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Recent developments in superannuation: address to the Association of Superannuation Funds of Australia Luncheon, Sydney.

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10 APRIL 2008




Thank you for the opportunity to address the Association of

Superannuation Funds of Australia on the topic of recent

developments in superannuation.

Fiscal Responsibility

Our Government is committed to exercising fiscal restraint through

a disciplined approach to spending and a hardline approach to

savings. Excessive government spending contributes to demand,

which can add to inflationary pressures. A comprehensive review

of spending is currently working to find additional savings above the

previously identified $10 billion across the forward estimates.

In his first economic speech, under point two of our five point plan

to fight inflation, the Prime Minister flagged that this Government

will examine all options to provide real incentives to encourage

private savings.

The Prime Minister has also quickly taken the initiative overseas, in

advocating the creation of a global early warning system to prevent

a repeat of the recent global credit crisis, as well as setting up a


Treasury review of equity derivatives and short selling. This is a

far-sighted approach not seen from the previous Government.

The Labor Government’s fiscally conservative approach and

support for a robust superannuation system is a key part of our

overall approach to managing the Australian economy.

Our government has a long history of championing the cause of

superannuation for all working Australians. It was Labor that

introduced the first fundamental superannuation reforms.

The introduction of compulsory superannuation has had a

significant and continuing impact, both on Australia's economic

health and the retirement savings of hard working Australians.

This reform extended superannuation coverage to nearly all

employees. Importantly, if the Government had not introduced the

superannuation guarantee arrangements in the early 1990s, most

low income, casual or part-time workers in industries such as

hospitality and retail would not have the added financial security this

has brought to their retirement incomes today.


Compulsion and ‘duty of care’

Compulsion brings with it a strong ‘duty of care’ by government.

Government, having rightly mandated that individuals save for their

retirement, provides tax concessions, estimated in the latest Tax

Expenditure Statement to be around $26.8 billion in 2007-08, and

directs the concessional contributions of around $60 billion largely

into the hands of private sector financial institutions governed by

trustee entities. In late 2007, the total system contained around

$1.2 trillion.

Superannuation is a form of long term savings that is not generally

accessible until at least age 55. Issues such as governance,

dispute resolution and compensation, safety, diversified investment

and operational costs are important concerns for this Government.

It is absolutely vital in our system that trustees are well placed to

minimise problems before they occur and minimise the need for

regulators having to embark on sometimes onerous or intrusive

oversight. Prevention is the best form of cure.


The central question for all participants in our system, regardless of

their particular interest, should be: ‘what is in the best interests of

the member and does it maximise their retirement income?’


There are a number of interlinked principles the Government has

consistently outlined. They are worthwhile recounting because they

will form the basis for how we examine issues going forward.

Achieving higher retirement incomes delivered over time through a

combination of the age pension plus superannuation set against a

clear goal.

Simplicity - each fund member should be able to understand at

least the general features of operation of the system and the

particular features of their own fund.

Safety and confidence - features to ensure people maintain

confidence that contributions will be made, that their future income

is not at risk, and that they can project the income available to them


on retirement; I draw a distinction between the risk from theft and

fraud and market based risk in a defined contribution system.

Choice and competition - the provision of a level of choice so that

individuals can have input into selecting superannuation options

that best suit their particular needs for retirement, whether it be a

particular fund, investment category, lump sum or pension/annuity,

or age of retirement.

There is a need to ensure a careful balance in a system which

denies individuals the choice not to participate in the system but

requires them to make what can be a range of complex choices

within the system itself.

Affordability - superannuation should be a cost effective savings

vehicle with operating costs kept to a minimum.

Improved incentives and equity - superannuation should be taxed in

a fair and equitable manner, and the Government has committed to

examining new ways to improve incentives to save, consistent with

a responsible fiscal policy.


There are some further practical considerations I would add:

Increasing workforce participation

Given the recent high levels of employment and the significant skill

shortages that have developed in sections of our economy, it is

important to encourage Australians to participate in the workplace

for as long as possible.

Administration overload

I am also conscious of the great pressure which fund administration

systems, IT hardware and software have been under due to a

number of recent policy changes, such as Better Super and the

‘anti-money laundering’ changes.

I can assure you this is being taken into account in developing new

policy and in considering other issues such as the automatic 'rolling

together' of lost accounts.


Hopefully further changes can be made that further simplify the

administration, operation and decision making for the entire

superannuation system.

Superannuation returns

The latest available data from the Australian Prudential Regulation

Authority for 2007 indicates fund assets rose to a total of $1.18

trillion, an increase of 15.4% despite a fall of 0.4% during the last

three months of the year.

However, some fund members will be concerned that the current

market volatility will mean their superannuation fund will experience

poorer returns. Equally, funds may fear that these short-term

fluctuations will make fund members more sensitive to their fund’s

performance and more willing to switch funds.

The ability of employees to choose their superannuation fund

indeed gives them the freedom to switch to another fund. A

significant amount of switching could put the liquidity of an

unprepared fund at risk.


However, trustees are now better placed to manage the risks

arising from market volatility than they may have been in the past,

as they are now required to have risk management strategies and

plans in place. Risks to the investment strategy would include

those that may arise from sudden market moves, including the risk

of members switching away from the fund.

Superannuation is a long-term investment. Over the long term, 35

years, Australian superannuation has delivered excellent real

returns of about 5% over and above inflation to 30 June 2007.

Different investments have varying degrees of volatility and no

single investment asset always performs better than others do.

This means that diversified portfolios usually provide more

consistent, less risky, returns.

The preservation arrangements and the compulsory nature of

superannuation allows superannuation trustees to manage market

volatility over time through a progressive rebalancing of their

investment strategies in response to market conditions.


As superannuation is a long-term investment, people continue to

benefit from their investment returns for many more years after they

retire. When they receive their fund statements this year they need

to look, not just at the yearly rate of return but to the more important

five to seven year rate of return that should also be included in the


I’ve asked the Australian Prudential Regulation Authority to ensure

that funds have adequate liquidity and the Australian Securities and

Investments Commission to ensure that funds adequately inform

their members about their returns.

First Home Saver Accounts

The Government is committed to assisting aspiring first home

buyers to save for their first home and encouraging private savings

to help put downward pressure on inflation and interest rates. This

commitment was reflected in the Government’s 2007 election policy

to introduce First Home Saver Accounts.


On 8 February 2008, the Government released a discussion paper

outlining the proposed features of First Home Saver Accounts and

how they will operate.

The Government has considerably strengthened the approach it

announced in the election campaign by boosting assistance to low

income earners, streamlining the operation of the accounts through

a Government contribution and improving accessibility by widening

the range of account providers.

These new accounts will create opportunities for providers to

develop new products to service the first home saver market.

The accounts will have a minimum period of four years before

withdrawal, allowing higher rates of return to be offered by account

providers. To facilitate competition on returns, providers will also be

able to offer a variety of investment options.

The Government will invest $950 million over the first four years on

the accounts.


The Government is working closely with industry in the

implementation of the accounts to ensure that they are an attractive

and competitive product for both industry and first home savers and

to minimise compliance costs.

The Government is currently considering submissions received

from industry and the community, including ASFA, in response to

the discussion paper and will announce the final details of the

accounts over the coming months.

Superannuation Guarantee (SG) Late Payment Offset

The Government has moved quickly to introduce into Parliament

Tax Laws Amendment (2008 Measures No. 2) Bill 2008 which will

amend the superannuation guarantee law to provide fairer

treatment to employers who make contributions after the due date.

The Bill will ensure that late contributions count towards the

required superannuation payments of an employer, and so

employers will not have to pay the same amount twice.


The prompt actions of the Rudd Labor Government clearly

differentiate us from the previous Government, who did not fix this

growing anomaly over the previous 11 ½ years.

Under the pre-existing superannuation guarantee law, employers

are required to make contributions at least quarterly on behalf of

their employees. Employers who fail to make the required payment

by the due date will have to pay the SG charge to the Tax Office.

The SG charge includes the unpaid (or shortfall) amount.

Currently, this means that an employer who makes a late

contribution directly to their employee’s superannuation fund

instead of the Tax Office, is considered to have not paid at all. In

effect the employer is being forced to pay the amount twice.

The Government is committed to reducing unnecessary burdens on

small businesses while at the same time ensuring workers receive

their superannuation entitlements.


The offset will be available to employers from the date of Royal

Assent, including employers who have been assessed with the SG

charge before this date, if their charge remains unpaid.

The Tax Office will continue to impose penalties and interest on

employers who fail to make their contributions on time to ensure

that there continues to be a strong incentive for employers to

comply with their SG obligations. The interest imposed is payable

to employees to compensate them for the lateness in receiving their

SG payment.

Tax Free Superannuation Lump Sums for Terminally Ill

On 13 February 2008 the Rudd Labor Government introduced

legislation into the Parliament to make superannuation lump sum

payments tax free when paid to persons suffering from a terminal

medical condition. This measure will assist in relieving financial

stress which individuals and their families suffer due to their illness.

I am pleased to note that we have backdated the start date on this

initiative. After coming to power, the Government reviewed this


measure first announced by the previous Government. In response

to concerns from people who would have missed out, we have

chosen 1 July 2007 as the start date. This is simpler and fairer for

those affected.

Self Managed Superannuation Funds

Earlier this year, on 14 February 2008, I announced that

consultation had commenced with a range of industry organisations

and practitioners about a range of matters of relevance to self

managed superannuation funds (SMSFs).

First, I note that in looking at governance issues, I am not focussed

on the SMSF segment alone. This simply forms part of my broader

focus on governance. The SMSF segment is an important part of

the broader superannuation market, and it is on the whole a robust,

sound and healthy area of the market.

However, results of a recent Australian Taxation Office (ATO)

survey indicate that whilst the majority of the sector is well

managed, a significant minority may not be. A robust governance


system is needed to ensure the security of the retirement incomes

of all Australians using SMSFs.

The Government is concerned where individuals are subject to

aggressive marketing, and may be persuaded to establish a SMSF

without being aware of their role and responsibilities, and without

appreciating the costs involved. This concern is not directed at any

particular segment providing advice to the SMSF market.

Trustee responsibilities and knowledge

In the ATO survey I just mentioned, the ATO found that 21 per cent

of participating trustees had a 'low to medium' or 'low' knowledge of

their obligations. This suggests a need for further education for


From the same survey, the ATO also found that over 30 per cent of

new trustees could not provide an explanation of the sole purpose

test, and more than 15 per cent did not have an investment



Additionally, 25 per cent of trustees were unaware of the restrictions

on the types of assets that can be acquired from related parties of

the SMSF and approximately two-thirds of new trustees could not

specify the limit on the level of in-house assets within the SMSF.

This information will help us identify risks in the population. I note

that the previous government, supported by us, introduced the

Super Safety arrangements and extensively upgraded trustee

duties, responsibilities and education in 2005. However, these

changes were not applied to the SMSF sector.

I am aware that some industry organisations are putting greater

emphasis on training for their members. Some are introducing

mandatory requirements for ongoing education.

Fees and Charges

Many new SMSF trustees say they believe running their own fund

enables costs to be minimised, so funds are more efficiently

managed. However, costs are incurred for the establishment of the

fund as well as the ongoing administration and operation. Arguably,


those who wish to enter into SMSF arrangements are not fully

aware of the fees and costs likely to be incurred.

ASIC has been drawing attention to this issue through the FIDO

website by encouraging people looking to establish their own SMSF

to consider whether they will be contributing sufficient assets to

produce a better result than a suitable low cost alternative fund.

As ASIC points out on its website, and has emphasised in Senate

Committee hearings, the cost of setting up and complying with the

rules generally means that you need $200,000 or more to put into

your SMSF for it to be competitive. In comparing SMSF fees and

costs by fund size, generally the smaller the asset size of the fund,

the greater the ratio of operating expenses to total fund asset size.

The latest figures from ATO annual return data show that the ratio

of operating expenses to total assets:

• is 10.51% for funds with assets of up to $50,000, and

• ranges from 3.55% to 2.63% for funds in asset ranges between

$50,000 to $200,000.


• drops to 2.26% for funds with assets between $200,000 and


Very worryingly, the trend from 2004 to 2006 is for an increase in

the ratio of expenses across these levels, and this data is likely to

understate the actual costs as it does not include all expenses,

such as some non-deductible fund establishment costs.

ATO data also shows that approximately 30 per cent of SMSFs

currently have less than $200,000 in assets.

The ATO states in its booklet 'DIY Super - It's your money … but

not yet' that funds with low asset values can have diminished

potential to generate returns due to their operational costs. Funds

with low asset values may not have a sufficiently diversified portfolio

of assets, subjecting members' benefits to increased risk. The ATO

also advises that funds with low asset values are sometimes used

for early access.

It is important that those recommending an SMSF provide effective

disclosure, to ensure that those who wish to establish an SMSF are


familiar with details such as the financial and time burdens and the

amount of money they need in the fund to make it viable.


The current penalty regime for SMSFs appears to limit the ATO

options for addressing non-compliance.

Generally, the application of penalties for non-complying trustee

behaviour comprises the imposition of civil and criminal penalties.

Penalties of this nature can be costly, time-consuming and harsh.

With this in mind, should our penalty arrangements be better

targeted to achieve the intended results? It should be noted that

trustees are already jointly and severally liable but tax concessions

apply only if they comply with their superannuation law obligations.

The ATO has advised me that they will continue to provide advice

to support professionals and trustees through the non-binding

public rulings regime.


Peak Superannuation Advisory Group

I have established a Peak Superannuation Advisory Group to

provide me with ongoing and direct links to the superannuation

industry and to act as a direct sounding board for the Government

on superannuation issues.

The Group has met once so far - on 3 March 2008 in Parliament

House, Canberra. Our first meeting was very useful in fulfilling its

purpose of providing a high-level perspective on superannuation

issues. I anticipate that it will complement the important and

continuing broad stakeholder consultations undertaken by the

Government from time to time.

Membership of the Group is drawn broadly from academia and the

superannuation industry with membership selected for their

knowledge of the industry. Members participate in their personal

capacities and not as representatives of any particular institution or



The Group draws on a wealth of experience in the superannuation

industry. The Group will aim to meet three times a year.

Lost superannuation

An issue I have been following with concern for some time is the

continued growth in the amount of superannuation reported on the

Lost Members Register. The Register, which uses information

supplied by superannuation funds, is intended to assist individual

members to identify lost super and consolidate their accounts.

Monies associated with the accounts on the register are still held by

the funds on behalf of the lost members. In the ATO’s latest annual

report, the number of lost accounts on the register had grown to

about 6.1 million, with assets totalling approximately $11.9 billion.

This is a worryingly large figure. I do note, however, the definition

of ‘lost member’ is drawn very widely to ensure that any account

which may be ‘lost’ is reported to the register. Consequently,

accounts which are inactive, but not ‘lost’, are inadvertently included

on the register. Nevertheless, the growing amount of


superannuation identified as lost superannuation has been a

significant issue over the last decade.

Lost accounts represent approximately one in five of all

superannuation accounts, with an average of one lost account for

every two Australian workers. This is a problem because the

sizeable number of these accounts suggests many Australian

workers will access less of their savings on retirement than they

would otherwise receive. In addition, the number of these accounts

collectively increases superannuation fund running costs.

Previous attempts to address this issue in the system have failed.

I have expressed a preference for the option of reuniting Australians

with their lost accounts by introducing an automatic consolidation

system, with an opt-out provision, using our Tax File Number


Under this option, lost accounts would be automatically rolled over

into a current or the most recently active account.


Members of the recently formed Superannuation Advisory Group

also discussed options to address this issue at the inaugural

meeting in March. I intend to consult further with the industry on a

range of practical solutions to this problem that will improve workers

retirement savings while minimising complexity and red tape.

Financial Services Working Group

As with every big industry, the financial services sector has a

number of significant issues that need to be addressed. In

particular, investors must have access to, and understand, the

information being provided to assist them in making informed


The complexity and length of disclosure documentation is of

significant concern to Government, with some documents being

100 pages or more and unreadable to most people. As Minister for

Superannuation and Corporate Law, I am determined to fix the

problem. I am committed to seeing that industry providers produce

simple, concise, and, perhaps most importantly, readable financial

services disclosure documents.


In February, I announced the tripartite Financial Services Working

Group, which has been established by me and the Minister for

Finance and Deregulation, Lindsay Tanner. The Working Group is

comprised of officials from Treasury, the Department of Finance

and Deregulation and the Australian Securities and Investments


The Working Group’s mandate is to determine the best possible

approach to delivering short, comparable financial product

disclosure documents.

The group will examine disclosure documentation in a staged

process. As a first step, the Working Group is working on the

development of a short and simple Product Disclosure Statement

for First Home Saver Accounts.

It is also examining the issue of ‘within product’ or ‘intra-product’

advice in regard to superannuation products. The group will identify

current obstacles, the removal of which will facilitate improved

access to such advice for all Australians. A consultation paper is

being finalised and will be released in the near future.


I am confident that the Working Group will provide innovative

solutions to some chronic problems. A large part of its success will

be due to its close consultation with interested stakeholders, both

industry and consumer, through an Advisory Panel that was formed

in March for this purpose, on which ASFA is represented.

Meetings of this Panel to date have been valuable forums for

informing the ongoing work of the Working Group.


There is a lot going on in superannuation right now. Today, I have

outlined our recent achievements, and some current issues of

concern to the Government.

I have also spoken of the Government’s broad consultations like

first home saver accounts, SMSF governance, as well as

consultations through the Peak Superannuation Advisory Group

and the Financial Services Working Group.


Given our priority towards the goal of a decent minimum retirement

income for all Australians, the Government will continue to progress

reforms where necessary and to consult along the way.

Thank you.