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A super strategy for the 90s and beyond: address to the Nationwide Superannuation Planners' Seminar

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8 JULY 1994

"A super strategy for the 90's and beyond"

address by





Good morning ladies and gentlemen.

We all know that it is crucial for people to save now so they can enjoy a higher standard of living when they retire.

The Government is firmly committed to superannuation because it benefits both individuals and the nation as a whole.

I am particularly pleased to be here today to outline the Government’s superannuation strategy. Superannuation trustees; managers and administrators like yourselves play a vital role in managing our superannuation savings.

I would like to concentrate on three main themes today:

• first, I will outline the Government’s retirement incomes framework and the progress made to date;

• second, I will comment on the statement made last week by the Treasurer; and

• finally, I will talk about the Government’s approach to supervising the superannuation industry under the new Superannuation Industry (Supervision) regime.

Retirement Incomes Policy

Retirement incomes policy is a hot topic in Australia. We are facing the fact that, as a nation, we are all getting older.


There is a vigorous debate on the best ways to promote superannuation and to raise national savings.

In the heat of the debate, it is easy to forget how much progress has already been made.

A decade ago, most workers had no access to superannuation, and few people fully understood the severity of our savings problem.

Australia lacked a strategy to face the major challenges posed by an ageing population. We needed to raise the level of our national savings to finance investment and to sustain long term economic growth.

In response to these challenges, the Government has implemented a comprehensive retirement incomes strategy.

That policy has three tiers:

First, we have guaranteed access to the safety net provided by a means-tested age pension. And we have no intention of phasing out the pension.

Second, the Government has supported compulsory superannuation through award superannuation and the Superannuation Guarantee.

Finally, we have provided a range of tax incentives for both compulsory and voluntary superannuation.

In essence, the Government has made superannuation the preferred form of retirement savings for Australian workers.


Achievements to date

Our retirement incomes strategy is already beginning to reap benefits.

Compulsory superannuation has fuelled rapid growth in superannuation. Industry assets now total around $180 billion, and are expected to grow rapidly into the 21st century.

Five years ago, just over half of all full time, permanent employees had superannuation. The number is now 96 per cent.

For the first time ever, full-time female workers have the same level of superannuation coverage as full-time working males.

There has also been a dramatic rise in the number of casual and part time workers with superannuation.

Increased coverage is only one step along the way. The next step is to ensure that workers accumulate enough superannuation to boost then- living standards in retirement.

Tax incentives alone are not enough. There is convincing evidence that tax incentives for particular forms of investment tend to change the pattern of saving rather than raising the overall level of savings.

This is where compulsory superannuation comes in.

In designing the Superannuation Guarantee, the Government balanced the need to increase savings with the cost to employers of providing superannuation support for their staff. For this financial year, employers will be paying 4 or 5 per cent of salary. This will be

gradually stepped up to reach 9 per cent of salary by 2002.


The Superannuation Guarantee is an example of long term policy making by the Government. The contribution to savings will ultimately be very significant.

Dr FitzGerald's report into National Savings estimated that the Superannuation Guarantee will eventually increase total private saving by about 1% per cent of GDP.

Similarly, a recent EPAC report on Australia’s Ageing Society found that by the year 2030, the SG will reduce expenditure on the age pension by over $15 billion per annum.

This is a significant achievement.


The Treasurer’s statement last week confirmed the Government's vision for superannuation.

The statement contained no radical changes. Indeed, for many people there will be no obvious change in the way their superannuation works.

There has certainly been some critisism that the statement does not go far enough. However, the people making that critisism fail to recognise the strong community view that there have already been enough changes to superannuation.

The Government has set the broad framework in place and is now firmly committed to a period of relative stability.


What the statement does is relatively straightforward. It strengthens and enhances the existing superannuation system to make it work better for everyone - particularly people with small superannuation accounts.

The problem with small accounts is that the fees and charges imposed on them can be more than the investment income they earn. Casual workers; part timers; and people who change jobs frequently can end up with a number of small accounts held with different

superannuation funds.

The Treasurer's statement announced a package of measures designed to solve the small amounts problem. Martin Spedding will provide more information about the statement later this morning. But I think it would be worth outlining some of the main measures now.

The new 'member protection' rules attack the root of the problem - charges eating away at small superannuation balances.

From July 1995, superannuation fund trustees will have to make a choice:

. they can provide 'member protection' on accounts under $1,000 by taking steps to prevent fees and charges being more than the investment income. This means that account balances are much less likely to go backwards; or

. they can transfer small amounts to another fund which does provide member protection.

As well as member protection, employers can choose to use the new Tax Office collection mechanism which I will return to later.


This means existing accounts will not be subject to erosion. Nor will funds be able to accept new accounts or new contributions which are subject to erosion.

The member protection measure does not impose price controls on funds. Rather, it ensures that costs are allocated to fund members in a way that protects those with small balances.

Funds will continue to have a responsibility to invest their assets wisely. And there will still be a high level of competition in the superannuation system which should help keep costs as low as possible.

The 'member protection' rules protecting small amounts without shifting them out of the superannuation system.

However, there will be some situations where employers find it difficult to find a fund willing to accept small contributions for their employees.

For this reason, employers will be able to pay small Superannuation Guarantee contributions to the Australian Taxation Office from next year. Subject to their award obligations, employers will be able to direct up to $1,200 per employee per year to the Tax Office which

will then hold the money paid on behalf of employees.

Where an individual's superannuation balance has built up to $1,200, the person will be encouraged to transfer their balance to a superannuation fund.

This Tax Office mechanism is not a superannuation fund. As such, it


is not subject to the regulatory costs which are imposed on superannuation funds for legitimate prudential reasons.

The Tax Office will be particularly useful in amalgamating multiple employer contributions on behalf of mobile, itinerant workers before they enter the superannuation system.

The Treasurer also announced other initiatives to combat the small amounts problem:

• The Government is encouraging major industry fund managers to develop a 'transfer protocol' to amalgamate multiple accounts;

• For the time being, employers will be able to meet their Superannuation Guarantee contributions with a single annual payment. Once the superannuation system is judged to be more settled, quarterly contributions will be introduced;

• Tax File Numbers (TFNs) will be used to help track and amalgamate superannuation accounts. People should find it useful to quote their TFN because it will help them keep track of their superannuation. However, no-one will be compelled to

quote TFNs for superannuation purposes.

Taken as a whole, the Treasurer's statement provides a comprehensive solution to the small amounts problem. This will particularly assist lower paid workers and women with broken working patterns.

The initiatives announced in the Treasurer’s statement are significant for people with small superannuation balances. But in many respects the statement affirms that the Government was already on the right track.


There were no changes whatsoever to the taxation of superannuation in the Statement.

We confirmed that the Superannuation Guarantee complements rather than replaces award superannuation.

The Government reaffirmed the existing schedule for gradually increasing employer SG contributions to 9 per cent of salary by 2002. We have also said that we will look at ways of introducing employee contributions some time down the track.

Superannuation is a key element of the Government’s retirement incomes and national savings objectives. The Treasurer’s statement builds on the existing framework by preventing the erosion of small amounts.


This brings me to my final topic - the new Superannuation Industry (Supervision) - or SIS regime.

The Government recognises that its decision to promote superannuation brings with it a need to strengthen the protection of fund members' interests. It has sought to do this through the SIS regime which began last week.

The role of trustees .

Trustees have always played an important role in managing superannuation savings. Until now, however, their duties and obligations were drawn from common law trust principles which were not always well understood.


The new SIS legislation emphasises that primary responsibility for the prudent management of a fund rests with trustees. Trustee accountability - together with equal representation on trustee boards - is the cornerstone of the prudential regime.

SIS gives trustees a clear legal framework to ensure that they are in control of their fund. The legislation seeks to ensure that:

• trustees make the necessary decisions regarding management of the fund;

. structures and procedures are in place to ensure that trustees' decisions are actually carried out; and

. reporting procedures are established so that the trustees know their decisions are being properly implemented.

The SIS legislation codifies some of the most important fiduciary duties of trustees. Some of these are covenants which bind trustees as if they were written into the governing rules of the fund. Examples of these covenants are:

• honesty;

• the 'prudent person rule';

• the formulation of investment objectives; and

• member access to information.

SIS confirms the key role that trustees have always played in the


operation of a superannuation fund.

I believe this has been a source of undue concern among trustees.

The Government has made it quite clear that court action will not be taken against trustees for innocent or inadvertent mistakes. So honest trustees diligently working in the interests of members will not fines or gaol terms.

In fact, SIS provides greater protection for honest trustees since accidental or minor breaches cannot generally be the subject of penalties. Previously, funds failing to comply with the legislation were exposed to substantial tax penalties.

Investment objectives and strategy One of the key duties of trustees under SIS is to decide on a set of investment objectives and a strategy to achieve them.

In formulating an investment strategy, trustees need to take account of the fund's particular circumstances. The strategy must have regard to:

• the trade-off between risk and return; • the benefits of having a diversified investment portfolio; and • the fund's capacity to meet its liquidity needs and future liabilities.

In addition, constraints have been placed on fund members’ ability to tell trustees how to invest.

The ISC will shortly release a circular which will answer the most commonly asked questions on investment strategy.


Under SIS, trustees always retain ultimate responsibility for the investment function. This is the case regardless of whether they choose to hire specialists to undertake investment and management.

The important point here is that the Government does not force trustees to engage specialist advisers and managers. We leave it to the trustees to decide what is best for their fund.

While on the subject of investment, I want to make it clear that the Government has not told superannuation funds where to invest. We welcome fund investment in small business and emerging technologies where this forms part of a properly diversified portfolio.

But we do not insist on this particular type of investment.

Even so, I expect that investment in small business and venture capital will become more common as the pool of superannuation savings grows.

Changes announced in the Government's Working Nation statement should also facilitate investment in this area. In particular, we have made it more attractive for superannuation funds to invest in Pooled Development Funds and Infrastructure Bonds.

Information Disclosure The SIS legislation supplements the basic legal accountability of trustees with other measures. Among the most important of these are the improved information disclosure rules.

An informed fund membership has a particularly critical role to play in the superannuation system. The disclosure requirements give members regular access to information about their superannuation


entitlements and the way their fund is managed. This should make funds more accountable to their members.

Equal representation Not only are members kept well informed, they also have the opportunity to become trustees and actively participate in the management of their fund.

By this time next year, many funds will have equal member representation on the board of trustees of their superannuation fund. This means that ordinary employees can participate in the management of their fund. These member trustees also provide

valuable links between other employees and their superannuation fund.

Member representation is fundamentally important because it creates a strong link between the day-to-day management of the fund and the ultimate interests of fund members.

Complaints handling arraneements The SIS regime also ensures that people have access to information, advice and redress where they are in dispute with their fund.

Funds will be expected to deal with inquiries and complaints within 90 days. And where a complaint cannot be settled internally, people will be able to take their problem to the Superannuation Complaints Tribunal which opened last week.

Powers of the ISC An important feature of the SIS regime is the stronger powers given to the industry regulator, the Insurance and Superannuation Commission.


Trustees will need to submit annual returns to the ISC, including confirmation by an auditor of the fund's accounts.

The ISC will conduct an extensive on-site audit program, principally through its State offices.

The approach taken by the ISC in supervising the superannuation industry is somewhat different from regulators of other financial institutions such as banks, building societies and insurance companies. This is because superannuation is different from other

forms of investment in at least two important respects.

Superannuation funds which comply with Government standards are eligible for tax concessions. As a result, the ISC has a responsibility to check funds for compliance with standards such as preservation and vesting rules. These rules exist to make sure that the tax breaks

on superannuation are used to improve retirement incomes - and not for other purposes. In the main, the standards set out in SIS are carried over from the Occupational Superannuation Standards Act.

Another thing that makes superannuation different is the very large number of funds. The ISC supervises 70,000 funds - a somewhat different task than supervising 35 banks. It simply is not possible for the ISC to closely supervise the systems and investment of each and

every superannuation fund.

SIS gives the ISC strong monitoring and investigation powers. The ISC will have the ability to seek penalties, through the courts. However, as I have made clear earlier, this type of action will only be taken against trustees who seriously and deliberately violate the law.