The Growth Challenge

SPEECH TO THE 2016 SMSF ASSOCIATION NATIONAL CONFERENCE

THE GROWTH CHALLENGE

ADELAIDE

WEDNESDAY, 17 FEBRUARY 2016

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This is land traditionally owned by the Kaurna people, so I begin by acknowledging their elders and traditions. And also by thanking the SMSF Association for the invitation to speak here in Adelaide today to so many members and investors.

Your Association is well served by Andrea Slattery, and her colleagues. I wasn’t even an hour into my new job in the portfolio and there’s Andrea at the door, the very first stakeholder. I think this, and all the discussions we have had since, give a really good indication of her commitment to the interests of you all.

Let me start by saying that I believe that superannuation is not a zero-sum game. Ideally, strengthening one part of the system need not necessarily weaken the rest. If we want a truly world-class super system, then we need every component to be performing well – from small funds like yours, to industry funds, public sector funds and retail funds. Super shouldn’t be a game of favourites for any government.

I know that for many of you, the recent share market volatility is front of mind, and I’ll come to that in a minute. But first, some perspective.

Australia’s super system is doing pretty well overall. Well enough for the Mercer Global Pension Index to rank us in the top three globally in 2015. And well enough for the Association of Superannuation Funds of Australia to report a 6.5 per cent increase in super assets in the middle six months of last year.

As you will know, the small funds segment, which includes SMSFs, is the largest in the Australian economy. This segment is also among the fastest-growing. You account for 29 per cent of Australia’s $2 trillion super assets, and in the five years to June 2015, SMSF assets grew by $180 billion, or 44 per cent.

Within your funds, listed shares, followed by cash and term deposits and non-residential property represent the largest allocations of investments.

I don’t need to tell this audience about the pressures on these asset classes, nor do I need to remind many of you about the pressures on small business.

And I know you have spent a good part of today talking about technology, managing risk, and more. So I thought I’d do two things in my 15 minutes today: first, sketch out some of the economic backdrop to the challenges the super system faces; then touch on some of our policy choices and considerations.

SHAREMARKETS AND THE ECONOMY

The stock market experiencing its worst start to the year has been enough for Reserve Bank Governor, Glenn Stevens, to remark that financial markets are ‘dropping their bundle’. Just last week, the S&P/ASX 200 index was trading at almost exactly the same mark as February 2006. And the gains we had seen over the last two years have been wiped.

Of course, the ASX is not the only indicator of the performance of our markets.

But that is little consolation for many, especially people watching their investment in equities teetering or losing ground in the lead up to retirement. Super is a long term investment, of course, but again, cold comfort if you’re already relying on your investments or about to retire.

At its core, the challenge for superannuation trustees, of all types but especially those with the added responsibility of managing their own fund, is growth.

The current climate is characterised by constrained capital growth and high volatility. Towers Watson and Rice Warner warned in July last year that over the next five to ten years the annual gain generated by a typical balanced fund is likely to be about two percentage points lower than long-term return objectives.

Even those of us who are generally optimistic about Australia’s economic prospects accept the reality of deteriorating terms of trade. World demand for coal and iron ore is weaker, especially in China. Even if Australia’s export volumes are holding up, lower prices mean export values are projected to drop.

We have very low inflation worldwide. Interest rates around the world are low and in some cases falling. The rate has increased in the United States, but is unchanged and close to zero in the United Kingdom and Europe, and below zero in Japan.

In Australia, wages growth is very modest. We have some employment growth but pockets of very high unemployment and an overall unemployment rate hovering at or above GFC-levels.

We have low productivity growth. Mining investment is falling, and non-mining business investment is still hesitant.

Australia is one of many developed countries with an ageing society and high levels of average life expectancy. Ageing and longevity put pressure on growth when people move out of the workforce and need more health and aged care.

At the same time we are changing from the boost given by mining investment and high commodity prices to more rapid growth of services. In these service industries, human capital – training and education – are particularly important.

In this way, the super industry’s growth challenge is the Government’s growth challenge as well.

These uncertainties also go to the question of whether we need to get used to a new normal of very slow growth, the ‘secular stagnation’ discussed in much of today’s global economic analysis.

In countries across the world, the secular stagnation hypothesis has been used to explain a chronic excess of savings over investment, resulting in a prolonged period of negligible growth.

Analysing OECD data since the 1960s, Larry Summers, the leading voice of this school of thought, finds strong evidence that in most cases the level of GDP is lower five to ten years after a recession than any pre-recession forecast or trend would have predicted.

Since the global financial crisis, growth has remained persistently low. Global growth slowed to 2.4 per cent in 2015. The very high growth rates of our trading partners, China and India, have reduced. The World Bank expects growth to recover at a slower pace than previously envisioned, to a modest 2.9 per cent this year.

Leading economists have produced rigorous research in recent times to show that the unequal distribution of wealth is one of the reasons behind this ‘new normal’. As wealth is pooled in an increasingly small section of society, the capacity for the majority to fuel the consumption necessary for economic growth has diminished.

Persistent low wages growth is an illustration of this.

If governments can’t rely on monetary policy to get the motor of growth to turn over, then we need to pull other policy levers. What can governments realistically do to stimulate growth when low interest rates are not having the desired effect?

If we don’t find new sources of growth, if businesses and governments don’t play the long game when it comes to investment, it’s the retirees of today and tomorrow who are going to shoulder the burden. It’s your balances which will suffer the consequences if we don’t position for long term growth.

This means making long term investments in assets like infrastructure which deliver good levels of growth over time, not peaks of growth in pockets of time.

With interest rates so low, and money so cheap, Government should also be open to the option of borrowing to make these investments under the appropriate priority-setting and governance arrangements like those Labor has already announced.

POLICY CHOICES

With growth sluggish and markets volatile, the government needs to focus on infrastructure and other areas where it can make a meaningful, positive impact.

Many factors are at play here and Government is only one of those. So two things we should focus on are broader policy setting to encourage growth and then more specifically the component parts, including the super system.

Even those who wouldn’t necessarily sign up to the views of Summers and the secular stagnation school would agree that we need to address some of the structural issues in the global economy, like the sluggish growth I’ve mentioned.

In Australia too, governments need to focus on where they can actually help achieve the right kind of inclusive, job-creating growth. Not just any jobs, but decent jobs, which support people’s aspirations.

That’s why we need to invest much more in education, to create a workforce of people with the skills for a future economy. Not for old jobs, merely refashioned. But for new types of work that will require uniquely human capabilities.

Not enough students are leaving education with the tools to succeed in the rapidly-evolving, technological nature of future employment. This is how we risk ending up with an economy where machines work for the best-educated and against the rest.

That is why the Labor Party regards investment in education as a litmus test for how prepared Australia is for the future economy and why we’ve prioritised the Your Child. Our Future. plan in our policy offering.

There are other ways Government can encourage growth which time doesn’t permit me to go into today. Industry policy based on research, not firm subsidies; better access to new markets in Asia; a tax system which is simpler and less regressive; and investing in cheaper sources of renewable energy are some examples.

Of course, our enormous pool of super capital plays a role in feeding economic growth.

Super has been largely responsible for the growth in Australia’s financial services and insurance industry. According to ASFA, super accounts for 45 per cent of the finance sector in Australia. This is part of Australia’s proud story of policy innovation.

In November last year I, along with Labor leader Bill Shorten and a number of other Labor members and senators, attended an Innovation Investment Partnership convened by my colleague Ed Husic. Andrea was there too, along with participants from a range of industries.

It confirmed that besides tackling skills shortages, regulatory and procurement reform, more needs to be done to improve capital flows to support Australia’s start-ups. Tapping into Australia’s $2 trillion savings pool is one way to do this.

A balanced view of super acknowledges the growth-potential of our savings and also puts people at the centre of the system, ensuring that it is structured to provide the best possible returns to members. This is a particular challenge given the volatility of global markets, and it affects all parts of the system.

What does it mean to put people at the centre of super?

We want to make sure that there are safeguards and filters in place to ensure that whatever super fund people end up with is the best for them. As the Association has said, it’s crucial that people have enough information, and the right information, about their super investments to make informed choices.

Of course, information itself is not always enough to make a good investment decision. That is why we are pleased to work with the Government to raise the standards of professional advisers.

We want to ensure that people are saving enough to give them a decent standard of living across longer lifespans. A good level of savings gives people the best chance of a decent standard of living in retirement. This is why the superannuation guarantee needs to go to 12 per cent over time, not frozen as it has been three times, and with a permanent freeze flagged in the press.

Workers in part-time and casual work, especially women, need to get a better deal from the super system and we are working on affordable ways to achieve that at a time when the Low Income Super Contribution is being abolished.

Labor wants to tax super more fairly.

Our proposal is that people with fund earnings above $75,000 be taxed at the same rate as earnings in the accumulation phase. The measure will only affect approximately 60,000 account holders with super balances in excess of $1.5 million. We’ll also lower the threshold on the High Income Superannuation Charge from $300,000 per annum to $250,000.

I look forward to talking with you in the coming months about all of our proposals.

Let me say again in finishing up that it is not my job, nor is it the Assistant Treasurer’s, to promote one sector of superannuation over another.

A well-functioning system creates wealth and security in old age for all sections of Australian society. I want best practice and the best outcomes for people, no matter which part of the system they inhabit.

In that context I acknowledge again the SMSF Association and I thank you again for the invitation to speak to you all in such numbers.

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