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Thursday, 27 April 1961

Mr CREAN (Melbourne Ports) .- The Opposition does not oppose the measure. However, we on this side regard this is a very clumsy way of doing what the Government intends to do. The Government intends to channel some 30 per cent, of the total future investments of insurance companies and superannuation funds into government securities, two-thirds of it into

Commonwealth securities and the remaining one-third into the securities of local government authorities and others, which are still described as public securities. We regard this as an essential move to secure .a better overall disposition of the investment pattern in the Australian community, and apparently, belatedly again, the Government also recognizes this. I .should like to refresh the recollection of honorable members on a debate on life insurance that took place in this House nearly three years ago. On that occasion, speaking for the Opposition, I said -

.   . I feel that .the time may have arrived for a comprehensive re-examination of the role which insurance plays in the community to see, among other things, whether there should be some better guidance or directions with regard to the investment ;of these vast amounts.

Later, speaking in the same debate, the honorable member for Petrie (Mr. Hulme), now a member of the Ministry, quoted1 those words of mine and went on to say -

I say quite definitely that, when these companies

The honorable member was referring to insurance companies - move their investments away, perhaps, from Commonwealth securities and into mortgages, they are seeking a higher rate of interest. That, of course, has a reflection in the bonuses which are received by the policy holders. I believe that when the companies do this they are acting in the best interests of the policy holders.

If the direction were that the companies must invest their funds - even to the extent of more than 50 per cent. - in Commonwealth loans or in local authority loans, then the companies would not be acting in the best interests of the policy holders.

I have quoted the honorable member tor Petrie only to show that at least there has been some change of views by the Government with respect to this important subject of investments of life insurance companies.

Mr Haworth - When were those speeches made?

Mr CREAN - My speech was made on 20th March, 1958, and that of the honorable member for Petrie on 25th March, 1958.

Mr Bandidt - That was a speech by ti back-bencher.

Mr CREAN - He is now a member of the Ministry.He at least has been persuaded that what he said in 1958 was wrong. I do not concede that I thought he wasright in the first place - I did not - but we now have a change of heart on the part of the Government. This Government claims not to believe in controls. It claims to support something that it calls free enterprise. Its action now serves to highlight the fact that it is impossible always to hold such pure theories. Sometimes one must choose between the private interest and the public good. In my opinion the Government's move now is a move in the direction of the public good; but rather than face the problem systematically the Government proposes' to deal with it in a back-handed way that involves reconstructing the income tax legislation so far as the assessment of life insurance companies and the treatment of private superannuation funds are concerned.

In an article in the 1st April, 1961, issue of the "Taxpayers' Bulletin" the present method of assessing life insurance companies is described succinctly. The article reads -

Briefly, life insurance companies are assessed under a special code found in Division 8 of the Assessment Act. In brief, premiums do not comprise assessable income and assurance companies are taxed on their net investment income and, in addition, under Section 115--

That is one of the sections that is to be altered by this bill - a special deduction is allowed of 3 per cent. of that part of the " calculated liabilities "--

I do not at this stage propose to go into the intricacies, even if I understood them completely, of the way in which the Commissioner of Taxation arrives at what is called calculated liabilities. The article continues - at the end of the year of income as bears to such calculated liabilities the same proportion as the value of the assets.

Provident, benefit and superannuation funds established for the benefit of employees are free of income tax in terms of Section 23 (j) of the Assessment Act.

That section also will be amended by this bill-

Subject to certain conditions, the income of a provident, superannuation or retirement fund established for self-employed persons is exempt in terms of paragraph (j.a. of the same section.

That, briefly, describes how life insurance companies are assessed at present. The changes proposed by the Treasurer (Mr. Harold Holt) are for a number of reasons. On reason is the present method by which life insurance companies are assessed. As the Treasurer pointed out in a statement to the House about a fortnight ago, although life insurance companies theoretically pay tax on their assessable income at the rate of 5s. in the£1, the practical effect is that they pay tax at an average rate of only ls. 6d. in the £1 on their assessable income. As the Treasurer has pointed out the present tax structure tends to have an inbuilt disadvantage to the holding of government bonds by insurance companies as against shares. Like any other company, they are exempt from paying tax on dividends received1 from other companies. It pays them, from a taxation point of view, to have a higher proportion of dividends, which bear no tax, than government bonds, which are calculated as assessable income for taxation purposes. This is one factor that has influenced insurance companies in the disposition of their investments. The choice has not been altogether a free one for the insurance companies. It is a free choice only after taking into account and carefully calculating the effects of taxation.

We are told that insurance is a good thing for the community because it is one of the principal sources of private savings. Insurance premiums amount to about £150,000,000 a year, but allowing for the payment of maturing policies, the net flow into the savings pool in the hands of life insurance companies is about £100,000,000 a year. People are encouraged to take out insurance policies because to a certain extent premiums are an allowable taxation deduction. An individual taxpayer may claim a deduction of up to £400 in respect of insurance premiums paid. Those deductions mean a loss of revenue to the Government of about £35,000,000 a year. In addition, undertakings that provide superannuation benefits for their employees are allowed to deduct the cost of those benefits when computing their assessable income. The loss to revenue in this way amounts to a further £9,000,000 a year. The total effect of inducing this £100,000,000 of net investment each year into the insurance companies is to reduce the revenue of the Commonwealth of Australia by £44,000,000. I say to the honorable member for Hume (Mr. Anderson), who is interjecting, that I want to develop this argument in my own way because this is a fairly complicated matter. Offsetting the net advantage that I have mentioned is the fact that it costs approximately £25,000,000 per annum to administer the life insurance companies of Australia. When these figures are taken into account, it is seen that this is not a very systematic way of channelling £100,000,000 worth of savings from the community at large. About £44,000,000 of revenue is lost and something like £20,000,000 or £25,000,000 is expended in running the life insurance companies themselves. When these factors are taken into account, it is seen that there is not the degree of injustice in the Government's action as at first sight appears to be the case. That is one aspect of the nexus that is responsible for the changes that are being brought about by this measure.

Another factor, of course, as the honorable member for Petrie (Mr. Hulme) pointed out in this House some years ago, is that the insurance companies have an obligation to make to their policy-holders the best possible payments upon the maturity of their policies, having regard to the existing channels of investment and the effects of inflation which has existed in the Australian community over the last ten years in particular. What the insurance companies have to do in this regard is set out very clearly in an address entitled, " The role of Insurance Funds and their Investment in the Australian Economy " that was delivered to the Victorian Branch of the Economic Society on 26th September, 1958, by Dr. Bell who is, I think, an economic expert retained by the Australian Mutual Provident Society. He pointed to three essential things so far as life insurance investment is concerned, and stated -

The liabilities assumed are of a long-term and continuing nature.

As these liabilities are of a long-term and continuing nature, the life insurance companies have had considerable difficulty over the last ten years in trying to estimate the likely effects of inflation on them. In periods of stability, the life insurance companies have been prepared to favour gilt-edged securities. But of recent years they have seen the capital value of gilt-edged securities fall, and they have attempted, on a longterm basis, to shift their investments into channels that either provide a higher rate of interest than government securities, such as fixed interest securities, or, alternatively, into equities in which there is a greater degree of correspondence between the rise in the value of the equities and the fall in the value of money. Dr. Bell went on to say -

The element of interest has a major role to play in the solvency of the whole operation of life insurance. . . . Life offices are, of necessity, large fund accumulators.

That seems to me to sum up fairly briefly the concept of life insurance companies in the traditional sense. Formerly, as the figures that were cited by the Treasurer show, the life insurance companies had a much higher proportion of their total investment in government securities than they have at the present time. The other main channel of investment was in the form of mortgages. They had very little resort to investment in fixed interest securities or the actual ownership of shares. Because of the inroads of inflation the insurance companies have been forced to change their investment pattern. We on this side of the House believe that the sensible and equitable thing to do in the public interest is not to let interest rates all rise one after another, but to endeavour to grapple with the problem which makes interest rates rise, that is, to grapple systematically with the problem of inflation. If there is to be a margin between the interest rate on gilt-edged securities and that on equities, we think it is more equitable to lower the gilt-edged rate progressively - and the other rates with it - rather than to allow all rates of interest to rise. But the tendency of this Government has been to take the other course, to let what it calls " money factors " rule. That theory sounds very good, but we have to examine the position. Under this scheme there may be some beneficiaries, but there are a lot of losers. To a great extent, life insurance and the later development, the growth of superannuation funds, which I will talk about in a moment, tend to be middle class and upper class devices rather than means to enable the poorer sections of the community to accumulate money.

Mr Killen - Have not the insurance companies a responsibility to protect their policy-holders?

Mr CREAN - 1 agree that they have an obligation to protect their policy-holders, but the Government has an obligation to protect the public. At times, there may be a conflict of interest between the policy-holders - a limited section - and the community as a whole. I suggest that that is the situation that has developed. I am trying to make the point that if we consider the amounts of insurance policies rather than their number, we find that to a great degree the principal policy-holders in life insurance companies are in the sections of the community that are able to save. They are aided by the fact that saving by means of life insurance is made more attractive by concessions offered under the taxation structure. These concessions are granted at a cost to revenue of £44,000,000, taking into account deductions allowed to employers in respect of their contributions to superannuation funds.

The insurance companies may squeal about the Government's proposals, but 1 think they should look at the very substantial benefits they derive at the moment from taxation concessions. If we evaluate on balance the adverse effect of this measure on the insurance companies we find that it only slightly offsets their present taxation concessions. The Government should have examined this particular aspect of the matter more closely than it has done. Turning to the other aspect of the problem, I think that the Government has leaped in the dark. I refer to the setting up of private superannuation funds, some of which are administered by life insurance companies and others by the funds themselves. The investments are determined either by a fund itself or by an adviser to the fund.

The problem involved here was highlighted very well in a paper that was delivered at a fairly select conference held some time ago. At the 64th session of the Actuarial Society of Australia and New Zealand an address was given by Mr. J. R. Harris, F.F.A. Those letters stand for Fellow of the Faculty of Actuaries. His remarks were made from the point of view of a gentleman who is concerned mainly with this new device, the private superannuation fund. A few things should be said about these private superannuation funds. The first is that, apart from occasional surveys that are made by the Commonwealth Statistician, very little concise in formation about the extent of the funds is available. The second is that sometimes they invest through life insurance companies and sometimes they simply set up funds which are almost entirely controlled by the managements. The kind of difficulty that arises was referred to a few years ago by some of the Government's advisers. On page 7 of the 11th Annual Report - that for the year ended 31st December, 1956 - the Insurance Commissioner, referring to these private superannuation funds, said -

It is probable that in most instances surrender occurs as a result of withdrawal from a superannuation scheme following a change of employment. Lt is understood that very few superannuation schemes provide for transfer of policies from one scheme to another as an employee changes his employment.

Yesterday the Minister for Labour and National Service (Mr. McMahon) told the House that it is a good thing for the economy when people change their employment, but the existence of these superannuation schemes makes it difficult for people to change their employment.

I suggest that the situation at which we have arrived was summed up very well in an article in " Nation ", of 3rd December, 1960. I commend this article to the consideration of the Government and its advisers. It is headed1, " Stick for the Staff ", with the sub-heading. " Market consequences of Mr. Holt's blow to the pension funds". It cites the example of a firm named Ralph Symonds Limited which, the article says, was offering to take over an ailing Sydney piano manufacturer, Beale and Company. It was found that Beale and Company had one of these private superannuation funds in existence. At first, on a theoretical level, part of the argument in the take-over bid was whether the fund should be wound up or the new firm should take it over. According to the writer of this article, on an examination of the legalities of the position it was found that - "... the money in the staff fund did not belong to the company, neither was it money which the employees at any particular moment had the right to acquire; it was a retirement fund, something that keeps rolling along."

I suggest that as in many instances employees are paying a minimum of 10s. a week, and much larger sums, into funds which presumably belong to no one, and which can become a plaything in take-over bids, it is time something was done- to regulate this kind of activity, just as something has been done in other fields of insurance. In many of these funds, if an employee has a row with the boss he has no right to get back even his own contributions, let alone the contributions to the- fund which the employer has claimed as a deduction under the provisions of section 66 of the Income Tax and Social Services Contribution Assessment Act. These funds are an entirely unregulated part of the economy. We are told that at the moment they aggregate about £300,000,000, and another £300,000,000 is in government superannuation funds, where I hope the protection is greater than in the private funds. Those figures were given in the speech delivered by the Treasurer (Mr. Harold Holt) recently.

The writer of the article in " Nation " refers to another point which, in my opinion, is significant, and that is that the investments of a Targe number of the superannuation funds are purely in the business itself. The writer asks: What happens if at the same time as some people are seeking retirement benefits from the fund other employees are being laid off because the firm says that it cannot continue to employ them? If. the superannuation fund, is part of the entity as a going concern,, the fund becomes a going concern, not. a running up concern. I believe that, this sort of thing calls for some regulation..

It is easy enough to say that these are just private rights. In my opinion, once more than a dozen people are employed in a firm and have rights of this kind built up out of their own savings, the matter ceases to have the intimacy of privacy and tends towards the point where there should be some public intervention to regulate it equitably in the interests of people who are often unable to defend themselves against the depredations of employers. That has been done in other parts of the world, particularly in that great citadel of free enterprise, the United States of America. If it can be done there without offending anybody, surely in all justice it can be done in Australia.

The problem that concerns a great number of American people is the concentration nf economic power. The article in " Nation " from which I have quoted points out that in Australia at the moment the staff fund of one of our biggest companies, the Colonial- Sugar Refining Company Limited, is its largest single shareholder. Where do we get to when the principal shareholders of companies are, as it were, passive blocks of shareholders, when legally it is impossible to tell who owns, the shares, and when, in the final analysis, the only significant question is, who in theory are the trustees? In most cases the answer is that the managements are the trustees. It is just another device for making, the managers more- secure than previously in their authority over the shareholders. Again I suggest that in the interests of the apostles of free enterprise this aspect calls for closer scrutiny.

In the United States the majority of the shares in Sears Roebuck, which is one of the biggest discount and merchandising houses in that country, are held by the staff pension fund. I am not suggesting that that situation has been reached in Australia, but it could be reached. If we are getting anywhere near it, then rather than wait until one of our large firms cannot pay superannuation benefits to its employees^, and before it is too late. some sort of organiza-tion should be set up to which the funds have to report annually so that their total significance can. be evaluated. This matter is of interest to the community as a. whole. The members of this Government never face up to a situation until the roof of the house has fallen down about their heads. But occasionally there are innocent victims when the roof falls down. It is the. duty of a government to interfere for the public good rather than to let the private interest run along blithely in its own way.

I said earlier that I would cite examples that had been quoted by Mr. Harris. He takes as a possibility the case of a young bank clerk who as far back as 1921 started at the lowest rung of the ladder. He explains what would have happened if there had not been any inflation from 1921 to 1960 and if a fund had been created, the contribution to which had been 10 per cent, of the bank clerk's salary. I am not concerned at this stage with whether the young man paid all of the 10 per cent, or whether it was shared between the employer and the employee. That bank clerk would have expected that upon retirement he would be entitled to a lump sum benefit of £3,644, or 8.1 times his salary in the year in which he retired. However, the actuary points out that, because of the effects of inflation, instead of getting £3,644, the purchasing power of which would have been 8.1 times his salary in the final year of employment, the clerk would now receive £4,719, or only 2.9 times his final salary. That illustrates the kind of dilemma in which these private superannuation schemes are placed. They have to seek some channel of investment which will give to a man at the end of his contributing life a return the purchasing power of which approximates what he expected when he joined the scheme. That is why you have this recourse on the part of private superannuation funds to equity investment rather than to government bonds.

Mr. Harrisset out the position very well at page 1 12 of the report of the proceedings of the actuaries' conference. He said -

I would expect to find in most Australian funds at present-

He was speaking as an actuary who was advising members of private superannuation funds -

(a)   that the fund was obtaining a higher yield on new fixed interest investments than on its present portfolio.

In other words, he was postulating that interest would continue to rise rather than 10 fall and that the tendency would be to go into the fixed interest field. Of course, alterations have been made by this Government in recent times that have had some effect on the ability of people to continue to look to funds in this way. Mr. Harris also said that he would expect to find -

(b)   that the fund's income would exceed its expenditure for some years even if it was immediately closed to new entrants. . . . Consequently new investments will have to be made for some years.

(c)   that the term of the fund's fixed-interest investments was much shorter than the term of its liabilities.

In other words, they have to continue to cross-change these fixed investment securities, hoping they will be on a rising market.

But what happens if they are on a falling market? I suggest that some of these funds started off very optimistically a year or two ago. The Treasurer suggests that new investment in the funds is of the order of £90,000,000 a year and that the tendency is for a higher proportion of that money to be placed in fixed interest or equity investments. Those who administer these funds may suffer a few headaches within the next twelve months as a result not only of this legislation but also of previous legislation, but would it not be in the interests of those people to do something immediately to ensure that there was more regulation of their investment policy? At least, they might then know where they were going rather than have misgivings after certain changes had occurred. That is why, Mr. Deputy Speaker, I suggest that the Government is now only tinkering with the problem. It is certainly using the existing tax provisions to bring about something that it regards as being very good overall, but the problem is not being dealt with systematically.

The proposed legislation avoids the emerging and major part of this problem - the private superannuation funds. It does nothing at all to grapple with the problem of the scrutiny of the socalled rights of some people who have invested in these funds. We have what seems to me to be almost a ludicrous contrast. Yesterday the Minister for Labour and National Service (Mr. McMahon) told us that labour turnover was a good thing, hut he does nothing to stop that which makes labour more immobile than he wants it to be. It is not to be assumed that I agree with his argument, but I point out that only two or three years ago industrialists were pointing to labour turnover as being an adverse factor, not a favorable factor. The Government's action shows that it does not follow the winds of change but is only dragged along and that it ends up in the middle of the cyclone and perpetrates a lot of misery.

The Opposition does not object to this measure, because we regard a certain amount of social control in the public interest as having priority over the unmitigated advantage of individuals who pursue an economic path of their own choosing. I do not even criticize the work that the insurance companies have done over the years. I merely point out in conclusion that the position they have reached has not been arrived at entirely by their pulling themselves up by their own boot straps. They have been aided and abetted by taxation concessions. The new form of development - the private superannuation fund - is simply an attempt by some to rise on the escalator of inflation at the expense of the majority, who are down at the bottom. We believe in controlling inflation for the majority at the bottom rather than providing top-hatted schemes for those who are at the top.

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