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Speech to Not For Profit Financial Planners Conference: 4 February 2013
I am pleased to join you for this important conference.
The Superannuation sector is of vital importance to the Australian economy – and to the wellbeing of millions of Australians as they prepare for retirement.
As financial planners, each of you have a vital role in the superannuation system. People need to take key decisions for themselves – such as their asset allocation, and whether they make voluntary contributions. For many people, taking these decisions without advice would be extremely daunting.
The superannuation sector has been exposed to an extraordinary degree of legislative change in recent years – and if recent press speculation is correct, yet more change is coming at the next budget.
The fact that the rules for superannuation change so regularly, when overlaid with the fact that they are complex to start with, is a big problem. It can really corrode trust and confidence from ordinary Australians.
In fact this is one of the three major areas of challenge in superannuation that I want to talk about today.
The superannuation industry operates with a set of remarkable statutory privileges: it receives a large flow of contributions each year (last year exceeding $117 billion); it offers customers long term savings products with substantially preferred tax treatment over competing products; and of course it is able to charge fees.
These privileges are granted for very good public policy reasons: because of the importance of having as many Australians as possible accumulate wealth with which to fund their retirement, as opposed to this funding burden falling on the taxpayers of the day.
That is why there is strong bipartisan support for the superannuation system.
But we need to recognise that there are some significant challenges to the capacity of the system to achieve its objectives.
Today I want to highlight three of them – and some of the policy directions to address those challenges.
The first challenge is the complexity of the system – and the way that complexity is compounded by steady change in the rules.
The second challenge is cost – and whether we are doing as much as we can to make the system as low cost as possible.
The third challenge is governance – and whether there are governance flaws in the current system which can compromise the objective of maximising retirement savings.
Let me turn to the first issue: the complexity of the superannuation system.
This is a point I hardly need to make to anyone in this room, but being a politician I will anyway. Under our superannuation system individuals must make complex decisions, on issues like:
- Asset allocation and risk preferences
- Contribution rates (including non-concessional contributions)
- What trade off to make (and when to make it) between paying down a mortgage or making additional contributions into superannuation
- What to do in the “decumulation” phase – how best to live off a lump sum. In this respect - and rephrasing the Milton Friedman quote about Keynesian economics - “we are all rentiers now”.
In fact the system is more than just complex. It can sometimes be quite harsh in the way some of the rules can apply to individuals. It is very hard to understand or defend a set of rules under which your contributions to superannuation up to the $25,000 limit are taxed at 15 per cent, but if certain highly technical errors are made you can be taxed at 93 per cent on your contributions.
What is more, you as an individual can make every effort to comply but then be exposed to these horrendously high tax rates due to your employer or your superannuation fund making a payment which is early or late by a few days around 30 June.
This is just one notorious example of the complexity. The Coalition’s commitment on this particular issue is that we will develop an appropriate process to make sure that Australians are not unfairly penalised for genuine unintended errors when making superannuation contributions.
A more serious and fundamental issue is that this is a system under which people accumulate savings over a period of 30, 40 or 50 years – yet face the risk of governments changing the rules on a regular basis.
Just in the last few years for example, the contribution limits on concessional contributions for those over fifty were reduced from $100,000 to $50,000 to now $25,000. As I wouldn’t need to tell anyone here, that has played havoc with the plans made by many Australians to save heavily through superannuation in their fifties – after they have got the kids through school and paid off the house.
More recently, the Rudd Gillard Government’s budgetary difficulties have seen a series of panicked attempts to raid the superannuation honey pot. There were well sourced rumours floating around prior to the November mini budget, of the announcement of a new penalty tax on superannuation contributions by high income earners.
Last week the rumours reappeared, with indications that the Rudd Gillard government will tax withdrawals above a certain balance level, mooted to be one million dollars, at penalty rates. Now as many in the industry have pointed out, one million dollars as a lump sum translates to an annuity income of around $50,000 a year – a reasonable but not a champagne income.
I would add that to seize on this number as some kind of indicator of who is wealthy is a highly misleading thing to do. Any time you translate an annuity income stream into a lump sum, it produces a large-sounding number. If you take the pension for an adult couple, and work out the lump sum you would need at age 65 to produce this income stream for 40 years, it is a figure of several hundred thousand dollars.
The more fundamental point though is that this is another example of the daunting complexity of the system – and the fact that the constant changes to the rules tends to reduce confidence in the system. That is why the Coalition has made an important commitment on this front:
We will deliver greater stability and certainty on superannuation – we won’t move the goalposts. It is unfortunate that Labor has wasted so much money and made so many threats and changes to the superannuation system, cutting back on contribution levels and discouraging many people from providing more for their own self-funded retirement.
This has not been in the long-term interests of Australians or Australia.
We will ensure that no more negative unexpected changes occur to the superannuation system so that those planning for their retirement can face the future with a higher degree of predictability.
We believe the people who want to plan and save for their own retirement should be supported by government, not penalised.
Now one of the important systemic ways to help people navigate the complexity they face in superannuation is to ensure the wide availability of financial advice. Obviously the work you all do is extremely important in this regard.
The recent changes arising out of the Future of Financial Advice legislation have been quite controversial.
The starting point for the FOFA reforms was the Ripoll Inquiry into the collapse of Storm Financial. That inquiry recommended imposing a fiduciary duty on financial advisers, requiring them to place the interests of their clients ahead of their own. The Coalition supports this key recommendation.
We do not support, however, a number of the detailed measures which were included in the FOFA legislation and which were not the subject of recommendations by the Ripoll inquiry.
For example, there are very detailed and prescriptive rules applying to financial advisers, amongst other things imposing new rules to disclose annual fees on a retrospective basis (that is, for products which have been in place for existing clients for many years). Another example is the banning of commissions for insurance provided inside superannuation. In the main these rules have little impact on the people in this room, but they have a big impact on those providing financial advice under other business models.
These changes, we in the Coalition think, will have costs that exceed their benefits. They make it harder for independent advisers to provide advice and charge the individual recipient of that advice. Given the complexity of superannuation and financial services generally, and the importance of the widest availability of good financial advice, we think this is regrettable.
The Coalition has made it clear we will change the law in this area if we come to government. Coalition members of the Corporations and Financial Services Committee – I was amongst them - made 16 recommendations as part of the Committee’s inquiry into FOFA. In government, we would implement all of them, including:
- the complete removal of the opt-in arrangements;
- the simplification and streamlining of the additional annual fee disclosure requirements;
- improving the Best Interest Duty;
- providing certainty around the provision and availability of scaled advice (that is, personal advice which is limited in scope); and
- refining the ban on commissions on risk insurance inside superannuation.
Clearly a major public policy issue is minimising the cost of management of superannuation.
The lower the fees taken from a superannuation account, all other things being equal, the higher will be the balance in that account at the end of the accumulation period.
Now economics being economics it is not always the case that other things are equal. For example, funds with a higher proportion of actively managed equities will tend to charge higher fees than funds with a higher weighting towards either index funds or fixed interest.
But putting aside those kinds of differences, achieving the lowest possible fees in the system is obviously desirable.
In the Coalition’s view, this is where competition is very important.
This includes the competition provided by the many different sectors of the superannuation industry – retail funds, industry funds, corporate funds, public sector funds and self-managed funds.
The Coalition has no brief for any one sector of the industry – we support competition. If one particular fund, or category of funds, offers a better and/or cheaper product, good luck to it. That’s good news for members.
Competition working properly will lower costs and fees, provide an incentive to achieve the best investment outcome, and promote innovative products and services.
Unfortunately key decisions of the current government, rather than increasing competition in superannuation, have weakened it. In introducing the MySuper arrangements, the government has failed to take the opportunity to open up the “default funds” system to competition.
To be nominated as a default fund in a modern award is a valuable privilege – it means the fund will receive a steady stream of contributions.
The industrial tribunal, Fair Work Australia, determines which funds are nominated in modern awards – in a process which is non-transparent and non-competitive.
These arrangements demonstrate a clear bias in favour of industry funds and public sector funds. In the Coalition’s view there should be an even playing field.
An analysis conducted by the Institute of Public Affairs in 2010 found that, across 166 modern awards approved by Fair Work Australia, there were a total of 566 funds specified as default funds under those awards and, of those, 513—the vast majority—were industry or public sector funds. Australian Super was specified as a default fund in over 70 modern awards.
The best that Minister Shorten has been prepared to do is ask the Productivity Commission to examine default superannuation funds. But on the day the PC released its draft report, with some modest reform proposals, Minister Shorten promptly rushed out a press release stating that the Gillard Government would preserve the role of FWA in selecting default funds.
This makes no sense. If the idea of a MySuper fund is that it is a low cost product which meets certain mandated requirements, then surely any product which meets those requirements should be suitable for an employee’s superannuation to go into. That is the position the Coalition supports.The Coalition has made our position clear. If we come to government, we will move to change the current anti-competitive system for choosing default super funds.
Another example of weakening competition, unfortunately, comes in the lack of competitive neutrality in the treatment of different parts of the financial advice industry.
The recent legislative changes have specifically authorised “intra fund advice” as something which can be paid for through a general levy applied across an entire superannuation fund. In effect this means that every member of a fund pays for advice – even if they do not take advantage of it. Oddly, this has been done at the same time as the government has imposed substantial new restrictions on those financial planners who levy a specific charge for their services to each recipient of those services.
By contrast, the Coalition is committed to boosting competition and empowering consumers. We intend to make it easier for consumers to properly compare super funds by working with the industry and APRA to develop a series of industry-wide standard definitions and performance benchmarks.
I want to turn thirdly to the question of the governance of superannuation funds.
Governance is necessarily a rather dry topic – but it is critically important.
Let’s remind ourselves of the purpose of superannuation – to fund the retirement incomes of Australians.
The legislation governing superannuation makes it very clear that this must be the sole purpose of any superannuation fund. The so-called ‘sole purpose’ test is set out in section 62 of the Superannuation Industry (Supervision) Act 1993. It requires the trustee of a regulated superannuation fund to ensure that the fund is maintained solely for the benefit of each member of the fund.
The reason for spelling this out in legislation, of course, is that the agglomeration of substantial economic resources – extremely substantial in the case of the $1.5 trillion superannuation sector – naturally presents temptations.
These include the temptation for those with influence and control over these economic resources to use them to advance interests which are different to the interests of members of the fund in maximising their retirement savings.
This is a problem well recognised in economics and corporate finance theory, and is described in the jargon as the ‘agency’ problem – the interests of managers of a firm are not the same as the interests of shareholders. So you need some legal safeguards to keep the interests aligned as much as possible.
This problem is not unique to the retirement incomes system in Australia. In the United States, the analogous system of tax-advantaged retirement savings includes so called 401(k) accounts, operated by a company on behalf of an employee. A serious problem in the US system is that companies facilitate and encourage asset allocation decisions which serve the company’s interest rather than the employee’s – particularly to invest a high proportion of the funds in such accounts in the company’s own shares.
Notoriously, this was a feature of the collapse of energy trading company ENRON in 2001. It encouraged employees to invest their 401(k) accounts in the company’s stock, through various means including providing a partial matching of employees’ contributions – using its own stock. As a result about half of the retirement savings of Enron employees (US1.2 billion) was invested in Enron stock.
This is a good example of what can happen if retirement savings are directed for for purposes other than maximising the retirement incomes of the fund members – in this case, giving priority to the quite different purpose of supporting the share price of the employer company.
Thankfully we do not have that problem in the Australian system – but we have our own distinct problem, which is temptation to use superannuation resources to advance other agendas including industrial and political agendas.
Presently the Victorian branch of the construction and general division of the CFMEU is attempting to put pressure on building industry superannuation fund CBUS in relation to property developments pursued by CBUS. This follows a major industrial dispute last year between the CFMEU and Grocon.
According to media reports last month, CFMEU Victorian secretary John Setka said his members were angry that CBUS had awarded Grocon a $430 million project in Sydney. “I reckon it’s a slap in the face for the union, what CBUS has done,” Mr Setka is quoted as saying.
The CFMEU has sought expressions of interest from other super funds to become the default fund. Presumably it intends to use the award process to have CBUS removed as a default fund for workers covered by the relevant awards. This would stop the flow of contributions from such workers to CBUS.
As former ACTU secretary Bill Kelty has noted, this episode raises very serious issues:
“I don’t think it is appropriate for anybody to use them (super funds) as industrial playthings or political playthings”
It amounts to an attempt by a union to use the economic resources of a large superannuation fund over which it has substantial influence – including appointing three directors – to secure industrial or political outcomes, in this case to advance its industrial dispute with Grocon.
What would such action mean for the interests of the 655,000 members of CBUS? The property development venture is being pursued to generate economic returns to fund the retirement incomes of members of CBUS – members who by operation of statute have a proportion of their remuneration paid in the form of employer superannuation contributions. Grocon has presumably been chosen using normal commercial processes with a view to getting the development done as quickly and cost effectively as possible.
Yet the CFMEU is proposing to subjugate the interests of the 661,000 CBUS members to the furtherance of the industrial agenda of the CFMEU in Victoria. How could it be compliant with the sole purpose test for CBUS to agree to the CFMEU’s request? It raises a very clear question as to the approach that the three CFMEU appointed directors on the CBUS board intend to take.
CBUS is not unique in facing these pressures. Consider for example TWU Super, a fund with $2.6 billion under management and 130,000 members, with four directors appointed by the Transport Workers Union. The four directors appointed are the TWU's federal secretary Tony Sheldon and three state secretaries: Wayne Forno, Wayne Mader and Jim McGiveron.
IN 2011 the TWU vigorously attacked changes proposed by the management of Qantas to the operation of that company, changes that management said would improve the company's financial performance.
Members of TWU Super have a right to expect that the sole consideration exercising the minds of directors is how to maximise the financial returns generated by the fund. But an obvious question arises: h ow do the directors of TWU Super, who are also union officials, think about equity investments in Qantas or other companies in the transport sector?
The recent Cooper Review had some comprehensive recommendations for governance reform in superannuation. It found that the equal representation system – of both union and employer organisations appointing directors to boards – “no longer seems to achieve its original stated objective”.
The Review noted that directors are often not elected but rather are nominated by third party organisations, such as employer associations and trade unions –and in practice these organisations do not necessarily represent all employers or employees.
It pointed out that the system leaves significant groups ‘unrepresented’, including those who are retired and receiving benefits payments from the fund.
It therefore recommended that the equal representation model should no longer be mandated, and where it does apply at least one third of representatives of both members and employers should be non-associated.
Unfortunately, these recommendations of the Cooper Review have been ignored by the Rudd-Gillard Government. By contrast, the Coalition has committed to improve superannuation governance, by implementing a series of corporate governance reforms recommended by the Cooper Review but not progressed by Labor.
Specifically, we will ensure:
- There is a more appropriate provision for independent directors on superannuation fund boards;
- Directors who want to sit on multiple superannuation boards must demonstrate to APRA that they don’t have any foreseeable conflicts of interest;
- Disclosure of conflicts of interests is mandatory; and
- Directors of superannuation funds must disclose their remuneration in line with the provisions that apply for publicly listed companies and other APRA regulated sectors.
The superannuation sector is a large and growing part of our economy.
It is vital that Australians maintain trust and confidence in the sector.
The Coalition does not have a preference for any particular part of the sector. We want to see vigorous competition across the sector, as a means of delivering the best possible outcomes for fund members.
Competition is key to the securing the interests for members. For clients of financial advisers promoting competition is also vital, as is the imposition of a fiduciary obligation.
The current government’s agenda of policy changes in superannuation is conspicuous for the issues that it does not address.
It does little to address some serious deficiencies in corporate governance of superannuation funds, and leaves significant recommendations from the Cooper Review unimplemented.
It is silent about the risk that where a union is experiencing corporate governance problems, an associated superannuation fund could be affected.
It does not do enough to mandate ‘corporate grade’ disclosure of the remuneration of directors of superannuation funds.
By contrast, the Coalition has a clear reform direction in superannuation which we will be pursuing should we come to government at the next election.
We think it is essential, to ensure the maintenance of trust and confidence in the retirement incomes sector – and to ensure it discharges with maximum effectiveness the vital task of stewarding the retirement incomes of Australians.
 APRA releases annual superannuation figures to 30 June 2012 http://www.apra.gov.au/MediaReleases/Pages/13_01.aspx
 Louise Staley, Institute of Public Affairs, “Keeping Super Safe: A call for greater transparency from superannuation funds”, April 2010
 Minister for Financial Services and Superannuation, Media Release, “Government supports evidence based and expert led process for default funds”, 22 August 2012
 M Skulley, ‘CFMEU stirs up anti-CBUS campaign’, AFR, 7 Jan 2013
 The Australian, 6 December 2012, “Superfunds must not become union playthings Kelty warns CFMEU” Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System, June 2010