government's preferred approach is to encourage competition and transparency, allowing the market to set prices and fee levels and consumers to make their own informed choices. Choice will introduce greater competition into the superannuation industry placing downward pressure on fees and charges.

Capping of entry and exit fees gives rise to insurmountable problems. Super products vary greatly and fees should reflect the underlying costs of the fund and the costs of particular transactions. Larger funds might be able to take advantage of economies of scale in regard to fixed costs. Smaller funds may be significantly disadvantaged. Innovation in the industry could be curtailed.

Capping of fees could lead to cross subsidisation between members of funds. If fees are capped at certain levels or prohibited, all funds will set fees at that level and competition would be greatly diminished.


Labor also says the disclosure regime is inadequate but as I just said a moment ago, the Government has worked consistently to put regulatory measures in place to ensure that consumers will be well informed.

The Financial Services Reform Act requires that fees and charges are fully disclosed to the consumer. This is an important protection. It applies across all financial products. Regulations proposed to be made under the Act which provide greater detail about how disclosure might be made are currently being opposed by Labor. It is hard to understand why, on the one hand, Labor expresses concern about whether disclosure will be adequate and, on the other hand, Labor moves to defeat the disclosure requirements in regulations, currently before the Senate, without offering an alternative proposal or model for disclosure.

Investment choice

After 5 years of opposing choice Labor now wants full investment choice options. But the Government's choice model already provides these options. Members would be able to choose a fund tailored to their individual needs, including one which offers `ethical' investment options. They will have unlimited choice.

Costs to Employers

Another issue of concern which has been raised is the cost of choice to employers. There has been commentary on this

issue in the press today. Treasury estimates that the cost to employers will be $54 on average in the first year, and $36 each year after that.

The Government is mindful of imposing costs on business. I am pleased that there are already financial products and services available to make choice more simple and inexpensive for employers. There are examples of banks very successfully offering on-line services, distributing superannuation payments for employers who offer their staff choice.

The Government believes the market will change to facilitate choice. SuperChoice is a great example of innovation, it was put together by a group of superannuation fund administrators such as the CBA and Westpac, to name a couple. Under this model, there is no duplication of effort, it reduces fund administrator costs, simplifies the employer's superannuation remittance process and eliminates the possibility of data-entry errors by employers and fund administrators.

We must remember that superannuation is not the employers' money. It is not the Government's money. It is not the superannuation funds' money. It is the retirement savings of ordinary Australians. Arguing against choice is a no brainer.

The arguments against choice are like saying that because buying a home is a complex and important transaction requiring education and understanding, we should take the choice away from individuals and let employers choose the right home for them. Central to this argument is the patronising assumption that Australians are not capable of making decisions about investment of their retirement benefits if given the chance.

We don't let employers choose our homes. We don't let employers tell staff where to bank, who to insure with or which stocks to buy. We shouldn't continue to allow employers to choose their employees' superannuation fund.


Choice of superannuation is closely related to portability of superannuation - another important policy commitment made by the Government. I will be releasing a consultation paper on this very soon.

Portability will allow individuals to move existing contributions and earnings into their fund of choice. Enhancing portability will also increase competition in the industry, encouraging downward pressure on fees and charges, and a culture of disclosure and good performance.

APRA figures from March this year indicate that there are just over 24 million superannuation accounts in Australia which means there are approximately 2 to 3 accounts for every person who can have an account.

Current labour force trends are a part of this picture. Increasing part-time and casual work and the incidence of people with broken work patterns (such as women who take time out to care for children) are likely, in the absence of choice and portability, to lead to greater numbers of accounts. Greater numbers of accounts incur greater net fees and charges and may dissipate the final retirement benefit.

Labor proposes automatic consolidation of accounts unless people opt out. But the Government supports consolidation where people decide this is what they want. Some people may wish to retain more than one account for good reasons. Where they want to consolidate, this should be permitted.

Safety of Superannuation

The theme of tonight's speech is paving the way for a more effective system. And no consideration of this topic can escape the need to address the safety of superannuation.

With the billions - projected trillions - invested in our superannuation system a robust framework for the prudent management of superannuation is a key priority. It must be said that only a minute proportion of superannuation savings regulated by APRA have been lost - less than 0.0001%.

But recent comments provided by the regulator APRA are a timely warning to trustees of both big and small superannuation funds that they must improve their risk management systems and properly safeguard members' interests.

Although there is reason to be confident that Australians' superannuation savings are safe, we do need to be vigilant

and to ensure that we have the very best regulatory model that can be devised. To that end, APRA's funding was bolstered by $11.4 million over 4 years for prudential supervision over the years 2001-2002.

Recent recommendations by the Safety in Superannuation Working Group chaired by Don Mercer suggest some improvements can be made including the licensing of trustees.

I am carefully considering all the recommendations. The Government's response will consider what improvements can be made to reinforce effective regulation for the safety of super.

The Forward Agenda for Superannuation

Which brings me to adequacy.

Increased awareness of superannuation has lead many to start to think about whether they will have enough to retire on.

A key design feature within our system is that while compulsory superannuation in conjunction with the Age Pension will provide a sound base for the provision of retirement incomes, this can be supplemented with additional voluntary contributions depending on individual expectations and preferences and capacity.

As individuals we all have different preferences as to how we will spend our retirement years, and we have different perceptions or expectations regarding the level of income we will require or need in retirement.

Adequacy is a complex issue but the questions we need to ask are quite simple.

The first question is how much will people receive in retirement and is it enough to realise their individual goals? The second question is how much consumption people should forego during their working life to provide for their consumption in retirement, and whether Governments should be foisting that decision on them. The third question is how much should the Government spend or forgo to assist people to realise their financial goals?

Treasury analysis indicates that the fully implemented SG arrangements, in conjunction with the improved Age Pension after tax reform, will make the average Australian's financial independence in retirement more secure than at any other time in Australia's history.

In a recent submission to the Senate Select Committee on Superannuation, Treasury concluded that the Superannuation Guarantee, together with the Age Pension, could produce replacement rates in excess of 60 per cent for Australians on median earnings working for 25, 30 or 40 years. This also holds true for Australians on median earnings with interrupted working lives, as so often happens with women in the workforce.

Whether or not a particular replacement rate is optimal is a matter of judgement for the individuals involved, but it is generally accepted that most people will not need as much money in retirement as they do during their working lives. This is because most retirees simply do not face the same costs as working age people. By and large they will no longer be facing two of life's largest expenses - that is, their mortgage and, of course, children.

Older Australians and Workforce Participation

But questions of adequacy also points to a significant challenge for the design of future retirement incomes and that is our ageing demographic.

An improvement in workforce participation by older Australians will have a direct and immediate impact on maintaining living standards and economic growth in the future.

We need to create a workforce where people of all ages are recognised for the skills that they have, rather than the age that they are. For the aged cohort of 55 to 64 the workforce participation rate in Australia is 49 percent. In the United States it is around 60 percent, and in New Zealand and most other comparable countries it is between 57 and 60 percent. In Australia people are being encouraged out of the workforce at too early an age.

We need to look at the medium and long term economic position of this country. We cannot discount the fact that our society is ageing. We need to value the contribution of mature aged workers and keep that corporate knowledge in the workplace instead of encouraging increasingly early retirements.

As the saying goes "Age is not a condition, it is a state of mind".

While the ageing demographic clearly has important implications for labour market policy, superannuation policy may also be harnessed to foster increased participation among older Australians who need to save more and longer for their retirement.

This is something the Government has already begun to address with the phased increase in the preservation age from 55 to 60 between the years 2015 and 2025.

Making it easier to contribute to superannuation at an older age will also allow more mature Australians to keep working. In recognition of those who choose to work beyond the age of 70, the Government increased from 70 to 75 the age to which working people can make personal contributions to superannuation.


In conclusion, the significance of planning and saving for retirement will be increasingly important for all Australians.

The Government strongly supports this savings culture and I am confident that the initiatives I have outlined tonight (that are only some of the measures being implemented) will significantly enhance the attractiveness and flexibility of superannuation.

Increased community awareness of the importance of savings for retirement has given superannuation a momentum it has not had before.

It is a very healthy and productive sign that ordinary Australians are now taking notice of what is happening to their retirement nest eggs.

I welcome debate about the future direction of superannuation. After the imperatives of paying back debt and reforming the tax system, the future of savings and the adequacy of retirement incomes is one of the biggest challenges we face as a young nation with an ageing population.

Thank you for your interest in the dynamic issues and trends that are shaping the superannuation of the future.





© Commonwealth of Australia 2000