Back in June, I made a contribution on the Superannuation Legislation Amendment (Stronger Super) Bill, and I made certain important points that I will quickly revisit, because they go to the core of what the Gillard Labor government mean to achieve with our Stronger Super reform package.
We all know that compulsory retirement savings are a relatively recent phenomenon in this country; but, since their introduction by the Keating government in 1993, they have become a significant feature in our economic and social landscape. In my contribution earlier this year, I recognised that Australia has the world’s fourth largest pool of privately managed funds, with total savings of some $1.4 trillion. Of course, the goal of these funds is to maximise retirement savings for workers, and this was the purpose of the 2009 Cooper review of superannuation which ultimately led to the Stronger Super package of reforms. I would like to quickly recognise that it was my Tasmanian colleague—and Senator Brown’s Tasmanian colleague as well—the now-retired Senator Nick Sherry who initiated the Cooper review. I am sure Senator Brown joins me in acknowledging Senator Sherry’s passionate advocacy for superannuation for working Australians.
The bill I spoke on previously was about a component of the reforms, the SuperStream system, which made the process of everyday transactions in the super system easier, cheaper and faster. Stronger Super also includes reforms that will improve the governance and integrity of the superannuation system and will improve integrity and increase community confidence in the self-managed superannuation fund sector.
We know we have an ageing population and, consequently, an increasing need to fund the retirement savings of the next generation. That is why, in addition to the Stronger Super reforms, we have committed to increasing the compulsory employer super contribution from 9 to 12 per cent. This is a reform which will have a significant impact on the quality of retirement for Australian workers, and it is one that is desperately needed to support Australia’s ageing population.
One of the recommendations that came out of the Cooper review was to introduce a simple, low-cost default superannuation product called MySuper. Mr Jeremy Cooper, the Chair of the Super System Review, put it well in an article he wrote for the Australian Financial Review, published on 20 April 2010. He wrote about removing the ‘bells and whistles’ from super products. The Cooper review engaged Deloitte Actuaries and Consultants to provide an estimate of reasonable and achievable total costs for an average fund member with a $25,000 account balance assuming the adoption of the MySuper model. Nearly all of today’s default fund members are paying more than the fees projected by Deloitte. In fact, some members are paying twice these amounts.
The reality of the superannuation industry is that while having a choice of funds is good for competition, many fund members take little interest in their superannuation until they are nearing retirement. Investment options and fee structures for superannuation funds can be complex, and it is rare for fund members to seek expert advice in relation to their investment.
The Cooper review found that there are low levels of financial literacy regarding the superannuation sector, and the majority of Australians are disengaged from their super investments. The review did recognise that there are some Australians who are actively engaged with their superannuation investments. However, our compulsory superannuation system does not cater for the different levels of engagement, particularly for those fund members who do not choose their fund or take an active interest in their super. The MySuper product caters for those fund members, to stop them paying for the bells and whistles. Another way of putting is that we are helping people avoid paying for a Ferrari when all they want to do is drive a Commodore—or a Ford, depending on which car you prefer.
The Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2012 establishes the core framework for MySuper, through amendments to the Superannuation Guarantee (Administration) Act 1992 and the Superannuation Industry (Supervision) Act 1993. MySuper products will replace existing default investment options in default funds from 1 July 2013.
The bill requires the Australian Prudential Regulatory Authority, or APRA, to be satisfied that a MySuper product has some core characteristics—namely, that there is a single, diversified investment strategy, which can be a lifecycle investment approach; there is equal access to services for all members; the same process is used in allocating investment returns to members; no limits are placed on the contributions that a trustee of a MySuper product will accept; and a member cannot be transferred out of the MySuper product unless the member consents, or if it is required by a Commonwealth Law.
Trustees of superannuation funds will be required to be authorised by APRA for each MySuper product they wish to offer. APRA will be able to accept applications for MySuper products from 1 January next year. Trustees will be restricted to one MySuper product per fund; however, there are two exemptions to this rule. The branding goodwill exemption will allow merged superannuation funds in which there was material branding goodwill prior to the merger to maintain their existing brand names and continue offering different MySuper products. The large employer exemption will allow funds to offer a tailored MySuper product to employers that contribute to the fund for the benefit of at least 500 employees and associates to suit the needs of the particular workplace.
Funds will be required to charge all members the same set of fees for a MySuper product. However, some employers will be able to negotiate a discounted administration fee for their employees in the generic MySuper product. This will allow trustees to provide more flexibility to certain employers and will result in some members not being forced to pay higher fees as a result of the introduction of MySuper.
A government amendment to the bill responds to concerns raised by trustees who operate a lifecycle investment strategy. While these employees will be placed into a MySuper product by default, it is important to emphasise that we are not taking away choice for those employees who wish to exercise it. If any employee wishes to have more than the basic level of service that a MySuper product offers they simply need to make the choice that is available to them. And those who choose to exercise even more control over their superannuation can set up a self-managed superannuation fund.
MySuper products can now have different investment fees within a lifecycle investment strategy provided that APRA is satisfied that certain criteria are met. The criteria ensure that members invested in assets with lower investment costs do not cross-subsidise members invested in assets with higher investment costs because they are in different stages in the lifecycle. The product may charge no more than four investment fees through the lifecycle. The benefit of a lifecycle investment approach is that it varies the risk over different stages of employment. While employees in the early stages of their career may be willing to take on higher levels of risk for higher long-term returns, they may choose to reduce their risk as they approach retirement so they have greater security in their investment, particularly to insure against events such as the global financial crisis.
The bill also provides for a uniform fee structure. MySuper products will be restricted to charging fees that are described in the same way so that they can be directly compared. I would just like to mention that, when the Howard government introduced the ability for workers to choose their superannuation fund in 2005, very few workers exercised that choice because the fee structures were so complex that it was difficult to compare funds. Some of the fee disclosure documents were between 50 and 100 pages long. Competition between superannuation funds is a laudable aim, but, given the complexity of financial decisions it is important that consumers are able to make ready and easy comparisons between products. Only then can there be true competition between superannuation funds, and that is what a uniform fee structure between MySuper products will achieve.
Of course, the other important component of competition is the ability to compare products, so I am pleased that APRA will be collecting data on all MySuper products and making this information freely available by publishing it on its website.
I have summed up the elements of the MySuper reforms dealt with by this bill. There are some remaining elements of MySuper, including enhanced trustee duties, insurance arrangements, and disclosure, which will be dealt with in subsequent legislation. I note that the bill currently before the Senate was subject to an inquiry by the Joint Committee on Corporations and Financial Services. There were a number of peak organisations who submitted to the inquiry in support of the MySuper reforms and these included the Industry Super Network, the Financial Services Council and the Australian Chamber of Commerce and Industry—and, as we know, ACCI are not often great supporters of initiatives of this government.
I will just read a short statement from Industry Super Network’s submission, which I think highlights one of the shortcomings of the Howard government’s superannuation choice policy:
… superannuation, regrettably, does not operate like a competitive market where consumers make informed and active decisions to place their savings with the best performing funds … Without active engaged consumers there is little incentive for providers to strive to offer the best possible product delivering the best possible returns.
In the last few seconds that I have remaining I would just like to say that, in an economy like Australia’s where we have the wealth and therefore the means to provide what most Australians dream of after a life of hard work and paying taxes, a comfortable and dignified retirement is what everybody should be entitled to. This bill will help people to realise that outcome.