Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Putting You in the Professional Spotlight
Keynote Address to
Self-Managed Super Fund Professionals' Association of Australia (SPAA)
13 March 2009
Thank you for that introduction and thank you to SPAA – the Self-Managed Superannuation Fund Professionals’ Association of Australia – for inviting me to address your conference.
With Parliament sitting all this week it proved difficult to get to Adelaide before this morning but I am grateful to SPAA for finding me time to speak.
I always enjoy coming to the beautiful city of Adelaide where I have strong family connections.
I would like to make a few introductory comments about SPAA.
I’d like to publicly acknowledge the advocacy role being played by Andrea Slattery, your chief executive.
Through Andrea, SPAA has been prominent in voicing advice on policy direction and policy inputs, at this very challenging time for the markets, for the economy and for superannuation.
Andrea sits on the peak national superannuation advisory council the Prime Minister and I have established, and I strongly value her input in that critical forum.
On SPAA as an organisation, I would again extend my congratulations.
I read recently that your membership has risen 50%, from 1,000 to 1,500, in the 12-month period of calendar year 2008. That in itself is quite an achievement and it positions SPAA to continue its role as the peak voice for the self-managed sector going forward.
I understand that your Chairman, Graeme Colley, speaking here this week, has indicated that SPAA will further gear-up for involvement in Parliamentary and other policy inquiries. Again, I am encouraged by this.
Shortly, I want to address several SMSF-specific issues – most of which I think we are in broad agreement – and also touch on some wider superannuation sector issues, but before I do I think it’s important to put the last year in context.
We are all only too well aware that the world is in dire financial and economic straits.
We are in fact heading into a global recession with global growth forecasts slashed for this year.
Internationally, growth is expected to fall to the lowest level since World War II.
Indeed, just this week, the IMF Managing Director, Dominique Strauss-Kahn, warned that the world was gripped by what he and the Fund called a “Great Recession”.
Yesterday’s job data here in Australia and last week’s national accounts show yet again that we cannot be and are not immune to this global reality.
As the Prime Minister has said, as of the end of 2008, seventeen OECD economies had already entered recession: the US, Japan, Germany, the UK, Italy, Spain, the Netherlands, Singapore, Hong Kong, Sweden, Denmark, Finland, Hungary, Portugal, Turkey, Ireland and New Zealand.
Let’s be very clear – this is the worst international economic environment Australia has faced since the 1930s, and 2009 is shaping up as an extremely challenging year.
But because of all this – now is not the time to sit and wait.
It’s the time to act, and to do so decisively.
It would be irresponsible not to act swiftly and decisively to cushion Australia from the worst impacts of the global recession.
That’s why, on 13 February, the Australian Parliament passed the Rudd Government’s $42 billion Nation Building and Jobs Plan to support jobs and to invest in future long-term economic growth.
The Treasurer recently described the Plan as “temporary investment with lasting gains”.
I think this is an apt description.
Treasury estimates that the Nation Building and Jobs Plan will support up to 90,000 jobs in 2008-09 and 2009-10. And, the initiatives in the Nation Building and Jobs Plan will boost economic growth by about ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.
The $42 billion Nation Building and Jobs Plan builds on the stimulus measures already implemented by the Rudd Government to support economic activity and jobs.
With so much at stake, this is clearly no time for indecisiveness or delays. In fact, the IMF recently urged governments around the world to get on with implementing their stimulus packages.
And, that’s exactly what the Rudd Government is doing.
We are rolling up our sleeves, and getting on with the job of supporting households and businesses — and above all, supporting jobs.
We are providing more than $28 billion in much-needed infrastructure support in the form of upgrading and repairing school buildings, constructing new homes, and providing free ceiling insulation.
The package has seen – this week – the commencement of the first round of about $12 billion in one-off cash bonuses being paid to low and middle-income families and workers to further stimulate the economy.
The second wave, the tax bonus for working Australians, will be delivered from April 6.
All of this builds on the first stimulus package, the Economic Security Strategy, our support for the financial system in the form of the bank deposit guarantee and wholesale funding guarantee, our boost in funds for the securitisation market through the Australian Office of Financial Management, our local government support package and our infrastructure funding packages.
The global financial crisis and superannuation
No aspect of the nation’s economy is immune from this crisis and the global financial downturn has had a significant and immediate impact on superannuation fund balances.
I share and understand the very real concern Australians have about recent volatility in superannuation savings.
Despite this, our superannuation system remains robust, sufficiently liquid and very well-regulated by APRA.
The latest available data from the Australian Prudential Regulation Authority indicates that, as at September 2008, superannuation fund assets totalled $1.15 trillion.
While we cannot shy away from the effects of the recent financial market turbulence, we must remember that superannuation is a long-term investment.
I know that’s a tough call, but all the figures back it up.
In a mature system, the average amount of time people will spend in the super system is around 35-40 years before they retire, and about 20 years after they retire.
Short-term fluctuations are unavoidable.
Performance over 5 to 10-year periods is a better measure of a fund’s performance, as it measures the fund’s performance over a market cycle, including rising, falling and flat markets.
One dollar invested in superannuation ten years ago would today be worth about $1.74.
The median annual return in the 10 years to December was 5.22 per cent.
And, the nominal value of a $1 post‑tax contribution to superannuation invested on 30 June 1988 is estimated to have grown to $4.85 by 31 January 2009.
We also have to remember that people approaching, or in retirement, will still have, on average, 15-20 years in the financial system, giving markets sufficient time to recover, which will positively impact on their balance.
And history tells us that markets will recover over time.
It is vital that superannuation members understand this long-term focus.
While we have a robust superannuation system by world standards, some important challenges lie ahead for the sector.
In addressing those challenges, the key priority for the Government remains constant — and is best captured in a set of principles I have previous outlined.
I think there is value in repeating them here.
- Adequacy - achieving higher retirement incomes delivered over time through a combination of the age pension plus superannuation set against a clear goal.
- Simplicity - each fund member should be able to understand at least the general features of how the system works and the particular features of their own fund.
- Safety and confidence - features to ensure people maintain confidence that contributions will be made, that their future income is not at risk, and that they can project the income available to them on retirement; I draw a distinction between the risk from theft and fraud and market-based volatility or risk in a defined contribution system.
- Choice and competition - the provision of a level of choice so that individuals can have input into selecting superannuation options that best suit their particular needs for retirement, whether it be a particular fund, investment category, lump sum or pension/annuity, or age of retirement.
- Affordability - superannuation should be a cost effective savings vehicle with operating costs kept to a minimum.
- Improved incentives and equity - superannuation should be taxed in a fair and equitable manner, and the Government has committed to examining new ways to improve incentives to save, consistent with a responsible fiscal policy.
With these principles firmly in mind we have taken a range of steps in support of our superannuants.
Support for self-funded retirees
The Government is acutely aware of problems being faced by up to 950,000 self funded retirees due to the global economic crisis.
So we have taken a range of actions.
Minimum drawdown relief
Many retirees with account-based pensions have expressed concerns that meeting the required minimum drawdown amount for 2008‑09 will mean having to sell assets and realise losses in a depressed market.
In response, the Government changed the rules that require retirees to make a minimum drawdown from their superannuation capital each year. Specifically, the Government has suspended the minimum drawdown requirement for account-based pensions for the second half of 2008-09.
This will happen through a 50 per cent reduction in the minimum payment amount for 2008/09.
Towards the end of this financial year, the Government will consider the minimum drawdown rules for 2009/10, taking into account the market conditions.
Regulations that support this measure will be considered by the Governor General in Executive Council today.
Economic Security Strategy payments
The Government extended lump sum payments as part of its Economic Security Strategy to holders of the Commonwealth Seniors Health Card as well as age pensioners.
These one-off payments of $1,400 to singles and $2,100 to couples were made from 8 December 2008.
Nation Building and Jobs Plan tax bonus
Many self funded retirees will also be eligible for the tax bonus under the Nation Building and Jobs Plan if they paid tax in the 2007/ 08 financial year.
This is because all taxpayers will be eligible for the tax bonus under the Nation Building and Jobs Plan if they paid tax in the 2007/08 financial year (after taking into account available tax offsets and imputation credits), and if they had a taxable income in the 2007/08 financial year of $100,000 or less.
Some 290,000 of the 950,000 self funded retirees will likely receive a Tax Bonus of up to $900 in respect of their 2007-08 income.
Approximately 230, 000 of these self funded retirees rely exclusively on income from private sources and will get a tax bonus.
In addition to direct payments, the Government has also taken decisive action to ensure the age pension safety net reflects the impact of the global economic downturn on asset values and earnings.
To this end, the Government has twice acted to reduce the upper deeming rate that applies to bank deposits and other financial assets, once in November 2008 and again in January 2009.
This is because deeming rates must accurately reflect returns available to retirees on financial assets so their private income can be assessed fairly for the age pension.
- From 20 March 2009, the upper deeming rate will decrease from 4 per cent to 3 per cent for the balance of financial investments over $41,000 for single pensioners or $68,200 for a couple.
- The lower deeming rate will decrease from 3 per cent to 2 per cent for balances up to those amounts.
The Government also assists self-funded retirees through the tax system, in particular through the senior Australians tax offset (SATO).
When combined with the low income tax offset, the SATO ensures that eligible single older Australians can have income up to $28,867 in 2008-09 without paying income tax or the Medicare levy.
As part of the Government’s plan to reduce income taxes, this will increase to $29,867 in 2009-10 and to $30,685 in 2010-11.
Similarly, a senior Australian who is a member of a couple can earn up to $24,680 in 2008-09 without paying income tax or the Medicare levy. This threshold will increase to $25,680 in 2009-10 and $26,680 in 2010-11.
Self Managed Superannuation Funds
I would now like to turn to the SMSF sector.
As you would know, whilst SMSFs are the smallest superannuation sector by number of member accounts, by assets, SMSFs are now the single largest sector in our superannuation system.
At your last conference in Brisbane, I indicated that the number of SMSFs had grown from 97,000 in 1995 to 370,000 in 2008.
Well today there are almost 400,000 SMSFs, and I expect upon the publication of the next data set, we will have in excess of that number.
These are critical facts that I keep in mind as a policy-maker – these figures, this growth, have implications for all other sectors in our system and indeed for the entire retirement incomes system.
As I mentioned earlier, superannuation has certainly taken a hit as the global financial crisis sweeps through our economy.
Interestingly, however there is, as yet, no available data on the long-term investment performance of the SMSF sector. This is a vital weakness in the data set.
It is true that SMSFs are a clear manifestation of choice in our superannuation system, and just as in the sectors regulated by the Australian Prudential Regulation Authority, APRA, I think you’ll agree well-informed choice is the best type of choice.
Accordingly, I have asked the Australian Taxation Office, which regulates the sector, to start collecting this information. This will commence using this financial year’s data.
Over time, this will become a highly valuable long-term data series.
Once this is in place, and with the publication of data on the long- term performance of APRA-regulated funds later this year, we will, for the first time, have long-term performance data across the whole system in the public domain.
As you would know, shortly after coming to office, the Government commenced an industry consultation on issues associated with the SMSF sector.
This consultation focused on a set of broad governance issues including trustee responsibilities and knowledge; costs and efficiencies; issues of competition and compliance with the regulatory framework.
Those of you who were here on Wednesday would have heard the Shadow Minister ask about the status of that review. Indeed, he continued to perpetuate his latest fiction about a mysterious list of 23 reviews I am alleged to be conducting, citing this as one on his list.
I would challenge the Shadow Minister to put his facts on the table and provide us all with his supposed “list”.
Our hard-working and dedicated Treasury officials and I are indeed busy, but I think as we consider these important and sensitive issues, we should remain in the world of fact rather than fiction.
But on the SMSF work, I would say the following.
Since we conducted our consultation, the last 12 months have produced a radical shift in the global and local financial environment.
Is the Shadow Minister’s position that I should have progressed reforms in complete isolation of those events?
That the Government should have drawn a line after the initial consultation and disregarded the following events, irrespective of how they have impacted on your critically important sector?
I would say two things – first, if that’s his position it’s a good thing he is the Shadow Minister; and second, those of you who know me and know my approach to good policy, know that I don’t operate in an unconsidered manner.
Instead, what we’ve been doing is conducting an intensive and ongoing dialogue with your sector about the way forward.
For example, Treasury and I continue to work closely on the broad themes of the consultation and indeed on possible reforms with key superannuation stakeholders, including of course SPAA and in particular with Andrea and Graeme.
Your leadership at SPAA have clearly understood that what we need to do is to place any regulatory reforms of the SMSF sector in the context of a rapidly evolving financial environment.
In this vein, your leadership at SPAA have been working with Government on the practical details of the measures for improving the sustainability and effectiveness of the SMSF sector.
I would like to again publicly thank them for that work and the valuable representation that they continue to provide.
As Minister, I may not be out making public mileage with these issues, but I can assure you that the work proceeds.
This Government will get this work right and we’ll do it in an appropriate rather than expedient timeframe.
Having said that I would like to make a few remarks about the likely direction of any reform in this area, and then conclude with a few comments on broader work underway to modernise our national retirement incomes system.
I do continue to be concerned about several features of the SMSF sector, many of which have actually grown more acute as the global financial crisis has hit our shores.
SMSFs do continue to be unregulated in a prudential sense. Of course, the ATO works hard at its allocated role but that role is based on compliance only.
Compliance is assessed on very small samples, sometimes as low as 2-3%.
In addition, I am concerned that Anti-Money Laundering measures as yet do not apply to SMSFs and I continue to work with my Ministerial colleagues to address this.
Now, on many fronts, as I have always said, trustee education is the key baseline for reform.
The case for trustee education is a compelling one.
While the majority of existing trustees are doing a reasonable job, a minority have very little idea of their legally set-down responsibilities. I know that this is of concern to you all.
As you know, this has been demonstrated in the last ATO survey of new SMSF trustees which found that more than 30% of trustees could not provide an explanation of the sole purpose test and 15% did not have an investment strategy.
With superannuation being compulsory, supported by significant tax concessions and with the Government responsible (in the form of age pensions) for those for whom the SMSF experience may turn sour, I am sure you can see my interest.
But here I would again acknowledge what SPAA has been doing – the focus on the role of education in the development of your policy positions is critical.
I would today clearly lay down the challenge – the SMSF sector needs to move forward with its thinking on the role of education of trustees, and indeed it must be for all trustees.
I also remain very concerned at system-safety level about the use of debt instruments in SMSFs.
In addition, we now see such products as Contracts for Difference, or CFDs, making an appearance.
I am genuinely concerned about the role of such products.
This issue is directly linked to the other key reform considerations – trustee education and knowledge – do trustees understand the risks?
It’s linked to a lack of prudential regulation – what risks are posed to the SMSF system as a whole?
And to the retirement incomes system in full (what are the implications for other sectors and for the demand for pensions if things go wrong?)
Again, earlier this week you saw the Shadow Minister attempt to inject some fear into this sector by telling you he had it on some kind of “good authority” that minimum account balances were around the corner for SMSFs.
While I am not proposing to get bogged down in a backwards and forwards debate on this issue, I can say that the Government has no such position.
Again, I refer to the financial and economic times in which we find ourselves.
The reputation of the SMSF sector as a safe, growing, cost-effective part of our superannuation system rests on those taking out SMSFs being appropriate for the product.
I would encourage SPAA and the sector more broadly to confront this matter going forward.
For example, in discussions with accounting bodies last week, I raised the potential for including in professional standards the high costs of operation for lower balance funds, particularly given the research from ASIC that I referred to earlier.
Is it sustainable, is it desirable?
In the interests of your sector’s long-term future and reputation, I strongly encourage you to examine the issue closely.
Broad retirement income systems work
As I have said, the Australian superannuation system is strong, stable and continues to deliver. But there is still scope for improvement.
Looking further ahead, the Government understands the need for a tax and transfer payments system that is simpler, rewards hard work and provides security for retirees.
That is why the Government has established an independent review into Australia’s future tax system. The superannuation and retirement income systems are under the microscope of the review.
The review panel released a retirement income consultation paper in December 2008. This paper focussed on five possible objectives for the retirement income system.
- The system should be broad and adequate
- The system should also be acceptable to individuals
- The system should be robust
- The system should be simple and approachable
- Finally, the system should also be sustainable.
Looking back to my earlier Principles, I can say I broadly accept the Review’s objectives.
The review panel has been receiving submissions on these questions and I know SPAA recently met with the Panel.
The Panel is currently preparing its first report into elements of the retirement income system which will be delivered to government by the end of March. This is so the government can consider the findings in conjunction with Dr Harmer’s review of pension adequacy.
Cost and efficiency
Our superannuation industry is maturing and now is the time to take a close look at its operation, structure and cost.
We need to consider these issues across all industry sectors — corporate, public sector, industry and retail, as well as the self‑managed superannuation fund sector.
I highlighted a set of issues last June and asked each sector to consider the issues, not just in another sector, but in their own and to provide effective and comprehensive proposals to modernise practice and maximise long term returns in the best interests of the member. I and the Government believe that every opportunity should be given to all interest groups, particularly during this sensitive period for financial markets, to provide their own proposed solutions before finalising policy.
And any examination should be conducted in a thorough, open, transparent and highly engaged manner.
I like to call this “renovating the house”.
Just as I have today reminded the SMSF sector to consider education and other issues, I continue to urge all parties across all sectors to give these matters careful consideration and to work together to maximise the retirement incomes of hard-working Australians.
Today I have outlined the Government’s priorities for superannuation and in particular SMSFs.
The Government is committed to ensuring that our superannuation system is safe, stable and efficient.
The year ahead will be a tough one – no-one can deny that – but if can continue to work together on sensible, well-timed reforms, I am sure that what people will come to remember are the strengths of our system during these difficult times.