Thursday, 14 February 2019
Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018; Second Reading
I rise today to speak on the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018. It is a very special honour and pleasure for me to speak about superannuation because I do feel like I come to this place with a level of both experience and authority in this particular area. I worked in superannuation for almost all of my professional career before coming to the Senate, both in retail and industry superannuation funds, which I think gives me quite a unique perspective on superannuation and its intricacies, complexities and vagaries.
On top of that, I have another interesting circumstance, which is that I started my professional career in 1992, which, of course, is the first year that superannuation was introduced in Australia. So I have actually had superannuation throughout my entire career. Yet the superannuation industry—all $2.7 trillion of it—is not yet a mature industry, because it has had that step-up in the percentage of superannuation guarantee between 1992 and where it is now. It started at two per cent, and now it's at 9.5 per cent. But it really won't be until people who are starting work now, and are getting their 9.5 per cent superannuation guarantee now, retire in 45 or so years time that, I think, is probably when we can actually call this industry mature. That's an extraordinary assertion, because with $2.7 trillion under management, that actually makes superannuation larger than Australia's GDP. It's an extraordinary claim and one of the reasons why superannuation in Australia potentially is considered the envy of the world. Our superannuation system is often called the envy of the world. I would actually go so far as to say that that is not, in fact, the case. Yes, it is a very important industry. Yes, it is quite a successful one. But I think we need to go back to superannuation's origins to understand exactly how it came about.
I heard Senator O'Neill say that this was a Labor introduction. Absolutely, it was a Labor introduction. In fact, if you cast your mind back to 1992, it was Paul Keating who initiated compulsory superannuation in Australia. But don't think that it came from an entirely altruistic place. At that stage the budget was in terrible strife, yet the union movement was putting undue pressure on the Labor Party to give a pay rise to unions, particularly to public sector unions. There was an unholy accord, for want of a better expression, between Bill Kelty and Paul Keating back in about 1991 when they decided to introduce compulsory superannuation, rather than a pay rise, for the unionised workforces. Two per cent would be added to people's salaries, but it would be withheld until they retired. That way people could get a pay rise, but it wasn't inflationary, so it didn't necessarily have a detrimental effect on the economy. Everybody was happy. That was, everybody except for the employers who had to pay that two per cent. Of course, it was very hard for employers. They weren't going to take money out of people's salaries to withhold and quarantine for 40 years, so they had to pay an additional two per cent.
That compulsory superannuation system actually put a lot of people out of work. That's ancient history. However, we should understand that the legacies of superannuation have actually been compounded and bandaided over so many decades that what we have now is a highly imperfect system. It is certainly not the envy of the world, as we like to say, but it is compulsory. So what we say now is that essentially we are going to quarantine nearly $1 in $10 of everybody's salaries. The government say we have to. If the government say that we are going to compulsorily take away nearly $1 in $10 out of your salaries, we as a government are also then morally bound to ensure your money is invested properly. It's not just properly; it has to be invested cost-efficiently and productively.
The objective of superannuation is to save enough so that you have an income in retirement that can either supplement or substitute the age pension. That is the objective of superannuation, according to David Murray, the author of the Financial System Inquiry. So, with that objective in mind, what can we do to ensure that Australians' money is saved and invested cost-efficiently, appropriately and productively? We saw just recently the Productivity Commission come out with some extraordinarily compelling evidence about the structural flaws in our superannuation system that are costing members dearly. They are: entrenched underperforming funds; unintended multiple accounts; unreasonable free structures; and unnecessary insurance. Just by eliminating those entrenched underperformers and multiple accounts, a 55-year-old today could earn an extra $79,000 in their retirement. That's an amazing amount—$79,000. That's potentially one or two years of tax-free income for a retiree. More importantly, though, if we just got rid of the multiple accounts, someone under 25 today could earn an additional half a million dollars towards their retirement. That would certainly make for a far more comfortable retirement.
This is evidence enough that reform is absolutely imperative. However, what we have seen in commentary from both industry and Labor is that any reform is not without its ideological hurdles as we make our way through the chicanes of vested interest. Inevitably, there is vested interest in the superannuation industry, particularly from the Labor Party. The Labor Party is in an unholy alliance with the union movement and the industry superannuation movement. So it's not ever going to be something easy to reform.
However, from a government perspective, the more people that we have who can adequately fund themselves in retirement, the lower the tax burden will be on future generations. This is particularly important. If I were 25 years old today and I heard that if my money were effectively invested I could have half a million dollars towards my retirement and, if the system were more efficient, I would have a lower tax burden throughout my working life, I would think that was an absolute no-brainer. However, there is a problem. That is that it's very rare to find a 25-year-old who has their eyes on their retirement. We have something called financial myopia—a short-sightedness where we can't imagine what we will be like at that age. So it's hard to make the most optimal decision at that age for life ahead. For that reason, it is the responsibility of government to be, essentially, the custodian of future generations' standard of living. That's why we take that role particularly seriously. That's why we include a fair tax system that respects hard work and policies that create growth and opportunities in competition and choice for the future.
But we also have to have an honest discussion about who the superannuation system serves. The most important person it serves is the superannuant, the investor, the end user. It's not the providers. It's not the industry superannuation funds that I used to work for or the retail funds. It's no-one else. It is the end user we have to stand up for.
Let's have a look at this package that the government has put together on protecting our superannuation. This important package came out of considerable consultation with industry, and it also went through the Senate Economics Legislation Committee, of which I am chair. I can walk you through some of the discussions and recommendations that that committee had. The most important aspects of this legislation are threefold. Before I get to that, can I say that the Protecting Your Super package will result in millions of Australians saving billions of dollars in fees and charges and a reduction of unnecessarily duplicated accounts. It will ultimately mean more money in retirement for those members. In particular, though, the package will benefit women, who on average retire with a significantly lower balance than men. Hopefully the plan of the game is to make sure that it is much easier for women to build their superannuation.
Let me take you through a couple of issues that have come up in the discussions about this particular bill. There was some concern about removing superannuation for under 25s. This is a sensible idea. The problem at the moment is that accounts for under-25s are being eaten up by insurance premiums. Poor under-25s, particularly those who have multiple accounts. They have life insurance and TPD insurance and income protection insurance, but the premiums that get charged every year eat up their low balances. So by the time they go to consolidate their balances there's hardly any superannuation. It takes longer for them to save superannuation because of the eating away by fees and charges, particularly insurance premiums.
What we've done is we've said that we will make insurance and superannuation optional—opt in—for people under 25. They don't have to have it. If they feel they need it they can have it, but on a default basis they don't get it automatically. There was some concern that there are a number of under-25s that are potentially in dangerous occupations. That was where some of the push-back came. But those individuals can always opt in if they are in a dangerous occupation. It's up to the superannuation fund to speak to their members and ask them whether they think that insurance is appropriate for them. Deciding what a dangerous occupation is is quite an interesting decision in itself. If you're a window cleaner, is that a dangerous occupation? It's not if you're only doing windows at ground level, but if you're doing windows on the 25th floor it is. If you are a construction worker, is that a dangerous occupation? Potentially it is, but it depends what type of construction work you do. Who is it up to to decide what is a dangerous occupation and what isn't? There are also some dangerous occupations that are white-collar, as well, so that does make for a level of confusion.
Senator Ruston interjecting—
For instance a politician, I hear my colleague saying. The most important thing is that it's not up to us to define what a dangerous occupation is; it's up to the individual to work out whether they need insurance or not. At the moment, though, what is happening is that young people, because it is a group insurance policy, are subsidising the insurance of older Australians. There's nothing fair about that.
The other thing this legislation does is limit fees in superannuation. At the moment, if you change superannuation funds—if you decide to move from one fund to another—there might be exit fees on the way through. More importantly, there are exorbitant administration fees charged all over superannuation. This legislation limits the extent of fees charged on superannuation, to make sure your savings are being managed cost-effectively and most productively.
Of course, the other thing—I think this is the most important part—is to get rid of those multiple accounts. We want to see consolidation of accounts throughout the entire industry. Apparently there are literally millions of inactive or duplicate accounts out there. As the Productivity Commission has pointed out, to get rid of those multiple accounts would make the industry so much more productive. There is a disincentive, however, for the funds themselves to get rid of multiple accounts. If you are charging fees on each one of those accounts, the more accounts you have as a provider, the more money you make, which is why we've had to drag the industry kicking and screaming along to the reforms to encourage them to get rid of multiple accounts. I have worked for one firm, AustralianSuper, which actually got rid of its own multiple accounts. It has so many customers. It had some of its own customers with multiple accounts. That's terrific. That's fine. But what we want to do is get rid of multiple accounts across the industry. So, if you've got an AustralianSuper account, a Hostplus account and a Colonial First State account, the ATO will do the consolidation for you. It will identify those funds that are multiple and it will consolidate them on your behalf so that you don't have any inactive funds being whittled away by unnecessary fees and charges. Those are the three main objectives of this legislation.
According to the latest data, the changes that we're making to insurance will allow an estimated five million Australians who have paid a combined $3 billion in insurance premiums an opportunity to choose whether they will be covered rather than paying for it by default. That is particularly important. You can see how many Australians this legislation affects. Why have we picked the age of 25 for insurance rather than the age of 21 or not under 21? The change to default insurance to new members under 25 was chosen as an appropriate threshold for opt-in insurance based on the claims data. We went to the insurers and found out who was claiming for what. It showed that only one per cent of members aged 25 or under claimed on their insurance within a given year—one per cent. There is an actuarial firm called Rice Warner, and they have done some analysis on this as well. Their analysis has shown that some members under the age of 25 are paying over 300 per cent of their true premium for death, life insurance and TPD cover. In addition, the Productivity Commission has noted in its superannuation report that people under 25 generally have far less need for insurance. This is reflected in the decision, as I think I've told you, of AustralianSuper's superannuation fund—my old employer, who have got rid of their own multiple accounts—to make insurance opt-in for under 25s from November last year.
Accounts that aren't receiving superannuation contributions are at the most risk of erosion from insurance premiums. These are called 'inactive accounts'. Inactive accounts can be eroded all the way down to zero at the moment simply for premiums for cover that members don't know they have or can't actually claim on. Not receiving the contributions suggests that the member has either a duplicate account or isn't, in fact, working, which has implications for insurance eligibility. So you can find that, even though you've been paying for this insurance all this time, if something goes wrong, you can't claim on it anyway. What an extraordinary waste of money, particularly for the young. Why should members continue to pay indefinitely for insurance that they can't use? Moreover, the insurance measures for inactive accounts ensure that the consolidation regime that we have planned for the ATO is more effective and can be realised immediately.
When money is held by the ATO, it doesn't necessarily accrue interest. There has been some criticism that, potentially throughout the consolidation process, members might be worse off as opposed to keeping it in their superannuation funds where they would earn a return. That's not necessarily so. The ATO is quite clearly the best body placed to protect and consolidate loss in unplanned superannuation, because, unlike other industry participants, it has absolutely no vested interest in the process. It has no interest other than to ensure that people are reunited with their own money as quickly as possible. It should be quite a quick process. The ATO estimates that once it receives an amount for which its data matching has identified an inactive account that can receive the amount, it would take less than a month to transfer it from one inactive superannuation fund to an active one. In addition to that, the government has amended the bill to require the ATO to reunite amounts where possible within 28 days—so, under a month. While the money is held with the ATO, the important issue is that it's not charged fees and it will also receive indexation at CPI levels. That's a safeguard that wouldn't be bestowed on an amount that was in a fund, where, in fact, it could go backwards. The Productivity Commission's report into superannuation found that fees and insurance premiums charged by funds on unintended multiple accounts are the key driver to the erosion of funds and of retirement incomes.
I should also mention the inactivity period. What is the definition of inactivity? It is in fact 16 months. We originally said it was going to be 13 months. The original period of 13 months was chosen to provide a balance between the amount of time that account balances are subject to erosion through fees while held up in multiple rather than consolidated accounts. The Productivity Commission's recommendation and the Superannuation Voluntary Code of Practice both feature 13 months of inactivity; however, the government has heard concerns that 13 months might not help women on maternity leave, in particular. Multiple accounts are a widespread problem; many Australians are shocked to find their nest-egg eroded. This bill will most of all benefit young members, members with low balances, low income earners and members with multiple accounts. That is in the best interests of so many Australians. We must never forget that the most important foundation stone of superannuation is that your superannuation is in fact your money.