Address to Per Capita Reform Agenda Series on Superannuation Governance

06 June 2012

It is good to be here. It's interesting that it's in Maurice Blackburn. Not only an eminent law firm, but their founder was a very famous contributor to the labour movement and indeed politics over many years. He certainly believed you could win political debates by quality of argument, and by conviction and passion. So I guess it's no accident that they are sponsoring Per Capita and it's also nice to be here as a guest of Per Capita.

I think Per Capita provides a note of sanity in some of the political debates which go on here, because they believe in hope, they believe in evidence, they believe in innovation. You just have to look at some of the work that Tim has done on cost of living last year or David Hetherington in terms of the mining boom, the tax survey. Per Capita does good work.

And, I'd also be so bold to suggest that some of the implicit values of Per Capita are the same as those in the Labor government. That is, you don't just govern for the next 24 hours; you govern for the next, what Australia will be like in the next 20 and 30 years. What politics needs is forensic passion to talk about the future and not just the immediate.

I'd submit to you, before I get on to Superannuation that if you think that 20 year test of decision making is important. That idea, that if you could cycle forward 20 years and look back then over the previous 20 years. In 2032, which is not often spoken about, in 2032 what are the decisions being made by the Gillard Government in 2012, which will be standing in 20 years time and will be seen to have been appropriate policy, a policy for the time and a policy for that intervening 20 years.

And, you'd have to include superannuation, which I'll return to, lifting it 9 to 12, the national broadband network will stand the test of time, setting a price on carbon will stand the test of time, paid parental leave will stand the test of time, the national disability insurance scheme will stand the test of time, skills and training investment will stand the test of time, and indeed the Future of Financial Advice, which I'll briefly touch on, those reforms, will stand the test of time.

And it is important that we have debates about the future and about these areas, in particular, superannuation and financial services because as we age as a society and as we age as individuals it's so terribly important that if we are to enjoy a century of quality life, which is well on the cards for many in Australian society, those lives be full of meaning and prosperity. And, that's why savings policy is so fundamental at so many levels and superannuation policy too. A long life full of meaning for all Australians, and not just some.

And, indeed whilst there's debate periodically about superannuation in terms of market performance, I think we also need to make sure we've got public policy, which recognises the ups and downs of the market, but in the long term the markets have generally delivered outcomes for people and the question is do we have our public policy setting right so that all Australians can enjoy an equal share of the national wealth, which is created in Australia.

So, when we have a look at the issues of superannuation, and I know some would say that can't we just stop tinkering with the treatment of superannuation? Can't we just leave it alone? That is a great goal to have, and that is the goal of this Government. We also have to make sure that if we make the decision to leave the work-stations of drawing up legislation, we need to make sure that superannuation, when we do that, is adequate, it's equitable, it's transparent and it's innovative.

Adequacy is terribly important. Now low-income earners do have the pension as their minimal safety net. But what we've also looked at doing is improving the safety net in terms of superannuation. Again, when we talk about this, let's have a think about what we've done in terms of superannuation and the low-income.

Before this Government passed the laws we did in March of this year, people pay 15 per cent tax on their superannuation savings and there is something like 3.6 million Australians who earn less than $37,000 in Australia. What we've done for those 3.6 million Australians, 60% about 2.1 million of whom are women, is that we've passed a law that says that we will get rid of the tax. You just don't pay tax if you earn less than $37,000 a year.

Let me translate what that effectively means for people. At the moment people, if you earn less than $37,000 you are paying a tax rate, that's on your income tax, but at the same time on your compulsory savings you are paying the same tax rate. One of I think the fundamental pillars of the compact of superannuation is that if it's compulsory it is concessionally taxed. And then of course you add the benefits of dividend imputation into that.

But for people on less than $37,000 a year the tax concession was nonexistent. So we've managed to get rid of that and that's going to see nearly a billion dollars in tax concession flow to 3.6 million Australians.

Whilst there was some complaints in the budget, what we've done at the other end of the spectrum is introduce a note of progressivity in terms superannuation. Because what would happen is that it was a flat 15 percent tax on super for anyone regardless of their income. We've introduced in the last budget a measure which says if you earn more than $300,000 you'll pay 30 percent tax on your superannuation and not 15 per cent.

Because what we discovered is when we crunched the numbers is that 128,000 Australians are enjoying a billion dollars of tax concession and 3.6 million Australians weren't getting any tax concession at all.

So what we've managed to effectively do, and still if you earn more than $300,000, if you're in that happy group, you'll still get a tax concession because it's still lower than what you would pay in terms of income tax. What we've managed to do, is ensure that we are now providing more of the tax concession in superannuation to those who can best benefit from it.

And one shouldn't doubt the impact of an extra $500/$600, which is the value if you are on $35/$36,000 in tax concession. When you think about someone who is 25 or 30, that compounding effect of that amount each year plus the investment returns over the next 30/40 years. This is a significant transfer of wealth to people on low-incomes so they too can build nest eggs.

So equity is terribly important in what we do and we have tried to make the tax concessions fairer. So that's dealing with the issue of equity, but there is a broader issue of equity, which is really the headline issue of what we've done. We have increased superannuation from 9 to 12 per cent.

Superannuation isn't going to be the key savings mechanism if you are very poor. You are still going to rely on a strong pension system and a strong health care system. But, if you are earning some income, if you're earning a reasonable income during your working life, what we need to do is make sure that that superannuation, which is the strategy for the middle-class to be able to have retirement savings, that they in fact do have adequate savings.

People forget, and perhaps this is a lack of appreciation of history that before 1985 only people in the public sector and a few very strong unionised sectors or the very well off, had retirement savings. Only 40 in every 100 Australians had a retirement savings account of some sought.

After the union movement in negotiation with the then government forewent a 3 per cent pay rise to introduce universal compulsory savings. And then after the Hawke/Keating governments in 1992 working with Bill Kealty and others introduced laws, which would increase compulsory super from 3 to 9 per cent over the next 10 years have people began to accumulate reasonable balances.

I regret when you talk to people in their 50s and 60s that these changes we are talking about weren't made in 1965 and 1972. But nonetheless we have created a system, which is now, for the first time, beginning to mature.

What we've seen is that 9 per cent in the opinion of Treasurer Swan and the Government was simply not adequate to the task of ensuring people can retire with something approaching 65 percent of their pre-retirement average weekly earnings.

People can debate where you draw the line on adequacy, but I think that's not a bad test, about two thirds of what you earn, use to living on when you were working, is an adequate, I feel at least, retirement safety net.

So we've passed laws, again, in the teeth of conservative opposition, increasing superannuation from 9 to 12 per cent. They'll be in instalments from the first one from the middle of 2013, a quarter of percent, the next year, another quarter of percent, then the next 5 years a half a percent for each year thereafter rising to a total of 12 per cent by 2019.

These are modest increases, these are reasonable increases, they're are increases that can be absorbed in the value created by enterprises through the wage discussions and negotiations at the enterprise level.

What it does mean, put another way, if we want to put some zeros around what the 9 to 12 per cent means. It means our national savings pool will increase from where it currently is at about $1.4 trillion to in 2035 $6.2 trillion.

We are currently the fourth largest privately managed funds under management jurisdiction in the world. There are not a lot of things Australians come fourth in the world at. Hopefully, we'll do well at the Olympics. It is fair to say that because of our policy changes of 9 to 12 per cent we will move to third place in the world.

Now this is a distinct national advantage. This is as good as the emu and the kangaroo and it's part of our national, I believe emblem, as much as some of our iconic fauna and flora. But going 9 to 12 per cent was not done in cooperation with the opposition. They opposed it relentlessly at every step.

Increasing superannuation, as people in this room and by and large aware is not a tax on business, it is paid for through the creation in value at the enterprise level through the work of individuals and employees. And it is part of the overall remuneration increases which people see.

We have the experience of 1992 to 2002, which show that as superannuation contributions increase from 3 to 9 per cent, business profited as the share of GDP went up. Unit labour costs fell, we saw unemployment fall from 11 per cent to 6 per cent.  I'm not saying super contributed to all these outcomes, but it clearly didn't mitigate against those outcomes. And that's the story of superannuation and 9 to 12 per cent.

But, it's not only the case of it being equitable, it's not only a question of it being adequate, but I also think there is an important question that it is efficient and that the transaction costs are as efficient and as transparent as possible. That's why the Government has embarked on reforms called MySuper.

MySuper has been not without its debates, not without its late night negotiations between retail sector, the industry funds, the consumers, the unions, the accountants, the financial planners, there have been a lot of people who have been interested and of course the regulators at ASIC, APRA. The Government, fortunately, we didn't have to spend too much time with the opposition as they generally didn't support it, which is the only upside of their relentless negativity.

It's based on the assumption that when you have a large volume of transactions, which we do in superannuation. One number I saw, I can't remember the precise source, but about 100 million transactions annually in superannuation costing $3 billion. That's crazy. We feel that whilst the industry is coming to maturity we can put downward pressure on fees and charges within the superannuation industry. And, by and large the industry has bought this argument.

There has been plenty of patch preservation and trying to tweak something here or there, work out how we cover commissions on insurers for instance within in superannuation, special individualised life packages, insurance outside of superannuation, but fundamentally the industry has been cooperative in trying to decrease and coming to the party and decreasing the transaction costs of superannuation.

I think it is accepted after years of advocacy by Labor, by our people within superannuation, by industry funds, by some leaders within the retail sector, that it's good that we have compulsory superannuation, but it's important that people who get to service and be guardians and custodians and investors of the money of superannuation, people who are looking after it, in the beneficial interest of members until members retire - that they don't unduly charge people for the privilege on the way through.

So if the rain falls on the mountain, it's not taken off in too many places before it gets to the sea. So we don't have too many people clipping the ticket as industry insiders would use in their vernacular. So that's why MySuper is important, the idea that you can compare 80 different superannuation funds at a glance.

That once it's badged from MySuper, the low cost default fund status, people who are not taking day to day interest like some of those that basically have self-managed superannuation funds, but are willing to trust because of the size of their account or their pleased with the performance of the fund or they simply have other financial priorities and just expect someone to mind the money. We'll they shouldn't be charged for valet parking services when they are catching the train.

So we've put through legislation, we've got more legislation coming through. We want people to be able to from the beginning of July next year right through to the end of June 2017, when people MySuper compliant. We want it to be possible for any worker in any factory, or any hospital, or any school, or any office to be able to look at the performance of their fund and compare it on fees and charges with another fund.

Because as we know, it's been very easy in the past to make it hard to compare fund performance. And, again, this is perhaps over simplifying it, but we are trying to create a unit pricing approach to superannuation. So at a glance you can see this is the quantity, this is the price. From there, we've been attacked a little saying we're dumbing superannuation down, but I don't buy that. Because that's saying that consumers are dumb.

What we recognise in this government, is that we want to relieve the transaction pressure costs, the price of transactions, we want to force downward pressure on competition between funds.If someone wants to engage in a more active basis on their superannuation, looking for bells and whistles they can. But I don't think a customer is apathetic if they're trusting the people who are managing their money just to do their day job, for which they pay their hundred base points. I don't accept the proposition that people should be paying $160, $180 basis points for vanilla funds management. It just simply isn't right. 

So that's what we are doing with MySuper, of course something which is has received to be fair more support is SuperStream. This is the proposition that we can improve the electronic back office of superannuation. We had to work with small business to make sure they don't feel that they are compelled to use computers, if some of them still want to use paper based transactions office, they can. But I don't know in the long term if that is serving the business model of either the business, the fund or the member.

We do want to make it a lot easier to move to the technology platform, the common identification of funds, fund numbers so you can find your lost super. We think there are a lot of efficiencies to gain through supporting consolidation of small accounts, of lost accounts.

I think most Australians would be surprised to know there are more than 30 million superannuation accounts, which is not bad going considering there are 11.5 million people at work. You know that someone is making some money on fees there.

So we do want to make it easier for employees to recoup their various funds. You want to make it easy for Gen Y to not have to network too much to find their money, and Gen X even. I don't know what to do about the boomers. So SuperStream, consolidation, these are improving transparency and efficiency in Superannuation. But there has been another set of changes, which we've had to fight tooth and nail, which is the Future of Financial Advice reforms.

I have to say this about the opposition, that if I want to find someone to fight for vested interest, I'd ring them first. They have fought for financial planners with the same ferocity as Stalingrad fended for their part of the tractor factory. I'm reminded of Charlton Heston and the national rifle association from my cold dead hands, you know the reference to removing his guns.

Well from the Liberal Party, from my cold dead heads conflicted remuneration commission structures from financial planners. I mean there are some things that make people fight. We had 12 divisions on this issue, do we elect people in parliament to fight for the betterment of people of for conflicted remuneration commissions? I know the answer to that and everyone in the Labor Party and sitting on the cross-benches knew that.

So what we are able to do is make changes to the way in which financial advice is provided in Australian. And, at the same time we do it because we actually like financial advice. We believe in financial planning. We want to make it easier for accountants to provide financial advice, there are 40,000 of them. That's good competition, that's in every country town in Australia.

We found a lot of very good financial planners committed to the professionalization of their industry. We understand there are a lot of people working very hard in the wealth management industry to help their clients do well. Despite some of the propaganda from some of the more vigilantly sections, and the militias' elements of the financial planning brigade, we are pro financial planning in the government.

We have had excellent cooperation from everyone from Choice and consumer groups right through to the Financial Planners Association of Australia and others who are interested in change.

We were happy to work through compromises. We have an opt-in requirement, which means every two years, heaven forbid, someone's got to ask their client for a new mandate. Imagine if politics eliminated the opt-in provision in elections, won't happen of course. The Liberals want to have an opt-in every Saturday.

We also said that if the financial planning industry can work out a code, which ASIC ticks off you don't need opt in. Some on the left said this is giving in too much to the planners, but I'd say hold your horses. It is appropriate to get change through. I don't want to be someone at the end of a term in government that said we'll we had the best policies we just couldn't get the majority to vote for it.

What I think is with FOFA, we've managed to secure a ban on commissions for advisers who are working for two masters – the product provider and the client. I've met TRIO victims and they are unhappy with the Government because we can't compensate all of them.

But, I tell ya, financial planners receiving hefty commissions from products, which subsequently disappeared in the Caribbean and also trying to advise their consumers. I do wonder if TRIO would've happened if Joe Hockey had the courage we had when he did his FSR legislation in 2001.

Would TRIO of happened if the changes we put in place in 2012, were in place in 2001? Now, we'll never know, but I have a hunch that the professionalization of the financial planning industry is a good development for everyone, financial planners included.

So that's why we are working through efficiency and effectiveness. We've also talking about the governance of superannuation funds. Here are perhaps some of the working majority consensus have been able been able to build on other issues, hasn't been as forth coming as I would've liked. Those who know what I mean will understand what I mean.

But I do think governance of superannuation is fundamentally an important issue.  The equal representation model is very important. I think it is one of the strengths of many aspects of the industry superannuation funds, of corporate funds, of indeed government funds.

But I also think, we also believe the bill we passed through the House of Representatives last week is a step in the right direction, putting a specific new duty on individual superannuation fund trustees to act honestly in the member's interest first.

We've also given APRA the same powers in super that they enjoy in banking and insurance, credential making standards, which in my opinion closes the regulatory gap, which has existed for too long within superannuation.

We'll be seeking the legislation that's passed the House of Reps, whose requiring portfolio disclosure, so members actually know what assets are being invested in. In addition, we want to know what pay and remuneration of senior executives. None of this is about wanting to change what people do. But I just feel a more empowered, informed consumer base, creates better standards.

Now the future, and I think we might have to talk about governance further and I look forward to Per Capita's, and invite Per Capita to help make a contribution in this area. I do believe that boards need to be renewed on a regular basis, a 3 year cycle. That doesn't mean if you're a long standing director, not putting mandatory term limits. We do think you have to go back and make sure people get into a comfort zone where they never have to re-submit their tenor to the people whom they represent.

I do believe in Superannuation we can afford to be bolder on diversity. I see no problem with the superannuation industry declaring that in the next 10 years they move to 40 per cent women on boards, directors on boards, at least 40 percent. As someone pulled me up on this the other day, why not 50 per cent. I said get to 40 and then we can go to 50. But 40 per cent in the next 10 years I've either gender, to put it that way, I think is an appropriate target.

Superannuation should be reflective of the aspirations of its members. I don't buy the proposition that says, for instance if you look at the ASX top 200, there's about 10 per cent of the directors of the ASX top 200 are women. I just don't accept that 90 per cent of financial genius resides in men.

So I do think that part of the broader agenda for women in the community, for instance, the march of women for institutions of power, superannuation can afford to lead than oppose to follow. To be fair, Superannuation does a better job, it's north of 20 percent directors are women. I think that's in part because of the equal representation model, but not universally because of that.

I do think that boards need to be less defensive about talking about independents on boards. I think the role of having independent chairs needs to be seriously considered. There's some who say you have to have a set formula for independent employee and employer. I think we need to work through what we define as independent because I think that some of the simple comparisons between corporations and funds aren't equally made, they are not exactly mirror images of what they do and how they operate.

I certainly do think that no fund should be scared of a greater role of independent voice in its considerations, especially around audit and remuneration. Obviously, we need to make sure that directors meeting attendants and qualifications are spelt out as well.

There's one final thing I'd say which beyond the points about further work in governance. This really goes to innovation.  I had the opportunity to take a delegation to Israel very recently.

I have to ask myself why it is that Israel, or Finland, or Singapore, or Korea, do so much more innovation as a proportion of their economic activity, than we do in Australia. I accept the part of the Israeli innovation start up stories because they have 11 neighbours who periodically want to excise them from the map.

That probably puts you on the top of your game, but it's got to be more than that and it can't solely be that factor. I accept that they've got a defence establishment that is less proprietorial about technology and that the people who serve through it can go out into the wider community with that knowledge for commercial benefit.

But I get the impression also, and we don't necessarily want to replicate all aspects of that, but Finland's neighbours haven't invaded it since 1940, Korea ok that's a little awkward, Singapore though, again its neighbours haven't challenged its existence. So it can't just be, if you like, defence or national threat which inspires innovation. It seems to me this is where superannuation funds have led the way in the past in the development of innovation of asset classes have an opportunity.

Frequently, as Superannuation Minister, and you just have to talk to Bob Katter to get this next bit of advice. "Minister they should spend their superannuation on, you know, nation building or infrastructure or something new." Well the deal still has to be good for its members, it's not toy money. It's real money. So I've got no hassle with innovation, I've got no hassle with developing into infrastructure, but the deal still has to be a good deal.

So having put that caveat on it. I do wonder in Australia, in financial services, perhaps you can even take this point more broadly is do we have a fear of failure. Is it unacceptable in Australia to try something and fail. I think if you look sometimes at the coverage people get – yes it is. Whereas I think, whilst you wouldn't want a 90% failure rate, I think we should be a little bit more tolerant of failure than we are.

I do wonder sometimes if some of our fund managers are happy to stick to the index performing market base, you know top 200 listed equities and a bit afraid to step out. Now I get that the deal still has to be a good deal but I cannot believe that with the remarkable knowledge which resides in the minds of so many Australians that we are not capable of innovating more in the asset classes we invest in.

I mean if we are not careful what we call emerging markets will be emerged markets and we just won't be there. So be it, working in emerging markets, be it in R&D, in innovation start-ups, be it forming alliances with universities, be it creating funds of funds, which are willing to invest in R&D and take a 15 to 20 year horizon, which realistically is the time it takes to move from idea to commercialise an idea.

I just think in Australia with our funds under management we have a distinct national advantage, which frankly none of those other nations have. And, certainly Singapore is probably the closest analogy to be using some of that to invest boldly. It just seems to me that there is a debate to be had about superannuation. Not about backing in losses, but about backing in innovation, with a tolerance to trying things and keep trying them until they work.

And using the considerable knowledge, which resides in other silos of the Australian economy, be it higher education where sometimes promotion seems to be based on the number of academic papers published opposed to the number of start-ups and commercialisations. And, I'm not against the publication of academic papers being published, but I do respect and understand is that superannuation needs to be talking to our science, to our emerging markets.

I think that with our deep and liquid savings market, which can take a long term profile and investment, there are more opportunities in innovation than we've previously looked at.

But anyway, I know there is an eminent panel here to talk about ideas, it seems to me though that the superannuation story, to return to where I started, is one of those 20 year stories that if we were to convene in this room again, Maurice Blackburn will be in a 30 story building by then, but if we get to somewhere near the topfloor of Blackburn, Per Capita will probably be either be a prescribed group if the Abbott government been in too long, but, indeed whatever the circumstances whereby we came together in 20 years I genuinely believe along with those other list of items I went through, superannuation will be something they say that Gillard Government got something done which was good for the nation and we've seen the gift of what has happened go on for individuals, go on for companies, go on for the Australian economies and ideally even for Australian innovation.