Thank you for that warm welcome — it’s wonderful to be here on the Gold Coast for ASFA’s conference.
Occasions like this conference are always an important networking and educational event at a professional level, but it should also be an opportunity to step back and recall the enormous significance of the work you all do each day.
In terms of long-term benefits, there are very few professions where the work you do today has such far-reaching effects on people’s later lives.
You are an industry that always thinks about the future.
For all of you as the custodians of the retirement funds of millions of Australians, and for those of us too in government as policy makers, our decisions have far-reaching effects on the way people will be able to live during the third portion of their lives.
The first recorded superannuation policy was by the Emperor Augustus Caesar in 13 BC who paid an annuity to veterans who had completed 20 years in the Roman Imperial Army.
The first recorded superannuant was a lucky civil servant in Britain called Martin Horsham who in 1684 gained a lifelong pension of 40 pounds from the London Port Authority – half his final salary. This was even though he had been in the job for two years. Far be it from me to say that public servants are adept at looking after their own interests.
The first super fund in Australia was established in 1862 by Australia’s oldest company, the Bank of New South Wales, now Westpac, for its bank employees.
In fact, the history of superannuation has always been a combination of private and public efforts to find a financial path for people to maintain an income stream when they are no longer earning paid income. It has also been an evolution of innovations in investment and policy.
There is one other historical vignette that I want to recall and that is the establishment of the old age pension in Australia in 1908 by the Deakin Government, and this has enormous significance for the current political and policy debate.
At that time the life expectancy at birth for men in Australia was just 55 and for women 591 years of age.
In 1911, only around four per cent of the population were aged 65 or over2. So you really had to outperform.
It was means tested and character tested – if a man had recently deserted his wife for example, they were ineligible for the pension.
Even at that time the Government of the day struggled to find a way to pay for the new pension for even a tiny cohort of the population who became eligible for it.
Fast-forward to today and, as you are no doubt aware, last year’s Intergenerational Report showed that by 2055, the number of Australians aged 65 and over will more than double, while one in every 1,000 people will be 100 years or older.
At the same time, the number of people of working age for each person aged 65 years and over is decreasing.
This will, amongst other things, put pressure on our retirement income system — a system that includes the age pension, superannuation and other savings.
With this in mind, we need to ask: how do we respond to this policy challenge; how do we help Australians to secure their retirement future by increasing flexibility and choice in the system; and how do we do this in a way that is sustainable and fair?
Superannuation reform package
We have today the opportunity to modernise our retirement income system, particularly superannuation, to make sure that it works for everyone.
To ensure that the tax concessions that apply to superannuation are sustainable, and that the system has overall integrity.
To ensure the system is flexible — accommodating the wide range of working arrangements and patterns people follow across their lifetime.
And that is what we have delivered through our superannuation reform package, which was introduced into the Parliament less than 48 hours ago.
So given the timeliness — and your keen interest — I’d like to take the opportunity today to unpack some of the detail, and to provide a snapshot of what lies ahead.
Objective of superannuation
I’ll begin with the objective of superannuation.
Despite being a two trillion dollar industry, growing to nine trillion dollars before too long, there has never been a clear, legislated objective for superannuation.
This has meant that it has been very easy for different governments to make ad hoc changes to the superannuation system over the many years it has been in place – changes that have ultimately gone to undermining confidence in the superannuation system.
As a result, and as recommended by the root and branch review of the financial system through the Financial System Inquiry (FSI) – one of the bills that we have introduced enshrines in law the objective of superannuation — which is, ‘to provide income in retirement that substitutes or supplements the Age Pension’.
This is, the first time we have had such a clear definition of what our superannuation system is intended to do – and what it is not intended to do.
It is about increasing the number of Australians who are self-sufficient in retirement. It is not about estate planning. It is not about tax minimisation.
And I believe that this clarity will promote confidence in the system overall — providing a framework for evaluating future changes.
It is also why, after a period of consultation, there was strong support amongst the industry to do this — including, I’m very pleased to say, from ASFA.
During the process though there were, of course, areas of agreement on the wording of the objective. For instance, that the primary objective should be concise and supported by subsidiary objectives.
However, some stakeholders wanted the objective to go further — to include concepts like ‘adequacy’ or ‘comfort’ in retirement.
This included ASFA, and I understand and I do appreciate that view. But as David Murray, who headed the FSI, recently said, to include these very subjective words would "open the way to constant political interference".
Moreover, the Government is very aware that there is no consensus on how concepts such as ‘adequacy’, ‘comfort’ or even ‘dignified’ are understood, let alone measured.
That is why the Government has ultimately decided that a simple, unambiguous objective, without subjective concepts, is the best path forward whilst noting how important some of these other concepts are in the Bill’s explanatory memorandum.
Flexibility of the system
The other features of the package I want to discuss today relate to the new flexibility measures which will help people to save for their retirement.
Australians are a hardworking and aspirational people. And we do not want to put a handbrake on that aspiration when it comes to them saving for their retirement – far from it.
For instance, we know that people have very different work patterns.
Some might have multiple jobs and several careers across their lifetimes. Others might take breaks from work to look after children or to care for an elderly parent.
That is why, if it is to work for all Australians, superannuation must accommodate changes in how people interact with the system over the course of their lives.
The changes in the Government’s superannuation reform package will help to make the system more flexible, so it reflects the ebb and flow of people’s lives.
And it will do so in a number of ways.
The Government will allow a tax deduction for personal superannuation contributions that people make, regardless of their employment arrangements.
What this means is that individuals who earn income through both self-employment and as a wage earner — and those employees whose employers do not offer salary sacrificing arrangements — will now be able to take full advantage of their concessional cap contributions.
It means putting everyone, regardless of their employment arrangements, on a level playing field. Why should you be prevented from saving for your retirement because you own a small business but are also employed part-time? Or work for a business that does not offer salary sacrificing arrangements? That simply isn’t fair.
This flexibility measure alone could improve the superannuation balances of more than 800,000 Australians.
The Government is also very aware of the importance of allowing people to make catch-up concessional contributions when they have the ability to do so in circumstances where they have a low superannuation balance.
This includes women who may have taken time out of the workforce to raise children or to care for a family member.
And that is why we are providing people with balances of less than $500,000 – which was over 14 million individuals in 2013-14 – the opportunity to make additional ‘catch-up’ superannuation contributions concessionally throughout their working lives if they have unused concessional cap space from the previous five year period.
This will, of course, provide more flexibility for those with broken work patterns, irregular incomes or those who find their financial circumstances have changed later in life.
It is therefore disappointing that these measures have been opposed by the Labor Opposition.
The Government also will introduce the Low Income Superannuation Tax Offset to boost the superannuation savings of around 3.1 million low-income earners — including 1.9 million Australian women.
In addition, our new flexibility measures will encourage more people to make contributions to the superannuation fund of a low-income spouse, by giving them a tax offset as an incentive, which will help around 5,000 families.
These measures boost flexibility and build on other initiatives that support people’s ability to grow their superannuation savings.
While the package better targets the ability to make after-tax contributions to superannuation, individuals with total superannuation balances of up to $1.6 million will still be able to make after-tax contributions of $100,000 per year.
Furthermore, individuals under age 65 will be eligible to bring forward up to three years of non-concessional contributions.
These contributions can include amounts from a range of sources — for instance; take-home pay; inheritances; or a sale of a property, to name just a few.
It means Australians will be able to realise their aspiration to build their balances to the limit of the transfer balance cap if they have the capacity to do so.
Finally to provide more choice for people looking to secure their income in retirement, extending the earnings tax exemption to innovative income streams in the retirement phase, regardless of whether it is currently payable or deferred, will help remove barriers that are getting in the way of innovative new retirement income products, such as deferred lifetime annuities.
This, of course, is the first step in the development of comprehensive income products for retirement, better known to all of you as CIPRS.
Comprehensive income products for retirement (CIPRs)
This Government is focused on getting the policy settings right for the retirement phase of our world-class retirement income system. A big part of this will be ensuring that retirees can choose from range of retirement income solutions, such as those that help to manage longevity risk. That is why we will be consulting widely on the FSI’s recommendation to develop a new framework for CIPRs.
Because, as I mentioned earlier, last year’s Intergenerational Report showed that by 2055, the number of Australians aged 65 and over is projected to more than double, while one in every 1,000 people will be 100 years or older.
We want to give Australians more choice when it comes to managing their retirement income over their longer and healthier lifetimes. CIPRs will not only help individuals, they will also improve the efficiency of the retirement income system.
Now as I have mentioned, the Government took the first step to develop CIPRs in our superannuation package by removing barriers to innovation in retirement income stream products.
In the coming months we will consult on how new products will be treated under the Age Pension means test.
We will also be releasing a discussion paper this year that will explore the key policy issues for developing a framework for CIPRs. Of course, we acknowledge that this is a very complex policy area. It’s something we need to get right — and getting it right can only be done through consultation with a broad range of stakeholders, including all of you.
Given this, I anticipate having an extended consultation period so that every voice can be heard.
Future of superannuation
So that brings me to the last topic I wanted to cover today: the Government’s future priorities for superannuation.
Of course, the superannuation reform package now before the Parliament is a significant milestone — containing a range of measures that improve the equity, sustainability, flexibility and integrity of the superannuation system.
And the Government acknowledges that there is still a lot of work that needs to be done by the superannuation industry to implement these changes by the 1st of July next year.
But that said, this is not where the Government’s reform agenda does — or should — end. And there are a number of areas we will continue to focus on in the coming months and years.
Productivity Commission Review
One of those is the Government’s consideration of the superannuation system’s efficiency and competitiveness.
It is critically important that Australians have a superannuation system that is efficient and competitive — and one that is focused on improving after-fee returns for members.
Given the size and significance of the Australian superannuation system, even small improvements to the efficiency of the system can have a very large impact on the wellbeing of Australians in retirement.
That is why the Government has tasked the Productivity Commission to review this area.
This process is, as you are no doubt aware, currently underway and we expect a final report for stage 1 will be completed shortly, which will present criteria to assess the efficiency and competitiveness of the superannuation system.
A draft report for stage 2 will be released in the first half of 2017, outlining possible alternative models for a formal competitive process for allocating default fund members to products.
Finally, the Government intends to task the Commission to conduct a full review into the efficiency and competitiveness of the superannuation system — drawing on the criteria developed through stage 1 — following the full implementation of the MySuper reforms on the 1st of July 2017.
It is an important process, and long overdue — in fact, it will be the first comprehensive review assessing the efficiency and competitiveness of the entire system.
Progressing existing legislation
I also want to mention the Government’s intention to continue progressing superannuation legislation that was previously before the Parliament. This includes legislation:
- extending choice of fund arrangements;
- improving superannuation governance by requiring superannuation trustee boards to have a minimum of a third independent directors including an independent Chair; and
- increasing transparency by requiring superannuation funds to disclose information about their underlying assets and choice products to their members.
Taken together, these reforms will improve performance and confidence in the superannuation system, and allow Australians to save towards a better standard of living in retirement.
It is why we will remain strongly committed to these legislative reforms, which we introduced into the Parliament before the election.
Insurance in superannuation
Before I finish, I’d like to take this opportunity to share with you some thoughts on insurance provided to Australians through their superannuation fund.
Let me tell you, this is an area about which I receive many letters from my own constituents and from my colleagues in the Parliament.
It is fair to say there is a lot of confusion about how this part of the industry works. Especially amongst younger people who find their balance has been eroded by insurance premiums that they didn’t realise they were paying.
These are important issues because, as I noted earlier, the objective of superannuation is to provide income in retirement to substitute or supplement the Age Pension.
Trustees have an obligation to balance the offering of insurance inside superannuation with the potential erosion of member’s balances.
However, I understand from APRA that some funds have been slow to adequately tackle this through the implementation of appropriate policies and changes to insurance arrangements.
To this end, I recognise ASFA for its contribution to the cross-industry ‘Insurance in Superannuation Industry Working Group’.
I encourage this group to take these issues seriously and to consider how the industry can both take proactive steps to improve the current system and make practical recommendations to government on areas for regulatory reform, including through the Productivity Commission’s inquiry, which as I mentioned, is currently underway.
It is critical that this important part of the system is consistent with the overall objective of superannuation and is fit for the future.
So let me finish by again thanking you for the opportunity to speak today.
The Government is determined to do our bit to create a modern superannuation system — one that is sustainable, flexible and fair.
That is why we have embraced the challenges — demographic and fiscal — that are on the horizon, and we have welcomed them as opportunities.
And with your help and guidance, we are getting there.
1Source: ABS Australian Historical Population Statistics, 2008 (3105.0.65.001)
2Source: ABS Australian Historical Population Statistics 2008 (cat. no. 3105.0.65.001)