It is a pleasure to be here today amongst such an honour roll of individuals who are the Chairs of superannuation funds that manage hundreds of billions of dollars in assets on behalf of the Australian people.
Each of you has been entrusted to be the principle custodians of the deferred wages of working Australians which grows capital for their future retirement income and standard of living.
It is an incredible responsibility. I'm sure that at times, when world markets become volatile or during unpredictable international events, that responsibility keeps you awake at night.
As the Minister with responsibility for superannuation I also share in that custodial role.
Each day in my job I ask myself, how can we best safeguard the compulsory retirement savings of the Australian people? How do we empower people with choice and flexibility to ensure their superannuation best meets their individual needs? And, most of all, how can we ensure that we are always improving outcomes for fund members?
The majority of Australians are not 'sophisticated investors', as defined by the corporations act, so it is critical that we think about superannuation policy from their point of view – just as it is important to protect the interests of those who are young and new to building a financial asset – to ensure that the superannuation system works to build their future income, not simply the size and scale of the industry which has benefited from years of compulsory contributions.
Superannuation reform package
As you all know, superannuation was in the spotlight for much of 2016.
Last year the Turnbull Government made some significant changes to superannuation that will make the system fairer, more sustainable and more flexible.
These measures, such as the Low Income Superannuation Tax Offset starting from 1 July this year, will directly assist 3.1 million low income Australians including 1.9 million women.
In 2013-14, 10.3 million contributing fund members had balances less than $500,000. The flexibility measures in particular, which are opposed by Labor, year on year will afford these people the opportunity to boost retirement savings through catch-up concessional contributions and tax deductible personal contributions, regardless of the nature of their employment conditions. This includes workers who have irregular income or work patterns like tradespeople, contractors, freelancers and small business owners and employees.
With the legislation now passed by the Parliament, I believe it is incumbent upon your funds to engage with your members, to explain the levers available to them, as and when their financial circumstances allow, to make additional contributions. Even small additional contributions can make all the difference when it comes to retirement outcomes.
These are initiatives under my custodianship of which I am particularly proud and which can, and should, help people with lower balances who aspire to more self-sufficiency in retirement to improve their outcome in the decades to come.
Many of the reforms will commence on 1 July, and around 25 per cent of fund members are expected to benefit from the package in 2017-18. That is 3.9 million Australians are expected to be better off as a result of our reforms.
History of superannuation
Of course, it was not only desirable for these reforms to happen, it was essential.
Our superannuation system, as you all know, needs to evolve over time.
Since its earliest incarnation in the 1800s, when employer-based super was a perk for some privileged workers in the finance and public sectors, the system has changed dramatically.
Admittedly, it was slow to start. But by the early 1970s about one-third1 of Australians had access to some form of super. And it took off from there.
By the Bicentenary in 1988, superannuation's reach had extended to more than half of Australia's employees, and this would grow further with the introduction of the Superannuation Guarantee in 19922.
For instance, back in 2003-04, Australian households had an average of about $63,000 in superannuation assets. Ten years later, that figure had almost tripled3.
And today, 25 years later, it is a $2 trillion industry that — as one of three crucial pillars of our retirement income system — has a direct bearing on the lives of millions of Australians. Now it ranks as the second largest savings vehicle, making up around 22 per cent of all assets held by Australian households4.
Now, as you may know, Australia ranks fourth in the world for income adequacy and sixth for fiscal sustainability, according to the Global Ageing Preparedness Index. We're one of a few countries that rank highly on both indicators5.
But that said, while we do have a better retirement savings system than much of the rest of the world, we cannot be complacent. This is especially so of a system that is mandated. Because in its simplest form, compulsory superannuation is deferred wages.
Successive governments have made a decision to compel Australians to forgo a substantial portion of their wages every week of their working lives in order to save for that period of their lives when they no longer earn wages.
Today, working Australians must forgo nine and a half per cent of their hard-earned wages because successive Governments have determined that a compulsory savings is necessary framework to overcome our behavioural biases to save for the future and as a result, to provide tax incentives or concessions for doing so.
This system not only benefits individuals through a higher standard of living in retirement, but also the country through generating one of the largest contestable pools of assets in the world.
I can well understand though, that with increasing cost of living pressures and housing affordability challenges, many young Australians see the requirement to defer this substantial portion of their wages as savings for retirement in their twenties and thirties, as somewhat of an impost by government rather than a benefit or entitlement afforded to them by their employer.
So for this social bargain to work, governments must continue to offer generous tax concessions. That is, people pay significantly less tax on their contributions, investment earnings and retirement income streams than they would if they were paying their marginal tax rate.
We also know that people saving for their retirement through superannuation, and the industry itself, require certainty if they are to have confidence in the system.
That is why the Turnbull Government approached these important taxation reforms - to balance the sustainability, fairness and flexibility of the system - holistically and comprehensively. In doing so, we have given Australians certainty, and the industry stability about our superannuation tax policy.
But, unfortunately, this is not a bipartisan objective. Despite professing themselves to be the 'guardians of superannuation', the Leader of the Opposition and the Labor Party have proved that the opposite is the case.
They, along with the Greens, are promising significantly higher taxation on superannuation savings. And in addition to standing for higher taxation on these savings, the Leader of the Opposition has proudly declared that under Labor's policy, they will restrict the ability of small business people, mothers who have taken time out of the workforce, and older Australians with low balances, to name just a few, from increasing their savings. They promise to abolish the very tools that would give these people increased choice and flexibility to save. In short, they would deny them options.
Ultimately they undermine the very confidence in the system that they say they want to build.
However, it is not only certainty about the taxation of superannuation that provides confidence in the system – but so to the strength of the governance arrangements for trustee boards. As was highlighted in the final report of Jeremy Cooper's Super System Review back in 20106, "improving governance practices and structures is key to improving member outcomes." I couldn't agree more.
That is why, as you well know, in 2017 the Government will continue to pursue changes we've previously flagged — ones that will help to further strengthen the system and help improve member outcomes.
So today I want to talk about some of those changes, and I'd particularly like to focus on governance reform or, to put it another way, better accountability.
As I've said, the superannuation system is growing. It is dealing with very large sums of money. It is compulsory, complex, and boasts characteristics that are, generally, not found in standard markets.
In fact, today's superannuation system is very different to the system in 1992 when the superannuation guarantee was legislated.
In March 1992 the pool of accumulated super savings was around $150 billion7. With that figure now over two trillion dollars we have seen an almost 1300 percent increase in the size of funds under management.
It is therefore imperative that the legislation governing the system reflects this and is modernised, with well-governed standards of oversight and accountability as its foundation.
It is important both for individual retirees — the people whose money is at stake — and for our economy more broadly.
As I said, back in 2009, the former government commissioned the Cooper Review. It recommended a majority of independent directors for all super funds, but as a concession to funds that followed the equal representation model, recommended the one-third independent model. The review Panel also concluded that:
"the combined effect of a compulsory system (outsourced by government to the private sector) and legislated preservation of benefits demand a higher level of governance in respect of super fund members than the level required for shareholders in major listed companies."
And, as I have noted in previous remarks on this topic, it remains the case that the standards for governance and accountability of super funds remain lower than the standards that apply to companies listed on the Australian Stock Exchange.
Furthermore, in 2014 the Financial System Inquiry concluded that high-quality governance is essential to organisational performance8, and that independent directors are an essential part of modernising the system and keeping it fit for purpose.
More broadly, requiring independent directors on superannuation trustee boards would also be in line with international best practice on corporate governance.
In 2014, the OECD delivered its first report on corporate governance practices for listed companies. In regards to board structure and independence, the report said:
"Despite differences in board structure, almost all jurisdictions have introduced a requirement or recommendation with regard to a minimum number or ratio of independent directors. The recommendation for majority independence is the most prevalent standard."9
The Government believes that independent directors will enable superannuation funds to broaden the mix of skills at their board tables.
For instance, it will improve their capacity to innovate through the development of new products and invest — both of which are essential as the focus of the system shifts from accumulation to decumulation.
Independent directors will also improve transparency and decision-making by bringing an objective perspective to the issues a board considers, as well as hold other directors accountable for their conduct — particularly when it comes to conflicts of interest.
All of that is why, back in September 2015, the Government introduced legislation that would require superannuation fund trustee boards to have a minimum of one-third independent directors, including an independent chair.
However, only some in the superannuation industry, not all mind you, are doggedly opposed to any changes to improve governance or any changes that attempt to create more transparency and accountability to the operation of those funds.
To quote former Australian Workers' Union boss, Paul Howes,
"It has been disappointing to see a knee-jerk reaction against the call for a more independent governance model…Equal representation has been a success but the evolution of the super industry is important and I can't see anything negative in having more independents on boards10."
Let me tell you, the easiest decision making process in politics is one based on principles and the over-riding principle in the case of superannuation is that the money belongs to the members of the fund.
Not the fund managers, not the advisers, not the trustees, and not the government.
The members' interests must come first.
And we remain committed to implementing these reforms.
As I mentioned, diversity on boards can help with innovation. This is particularly helpful given another area we will focus on this year is the opportunity to deliver more efficient retirement income products that ensure Australia's retirement income system is world-class.
As is stands, the vast majority of Australia's pension assets — at least 94 per cent — are in account-based pensions.
There are benefits to account-based pensions, obviously. But they offer limited protection against longevity risk, and may not deliver high levels of income from a given superannuation balance.
With that in mind, the Government has released a discussion paper that explores the key issues in creating a framework that will facilitate the development — and offering — of more efficient retirement income products, what you know as 'Comprehensive Income Products for Retirement', or CIPRS.
In short, the new framework is an opportunity for trustees to better assist their members to transition into retirement. However, under what is being proposed there would be no obligation on trustees to offer these products to their members.
Now, there is obviously a lot more detail that could be discussed. But, unfortunately, time is limited.
What I will say, however, is that the discussion paper is an important step towards improving living standards and choice in retirement.
So I encourage all of you to look at and respond to the paper — which will be open until the end of April — and to get involved in one of the many roundtables in the coming months.
Choice and transparency
Before I finish, I want to very briefly mention two other critical areas of the Turnbull Government's superannuation agenda.
The first is choice. This key principle, introduced in 2005, says that most employers must provide their employees with a choice of superannuation fund for compulsory contributions.
However, 12 years on, there are still about two million employees without choice of fund because of their enterprise bargaining agreement or workplace determination. And the result is threefold: it prevents them from making decisions about their savings, discourages engagement, and limits competition between funds.
Of course, I am not saying that funds currently mandated by enterprise agreements are bad. Many perform well. But the Government wants employees to be able to choose the fund that best suits their needs — whether it is an industry fund, a retail fund or a self-managed super fund.
That is why, in March 2016, we introduced a Bill that would allow employees to choose their fund where they are employed under a workplace determination or enterprise agreement.
We estimate that these changes will make it possible for around an extra one million workers to choose the fund that receives their compulsory employer superannuation.
The Bill has since lapsed, but we have every intention of continuing to progress this reform.
The second critical area is transparency. To make choices people need information. It is critical to good decision-making.
If members are to select products that best meet their needs, they require easy-to-understand information on fees, risks and long-term expected returns, among other things, to make informed decisions about where their hard-earned money goes.
So we will take another look at these important issues to ensure we get the best and most helpful outcome for members.
I want to finish by again thanking you for the opportunity to speak today.
This will be another busy year on the superannuation front. There are, after all, few industries that have such far-reaching effects on people's later lives.
And that means it must be the best it can possibly be.
Whether it is through changes to governance, new ways of providing retirement income streams, more choice or greater transparency, the Government is committed to making that happen.
We want our superannuation system to remain strong. We want it to continue to reflect the time in which we live. And, most importantly, we want it to deliver for everyday Australians.
I look forward to working with you in 2017 to provide these sensible, and prudent changes to the non-taxation side of superannuation so that we can look back and say, this was a year that started of the next great wave of reform to a retirement savings and income system that is one of the great public policy achievements in Australian history.
We are world leaders in retirement policy but we have to keep improving to stay at the top.
1- http://tweb/sites/fg/ripd/bas/Briefings and Speeches/Speeches/Jan 2016 - MRFS - Super Chair Forum/ http:/www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/0910/ChronSuperannuation
2- As above.
3- Data from the Australian Bureau of Statistics (ABS), Survey 6553 - Survey of Income and Housing, ABS, Canberra 2015.
4- Only owner occupied housing is larger, constituting 38 per cent of all assets held by Australian households.
5- Canada, Chile, Sweden and Australia rank among the top ten countries on both subindices. http://www.globalaginginstitute.org/assets/client-assets/gapi/downloads/publications/GAPI_Report_2013_DL_LR-JNLC.pdf
6- Review into the governance, efficiency, structure and operation of Australia's superannuation system, Final Report, page 2.
8- Financial System Inquiry Final Report (2014) p.133.
9- OECD Corporate governance Factbook, p.30 (2014)
10- Source: 'Former union boss backs independent super boards', AFR, 7 August 2015