27 November 2015
Speech - #2015006, 2015

Address to the Association of Superannuation Funds Of Australia (ASFA) Conference, Brisbane

Check against delivery

Good morning everyone, it's a great privilege to be here today.

I wish to start by acknowledging ASFA CEO Pauline Vamos and the important role ASFA plays in the superannuation industry.

This Government knows that it's important for us to have a conversation about superannuation and about the principles that will guide further policy.

ASFA understands this better than most.

So, today, let me talk a little bit more about the Government's approach to superannuation reform - where we have come from, where we are now; and where we are going.

Firstly, I want to go back to what super was set up to achieve. [CHART ONE]

The objectives of super when devised by Paul Keating and John Dawkins were varied but in essence, they can be distilled into three key aims.

The first was to promote better standards of living in retirement by supplementing or replacing the age pension. For instance, those who have small balances when they retire can use it to pay down a mortgage to ensure that they can live comfortably on the pension.

The second was to curb the rising cost of the Age Pension. In 2013-14 around 70 per cent of people of Age Pension age were receiving the Age Pension, and of these, 60 per cent received the full-rate pension. However, as Australia's superannuation system matures, many will retire with larger superannuation balances. As a result, the proportion of full-rate pensioners relative to part-rate pensioners is expected to decrease but the overall proportion of retirees receiving some amount of Age Pension is not projected to decline.

And finally, it was also about improving the national savings pool.

On this last point, I think it is fair to say that the objective has been achieved. Superannuation assets in this country now total about two trillion dollars.[1] This highlights that the system has grown and matured significantly.

Of course, there is still some maturation to come as more and more Australians contribute to superannuation from day one of their working life, but in terms of achieving a national savings pool, this aim has well and truly been met.

In relation to the first two objectives - these can now be merged by stating our objective on enabling Australians to achieve a better standard of living and independence in their retirement.

This brings me to my next point, which is where the Government wants to take superannuation going forward.

Our view is that a super system for the future needs to deliver:

  • greater choice;
  • stronger governance;
  • better information; and
  • more targeted incentives.

These are the Turnbull Government's core superannuation principles that will shape delivery of real outcomes for Australians who are saving for their retirement.

Greater choice in the superannuation system means funds are more competitive and downward pressure is placed on fees - a good outcome for consumers.

If funds are governed better, risk is reduced. The retirement savings of Australians are too important to allow superannuation to become a free lunch for vested interests in this country.

When consumers have better information, they make better choices, and will achieve better outcomes for their retirement.

When there are more targeted incentives in the super system, it means that it is fit for purpose in delivering what it is intended to achieve. If the incentives are right and the policy settings stable, Australians will have greater confidence in the system and more independence in their retirement.

Let me now turn to how we are intending to achieve these important outcomes that will set up our superannuation system for the future.

The Financial System Inquiry, led by David Murray, of course, was one of our key election commitments; it set the stage for significant reforms to superannuation and the broader financial system.

Throughout this process we have consulted with a wide range of stakeholders from various industries.

I would like to thank ASFA and its membership for your ongoing, considered, constructive and engaging contribution to this discussion.

The Murray Inquiry found that Australia's financial system is performing well. However, it also found that there is room for improvement and made recommendations to better position the Australian financial system for the future.

So, in response to the Inquiry, last month the Turnbull Government set out an agenda for improving Australia's financial system, which has five distinct strategic priorities. [CHART TWO]

I know this is of particular relevance to you here today.

As you know, for many Australians, superannuation is the largest financial asset after their homes. So the performance of the superannuation system has a direct bearing on an individual's retirement income.

We want as many Australians as possible to actively plan and save for their retirement, to harness the benefits that the superannuation system offers, and to work towards a self-funded retirement.

That's why the Government has committed to a number of significant superannuation reforms leading from the Financial System Inquiry. [CHART THREE]

Laying the foundation

Those reforms - which will be implemented in a staged approach - are all about laying the foundation for a superannuation system in which all Australians can have confidence.

The first relates to the governance of superannuation funds.

We've introduced legislation requiring a minimum of one-third independent directors for superannuation trustee boards and an independent chair for APRA regulated funds.

These changes, which are currently before the Senate, ensure that superannuation trustees are making decisions in the best interests of their members, which, in turn, improves the confidence Australians have in superannuation funds.

Second, the Government is enhancing the transparency and quality of information so members and employers can make more informed decisions when comparing funds.

We acknowledge the importance of Australians being empowered to make choices about how to invest their superannuation savings.

If we can help create a more informed superannuation market then we're also likely to see more competition between funds and greater value for customers

The Government will soon release exposure draft legislation for public consultation, outlining a revised portfolio holdings disclosure model and choice product dashboard regime. We are aiming to strike the right balance between minimising the compliance burden on superannuation funds, and enhancing transparency and comparability of information for consumers.

Third, we are enshrining the objective of superannuation in legislation because doing that will not only inspire confidence in the system, it will also provide a valuable yardstick against which to measure competing superannuation policy proposals.

On top of that, it also helps guide policy makers, industry and the broader community about the real purpose of superannuation.

Improving efficiency

Some of the changes coming out of the Financial System Inquiry focus on improving the efficiency of the superannuation system.

We are committed to improving competition in the default superannuation market.

Competition will drive greater efficiencies through downward pressure on fees, as well as improving the quality of products and services for members. The Government is committed to doing more to reduce fees and improve after-fee returns for members.

This provides protection for Australians who don't engage with their superannuation, as well as providing a sound investment option for members that do.

We also want to make sure that our regulatory framework is robust and suits the needs of the superannuation market. On top of that, we are commissioning the Productivity Commission to develop metrics that can assess the efficiency and competitiveness of the superannuation system, and to develop alternative models for allocating default fund members to products.

The Murray Inquiry noted the absence of strong consumer-driven competition in the default superannuation market, which has resulted in fees not falling by as much as would be expected given the increase in the scale of the system.

While MySuper has been a strong step in the right direction, more needs to be done to reduce fees and improve after-fee returns for fund members. The Government has accepted the Inquiry's recommendation that agreed to task the Productivity Commission to develop alternative models for allocating default fund members to products.

I invite all of you to participate in the Productivity Commission's consultation processes.

Following the full implementation of the MySuper reforms, we will then ask the Productivity Commission to review the superannuation system using the efficiency metrics.

Empowering individuals

Over the next few years, we are also rolling out reforms that help Australians become more engaged with their superannuation with a view to making better choices about how their funds are invested. We are doing this through three key measures.

The first is to allow more employees to choose the fund that receives their Superannuation Guarantee contributions.

It's staggering to think that there are currently around 2 million Australians with no choice here. We're talking about workers' savings - so it's critical to give them that choice.

This change means that some people who are currently forced to maintain more than one account can consolidate their accounts and avoid paying duplicate fees. [CHART FOUR]

Enabling this kind of choice will also benefit a significant proportion of women who may work multiple, casual jobs or dominate industries like retail where there may not be a choice of fund.

Secondly, we are supporting the development of retirement income products that combine flexibility with better protection against longevity as well as delivering higher retirement incomes and increased consumer choice.

To complement this work, the Government is continuing to remove impediments to retirement income product development.

Third, we're seeking to improve member engagement by way of better and more accessible information for consumers - for example, by including retirement income projections on member statements.

We will be rolling out reforms progressively over the next few years. At the moment, our focus is on governance reform, transparency and choice of fund. Next year, we'll shift that a little towards enshrining the objective of the superannuation system and the retirement phase of superannuation.

Let's now turn to the future of superannuation tax reform in Australia.

As everyone knows, the Government is carefully considering the tax treatment of superannuation as part of the Tax White Paper process.

In considering any changes to superannuation, it's important to remember that the tax treatment of superannuation has to be seen in the wider context of retirement income.

Above all else, however, we must remember superannuation belongs to those who have earned it over their working life. It is not my money, nor the Government's money. It is your money.

Understanding the purpose of superannuation is a vital part of any policy changes to the taxation of superannuation.

As I've already said, the Financial System Inquiry recommended that the primary objective of the superannuation system should be ‘To provide income in retirement to substitute or supplement the Age Pension'.

As indicated in our response to the Murray Inquiry, this is an excellent starting point for enshrining an objective in legislation.

But let me go broader than that.

Australia's superannuation system is now an integral part of the financial system.

Our superannuation system is a key part of our national savings - indeed, it was instrumental in sheltering us from some of the effects of the global financial crisis. And, although our superannuation system hasn't entirely matured, it already provides around 15 per cent of assets for people 65 and over and one-fifth of income for that age group.

This is set to rise as more people have the opportunity to contribute to superannuation throughout their whole working life. [CHART FIVE]

But we also need to balance this with recognition that superannuation is a cost to the Government.

This cost is increasing as the superannuation system matures, assets grow and the population ages.

Meanwhile, the age pension continues to provide an important safety net for Australians who do not have the ability to provide for their retirement futures.

So, let's have a look now at the areas that will guide further reforms.

It's important to remember that there can be conflicting principles. That's why striking the right balance is so crucial.

On one hand, we might want to reduce reliance on the age pension but, on the other, this comes at a cost to Government by way of providing tax concessions as an incentive to lock money away in super.

Other trade-offs include creating the right level of compulsion in the superannuation system while still giving individuals flexibility.

There are four key areas that are foremost in my mind when contemplating potential superannuation tax reforms: adequate retirement incomes; stability and certainty in the retirement phase; flexibility; and an efficient tax system and economy.

As I've noted previously, as a Government, we want to be very sure that superannuation tax concessions are appropriately targeted so that they secure an adequate retirement income for Australians.

But just what is adequate?

One way to approach this is by using replacement rates, where retirement income is given as a proportion of pre-retirement earnings.

We could do that by looking at the Mercer Global Pension Index, which suggests that a benchmark replacement rate of 70 per cent is a suitable rate of pre-retirement income for a median earner.

Treasury modelling indicates that a median income earner (that is, someone earning around $52,000 per annum) would achieve a net replacement rate of around 80 per cent under the current retirement income policy settings [CHART SIX].

The precise replacement rate or super fund balance that might be adequate is also dependent on a range of personal circumstances - whether someone owns their own home, where they own it and whether or not they have a chronic illness are just some of the factors that can influence such thinking.

So while governments deliver policy solutions to such issues as best they can, we need to recognise that there is no straightforward answer to the question of adequacy.

Let me make one thing very clear though: while superannuation should ensure adequate retirement incomes, it should not be seen as an open-ended savings vehicle for wealthy Australians to accumulate large balances in a tax-preferred environment, well in excess of what is required for an adequate retirement.

It is not an estate planning vehicle nor was it ever intended to be.

When Australians see the Government supporting the accumulation of enormous superannuation fund balances in a tax preferred, and, in retirement, a tax-free environment, the confidence in the system is significantly undermined.

The issue of confidence now brings me to my second area - the stability and certainty in the retirement phase.

I think we can all agree that this is vital for Australians approaching and enjoying their retirement.

Retirees have saved for their retirement under the existing rules across their working lives.

The Government acknowledges these efforts and sacrifices.

And yet we must also balance all that with the goal of shaping the superannuation system so it provides opportunity to all Australians.

Because until tax concessions and the superannuation system are perceived to strike the right balance, there'll continue to be calls for tinkering and more changes.

So policy stability and certainty in the superannuation system are definitely important.

Nonetheless, there also has to be room for some flexibility in the rules to take modern work patterns into account, such as people taking breaks from the workforce - including women with children and people with caring responsibilities - and then re-joining the workforce.

This is a key goal for the Government and we need to explore whether there are ways to make the superannuation system more responsive to individuals who wish to make catch-up contributions to counteract broken work patterns.

For example, rigidity of caps and other rules can make it difficult for some to improve super balances.

Once an adequate retirement income has been secured, there could also be more flexibility for individuals to choose between consumption opportunities during their working life and compulsory saving for retirement.

I'd now like to move to the final area: making sure we have an efficient tax system and economy.

Australia needs a tax system and economy that is properly targeted and sustainable. We can't make changes to the superannuation system if the costs of the changes are too high.

So an efficient tax system and economy may involve trade-offs with the other principles I mentioned.

For example, are the costs of providing flexibility to individuals with broken work patterns too high? Are the tax incentives that help people attain an adequate standard of living unsustainable for the economy?

We must also consider superannuation in the context of the broader economy.

Could the costs of providing superannuation tax concessions, for example, be directed elsewhere in the economy to make it work more efficiently? Could they, for instance, be directed to tax cuts elsewhere, to encourage participation, productivity and growth?

These are important questions for all of us as we think about the future of our superannuation system.

Ladies and gentlemen, this Government is committed to superannuation reform that creates a superannuation system that works for Australians.

We want to facilitate a conversation with all Australians so we all have a say in how we bring about reforms that ensure our superannuation system can provide higher standards of living for retirees.

But it is just one piece of a jigsaw puzzle that this Government will piece together to back Australians who want to work, save and invest.

And it is just one piece of the puzzle that enables us to deliver a superannuation system that is fit for purpose and delivers greater independence and certainty for Australians in retirement.

I want to see a superannuation system deliver greater choice, stronger governance, better information and more targeted incentives. And I look forward to working with you - the industry experts - to get there.

In closing, let me wish you all the best for the rest of this conference.


Chart Pack [PDF Download 692KB]

[1] https://www.superannuation.asn.au/resources/superannuation-statistics