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Tuesday, 16 November 1993
Page: 2930

Senator WATSON (9.07 p.m.) —Tonight we have before us for debate a package of seven bills to give effect to the prudential arrangements for superannuation announced by the Treasurer (Mr Dawkins) on 21 October 1992 in his statement entitled `Strengthening super security—new prudential arrangements for superannuation'. These bills and, in particular, the Superannuation Industry (Supervision) Bill, are some of the most significant legislation to come before the parliament in the life of this government. They represent the most detailed and far-reaching attempt in the history of superannuation in Australia to impose a common regulatory framework in the superannuation industry. They reflect the constructive approach of the committee system in the Senate where bipartisanship and teamwork have been above politics in determining a system of laws and rules for the good administrative practice in the national interest.

  The measures will affect almost every superannuation fund in Australia, including approved deposit funds and pooled superannuation trusts. Superannuation funds take a number of forms, with the main categories being personal superannuation funds, industry based funds, individual enterprise schemes and government funded schemes. The need for increased supervision of the industry is highlighted by the volume of money under the control of the superannuation funds, the diverse range of funds operating, the Maxwell case in the UK and the introduction of the superannuation guarantee charge, which has removed the voluntary nature of superannuation funds for most employees. These issues underline the need for increased supervision.

  If the government forces employers to contribute to superannuation on behalf of their employees—and often employees have no choice as to the fund into which the contributions are directed—employees are entitled to expect measures to exist which protect those funds that are set aside for their benefit. Broadly based superannuation arrangements have now been with us for six years. While still in its infancy in many ways, the superannuation industry is a rapidly growing collection of professionals and financial institutions. Money under control of superannuation funds currently stands at $169 billion. Superannuation funds are estimated to increase to between $300 billion and $600 billion by the year 2000.

  I believe that superannuation in Australia is now on the threshold of adopting a regulatory regime and structure which is unique in the OECD world. To move to a single entity superannuation fund trust structure, involving codification of trustee responsibilities, is a development which overseas countries will observe with a great deal of interest. The Australian system of super fund regulation could well become the template for regulation in other countries. In this regard, it is worth noting that the Goode report in Britain has made a number of recommendations which are in keeping with certain SIS provisions.

  Having said that, I am very surprised to read that the government believes that the reviews of superannuation should cease. The assurance of a hands-off approach to allow the industry to settle down after the SIS bills, apart from some finetuning, is not, I would say, a welcome comment. There are many unanswered policy questions which must be answered. Dr Fitzgerald, for example, has called for a final report since the government has promised each time it has unveiled major changes in the last five years that it would be the last change. To close down the debate on super policy would be a dangerous course of action. The reviews which have taken place in recent years have played a significant role in getting the superannuation industry to where it is today.

  It cannot be forgotten that the superannuation industry is also becoming a great source of tax revenue. Last year, the 1992-93 year, the tax on superannuation funds reached $1.522 billion, an increase of 33.6 per cent on the previous year and a massive increase of 180 per cent on the 1990-91 year. Five years ago the tax just did not exist. The threefold layering of superannuation—at entry, in the fund and on exit—as practised in Australia, is a unique feature in this country. Other countries have only one or two superannuation taxes, not three.

  The Senate Select Committee on Superannuation, which I have the privilege of chairing, tabled its ninth report on the SIS legislation in the last week of sitting. The committee received nearly 100 written submissions. It convened public hearings on the bills in Sydney, Melbourne and Canberra. In addition, informal meetings were arranged between the committee members and officers of the ISC at which amendments to improve the legislation were discussed. I thank the government and the members of the ISC for their participation. I think the end result is that we have a much better regime. It just shows that cooperation between the parliament and the executive can contribute to a better overall result.

  While addressing many issues and making a number of recommendations, a number of these recommendations deal with areas of superannuation apart from the SIS bills, which I will not specifically refer to now. The committee has recommended amendments to the SIS bill, the Superannuation Industry (Supervision) Consequential Amendments Bill and the Superannuation (Resolution of Complaints) Bill.

  The Superannuation Industry (Supervision) Bill is the central plank of the new policy platform. It contains provisions which will radically alter the way the superannuation funds operate. It is designed to increase the level of prudential protection provided to the superannuation industry, strengthen the security of superannuation savings, and increase the protection and rights of superannuation fund members. Given the magnitude of the proposed change, it was not surprising that the committee received 97 submissions and agreed to take evidence from more than 60 witnesses, representing the interests of superannuation providers, regulators and consumers.

  Perhaps the most controversial aspect of the SIS legislation has been clause 64—formerly clause 63 of the SIS bill—which contained a blanket prohibition on superannuation funds acquiring assets from members or members' relatives. Of the submissions received by the committee, approximately one-half of them—particularly from the very small businesses—were concerned with the impact of this clause. The object of clause 64, which is designed to take effect from 27 May 1993, is to be an anti-avoidance measure to prevent superannuation fund members selling their assets to their superannuation fund in order to obtain certain cash benefits.

  The majority of the written submissions addressing this clause focused on the following areas of concern: first, that the complete prohibition was too harsh as it discriminated against legitimate business transactions and small business activities; second, that it prevented people from funding their own superannuation and therefore particularly discriminated against the self-employed; third, that it failed to take into account the same types of investments held in different names; fourth, that it appears easy to avoid simply by interposing another entity between the superannuation fund and the member—we did ask the ISC to look at this to try to overcome this particular problem; and, finally, that it imposed a gaol sentence for breaches, which we believe is too severe.

  The majority report of the committee has recommended that the following types of assets be allowed to be acquired from members or members' relatives: freehold or leasehold property which reflects true market value that is used wholly and exclusively in the business of the member or member's relatives. During the committee stage I intend to move an amendment to modify this particular provision so that for excluded funds, that is, fewer than five members, there will be no more than 40 per cent interest and for others, that is, more than five members, 25 per cent interest will apply as a means of putting in place a further prudential control to make sure that it could not be exploited to the detriment of anybody involved. Assets able to be acquired also included listed securities, which means shares, units, bonds or debentures, rights or options, or any other security listed for quotation in the official list of a stock exchange.

  The committee further recommended that the sole purpose test be strengthened to ensure that any asset or assets included in the exemption provided under clause 64 acquired by the superannuation fund from a member or member's relative does not contravene the sole purpose test. Another major issue surrounding clause 64 is the penalty of two years gaol for a breach of the provision. When comparing the appropriateness of this penalty, one has to have regard to the severity and nature of the mischief that the provision is designed to prevent. In some circumstances, gaol may be appropriate but in other circumstances it is too harsh. The committee recommended that penalty points be introduced and that the time period be reduced to one year, and the final result of the opposition's amendment, which I foreshadow, will be to limit it to one year's gaol sentence because the crimes provisions provide that one year's gaol is equal to a 60 penalty points fine.

  The constitutional power over superannuation and state public sector superannuation schemes was a problem. The Commonwealth does not have a single and exclusive constitutional head of power over superannuation. In its first report the committee recommended that the government explore the possibility of obtaining a referral by the states of their power over superannuation. The issues arising from the SIS legislation indicate that this is now a central issue. Accordingly, the committee has recommended that the government revisit the recommendations of its first report.

  The referral of superannuation powers from the states to the Commonwealth was further highlighted in the application of the SIS legislation to state and territory public sector superannuation schemes. Following representations by the states and territories concerning the perceived infringement by the Commonwealth on state rights as a consequence of certain SIS provisions, the committee has recommended that the government negotiate with the states and territories to have their super schemes exempted from the SIS legislation. Clearly, if there was a referral by the states and territories of their power over superannuation to the Commonwealth, such exemptions would not be necessary.

  The committee considered at length proposals to allow superannuation funds to have enhanced access to tax file numbers. I need not remind the Senate that TFNs and their use arouse a number of sensitivities about privacy. The committee heard compelling evidence about the need to use TFNs to allow the new eligible rollover funds to work efficiently. However, there was equally compelling evidence from the Privacy Commissioner on the need for caution in expanding the use of TFNs. The committee recommended—and I expect that the SIS bills will ultimately be amended accordingly—that superannuation funds be allowed to use TFNs for taxation and transfer of benefit purposes and that this provision take effect from the date that the bill receives royal assent.

  The role of actuaries and auditors under the SIS bills is a matter which has not been the subject of intense or widespread media scrutiny or comment. Yet, after the watchdog activities of members, auditors and actuaries will be the first line of defence in detecting any wrongdoing by fund operators. The committee has recommended increased auditor protection to correspond with the increased responsibilities of auditors. In addition, it has again recommended that consideration be given to the establishment of a register of suitably qualified superannuation auditors.

  One of the major focuses of the report was on the impact of the SIS legislation on public offer funds. These now account for $14 billion of super savings and are currently operated on a dual entity basis between the trustee and the fund manager. Arguably, the most significant change to the superannuation industry by the SIS legislation concerns the requirement that public offer funds cease to operate on this dual entity basis and move to a single responsible entity. This accords with the recommendations contained in two Australian Law Reform Commission reports. Obviously, such a single entity requirement represents a massive departure from the current operating structure, the magnitude of which is incalculable when one considers the membership and investments in public offer funds.

  Although the committee fully supports the single entity approach, it is concerned at the lack of accompanying transitional arrangements for such change, particularly in the area of who should be appointed as the single responsible entity and how any conflict between the two entities should be resolved when it arises. From the written submissions and the evidence, it became clear that the government will need to monitor the transition process closely to ensure that unnecessary confusion and uncertainty does not occur. The last thing that super needs is 200,000 disaffected retirees who have money in a public offer fund.

  The committee has maintained an interest in maximising the welfare of consumers under the new super regime. The committee recognised that if the new super system is to work it must have the support of the public. In order to get this support, consumers must have confidence in the integrity of every facet. Vigilance, by both government and the industry, is needed over the day-to-day operation of all super funds. The Superannuation Complaints Tribunal will be the vanguard of this initiative. The committee found that the tribunal should have a wide-ranging brief in all matters except medical evidence.

  The committee also recommended that another layer of accountability be instituted. This will take the form of providing members with an independent advisory service which, initially, would be funded from consolidated revenue. The coalition intends to move a number of amendments which I will outline during the committee stage of the debate.

  In conclusion, the Senate Select Committee on Superannuation has been involved with this package of bills since its appointment in 1991. To this end, in its first report it set out the parameters and in subsequent reports `fine-tuned' its approach to superannuation. This report is the culmination of work on the regulation of superannuation. During the process it became increasingly apparent that specialist committees have an important role to play in complex legislation such as the package of bills currently before us. It is also apparent that the new system of referral of bills to committees allows public and competing views to be taken into account in the passage of legislation.

  Overwhelmingly, the superannuation committee worked in a non-partisan way in reporting on the bills. As Chairman, having succeeded Senator Sherry, I wish to give special thanks to Senator Sue West who was my deputy, Senator Bruce Childs, Senator Chris Evans, Senator Alan Ferguson and Senator Cheryl Kernot; the secretariat staff comprising Richard Gilbert, Krista Gerrard, Glenn Hunter and Cath Drinkwater; Gary Johns, for the work he did in his supporting role; and the ISC officers, including the Commissioner, Trevor Thomas the ISC policy officer, George Pooley and Donald Duvall.

  The legislation is, as I have mentioned, a blueprint for other countries to set up superannuation regulation mechanisms. However, in closing I must issue a note of caution. The mere enactment of legislation to regulate superannuation funds does not guarantee security for members of funds. It is now the job of trustees, members and the Insurance and Superannuation Commission, as regulator, to hold the superannuation system together. The ISC, as the committee has said time and time again, needs to be pro-active, alert and an effective regulator. I believe it has done this exceedingly well today and I wish it well in the future under its capable leadership. These bills give the ISC that power and it is now its responsibility to discharge its newly established statutory obligations.