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Building the National Nest Egg Challenges for a Greying Australia: address to the Investment and Financial Services Association: Sydney: 20 November 2003.



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Building the National Nest Egg Challenges for a Greying Australia

Address by

Senator the Hon. Helen Coonan Minister for Revenue and Assistant Treasurer

Investment and Financial Services Association

Sydney

20 November 2003

Intro

Thank you.

All signs point towards Superannuation policy headlining as a major election issue next year.

Retirement incomes policy is vitally important and I'm sure there will be a lot of people talking about it over the next few months - including me!

Given speculation about the size of the surplus, an obvious target for further spending will be superannuation.

Only last week I presented the Government's framework for superannuation at ASFA's annual conference.

As many of you are undoubtedly aware, Labor outlined a number of issues at the conference, including the surprising news that they now support Choice.

This was indeed a welcome backflip!

I now look forward to the Opposition's support during the next sitting weeks when the Choice of fund Bill will once again come up in the House.

Labor Policies

Despite their support for the notion of Choice, a number of ALP super plans will do little to improve the lot of Australian workers.

For instance, providing for the automatic consolidation of unclaimed accounts is ultimately counter-productive and flies in the face of Labor's support for Choice.

Automatic consolidation fails to address the underlying issues that lead workers to feel disassociated with their savings - including lack of ownership over a major life-long savings vehicle.

Fee capping is of course another policy that may attract popular support initially but I need not tell those present today that calls to legislatively cap fees are ill advised.

Superannuation products vary greatly and fees should reflect the underlying costs of the fund and the costs of particular transactions.

Ensuring comparability of fee structures and informed choice by consumers will do more to create a competitive environment than blunt measures that will discourage innovation and product differentiation.

Similarly, Labor's calls to force funds to provide five different investment options and to provide pensions and annuities do little more than create increased costs for some funds.

In a true choice environment, fund members would be able to determine what fund best meets their needs. The sort of heavy handed changes that Labor is contemplating could in fact force some rationalisation in the industry.

The Government, on the other hand, believes that the decision on how a fund operates within the regulatory framework is best left to the trustee.

Labor's policies fail to grasp the underlying issues on which the retirement incomes debate centres.

Rather, we are left with a mere grab bag of minor policies designed to engender a cosy feeling that Australian workers need not worry about super because the Government will continue to take the decision making out of their hands.

Although it might sound trite, I want to reaffirm that superannuation is a long term savings vehicle. It is there to meet the retirement needs of Australians.

Other people's superannuation is therefore not available to fund pet political projects.

I mention this because I am aware that a number of Labor frontbenchers have suggested people's retirement savings can be split in a number of ways.

There are a myriad of different proposals floating about:

Super for public housing;

for health and aged care;

investment in agriculture;

for education;

for community infrastructure;

for seed and venture capital;

for housing and urban renewal; and even

A discount on contributions tax for funds investing in rural Australia.

Quite apart from doubtful constitutional validity and reckless indifference to risk associated with most of these plans, the Labor Party must rule out diverting super into such projects.

Which brings me to the issue of how Australians can be motivated to plan and save more and what incentives would better secure a savings culture.

Challenges

The need for Australians to create wealth and save for their retirement should not only be a personal goal - raising current savings levels in the superannuation system must be a national priority.

Meeting the imminent retirement needs of an army of baby boomers and enhancing the prospects of future generations of Australians are just some of the challenges of building a responsive superannuation system.

Financial security and independence in retirement is every bit as important to Australians as our national security and our personal safety.

It is directly underpinned by our economic strength and is definitely necessary for our social cohesion.

Each of us can share the twin goals of securing our own financial independence while building the nation's wealth.

It is a shared endeavour between Government and those of us saving for our retirement, with the common objective of our personal financial security and our national prosperity.

This is all part of nation building - all part of building a stronger Australia.

I am supportive of policies that can produce significant increases in retirement income and build the nation's wealth and produce better retirement outcomes for Australian workers.

To this end, I was extremely pleased at the recent passage of the Government's superannuation co-contribution and surcharge reduction measures - a package worth $1.3 billion over four years.

The co-contribution measure provides significant incentives for low-income workers to make personal contributions to superannuation.

And it rewards those who are prepared to save, by delivering significant increases in retirement benefits.

The matched contribution is a direct injection into the retirement savings of workers earning up to $40,000.

It is my personal view that, in time, there may be potential to extend the co-contribution beyond $40,000 and I am interested in how this could work, in a targeted way, up the income scale.

In the recent package, the Government also managed to achieve a reduction in the superannuation surcharge from 15 per cent to 12.5 per cent over three years.

Although a smaller reduction than the Government originally proposed it is at least heading in the right direction and will help those with the capacity to save more for their retirement to do so and take pressure off the pension system.

IFSA hailed the package as the biggest news in super for 15 years and I thank the organisation and Richard Gilbert in particular for your support during the Government's negotiations.

Vision

To engage the wider Australian population in superannuation then people must feel part of it. The keys to making this happen are giving workers ownership of their superannuation as well as education and information.

We must have an environment in which people are motivated to plan and save with confidence and we must work to increase simplicity, security and choice in our superannuation system.

There must be incentives for people to save for their retirement; people must be given ownership of what is, after home ownership, probably the largest savings vehicle they have; and we must demystify the superannuation system, make it simpler, instead of its workings only being known by the fortunate few.

And finally, the system must be flexible and safe to meet the demands of a changing population.

Financial Literacy

Raising the financial literacy levels of the Australian population is a concept that has multi-partisan support as well as the attention of the financial services industry.

It is an unassailable proposition that the ability to make informed judgements and to take effective decisions regarding the use and management of money is a vital skill for all Australians.

This will contribute to an improved savings culture and serve the long-term retirement needs of a greying Australia.

The first national survey of financial literacy in Australia was released by the ANZ Bank in May this year. Overall, most people surveyed displayed a reasonable level of financial literacy.

98 per cent understand that they must prioritise their needs to balance income and expenditure, 97 per cent know that their employer must make super contributions for them, and 91 per cent know they can make extra super contributions.

However, the survey also identified significant gaps in financial knowledge.

55 per cent of super fund members claimed to know little about the fees and charges applying to superannuation and only 37 per cent of respondents had actually worked out how much they needed to save for their retirement.

16 per cent of the adult population spend all their income as soon as they get it and do not plan for the future. Only five per cent claimed to have no difficulty managing their finances.

Increasingly there is an onus on policy makers, financial institutions and advisers to educate the Australian public about the increasingly complex market place and empower them to take more effective control of their financial future.

Your own IFSA policy paper on `Retirement Incomes and Long-Term Savings: Living Well in an Ageing Society' noted that:

"Education, information and quality advice are critical to the achievement of Australians' expectations of their retirement incomes."

Overseas Experience

In looking at the issue of financial literacy, it is interesting to examine the overseas experience, which confirms that financial literacy and consumer education has attracted close attention in recent years.

And for good reason. In the US, nationwide surveys of school students over the period 1997 to 2002 have actually found that financial literacy levels are decreasing.

While it may seem difficult for Australians to comprehend, it is estimated that between 10 and 12 million households in the US have no relationship with a traditional bank or savings institute and instead rely on cheque cashiers and payday lenders to access their money.

In response, the US Government has recently passed legislation that will see the US Treasury charged with developing a national strategy for financial literacy and education by 2004.

The US Senate is considering a further proposal to establish a national body that would work in a collaborative way to promote and improve financial literacy education.

A major initiative being progressed in the UK is a national helpline and online service called Consumer Direct. This will provide a single point of contact and link for all consumer information services in the UK.

Addressing the need for financial literacy in Australia has not been ignored. A recent scoping study by Treasury has shown a wide and diverse range of existing programs.

Within the Australian Government sphere, the largest financial literacy program is the Financial Information Service, or FIS, run by Centrelink in the Family and Community Services portfolio.

There are about 120 FIS officers throughout Australia helping Australians to plan and take charge of their finances at no charge.

On average, the Financial Information Service conducts around 73,000 interviews, provides seminars to around 70,000 participants and responds to more than 200,000 phone calls each year.

The Australian Securities and Investment Commission (ASIC) is also active in helping consumers who are making financial decisions.

ASIC assists consumers with a range of services and activities such as a toll-free information line and provides an online information service, known as Fido.

The financial industry itself provides support including teaching material used in schools. Teaching resources you may have heard of include `Dollars and Sense' by the Commonwealth Bank and `Dollarsmart' by the Financial Planning Association.

The success of Australia's retirement income policies will be enhanced by the capacity of individuals to cope with the decisions and increasingly complex financial world in which they live, better understand financial products, to save and to plan for their future - that is, to be financially literate.

The Government is giving close attention to determining the best way to improve financial literacy across the community especially, but not exclusively, through the prism of financial security in retirement.

Whatever the forward program might be, there is a role for Government to coordinate an overarching approach embracing business, educators, the financial sector is likely and that's where IFSA will be a valuable contributor to what I hope will become a vigorous debate on how best to promote national financial literacy.

Choice and Disclosure

The ability of consumers to make informed judgements about fees and charges would be greatly improved by a choice environment and industry-wide agreement about disclosure.

Not surprisingly, despite having received numerous approaches from industry on reducing taxes, I am yet to receive a proposal from industry on how to reduce the impost of fees and charges.

The Government prefers to rely on competition to put downward pressure on fees and charges. Further prescription, regulation and compliance burdens are the last things the superannuation system needs.

However calls for the capping of fees are a political reality and scrutiny of funds will continue. Industry needs to step up to the plate and demonstrate why capping of fees is not the way forward. I lay down that challenge to you today.

The debate about fees, charges and disclosure is not as simple as banning one fee because it may just pop up somewhere else down the line.

For instance, nil entry fee products usually replace an upfront fee with a deferred annual fee or higher fee management.

An effective disclosure regime will give members an opportunity to truly compare between funds. Funds with high fees will be unable to hide their lack of competitiveness.

Allowing employees to choose their fund will guarantee that they can move from the uncompetitive to the competitive. The uncompetitive fund is placed under increasing pressure to lift its game.

Surely the first funds to support these changes should be those that believe they are offering their members the best possible deal.

Ultimately the Government's policies are about increasing member benefits. Competition can have dramatic effects as seen in the telecommunications industry.

But competition cannot be supported by disclosure alone. Providing disclosure but not allowing members to switch away is just a recipe for frustration.

I expect the Choice legislation to be debated in parliament in the coming weeks and I call on the Opposition to stand by its pledge last week that it would support choice. I suspect we will see a degree of backsliding by the Labor Party. When cornered they will say they don't actually mean full choice. It will be some variance.

Choice of fund will give individuals a sense of ownership over their retirement savings. This is vitally important in encouraging people to think about their superannuation and plan for retirement.

Opposition to Choice is seriously damaging some people's retirement incomes but the Opposition and minor parties in the Senate have been denying a right this Government has wanted to give employees since 1997.

The arguments against Choice just don't stack up. We know choice works. Many employers already offer employees choice of fund.

Indeed, a recent survey by Business Owner Research of employers with between 20 and 500 workers found that nearly half the employers already offered choice - and choice has been operating successfully in Western Australia for five years.

If the scaremongering is true, why is there no evidence of choice being costly for employers or of unscrupulous funds taking advantage of employees?

The Business Owner Research survey also found that most people who exercise choice do so to remain with their existing fund when they change employers.

A substantial education campaign will support the introduction of Choice. The Government has allocated $14 million to the ATO to run the campaign.

It will encourage people to take an interest in their superannuation and carefully consider any decision to

change funds.

Lack of control over and knowledge about where their super is, has separated some $7 billion of savings from Australian workers.

Portability will allow people to move their money when they change jobs. It will help to address the issue of multiple superannuation accounts and fees that can eat away at retirement savings.

The ATO has been cooperating on the challenge of lost members accounts and has been working on improving the information available including using tax file numbers to identify lost members.

In addition, industry members are utilising the electronic commerce interface called Supermatch to re-connect workers with their lost super savings.

On 1 July 2004, portability of superannuation benefits will become a reality for many Australians.

Together with choice and portability, a better understanding of how to manage money is critical to better risk management, an improved savings culture and the long-term retirement needs of a greying Australia.

The Government is closely examining whether to allow a new class of market-linked `complying' pensions - growth pensions.

This is something that IFSA is very enthusiastic about.

Growth pensions would be similar to existing complying pensions except income payments would not be guaranteed, and that will give rise to issues about consumer disclosure and information about products in the same way as the Choice legislation.

We are examining the growth pensions proposal with a particular view to the revenue and social welfare impacts and we are listening to industry. Clearly it is only worth doing if it produces better retirement incomes for workers with acceptable risks and costs to Government.

But proposals such as growth pensions will only work in conjunction with a robust disclosure and consumer protection regime such as that under the Financial Services Reform Act 2001.

ASIC has asked industry to undertake consumer testing of its disclosure model with a view to its further development and improvement.

Regrettably ASFA now appear to be walking away from a collaborative approach while criticising the very model they helped develop! I hope that I'm wrong about this and that criticisms of the model mean that they will come up with a solution rather than point out the barriers.

ASFA has concerns with the ASIC model relating to the disclosure of dollar amounts but the Corporations Amendment Regulations gazetted on November 13 already address these issues by requiring the disclosure of items as dollar amounts where practicable.

There is a challenge for industry bodies to achieve broader industry acceptance of a way forward on disclosure.

I urge all industry bodies to get together and resolve any outstanding issues on a disclosure model. It should not be beyond the wit and will of good people in the industry to agree to a model for disclosure that will provide an adequate level of consumer information.

My point is that the way forward on important advances in superannuation such as growth pensions, flexible products, choice and portability will all be adversely affected if industry can't get its act together and sort out disclosure.

Flexibility

If education and ownership is the key to understanding, flexibility is the vehicle that will make super more accessible.

Workforce participation by older Australians will help maintain living standards and economic growth in the future.

The Government wants to give Australians a degree of flexibility and choice as to when to permanently retire from the workforce.

Timing of retirement will tend to depend on individual preferences and circumstances.

We need to extend opportunities for older people to stay in the workforce rather than encourage increasingly early retirements.

This may require a better alignment of the superannuation rules with the need for flexible retirement patterns.

In this context, some people may prefer a gradual transition from work to retirement as an alternative to withdrawing fully from the workforce once they reach a certain age.

Others may retire and later wish to return to the workforce. We need flexible ways to met the varying needs of older Australians who are undoubtedly going to be living to a ripe old, and increasingly active, age.

The Government has already legislated to remove any age discrimination in Australian Government

workplaces.

The Prime Minister's Community Business Partnership will suggest practical ways the Government can encourage the private sector to employ more mature workers.

Recognising that many Australians are choosing to remain in the workforce for longer, the Government increased the maximum age limit for personal superannuation contributions from 70 to 75.

Clearly the issue of flexibility and the ageing workforce will be one the Government will be giving close attention to.

The Forward Program

The final two weeks of Parliamentary sittings will include the potential for disallowance of the amended portability regulations as well as consideration of the Choice of fund Bill in the House.

The Government has also proposed the Superannuation Safety Amendment Bill 2003 which will modernise and strengthen the prudential regulation of superannuation in Australia.

The reforms contained in the Bill cover licensing of trustees of super entities regulated by APRA; registration of regulated super entities; and development and maintenance of risk strategies for trustees and risk management plans for entities.

These reforms will improve the safety of super for fund members and help make super more secure than ever.

Recent experience with investment returns highlights the importance of building public confidence in the super system.

These reforms to improve the safety of superannuation are an important plank in building the confidence of Australian workers in the super system.

Clearly the Government has raised the bar on safety in the super system and the industry, recognising the importance of these measures, is doing its part.

Conclusion

It is worth remembering as the policy debate hots up, to be wary of those bearing gifts or promising pots of gold at the end of the rainbow. The "gold tooth" syndrome has no place in retirement income policies.

The fact is, superannuation is a long-term investment. And changes to superannuation often come with a long lead time and a large price tag.

For that reason, proposals need to be carefully and thoroughly evaluated. Having ideas is one thing but it's necessary to work them through and ensure they are efficient and fair and that they hit their target.

I am pleased to have been able to share some of the Government's perspective in the ASFA stocktake. Your participation is vital to the success of the Government's innovative policies and I thank you for your contribution.