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Address to the Conference of Major Superannuation Funds



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Address to the

CONFERENCE OF MAJOR SUPERANNUATION FUNDS

Tuesday 26 March 1991

at

The Northbeach Parkroyal Wollongong

"SUPERANNUATION - FOR WHOSE BENEFIT?"

SENATOR RICHARD ALSTON Liberal Senator for Victoria Shadow Minister for Social Security, Child Care and Retirement Incomes

SUPERANNUATION - FOR WHOSE BENEFIT?

Thank you for your invitation to participate in this important conference.

It is a unique opportunity to meet with many of the major players in the superannuation industry and to share with you some of the Opposition's concerns about the role of

superannuation in general and award superannuation in particular.

We all understand by now the desperate need to make Australia competitive again.

Progress will not be achieved just by subscribing to

simplistic nostrums like 'the clever country', but rather by a solid dedication to good old fashioned hard work.

But there is no point in working harder, longer and smarter if at the end of the day we splash it all up against the wall.

Whilst the present Government has spent the last 8 years comparing itself with its predecessors, the rest of the world has matched itself against its competitors. The result has been that the pace of change in Australia has reflected a manifest unwillingness to bite bullets.

But as Max Walsh recently pointed out, as the world recession starts to bite the competition on international capital markets is really hotting up - Germany has just posted its first current account deficit for nearly a decade, while for

the first time since 1985, Japanese investors have been net sellers of US bonds. The price of foreign capital is likely to rise significantly, making it even more imperative that Australia should boost its savings pool. Yet despite the fact

that we are now spending every year about $20 billion more than we earn - more than 5% GDP - we are presently seeing the Budget surplus evaporate before our very eyes, whilst at the same time there are increasing signs that the Government is about to kill the superannuation goose which lays the golden egg of private savings.

INVESTMENT CONTROLS

One of the best ways of frightening the pants off ordinary Australians who think their nest egg is inviolable and at the same time send the worst possible signal to overseas investors is for the Government to get into the business of seeking to

influence, let alone dictate investment decisions. Yet that is precisely what the present Government seems determined to do.

Senator Button's recent round of the banks and major life offices in hot pursuit of 'adventure' capital is simply the latest shot in a long running campaign from which he has

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emerged bloodied but unbowed.

There are undoubtedly many in the ranks of the Government and its ACTU cheer squad who consider it somehow unpatriotic that an industry with assets approaching $130 billion should not be prepared to take a national interest approach to its

investment portfolio.

While the Government officially disowns the ACTU's Australia Reconstructed agenda, which could see up to 20% of union based super funds providing equity capital for Australian enterprises, there has been an unremitting stream of

interventionist proposals emanating from the Labor side:

- Brian Howe favours the diversion of some super funds into low cost housing and low scale infrastructure projects

- the Treasurer regards superannuation fund investment policies as "stodgy" and "unimaginative" and has boasted of the institutional muscle which will be able to be flexed by a trade union movement presiding over $600 million worth of Australian savings

- the Left want a limit on the proportion of funds -

currently about 11% - which can be invested offshore

- Caucus wants the Government to consider directing a fixed proportion of super funds in to venture capital projects

- Senator Richardson believes that superannuation funds should urgently pump more money into manufacturing - perhaps he is proposing a new 'picking losers' strategy

- the Evatt Foundation favours the use of the

superannuation as a milch cow to pump money into

government business enterprises and thereby avoid the need for privatisation

- yet, in the wake of the forced partial privatisation of the Commonwealth Bank Caucus resolved that "in framing the terms of this equity issue, special attention he given to ensure the subscription of superannuation funds

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But the prime concerns of those who continue to lust after a slice of the superannuation action are the alleged high cost of capital, the dearth of venture capital and the obsession of fund managers with short term performance horizons.

It has long been Senator Button's view that the failure of the Management Investment Corporations (MICs) through the eighties was primarily due to a lack of support from the major

financial institutions. Indeed he has accused the capital markets of becoming "accessories to a form of economic vandalism" in preferring entrepreneurism to venture

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capitalism.

Late last year he was the prime mover in attempting to get another old ACTU favourite - the fund of funds concept - off the ground and was even floating the idea of easing prudential controls and cutting red tape to facilitate more enterprising

investment policies.

The major life offices gave this the thumbs down and the idea was quietly, for the time being at least, shelved.

But the Government remains obsessed with the idea that United States pension funds are major contributors to venture capital projects - in marked contradistinction to their Australian counterparts. But this ignores the fact that almost 40% of US venture capital comes from State Government pension funds, a

number of whom are under the influence of political activists and social engineers. Less than one half of 1% of the assets of the 200 largest US super funds are in venture capital investments, despite the fact that the massive US market

offers many more potential rewards than a small and distant one like Australia.

There is another very good reason for the reluctance of fund managers to go overboard on venture capital projects - it has proved very difficult to determine any reliable performance measures. At any given time the balance sheet will include many unrealised portfolio assets and frequently unrealised

losses, making it a potential nightmare for prudent investment managers.

It can be argued that present Government policy is in fact discouraging long term investment by the life offices and superannuation funds who are responsible for about 85% of the investment on the Australian stock market. In order to minimise their tax liability by qualifying for franking

credits many fund managers prefer to target currently high dividend payers rather than fast growth companies which need to retain as much as possible for working capital.

if there really are banks and financial institutions who refuse to " facilitate the growth and Internationalisation of prudently managed companies with established operations and business expansion opportunities” (to quote from the Concept Paper for An Australian Capital Development Company) then

let's hear about it.

If the Government can cite specific examples of financial institutions refusing to take up obvious investment opportunities then we are entitled to know the details before we are asked to endorse yet another variant on the v e d c /w a Inc

formula, only this time with the great bulk of the risk being taken in the private sector.

While Senator Button prefers to explain his latest knock back

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on the basis that " there is considerable confusion about the Government's Intentions" the fact is that anyone who has read the Concept Paper would be filled with considerable

misgivings. Why should the expertise available to such a new entity be obviously superior to that already available to the major life offices? would there not be enormous temptations to ensure that the $1 billion was put out to the market place

as quickly as possible? Would not the Government be under the same short term pressures to demonstrate performance as it alleges now exist in the private sector?

It is ironic that at a time when the ghosts of all round

protection have been finally laid to rest and the Treasurer is still prepared to resist many of the blandishments of those calling for selective tax breaks for industry, we are once again seeing the Labor Party get back to basics.

But perhaps the supreme irony is that while Senator Button persists in trying to cobble together large sums of money and to not even rule out compulsion, Paul Keating has predicted that further investment in.venture capital projects is likely

to evolve anyway.

Speaking to the International Iron and Steel Industry in October last year he said: "As the sums to be Invested grow, the superannuation funds will find It Increasingly attractive to hold some small proportion in higher risk investments

supporting new businesses and new products".

So what is all the fuss about?

The last thing that a responsible government should be doing is trying to force the pace in this very sensitive area. Having now been forced to concede that it got its economic predictions horribly wrong over the last 12 months the Government's moral legitimacy to advocate that others should

adopt counter cyclical measures must be suspect.

The ease with which even tin pot outfits could get their hands on VEDC or South Australian State Bank money in the good times strongly suggests any capital shortage is cyclical, not structural, in nature.

Indeed there are already signs in the market place that a new asset class of development capital vehicles will evolve once a low rate of . inflation and continued dividend imputation combine to bring down the cost of capital.

The real danger with even the heavy handed 'moral suasion' approach is that despite their size the large players may consider themselves vulnerable to threatened punitive government action and allow themselves to be 'persuaded' to demonstrate their patriotism by kicking some conscience money

into Ministers' pet projects against their better judgement.

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It is always very tempting for governments to argue that companies should do better and then to attempt to push them in certain directions by tax concessions. But the recent experience of MICs and the film industry deductions show that such incentives distort investment priorities, with many companies concentrating on the immediate tax break rather than the hard slog.

Indeed, despite his obvious disappointment at not being able to deliver a $1 billion Capital Development Fund as the centre piece of the industry Statement, Senator Button is determined to have another go.

But if he gets another artic response the Treasurer should publicly bury the idea if the hares are not to be kept running until the next election.

WHO CONTROLS INDUSTRY FUNDS?

The Government's propensity to intervene in investment decisions is in marked contrast to its hands off approach to industry funds.

Consumer confidence is a fragile flower which will quickly wilt in the face of further corporate scandals, collapses or indiscretions.

We have already seen unprecedented failures of financial institutions in both the public and private sectors. Two State banks have gone effectively broke, State government instrumentalities like the VEDC, have chalked up world record

losses and there have been major collapses of building societies and similar institutions. More recently the collapse of the Regal and Occidental Life Insurance companies have caused more nervous flutters.

A major review of the Life insurance Act is currently

scheduled to be completed by the end of this year.

Superannuation has traditionally not been supervised at all, with any desired limits on the activities of funds being spelt out in their common law trust deeds, the provisions of which can vary quite considerably and details of which are usually

closely guarded secrets, although in theory available to members.

However whilst the 1987 OSSA Act and Regulations introduce some very important standards relating to vesting,

preservation and portability as well as some reporting and disclosure requirements these new rules are ultimately more significant for what they do not contain.

Since the Treasurer's LIFA speech in November 1989, a steering committee consisting of industry and ISC representatives has

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been considering possible new prudential changes but so far the only tangible initiative in terms of increased

accountability has been the Treasurer's 1990 budget announcement that from 1995 all large superannuation funds will be required to have equal employer and employee

representation on the Boards of Trustees.

But this will only extend the current cosy and fundamentally unsatisfactory arrangements whereby for the vast majority of Industry funds, employer representatives are nominated by an employer organisation and employee representatives are nominated by a trade union or the ACTU. Such a method of appointment is fundamentally undemocratic, particularly when,

in many instances, members have no option but to contribute to the nominated fund.

Indeed so cosy is the current deal that until recently one leading, and now former, trade union official (guess who?) was chairman of two of the leading funds and a director of a third.

A Coalition Government would not continue to condone such a lack of freedom of choice.

The practice of trustees being appointed in a representative capacity is undesirable and in certain circumstances may be illegal. It is illegal under the Corporations Act to have board members acting exclusively for special interest groups because they owe their fiduciary duty to the company as a whole. As a former NSW Chief Justice said in Bennetts v The

Board of Fire Commissioners of NSW (1967) 87WN (NSW) 307: "It is entirely foreign to the purpose for which this or any other board exists to contemplate a member of the Board being representative of a particular group or a particular body".

A Coalition Government would want to see trustees elected on their individual merits having regard to their relevant qualifications for the position.

There are no formal qualifications or relevant experience required of trustees of industry funds. Unlike directors of companies, even a record of bankruptcy, mental illness or corporate criminality is no bar.

Very few industry funds have elected trustees, or even annual appointees. Most are effectively appointed until death or retirement. Moreover, most trust deeds allow for automatic replacement by the nominee of a specified organisation.

In practice, most of those appointed are chosen for their Industrial relations talents rather than their commercial skills despite the fact that the law requires a trustee to exercise a high degree of business prudence.

Thus ultimately thousands of millions of worker-owned dollars

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are controlled by a few key Industrial relations players and bureaucrats who then proceed to do a deal on the preferred fund which is then wheeled up to the IRC for rubber stamping.

Democratic notions such as workers actually having a direct say in the election of the custodians of their life savings, let alone having a choice as to which funds should handle their nest eggs are light years away from 'current industrial realities'. ,

A Coalition Government would ensure that workers at each enterprise could exercise a choice between funds, thus introducing some competitive pressures into the market place as well as some real industrial democracy.

When it comes to setting fund objectives, trustees can virtually write their own ticket as long as the provisions can be justified as being in the best interests of the members. But do they go for safety first, set very high levels of

fluctuation reserves, maximise their returns or seek to build a more competitive Australia in which their investments will get a better long term rate of return? In other words, what is their mandate? Do they have any and what investment objectives, policies and strategies?

If the ACTU and the Government agree on a 'national interest' objective or venture capital scheme it is not difficult to predict trustee reluctance to reject such wisdom. In order to minimise temptation, such decisions should be vested in the

hands of the professionals. Indeed the trustee function itself could appropriately be placed in the hands of a professional trustee company.

A Coalition Government would give serious consideration to adopting the model recently proposed by the NSW Government in respect of the administration of public sector superannuation.

Under this approach the trustee role would be separated from the management and investment role and the Board of Trustees would continue to be responsible for the legal identity and control of fund assets. in fulfilling their fiduciary

obligations to act in the interests of members and

beneficiaries they would continue to be empowered to determine such matters as the benefit design, be it accumulation or defined benefit and the appropriate level and discretion of payment for death and disability cover.

The management and investment board would be established on a competitive and commercially oriented footing and would be appointed on the basis of expertise in the superannuation and commercial fields.

in foreshadowing a much more arm's length and professional approach, my remarks should not be construed as union bashing.

The evidence to date suggests that the ACTU in particular has

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been very conscious of the need to act conservatively and I have no reason to doubt their ongoing good intentions. However it would be irresponsible of government to continue to adopt a laissez faire approach in a situation where the bulk of the members are involuntary participants.

There is also legitimate concern as to whether the investment requirements of the trustees reflects those of the membership. For example, a 'no investment in uranium' clause may or may not be supported by the members - chances are they know nothing about it. A Coalition Government would compel disclosure to the membership of any such special limitations on normal investment practices and these would need to be

specifically approved by a majority of the membership voting in a secret ballot.

The much vaunted safeguard which requires a two-thirds majority for any voting decision is illusory, particularly as there is no requirement for a minimum number of trustees.

Whereas union representatives can usually be expected to vote the same way, employer representatives are not nearly as monolithic. The prospect of industrial action directed at an individual employer could be quite persuasive in determining

employer voting positions.

Although the OSSA Regulations prescribe minimum information standards the nature and extent of the disclosure of

information by a large industry fund is in many respects optional, as is the publication of an annual report. Very little is required as to portfolio balance or investment performance, critical measures by which such funds should be

judged.

But the potential for abuse is just as real when it comes to the exercise of control over administrative expenses. Indeed it is often difficult to know where the administration of the trust stops and the promotion of membership begins.

If a fund has offices in a number of capital cities, sets itself an objective of 'liaising with relevant industrial organisations concerning the interests of members' and then appoints an unspecified number of 'co ordinators' to visit work places and assist in the administrative process, where is

the line to be drawn between promoting the virtues of

superannuation as opposed to extolling the benefits of union membership? Who needs industrial organisers and recruitment officers paid for out of members' dues when the cost can be borne, pain free, from employer contributions to a

superannuation fund.

If the only information provided to members is that the trustee spent over $100,000 last year on each of advertising and debt collection costs and more than $300,000 on 'salaries, wages and allowances' who is any the wiser?

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But what about the situation of inactive members? No

aggregate figures are available but it is believed to be quite common to find 15% of membership in this category. Indeed one of the largest funds discloses a 25% figure, worth around $50 million a year. Other major industry funds are simply silent on the question. The owners of many of these accounts could well be untraceable, particularly if they are in false names.

What is there to stop these inactive accounts being loaded with the bulk of the administration costs or debited with insurance fees for death and disability cover, thereby enabling the funds to make a generous profit on this business which can then be applied to employing union organisers to do

the rounds.

The ACTU has recently embarked on a sophisticated marketing campaign to try and arrest the alarming slide in union membership. So far this has included persuading the

Department of Social Security (DSS), the Commonwealth Bank and the Drug Offensive Campaign - in other words, taxpayers funds - to bear half the cost of a glossy lift out supplement which recently appeared in Cleo magazine. The $45,000 DSS contribution was justified by the Minister on the grounds that

it would be of interest to sole parent pensioners - hardly the prime target market for a yuppy magazine.

With this unabashed effrontery, what is there to stop ACTU representatives on industry funds from persuading their fellow trustees to pay for videos and other promotional literature designed to demonstrate that only union membership can deliver

the goods on superannuation.

Indeed given the very powerful data bases being built up by industry funds, what is to stop membership lists being made available to the trade union movement?

As the current OSSA regulations permit funds to declare a rate of return net of administrative fees and charges, it is impossible to determine where any bodies might be buried. The ISC has so far taken little interest in these issues,

presumably because they might be seen as too political.

The prospect of the emergence of bigger unions, followed by mega industry funds must raise these legitimate concerns to new heights.

Industry funds are comparatively recent animals in the super zoo, but they certainly attract the most interest from the spectators. This is not surprising, not only because they are the products of traditionally unholy alliances but because more than one million Australians have no choice but to pin

their retirement hopes on them.

So what do we know about the inner workings of industry funds? To my knowledge no one has yet done a thesis on the subject so I have had to rely on my own examination of the annual reports

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of five of the major players, representing nearly half of the members of all industry funds and with more than $700 million under management: ARF, BUS, HESTA, REST and STA.

I have to say the quality varies greatly - none of them could stand up against the average company report. Indeed two of them use identical words in the chairman's message - thereby implying an identical trustee (or ACTU) approach to investment policy. They all contain much harmless padding, but only

three of them actually disclose the names of the trustees and of these in one, the largest group represented the ACTU and the other, a single union.

In one case the auditor *had Insufficient time to prepare the audit". Another, which won the ASFA award for worthy

reporting standards the year before, did not even disclose how much was paid out in benefits during the year. On the other hand, the BUS annual report makes it clear that of the $30 a week taken out of each worker's pay packet only half goes to

super.

As BUS had some 203,000 members as at June last year, the current $1.50 a week administration charge raises $15.8 million a year of which about half goes to the fund manager. What happens to the other half, or for that matter, the $10 million raised a year by the apprentice levy?

But the matter which ought to be of the greatest concern to the members and to all those anxious to maintain public confidence in industry funds is that only one of the annual reports gives even the vaguest indication of the nature and extent of the administration charges, h e St a simply didn't give a figure, lumping it in with tax, insurance benefits, reserves and trustee expenses of $15.4 million.

Of the other four, administration expenses were $16.2 million. Did this include anything for trustee expenses?

Between them the five funds paid almost $25 million in insurance premiums. Did they make any and what profit by way of commission?

Concern about what might be covered by administration expenses is heightened when an examination of one trust deed shows that legitimate expenses to be charged against the fund which include money spent by the ACTU in promoting the fund and attempting to recruit members. If this does not cover a full scale union membership drive, I would be very surprised.

These reporting standards are lamentable and they will not be improved by AAS 25 or ISC forms which don't even enquire about admin expenses as a separate item.

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AWARD SUPERANNUATION SHORTCOMINGS

Let me conclude by addressing some serious problems with the award superannuation system which are continuing to undermine the legitimacy of superannuation as a viable alternative to the age pension.

(a) Part Time and Casual Employees

The treatment of these employees continues to cause considerable anxiety and resentment.

In many instances modest sums are compulsorily deducted but because of a fixed administration charge the net benefit can be reduced to virtually nothing. Though individually small they can add up to substantial sums

lying around in industry funds and providing a tempting pool of effectively unowned income.

Myriad small sums clearly do pose diseconomies of scale, but the Government shows no inclination to tidy up the system. It has been suggested that all preserved

accounts of inactive members could be swept into a central fund to which all workers could have access and with which all fund signing up new members would be required to check to determine any relevant outstanding

benefit entitlements.

Alternatively, all workers earning less than, say $200 per week, could be exempted from award coverage and instead encouraged by means of tax concessional

retirement savings accounts to provide for themselves until they enter into full time employment.

The present system is in many respects a rip off which effectively robs part time and casual employees. in many situations they would need to earn more than $2000 a year before the 3% contribution would provide them with any net entitlement after deduction of insurance,

administration charges and taxes. Many funds impose administration and insurance levies even if the employee is not working and their accounts simply provide a convenient pool from which to cross subsidise other workers.

(b) Freedom of Choice

Nine out of ten awards give directions as to where

contributions must be invested. In the Federal

arbitration arena as at 30 April 1989, of 284

superannuation awards handed down, 162 nominated a single fund and a further 90 allowed a choice only between an industry fund and a company fund.

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There is persuasive legal authority to suggest that this compulsion may be illegal.

In deciding that superannuation could form the basis of an industrial dispute under the Constitution the High Court, in the 1986 Manufacturing Grocers case was not dealing with a decision of the IRC directing payment to a

fund and made it clear that such an approach could be open to attack. The matter is therefore still to be tested and could well be struck down.

The element of compulsion is exacerbated by the practice in some industries such as building and transport of 'no super card no job'.

Freedom of choice should also extend to portability. It is simply not good enough for an industry fund to dictate that members can only transfer to another industry fund if they leave the industry. After all, its their money.

(c) Non Compliance

It is now acknowledged by the Federal Government that close to $1 billion is owing by approximately half a million employers in outstanding award superannuation entitlements to perhaps 2.5 million workers.

This is not surprising when it is realised that the latest ABS figures show that close to 60% of the private sector are not receiving any superannuation at all, despite the supposed universality of award super.

Yet the Government seems incapable of coming to terms with the issue.

Senator Cook, who prefers the softly, softly approach for recalcitrant unions is now threatening to prosecute small businesses who are in default. Senator Cook tends to see the whole economy as one big industrial relations battleground and can take a lot of the blame for

superannuation becoming a political football.

Whilst it remains another 'deferred wages claim by another name' there will be enormous employer and non union employee reluctance to be involved.

If the Government is fair dinkum about extending

superannuation to the work force it should be urging minimum levels of coverage, rather than simply

theoretical across the board add on payments, which in practice flow immediately to the industrially powerful and only much later, if at all, start to spread to the very people the union movement claims to represent.

Some 20,000 cases of non payment were detected in 1989-90

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and many of these could be liable to have payments

backdated to 1986 with interest. Some may even be liable for unfunded death or disability payments.

Almost six months ago the Business Council of Australia called for a national conference to consider the crisis, but after an early statement from Senator Cook that the matter was under consideration, there has since been a

deathly official silence.

One of the main problems which the Government refuses to address is multi skilling which can make any one award apparently inappropriate and yet leave an employer exposed to very substantial liability. This is yet another compelling argument for allowing access to an existing company or enterprise fund.

The Government has put on a brave front to date, but the fact is that the Awards Management Branch of the

Department of Industrial Relations which has only a $1,5 million budget for superannuation award enforcement, has managed to contact only about 7000 employers by telephone in the last six months and of these, 15-20% were already

complying and the rest have claimed to have subsequently joined a fund. The Branch is only able to make a few

symbolic visits in the field and the prospects of

clearing up the backlog to any significant extent are remote.

Unless the trade union movement is prepared to sanction some competitive solutions such as the payment of commissions to a range of agents - not just from life offices - there will never by an enforcement

breakthrough.

(d) Double Dipping

Although the ABS data is inadequate, there is no doubt that currently lump sums are used much more to travel, do up the house, pay off the mortgage and invest than to purchase a guaranteed income stream.

While the preservation age is fixed at the ACTU-

encouraged retirement age rather than the age pension age, there will be a well nigh irresistible temptation to dissipate lump sums and qualify for the pension in due course, especially whilst average lump sums remain at modest levels.

The Government and the trade union movement simply refuse to face up to this stark contradiction in goals, seeing the current qualifying age as the price to be paid for union support.

But this position is indefensible and if the Government

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won't bit the bullet, the Opposition will. The

preservation age will be initially raised to 60 after reasonable notice has been given, and will subsequently be brought into line with a uniform age pension age of 65 years for men and women.

Despite the serious concerns that the Opposition has on a number of fronts, we remain firmly committed to the continued and rapid spread of superannuation throughout the community.

Not only must Australia urgently boost the level of domestic savings, but we must also ensure that as many as possible of our retired citizens are both more self reliant and better off financially than the great bulk of them are today.