Speech to the Australian Institute of Superannuation Trustees' NSW State Conference, Sydney
April 19, 2010
Today I would like to consider the issue of trust in superannuation and particularly the role for Government as a trustee of the regulatory environment that superannuation trustees and the broader industry must operate within. The position of the Government regulation in superannuation is currently a hot topic. There is much debate and discussion in the industry with the number of reviews in process, Cooper and Henry being the most prominent.
It is the role of the Opposition to test and comment on the actions of the Government. This Government is developing a reputation for over-regulation and over-review. The Opposition listens carefully to the views of organisations such as the AIST in its position on issues and in the policy formulation process.
The idea of ‘trustee’ is an interesting concept. I understand trust laws originated in England in the 12th century at the time of the Crusades. Land ownership in England was based on the feudal system at the time. When a property owner left England to fight in the Crusades, that person needed someone to look after and run the estate whilst fighting. Participants in the Crusades developed a system whereby property would be conveyed to a representative, with all the benefits of ownership, with the understanding that absolute ownership would be conveyed back upon return.
Unfortunately, Crusaders would often return home to find that these early trustees refused to hand over the property and this led to the need for trust law in equity, which was developed to provide a legal remedy to the Crusaders whose trustee refused to give up property. Over time, a fiduciary duty was developed for trustee to ensure the beneficiary’s interests were looked after whilst the property was controlled by other hands. Trustees were eventually bound to avoid conflicts of interests that would prevent the property from being used for the benefit of someone other than the nominated beneficiary.
I note the contribution of Sir Edmund Burke into the formation of the trustee concept. He felt that trustees needed sufficient autonomy to act in favour of the beneficiary’s absolute interest, even if it means going against short term interests. Burke said – and I quote – that a trustee owes ‘his unbiased opinion, his mature judgment, and his enlightened conscience.’ Burke felt that a trustee betrays his judgment and duty if he or she ‘sacrificed’ it to the opinion of others, including the beneficiary.
So, a trustee is essentially a person or body with a suitable level of knowledge and understanding of an area of management, which is duty-bound to use that knowledge for the long-term benefit of the beneficiary, and who is required to avoid conflicts of interest.
The role of a Government is far more broad than a trustee. Government must balance public policy needs and the interests of literally millions of constituents and stakeholders. We can say that Government has endless conflicts of interest and responsible Government must know when to place one interest over another and it is rare that a decision is made to total agreement.
The Coalition has historically tried to reduce the Government’s ability to disadvantage the interests of individuals and groups. We have tried to empower people to make their own decisions by wherever possible reducing regulation and recognising that Government through over regulation can often cause more harm to people’s interests than good.
This position is informing my approach to superannuation, but it must be balanced with the pressures that are being placed on our taxpayer-funded retirement system from Australia’s ageing population.
I think policies to encouragement engagement and choice in superannuation also will help ease the pressure on our retirement system. The Government’s 2010 Intergeneration Report showed that our population will grow to 36 million in 2050 and that the number of working people for every person aged 65 or over will fall from the current number of 5, and will reach just 2.7 workers for every person over 65.
Australians will need to become more self sufficient in retirement because Australia’s tax system will not be able to cope with the extra number of retirees. You would be aware of the savings gap published by IFSA in February which shows that the amount of money between Australia’s retirement savings and what we actually need to continually cater for our retirement needs is $695 billion and growing.
Despite initial media fanfare in relation to Kevin Rudd support for a “Big Australia” he has retreated rapidly from supporting an Australia with over 35 million in 2050 given widespread community concern about how we can support a population of that magnitude and provide the infrastructure and services that will be required and the challenge of supporting that population in retirement. But for many workers, especially young Australians, retirement seems a lifetime away.
I remember graduating in Economics at the University of Newcastle in the class of 79. I and my class mates thought we had the world at our feet. We weren’t going to grow old. We weren’t going to go bald or grey, and we weren’t going to worry about retirement income and superannuation. Not much has changed today and Government has never really focused on catering retirement savings to younger people. Government as a trustee for planning our future must start doing more to encourage all Australians, but particularly young people to save in retirement.
Cooper Review
This is why I am concerned with the direction that the Cooper Review is taking. It doesn’t seem to be debating what Government should be doing – encouraging retirement savings – and it seems to be focusing on what Government should not be doing – changing the rules, creating uncertainty and catering for the disengaged and disfranchised.
Proposals leaked in relation to the Cooper Review last week are causing tremendous anxiety in the superannuation sector, which is already worried about what the regulatory environment will be in six or twelve months time. We are yet to see the proposals in detail, but I think that forcing superannuation funds to offer a no-choice product to Australians who are disengaged from their super is simply going to encourage apathy in superannuation, rather than encourage voluntary contributions and much needed engagement.
I agree with comments made by the AIST with regards to Cooper’s original choice architecture model. This review was supposedly about ‘renovating the superannuation house’, but it seems that Cooper is intent on bulldozing it and recasting the house in his own image.
One of the key reasons for the success of our superannuation industry has been the availability of choice and the flexible options available to Australian workers. The structure and development of the sector by the Hawke, Keating and Howard Governments has made us the envy of most other nations. Forcing superannuation funds to offer a no-frills default product to default workers who have made no election - which will offer no income insurance, limited disclosure, no real financial advice, and no-choice – is an idea that says to Australians “the Government will take your money and decide how it’s invested”. It also says “we know what is best for you even though we might not know your personal circumstances”.
One could argue that, in the absence of market failure, it is the role of markets to determine the products on offer. There is no demonstrated market failure in this case. We have an industry that generally services its clients well but we have a Government and a review which believes it knows best. Why would a worker want to engage with super when he or she will have no control over how it is invested and will not even be given information from the fund about what it is doing with the money?
The Coalition believes that the leaked proposals are overly prescriptive with regard to the investment choices of trustees. The Coalition thinks we should be encouraging innovating investment strategies from trustees, rather than limiting you to standard investment choices offering standard returns to disengaged members. This brings me to Phase Two of Cooper and the SuperStream proposals.
I think that these proposals are somewhat more constructive and reasonable, but there is still the question of Government’s correct role. As you would know, the proposals would enforce industry-wide standards to improve the quality of superannuation data passed from employer to trustee. We support measures to improve the usage of tax file numbers to find lost super and to consolidate accounts, but there are also concerns with some of the other recommendations Cooper has released.
There are some industry groups and companies who have worked with technology to create some very innovative products for the data transmission of superannuation. Whilst I think we need to move towards an entirely computer-based transfer system, I don’t think government should mandate standards and technology to the extent that Cooper suggests. For instance, I don’t think small employers and micro businesses should be penalised if they are unable to pay by computer, and if we are to create standards, we must ensure that the industry has the ability to create products outside the standards to encourage innovation and efficiency improvements.
The Government should not step on innovation in the industry, and there is a danger that this is what Cooper might ultimately achieve. But, without a clear direction being given by Minister Bowen regarding Labor’s direction on superannuation, it is difficult to even know whether Cooper’s proposals will be adopted or whether they will be disregarded as many in the sector are hoping.
Rudd Government’s Record
And it is hard to trust the Government when its approach to superannuation has actively discouraged superannuation savings. Kevin Rudd promised in the 2007 election campaign that he would not change superannuation “not one jot, one tiddle” was his promise.
The only two actual policies of any note that Labor have implemented in terms of superannuation have been attacks on adequacy. These have been the halving of the concessional contribution caps and temporary cuts to the co-contribution rate. As former Labor Prime Minister, Paul Keating recently said with regards to cuts on the concessional caps, and I quote “the government's given the message: don’t bother saving anymore. They should reverse it quickly. Shocking decision in my opinion; short-sighted; bad.” I don’t often agree with the former Labor leader, but superannuation is one area where we share some common understanding and commitment.
As you are aware, around 40,000 Australians have been caught out by the halving of the concessional contribution caps in the Federal Budget last year. These people are required to pay an effective marginal tax rate of up to 93 per cent, and this is despite the Government estimating that just 2,000 Australians would be caught out. I think that anyone inadvertently caught out by the change should be exempt from paying the higher tax rate. For instance, where a breach has occurred due to a change of employer or a different rate of pay, quite clearly this is an inadvertent breach and a punitive tax rate should not be applied.
Whilst the concessional contribution scheme operated under the same tax rules under the Coalition Government, the caps were at $50,000 for those under the age of 50 and $100,000 for those over 50. The vast majority of Australians simply do not earn enough to be caught out by these caps. Low and middle income earners are not being caught out by Labor’s changes and this wasn’t the case under the Coalition.
How can Rudd and his Government claim to be serious about engagement in super when their only two actions in the sector have been to dramatically punish those trying to independently save for their future?
The Coalition’s Direction
I’ve spoken about the areas where Government should get out of the way in reference to Labor and the Cooper Review. I’d finally like to talk about where we need to get involved and where the Coalition is headed in superannuation.
Firstly, we will reverse Labor’s cutbacks on concessional rates by re-designing concessional rates and what they hope to achieve. We think they should encourage an adequate level of super before penalising the worker. Like most in the sector, I think that superannuation contribution rates must be increased, but we will not engage Australians by telling them that we are going to take more of their money but refuse to give them an option or a say in how it is managed. This is why debates about the correct level of the superannuation guarantee need to be linked with how we can engage workers to actually agree to save more in superannuation.
We need to get workers wanting to save more in superannuation rather than simply taking their money and managing it for them. I’ve been looking at schemes available in the industry that are not just about increasing contributions by three or six per cent through soft compulsion measures, but encouraging employers to actively discuss options with workers and encourage engagement in superannuation by offering incentives and choice.
Once workers start thinking about these issues, they are likely to start saving more than the percentage recognised by soft compulsion because they start to see the benefits of superannuation. These schemes have had success rates in terms of numbers opting-in to the scheme of up to 80 per cent.
I was impressed by a survey released by the AIST in March which suggested that 61 per cent of workers would be willing to voluntary contribute to superannuation out of their wages in order to lift the superannuation contribution level to 12 per cent. If we can design the right program of encouragement, there is no reason why this percentage can’t rise.
The Coalition is committed to implementing choice in superannuation again. We will remove Labor’s mandatory default funds in modern awards and encourage both the employer and the employee to make a choice in fund. There is currently a lot of debate on fee levels, but fee percentages were decreasing under the Coalition’s policies of super choice, because they encouraged competition in the sector. Average fees were at 1.21 per cent of fund value in June 2008, and this was down from 1.37 per cent in 2002.
Labor’s default funds are reversing the competitive pressure on fees and performance. Why should a superannuation fund strive to excel when their client base is guaranteed by legislative instrument? Whilst I agree that we must get rid of unfair fees and commissions in the sector, we cannot discount the positive effect that competition has on efficient fee structures, and we are committed to bringing this competition back.
The Coalition is aiming for a super future where employees are engaged in their retirement savings. Where workers have a direct input to the amount of fees they pay, where employers and employees make real choices about superannuation options and actively decide to contribute to their own future. I will have more to say about these things in the lead up to the election, but the industry can be assured that we will take a light-touch approach on the wheel of super and will not be moving the regulatory goal posts on retirees during the game.
Conclusion
I started off my presentation by saying that the Government is trusted with providing direction for Australia’s retirement future. But its role requires it to know when to get involved with the sector and when to get out of the way.
We have an industry that is servicing this nation well. It is not a sector where there is market failure. It is an industry that should be the subject of light touch regulation.
The Labor Government simply do not know when to get involved and when to get out of the way. This is why we are having so many reviews and is why so many in the sector are anxious about the future.
The Coalition knows Government should get involved by encouraging and engaging workers to save more for retirement. We know that the sector needs maximum choice – to enable superannuants – and to encourage innovation in the industry. We know some things need strengthening and fees need addressing, but we also know that reform should not come at a risk to retirement sustainability.
Finally, we know that the industry wants a direct relationship with the Government, rather than being required to make endless submissions to endless reviews.
It has been an absolute pleasure discussing these issues with you today. I look forward to working with you in the lead up to the election and in a Coalition Government.
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