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Labor's six point plan for simpler super. Opening address to the Conference of Major Superannuation Funds: Gold Coast, Queensland: 10 April 2006. \n



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LEADER OF THE OPPOSITION THE HON KIM C BEAZLEY MP

CHECK AGAINST DELIVERY EMBARGOED UNTIL DELIVERY

OPENING ADDRESS TO THE CONFERENCE OF MAJOR SUPERANNUATION FUNDS GOLD COAST, QUEENSLAND 10 APRIL 2006

LABOR’S SIX POINT PLAN FOR SIMPLER SUPER

Thank you very much for inviting me here to speak today.

The funds you represent have done a great job in delivering a good, long term rate of return, at a low cost, to the millions of Australians who are now covered by compulsory superannuation.

I think it’s fair to say that in the course of the last 19 years, Australia has witnessed a superannuation revolution. Transformed from a benefit largely for the better off to an essential component of every working Australian’s financial security. For most Australians, superannuation is now their most significant financial asset, after their home.

The starting point, of course, for any discussion on superannuation has to be Labor’s historic role in its introduction and evolution.

In 1983, when Labor came to power, there simply wouldn’t have been a conference like this - 2000 people meeting for three days to discuss a $790 billion industry that shapes the future prosperity of millions of Australians and their families.

The implementation of universal, compulsory superannuation was a visionary, nation-building reform which could only be delivered by a forward-thinking, courageous Labor Government.

And let me remind you, it was done despite fierce opposition from John Howard.

He repeatedly railed against it. He described the superannuation guarantee as, and I quote, “stupid” urging the Labor Government “not to proceed with silly things like superannuation guarantee levies”.

But as a Minister in that reformist Labor Government, I take a different view. I’m exceptionally proud of that nation-building reform - which lifted super coverage from a mere four out of 10 working Australians to more than nine out of 10 in the workforce.

Reform which gave low and middle income earners, women, part time and casual workers the opportunity to secure prosperity in retirement.

Reform which built wealth for our people through private saving.

Reform that grew the economy and, at the same time, built a prosperous future for Australian families.

Over the years, there has been great change in your industry, not just in philosophy, but in the mechanics that drive it.

In fact, the theme of your three day conference recognises the constant change the industry has undergone in the last two years.

The Financial Services Reform Act, Super Choice, licensing, fund amalgamations and fund closures to name a few, and looking ahead - an anticipated contraction in the number of super funds from 2500 to 300.

No wonder your theme for this conference is “Striking the Balance”.

Getting the balance right is not always easy - neither in your business nor mine for that matter!

The conference program laid out before you is impressive in its scope.

From Rolling Stone editor and political journalist, William Greider, whose presentation is fascinatingly entitled The Soul of Capitalism - Opening Paths to a Moral Economy. Through to sessions devoted to women’s superannuation, future strategies for institutional investors including investment in major infrastructure and, significantly, climate change.

Without doubt one of the biggest challenges facing the Australian people and the Australian economy today.

As I said, a comprehensive and instructive conference agenda.

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Savings in the Economy

I want to begin by making a few comments about the importance of savings in the broad economic context.

No one can deny that Australia has enjoyed a remarkably long period of sustained economic growth over the past 15 years. But the truth is we are becoming too reliant on the good luck of a global resources boom. We simply can’t assume that this good fortune can go on forever.

The imbalances in our economy are being papered over by the deluge of a $40 billion bonus from our minerals boom.

It’s sobering to think where Australia would be now without the good luck element of our recent economic prosperity.

Without a booming China, without coal and iron ore prices soaring to unprecedented levels.

Australia is more vulnerable than the Howard Government thinks.

At $473 billion, Australia’s foreign debt is now on course to exceed $500 billion before the year is out. That’s higher than the entire foreign debt of all of Africa. It has grown by more than $100 billion in the past two years - its fastest growth at any time in our history.

In the last few weeks, we’ve learned that the interest bill on our foreign debt soared to $22 billion in 2005, up 40 per cent in two years. And the only future direction is up, with interest rates heading higher in the US, Europe and Japan.

We cannot keep escalating our foreign debt levels - not because our economy is about to implode - but because at some stage we’ll be brought to book by our creditors.

As a nation, we’re not paying our way. In February, Australia notched up its 47th consecutive trade deficit - following January’s record-breaking $2.7 billion.

Why - when the world economy is growing with record high mineral prices and rural exports in a post-drought recovery - is Australia not running a trade surplus?

The bottom line is this. We simply must get our trade account back into balance, and into surplus. We must make goods and services that the rest of the world wants to buy and we must save more - or else we won’t be able to support the living standards we’ve been enjoying.

And we can only do this if we make Australia competitive again.

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Lifting productivity, investing in the skills of our people, rebuilding national infrastructure, turning around our trade performance - that’s how we’ll secure a prosperous future.

Labor’s plan is built on the foundation of Budget discipline. All policy options must be measured against our over-riding objective of keeping the Budget in balance, on average over the course of the economic cycle.

Within the constraints of fiscal discipline, one of the eight principles outlined by my Shadow Treasurer, Wayne Swan, is to foster a domestic savings culture and reduce Australia’s reliance on foreign savings.

This is crucial to protecting the Australian economy from the threat of foreign debt. And superannuation savings are one of the most important ways to build domestic savings.

Superannuation savings have now reached some $790 billion largely driven by the nine per cent superannuation guarantee and high rates of investment returns over recent years.

But to secure our future prosperity - we need to do even better.

Security in Retirement

Security in retirement is a fundamental right of all Australians - a responsibility that society accepts and expects Government to deliver on its behalf.

Australians who have worked to build our country all their lives, contributing to our economic and social development, are entitled to a secure retirement.

Australia has a mixed retirement income system built on the government age pension, compulsory superannuation and voluntary superannuation - with superannuation managed and invested largely through trustee-based, private sector vehicles.

We also have an ageing population, a population increasingly reliant on retirement income.

Currently we have a very modest government age pension which is asset and income tested plus the add-on of compulsory and voluntary superannuation, now overwhelmingly in defined contribution schemes.

Almost unique in advanced economies is Australians’ desire for a retirement income that more closely reflects pre-retirement income. Hence Labor's introduction of the nine per cent superannuation guarantee and later, the commitment to a further three per cent employee/government co-contribution.

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Achieving this higher level of retirement income for the “baby boomer” generation now approaching retirement is a challenge for both government and superannuation funds.

Labor remains committed to the goal of “65 at 65” - based on the belief that people living in retirement need at least two thirds of their pre-retirement income to maintain similar living standards.

We remain committed to the existing system of access to the age pension and superannuation. We would also allow the terminally ill access to their super at any age without tax penalty and would consider exceptions for some occupations, on a case by case basis, determined independently.

Labor’s Six Superannuation Principles

Superannuation policy must be able to deliver the national savings to protect Australia from the threat of foreign debt, and deliver the private savings to secure prosperity in retirement for working Australians.

These are major national objectives in a complex policy area. So in considering specific policy options, Labor begins with our six superannuation principles. I believe the principles that underpin a fair retirement income

system are:

• Achieving higher retirement incomes; • Simplicity; • Safety and certainty; • Choice and competition; • Affordability; and • Improved incentives.

There are many competing claims for attention and support and many problems that could be solved within superannuation policy. In making policy, Labor will be guided by those principles, which establish our priorities for action. This is especially important given the universal, compulsory nature of Australia’s superannuation system.

Labor continues to take a practical, pragmatic view about compulsion and placing savings with the private sector.

We know that most people, especially when they’re young and retirement seems a long way off, do not voluntarily choose to save for retirement. There are obviously many reasons for this - insufficient discretionary income, short term rather than long term objectives and distrust of financial institutions and

government - to name a few.

Compulsion ameliorates a fundamental failure of "market economics" and the "rational" human being.

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But it also places an enormous duty of care on the part of government and the private sector.

Government must ensure funds are safely invested, at minimum cost, with compensation when systemic failure occurs.

Superannuation is unique; it’s not like another financial product. It’s compulsory, long term, tax preferred, complex and untouchable until retirement.

Linked to the need for compulsion, is the substantial default decision making by the majority of members. The responsibility vested in their fund to make sensible and profitable investment decisions on their behalf.

This is reflected in the absence of members’ active selection of investment, fund options and rolling together lost accounts.

Consequently, simple default mechanisms are necessary across the system for those who do not choose to actively participate.

A good example of an effective default design is the use of the "prudent person test" - the diversification of investments combined with maximising return balanced with safety that Labor introduced as a trustee requirement. It

is a practical and sensible approach and one that gives good long term rates of return.

Superannuation Today - Failure of Government

Despite the importance of your industry, after 10 long years the Howard Government has become increasingly out of touch with the practical problems that exist in our superannuation system.

Tax - A Complex Burden

Consider tax. Superannuation has not escaped the attention of John Howard’s high-taxing Government. Not surprising really - no one has emerged unscathed.

Tax on super has skyrocketed from $1.6 billion in 1995-96 to an estimated $6.7 billion in 2005-06. And while the Government's co-contribution scheme delivered $695 million in 2004-05, in the same year an extra $5 billion in tax was being taken out.

Recently the Minister for Finance, Senator Minchin, in one of his periodic episodes of “thinking out loud”, went so far as to call for the total abolition of the contributions tax in the May Budget. I, for one, will be interested to see if Treasurer Costello was listening.

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Lost Super

On top of this enormous tax burden, lost superannuation has blown out from $5.5 billion in 2000-01 to $8.2 billion in 2004-05.

One in two adult working Australians now has a lost super account - a massive hole in our super system that’s getting bigger every year. For many people, the process of rolling funds over is far too complex - tracking down the fund, filling out the forms and providing all the necessary identification.

It’s one of the major problems with our super system and the Government hasn’t come up with the right solution. Year after year, Minister after Minister comes up with yet another glitzy advertising campaign to solve the problem.

We’ve had Super Match, Super Online, Super Seeker all of them producing dismal results. Expensive, taxpayer-funded advertising campaigns and still one in two working Australians has a lost account.

The Elusive Forecast

Then there’s the elusive super forecast: consumers compelled to contribute to schemes but frustratingly denied estimates of their future payout.

Australians have little or no idea what their retirement income is likely to be at their access ages for super and the pension.

It’s the Catch 22 of super. Consumers are urged to invest in super and told it’s their responsibility to put aside enough for a comfortable retirement. But when they start asking how much they can expect in their super package no one will tell them.

How on earth can they sensibly plan for retirement if they have no idea how much they’ll get?

How can they make informed decisions to boost their savings to fill any anticipated gap between what they’ll receive and what they’ll need when they’re denied crucial information?

The gap between what you get and what you need

We’re all aware that total savings for many people fall well short of what is required - this has been repeatedly identified in a range of detailed studies over the past decade.

In these cases, additional contributions are needed and a range of suggestions including an expansion of the co-contribution and/or contribution tax cuts have been suggested. Labor will closely examine these when the final Budget forward estimates are revealed and expenditure priorities concluded. The needs of the self employed should also not be forgotten.

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False Choices

On the occasions when the Howard Government does take action on superannuation, it is counter-productive. This is what happens when a government is too busy governing for itself and its mates, not all Australians.

The introduction of so-called Super Choice is a perfect example.

The Howard Government claimed that with the introduction of funds choice, total fees would come down. But on all the evidence available to date, fees remain stubbornly high in some sectors. And that’s a huge problem for consumers because even a one per cent increase in total fees reduces total end savings over 40 years by a whopping 22 per cent

Add to this more red tape and complex legal obligations and it’s no wonder employers are complaining. And there’ll be more of them up in arms in two months time when these requirements are extended to small and medium sized businesses.

The Howard Government’s so-called Super Choice also contains anti-competitive restrictions such as exit fees, employer veto provisions, commission selling and, when combined with unintelligible disclosure documents, does not promote informed choice.

It’s worth noting here, of course, that industry funds typically don’t charge exit fees or engage in commission selling.

Regulation Failures

Regulation of superannuation is another area where the Howard Government has failed dismally.

The Howard Government’s disclosure regime has resulted in disclosure documents that run to a staggering 50 to 100 pages. How many consumers have either the time, or the inclination, to wade through them?

Indeed, many in the financial services sector itself find them difficult to understand. Even with the Government’s so-called refinements they are still overwhelmingly complex.

And there’s more to come. Two weeks ago the Government announced more refinements to the refinements!

It’s a major cost estimated at well over $200 million - imposed on industry and inevitably passed on to consumers.

We need look no further than the Westpoint financial scandal to see clear evidence that regulation isn’t working. Thousands of Australians, many in retirement or approaching retirement, have lost up to $400 million. It reveals a

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regulatory regime that is far from perfect - in fact, a litany of regulatory shortcomings have been uncovered including:

É A gap in regulation of promissory notes; É The lack of proactive checking by the Tax Office and ASIC; É Inadequacy of disclosure; and É Widespread use of commission selling.

On top of this, last week’s ASIC Shadow Shopping Report - the third critical report in as many years - revealed one in five planners surveyed were switching individuals into more expensive funds with an average loss of $37,000. In some cases a $100,000 loss. This unacceptable practice is largely being driven by commission selling.

Regulation should be much simpler - and much more effective.

Labor’s Six Point Plan for Simpler Super

After achieving higher retirement incomes, the second principle for Labor is to make the super system simpler for fund members.

We will combine greater use of default solutions to overcome a lack of active decision making with simple, standard documents across the system that are readable and understandable.

Labor’s Superannuation spokesman, Nick Sherry, has done extensive work in this area.

Nick, who along with my Shadow Treasurer, Wayne Swan, is here today, will be releasing a discussion paper on superannuation reform and I know he looks forward to hearing your views and ideas.

There is much that can be done to make the existing system simpler and more effective.

Today I want to outline some of aspects of Labor’s simpler super system: Labor’s six point plan for simpler super:

• Automatic consolidation of super accounts; • Access to forecasts of retirement income; • Making it easier to contribute to a super fund; • Real choice in super; • Keeping the super co-contribution; and • Simpler, tougher regulation.

Automatic consolidation of super accounts

To start with, Labor will move quickly to introduce the automatic consolidation of lost super accounts.

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This is overwhelmingly an area where a default mechanism needs to be introduced to correct a serious and growing problem. The current system effectively requires the individual to "opt in". Under our plan, a default, automatic rolling together will be provided with an "opt out" provision allowed.

As I mentioned earlier, there are currently 5.4 million declared lost accounts containing $8.2 billion - accounts where there has been no contact or contribution from the member for two years or more.

Most of these accounts could be consolidated but they aren’t and millions of Australians are missing out. They’ve lost contact with their fund often because of a change of address or they assume incorrectly that their small investment

has been eaten up by fees and charges. For others, the red tape involved makes it all too hard.

Labor’s automatic consolidation will not apply to defined benefit funds or where existing exit fees provide a significant cost penalty and prospective exit fees will be banned because they represent an anti-competitive barrier to fund consolidation.

Access to forecasts

I turn now to what I referred to earlier as the Catch 22 of super - the elusive forecast.

I know some funds already provide a forecast and it can also be obtained from a planner. Treasury, too, releases forecasts based on hypothetical case studies. But it is by no means a standard feature of our system and it is not universally available

All Australians, at regular intervals, should have the opportunity to know what their level of retirement income is likely to be, remembering of course that while a forecast is an essential guide, it is an estimate not a guarantee.

And it can be achieved in a simple standard format based on parameters set by the Government Actuary.

It would contain an estimate of lump sum versus pension options through to ages 55 to 65. For the first time, 10 million Australians would be able to get the information they need to plan ahead.

Overseas evidence suggests forecasts are useful. When a forecasting system was introduced in the UK, 93 three per cent of survey groups found them useful. More importantly one third asked for more information so they could increase their contributions.

Making it easier to contribute

We all agree that tax incentives are critical in the context of salary sacrifice.

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As a necessary base for increased voluntary contributions, whether by salary sacrifice or the co-contribution, it is important that the mechanism is as simple as possible to do so. Accordingly, Labor will ensure;

• Where authorised by an employee, an employer will provide necessary payroll payment facilitation; • All such payments will be made at least quarterly with superannuation guarantee contributions; and • Nine per cent superannuation guarantee contributions will be

calculated on the pre-salary sacrifice wage or salary.

These last two measures will correct anomalies in the system where a small level of abuse has been brought to our attention.

Real choice

To ensure consumers have real choice in their superannuation decisions they must have all the facts simply outlined. Without this, informed choice by consumers is impossible.

This means tougher regulation of anti-competitive behaviour, extended use of “default” mechanisms and far simpler standard disclosure that will ensure greater competition and informed choice. This will give the fund member the best priced - lower total fee outcome.

Keeping the Co-Contribution

As I said earlier, we wouldn’t be having the co-contribution debate if the Howard Government had honoured its 1996 promise to deliver Labor's universal three per cent employee/government co-contribution - some $10 billion a year in additional contributions.

Eight years on, the current watered down co-contribution scheme has delivered only one fifth of the value of contributions compared with the scheme scrapped by the Howard Government in 1997.

Nevertheless, it has been useful for some 900,000 Australians.

In the interests of certainty and stability Labor will maintain this scheme.

Further, Labor will maintain contributions splitting and extend it to inter-dependent relationships including same-sex couples.

Simpler, Tougher Regulation

Labor has always led the way on retirement incomes. It made the big and often difficult decisions that created the thriving industry which is represented here today.

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Our opponents, in contrast, first opposed compulsory super and have since done little but introduce layer upon layer of complex changes which have become a deadweight on the industry.

The problems were exposed in last week’s Productivity Commission Report from the Taskforce on Reducing the Regulatory Burdens on Business.

I am sure many of you would have agreed with the Productivity Commission assessment of the many difficult issues confronting the industry:

A super regime that’s:

É Burdened by a highly complex tax system; É Subject to considerable compliance requirements with much of this cost ultimately borne by consumers; and É A super regime where the rules have been changed again and again

over time, piecemeal change that has undermined policy outcomes and increased complexity.

Labor supports the Productivity Commission’s view that the “case for simplifying the superannuation system is overwhelming”.

The time for ineffectual tinkering is long past.

Conclusion

The record shows that after 10 long years, all we’ve endured from this Government is more red tape and more complexity.

History shows that it will take a Labor Government to introduce the sweeping changes the superannuation industry needs because it was Labor that made the tough, difficult decisions to introduce universal superannuation. We made those decisions because we will never shy away from the nation-building agenda Australia needs.

All along, it’s been Labor that’s had the courage and tenacity to make these groundbreaking reforms.

In the run up to the next election, we will be giving the Australian people plenty to make a real choice, an informed choice on superannuation.

The choice between an old, out-of-touch Government that puts political self-interest ahead of the national interest and the party I lead - building Australian’s future and protecting our prosperity.

Thank you.

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