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Speech to the Association of Superannuation Funds of Australia Luncheon, Melbourne.



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Speech

Speech by The Hon Lindsay Tanner MP Minister for Finance and Deregulation

Melbourne

Thursday 27 August 2009

I would like to begin by thanking the Association of Superannuation Funds of Australia for the opportunity to speak today. I know that the last 18 months has been the most challenging period the superannuation industry has faced since compulsory superannuation was introduced 20 years ago. And despite some recent positive movements in the market, indications are that superannuation funds will report negative returns for the second financial year in a row.

In the face of such circumstances it is fantastic that ASFA is able to bring together professionals from across the industry to debrief on recent events and look forward to what the future will bring for superannuation.

The global recession has been putting severe pressure on the Australian economy for some time now and this presents us, by ‘us’ I refer to both the Federal Government and society as a whole, with a host of significant challenges. Not the least of these challenges is the strain that declining superannuation values are putting on people’s retirement incomes and plans.

But this is primarily a short-term challenge. Eventually, and I am sure we all hope sooner rather than later, markets will recover and people will see positive growth in the value of their superannuation once again. People may have to put off their retirement for a couple of years and

they may not have exactly the amount to retire with that pre-2007 they had planned on, but the challenges that have faced the superannuation industry as a result of the global recession, the challenges I am sure you have all been dealing with everyday for the last 18 months, will eventually dissolve.

It is the longer-term challenges that Australia, like other countries around the world, faces due to changing demographics that we need to tackle now.

By 2047, some 7.2 million Australians will be aged over 65; that is almost double the current figure. To put that figure into perspective, there are currently around five people of working age to support every person aged 65 and over. By 2047, this will be halved to 2.4 people.

The demographic change that will occur in just one generation will place considerable spending pressure on critical areas of Government responsibility; areas such as health and aged care, and age pensions. That’s why the Government’s fiscal challenge is a good deal more difficult than it looks. Getting the Budget back into sustainable surplus means overcoming three challenges, not one.

The first is to exert discipline on spending as normal growth resumes. That’s why we have committed to a 2 per cent real cap on spending.

The second is to make longer-term savings, to fill the gap left in revenues by the retreat of the mining boom. That’s why we’ve made some tough savings decisions, and will have to make some more hard calls.

Association of Superannuation Funds of Australia Luncheon

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The third is to counteract the longer-term fiscal impact of the ageing of the population. That’s why we’ve made tough decisions like increasing the pension age.

Australia can’t afford another decade of complacency. The need for fiscal discipline is urgent and serious. Many other nations are now facing very difficult dilemmas because of long-term budget indiscipline and rapid demographic change. We must not leave that legacy for future Australians.

To be able to meet our responsibility in delivering these most fundamental of services and ensure that Australia continues to have a robust and adequate retirement income system for our children’s generation and beyond, it is vital that we begin establishing the future foundations now.

The Rudd Government is currently conducting two reviews that will play significant roles in informing the structure of Australia’s future retirement income system; the Cooper Review of Australia’s superannuation system; and the Henry Review of taxation in Australia.

I think both of these reviews will be of considerable interest to those in the room today and I would like to take this opportunity to discuss them with you.

As one of my direct responsibilities is public sector superannuation, I will also provide a brief overview of the Government’s public sector superannuation reform agenda, which is currently underway.

In May last year, the Government announced that a review of Australia's tax system would be undertaken.

An independent panel chaired by Dr Ken Henry, the Secretary of the Treasury, are currently conducting the review and will make recommendations on how future taxation arrangements will assist Australia to deal with the demographic, social, economic and environmental challenges of the

21st century. In May this year, on Budget night, the Henry Review delivered a report to the Government on Australia’s retirement income system.

This report supports Australia’s existing ‘three pillar’ - that is, mandatory private superannuation savings, voluntary savings, and the age pension - retirement income system, but found that there is both the need and the opportunity to calibrate the current arrangements to better meet future challenges and to reform some structural weaknesses within the system.

The impact that the shift in demographics I mentioned earlier is going to have on each of the three pillars of our retirement income system, and in particular the age pension, will be enormous. Building a sustainable pension system requires a balancing act that ensures the pension provides its recipients with an adequate standard of living and at the same time be affordable to taxpayers. A significant decrease in the ratio of working age to retirement age Australians is obviously going to make that balancing act much more difficult.

Our first step in addressing these challenges took place when we announced the pension reform package in this year’s Budget. The package, which was informed by both the Henry and Harmer Reviews, delivered on the Rudd Government’s commitment to provide an adequate and fair pension system, through increases to the age pension that will come into effect next month. It also included a commitment to gradually increase the qualifying age for the age pension to 67.

This was a tough decision to make, but a necessary one. It was necessary to respond to the longer-term cost of demographic change and establish the framework for a 21st century pension system. The age pension qualifying age had not increased above 65 years since its inception in 1909. In

1909, the average male life expectancy at birth was 55 years. The people who reached age 65 would spend, on average, 11 years in retirement.

Advances in medical technology and lifestyle changes have meant life today is vastly different to that of 100 years ago.

In 2009, 85 per cent of the male population will reach retirement age and can expect to spend more than 19 years in retirement. We ca n only assume that these figures will increase as advances in society lead to further increases in life expectancy. This, of course, means more people will be

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reliant on the pension, their superannuation, or a combination of the two, for longer periods and the changes to the age pension qualifying age were a necessary step in adapting to those changes.

It is interesting to note too that the change in retirement age is consistent with a number of OECD countries. The United States, Germany, Iceland, Norway and Denmark currently have, or are moving towards, a retirement age of 67. The United Kingdom is increasing its age pension qualifying age to 68.

The Henry Review’s report on Australia’s retirement income system also looked at the suitability of the existing cap on concessional contributions.

In response to the recommendations of that report, the Government made the decision to reduce the concessional contributions cap from $50,000 to $25,000 per annum from this financial year. This change is aimed at ensuring that spending can be better targeted to increase equity across the whole system and is fiscally responsible in both the short and long term.

The change in the cap will improve equity by reducing the disproportionate benefits received by high income earners who can afford to make larger concessional contributions. The Henry Review panel has made several further in-principle recommendations, which will be considered by the Government when the full findings are available which is expected to be at the end of 2009.

These include:

z reducing the complexities resulting from the interactions between the tax transfer system and

the aged care sector;

z maintaining tax assistance to superannuation while improving the fairness of concessions for

contributions;

z improving the management of superannuation savings throughout retirement to avoid the

risk of assets being exhausted during a retiree’s lifetime; and

z improving the public's awareness and engagement with the retirement income system.

In May this year, the Government announced the details of a review into the governance, efficiency, structure and operation of Australia’s superannuation system, known as the Cooper Review. The review’s scope includes looking at how governance arrangements can be strengthened, efficiencies

can be gained, fees reduced and long-term rates of return can be lifted in the superannuation industry. It will also examine how regulation of the superannuation system can be improved and business costs within the system reduced, something I imagine those in this room will be significantly interested in.

The review is being conducted by a panel of eight experts from the industry and is chaired by Mr Jeremy Cooper, a former Deputy Chairperson of the Australian Securities and Investments Commission. This panel will engage extensively with the superannuation industry, as well as other stakeholders and the broader public during the course of their work and I would encourage you to take up any opportunities you have to contribute to the design of Australia’s future superannuation system.

This week the review panel announced that it will undertake its examination of Australia’s superannuation system in three phases. These are: Phase 1 - Governance; Phase 2 - Operation and Efficiency; and Phase 3 - Structure.

Each of these phases will involve:

z the release of an issues paper, which is intended to assist interested parties to prepare

submissions;

z time to prepare submissions, which will allow approximately 6 to 8 weeks for submissions to

be prepared and submitted; and

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z release of the panel’s preliminary recommendations, following consideration of submissions.

These preliminary recommendations will form the basis of the final report.

The Phase 1 - Governance issues paper was also released on 25 August and calls for submissions by 16 October 2009. The panel’s recommendations on this phase of the review are due in early December 2009 with the final report to be delivered to the Government by 30 June 2010. Full details of the review, including the governance issues paper released this week as part of the review, are available at: www.supersystemreview.gov.au.

As I stated earlier, one of my direct responsibilities as the Minister for Finance and Deregulation is public sector civilian superannuation. The Rudd Government has been undertaking some serious reforms in this area and I would like to update you on those reforms today, particularly the progress of two aspects.

As I am sure you are all aware, there has been a dramatic rationalisation of the superannuation fund market in Australia over the last decade. Data from the Australian Prudential Regulation Authority shows that, excluding small entities, between 2001 and 2008 the number of superannuation entities dropped from 3730 to 505. Influencing this change has been recognition that benefits can be achieved through the economies of scale enjoyed by larger funds, as reflected in studies from Australia and around the world.

It is not only private sector funds that have realised the benefits of consolidation. Since 2001 the number of funds in the public sector has halved, from 81 to 40. As recently as October last year we announced that we will merge; the Australian Reward Investment Alliance; the Military Superannuation and Benefits Board; and the Defence Force Retirement and Death Benefits Authority; into a single trustee board from 1 July 2010. The new board will have around $21 billion worth of funds and 650,000.

The consolidation of superannuation boards has obvious benefits in improving efficiency and service delivery; and in creating a greater pool of assets for investment purposes; and we will continue to look at opportunities for further consolidations in the public sector.

My department - the Department of Finance and Deregulation has also recently undertaken a review of the administration arrangements for the main civilian and military superannuation schemes. My colleague, the former Minister for Superannuation Nick Sherry and I commissioned this scoping study to review the Government’s approach to administering public sector superannuation schemes.

The study was commissioned in part due to the fact that the schemes’ administrator, ComSuper, have not markedly changed their governance arrangements since they, or it least their predecessor organisation, begun providing services to the Australian Government in 1922. The scoping study has sought to identify and assess the most effective and efficient approach to the future

administration of Commonwealth Government super schemes. The recommendations of the scoping study are currently with Government for consideration and I anticipate an announcement will be made in the near future that will bring the administration arrangements of Commonwealth government superannuation into line with the remainder of the industry.

As I said in the beginning of my speech today, I have no doubt that the last 18 months has been a challenging period for you all. The global recession has hit us all and while we are not out of the woods economically yet, I am cautiously optimistic that the next 18 months will bring some positive growth to the Australian economy and with that, growth to our markets. To ensure that Australia is able to provide a robust and sustainable retirement income system for the next generation though, we need to look beyond these immediate challenges.

We need to begin planning for Australia’s future superannuation system and through the initiatives that I have outlined today that is exactly what the Government is doing. I encourage you all to make a contribution where possible and help ensure Australia’s superannuation system remains one of the world’s best.

Thankyou.

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Nardia Dazkiw - 0418 144 690 www.financeminister.gov.au