Speech to FSC/BT Political Breakfast

SPEECH TO THE FINANCIAL SERVICES COUNCIL / BT POLITICAL BREAKFAST

‘SUPERANNUATION FOR THE LONG TERM’

SYDNEY

TUESDAY, 5 APRIL 2016

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This land is traditionally owned by the Gadigal people of the Eora Nation, so I begin by acknowledging their elders and traditions.

I’d like to thank Sally Loane and the FSC for the invitation to speak and Sue Houghton from BT for the introduction. It was very generous of BT Financial to offer to host us here in Sydney today.

I also appreciate the time that Sally, Greg Cooper and colleagues from the FSC, and so many of you here today, have given me in recent months as we discuss a whole gamut of important issues like tax; insurance; super, and the broader financial system.

I want to focus on super today. But first, by way of introduction, let me just situate that in the context of Australia’s financial services industry more generally.

FINANCIAL SERVICES OVERVIEW

The second FSC/UBS State of the Industry Report provides a comprehensive summary of Australia’s financial services industry. It has become the go-to barometer of the sector, and I congratulate the FSC and UBS for producing it.

Australia’s financial services industry has $2.6 trillion in funds under management, the third-largest pool of contestable funds in the world – remarkable in the twelfth biggest economy with only the fifty-second biggest population.

For me, this means two things.

Firstly, that we need to get better at acknowledging the significance and contribution of the services sector in Australia’s broader economic story.

As the State of the Industry Report shows, the financial services industry alone employs 451,000 Australians, an increase of close to 39,000 jobs over the June 2015 quarter. 52 per cent of the employees in the industry are women. The broader services sector is the largest and fastest-growing in the Australian economy. It is the most important contributor to Australia’s employment growth which, according to the RBA, is what’s making up for weaker figures in other sectors. The lion’s share of job growth in the last three years has come from key services sectors – health and aged care, education and of course financial services. Science and technology have also contributed a large part of employment growth.

It’s the growth potential of the services sector both here and overseas which makes it so exciting. The University of Melbourne’s Asialink Centre Australian Jobs Future report projects that by 2030, Australia’s annual services exports to Asia alone could be worth $163 billion, which is an increase of more than 135 per cent from 2013. The report also shows that financial services make up the majority of the net foreign income of Australian companies, at 48 per cent.

That’s why Ross Gittins has written ‘don’t turn your nose up at services jobs’.

It is against this backdrop of growing significance and potential that I find the under-appreciation of services in Australia’s economic narrative so puzzling.

The services sector is fundamental to our transition away from old sources of economic growth to the new. While there’s always going to be an important role for mining, manufacturing and agriculture in the Australian economy, if we want to plan for the future sources of growth, services should be our focus.

The second, related point that flows from the significance of our financial sector is the need to ensure that the system is performing well for all Australians.

With these opportunities come big responsibilities.

We are all keenly aware of recent, well-publicised cases where the sector has not only underperformed but it has in fact let people down, in some quite egregious examples of misconduct.

I’m sure you all found these cases distressing, like I did, with reputational impacts on not only the companies involved, but the industry as a whole.

We do need to clean up life insurance so that no Australian is treated the way that the victims of recent life insurance cases have been treated.

For too long, the life insurance industry has had no code of conduct or code of practice to govern it. This must change as soon as possible.

The Code that is being drafted by the FSC and others needs to be robust and respond specifically to the industry shortcomings that were exposed recently.

We welcome the FSC’s recent announcement of a Steering Group for the Code which includes consumer advocacy group representatives.

Ultimately, it will be up to the industry to convince the public of the merits and the strength of the Code.

This will be vital to restore confidence in the life insurance industry, and the financial system more broadly.

The Australian financial sector cannot afford to be scarred by this kind of misconduct in the future.

SUPERANNUATION

I’d like to turn now to superannuation, the largest of the five areas in the financial services sector identified by the State of the Industry Report – the part that puts the 2 in $2.6 trillion.

As I have observed in other forums recently, it is perhaps unusual to see so much work happening in super and financial services policy in an election year.

Let me sketch out some of our plans and our thinking in this area for you by touching on a few of the key issues that I’m most concerned about.

Firstly, while our retirement income system is rated one of the best in the world, it still does not meet expectations for adequacy. Various sources of modelling have found that only around half of all retirees over the coming decades will retire with sufficient resources for a comfortable retirement.

Secondly, we have a gender gap in super. The Senate Committee on the Economic Security of Women in Retirement, led by Labor Senator Jenny McAllister, will be reporting to the Senate this month. Its preliminary findings show that Australian women retire with approximately half the level of retirement savings of men. In 2011-12, the average super balance at retirement was $105,000 for women and $197,000 for men – a gender gap of 46.6 per cent. I’m sure you will agree – this situation is unacceptable.

This goes to my third concern, the fairness of the system more broadly. You’d all be aware that the Financial System Inquiry found that the majority of super tax concessions accrue to the top fifth of income earners, and that these concessions are unlikely to significantly reduce future Age Pension spending. It’s clear that we need to make tax concessions in super more targeted, sustainable and fit-for-purpose.

A fourth issue is compliance. It is staggering that around 690,000 Australians, or one in every fifteen workers, are not being paid their super entitlements properly, or at all. Overall, the amount of super which is not paid each year is in the order of $2.6 billion annually. The Australian Taxation Office has described the non-payment of super by employers as “endemic.”

It has been good to see that the proposed watering down of penalties for non-compliance was shelved by the Government recently. But I believe that more needs to be done to ensure super entitlements are paid correctly and on-time.

I think there is broad industry acceptance of the need to address these issues I have set out. Of course, differences of opinion exist on the best way to achieve these ends.

Labor has been very clear about our policy to address some of the problems in the super tax system for almost a year now.

Our proposal has two main parts.

Firstly, income from super in retirement exceeding $75,000 per year would be taxed at 15 per cent, rather than the current rate of zero tax. Many of you will recall that earnings from super in retirement phase used to be taxed. This change is projected save $1.4 billion over the forward estimates.

And secondly, a Labor Government would reduce the phase-in point for the 30 per cent High Income Contribution Tax on super from $300,000 to $250,000. This change is projected to save $500 million over the forward estimates.

We think these two modest changes strike the right balance between fairness and sustainability. They maintain concessionality, while reducing government spending at the top of the income brackets.

I don’t intend to use the time today to focus on the current Government’s approach to super. But having been in the portfolio for six months now, there is a real sense to me that this Government has missed some opportunities to make a good system an excellent one, and in some cases they’ve been problem, not the solution.

When we have issues with adequacy, the Government has delayed super guarantee increases and has even floated freezing the SG permanently.

While the gender gap persists, the Government has abolished the Low Income Super Contribution, around two thirds of the benefits of which flow to women.

While compliance issues worsen, the Government has tried to weaken the penalties for non-compliant employers.

You see the point I’m making.

BUDGET PREVIEW

With the Budget looming closer on the horizon (and a week sooner than the Treasurer was expecting!) we now look ahead to see what comes next.

The Government has indicated that super is going to be an important part of the 2016 Budget.

We’ve heard a few thought bubbles from the Government already about Budget policy measures – like letting low income workers opt-out of super, imposing higher capital gains taxes on super fund investments and some fairly substantial changes to remove worker safeguards from the default fund model.

If you’re concerned that you don’t know what the Government is doing in superannuation – you’re not alone. It’s hard to read the signals, and I’m not sure the Government themselves have decided yet.

It’s well and truly time for them to put their cards on the table.

Labor will judge the super policy measures in Budget against three benchmarks:

Firstly, the Government must not exacerbate the adequacy issues that they have worsened in the previous Budgets. They need to outline a clear plan for more low and middle income workers to retire with adequate super balances.

Labor would be particularly concerned about any budget measure that disproportionately affects the retirement outcomes of low and middle income Australians. It is for these reasons that we opposed the changes to the Age Pension in 2015.

Secondly, the Government must address the regressive spending on tax concessions in the system, which is extremely costly to Government. This is an issue which is recognised across the board, from business to unions and specialist policy forums like the AFR’s Taxation Summit. Any change which stops short of addressing this issue is unacceptable to us.

Finally, the Government must outline a plan to lower the gender gap in super, especially after worsening the situation with the abolition of the LISC due to come into effect in 2017.

Addressing these three issues must be the key agenda for super policy-making in the years ahead and we will judge the Budget against them.

CERTAINTY AND STABILITY

When it comes to economic policy-making, the topic of certainty in super is one that is often brought up with me by stakeholder groups and industry representatives. I understand these concerns, especially given this Government’s shambolic approach to policy-making.

Stability shouldn’t be a reason to do nothing at all.

In my view stability is not the primary issue, it’s predictability.

The real problem is a lack of clarity about the direction of change in the super system.

That’s one reason we need to agree on an objective of superannuation to be enshrined in law, which Labor believes should be a bipartisan effort with genuine consultation from the Government.

Beyond that, we can do much more to make super policy more considered, thought-out and predictable.

I understand when people say that it can feel like super policy-making jumps from one issue to another without concern for the broader effects on confidence in the system. I know that the shifting goalposts of super policy-making can be problematic for people moving into retirement or saving for their retirement.

That’s why it’s unfortunate that Labor’s proposal for a Council of Superannuation Custodians does not get the consideration it deserves.

It was disappointing to see the Council abandoned by the Liberals very early on in their term, especially given the wide support for the concept across industry, including from the FSC in your submission to the consultation process.

Especially given all of the uncertainty at the moment, I think that the Council on Superannuation Custodians is a concept well worth reviving.

The idea behind the Council is for super policy to be developed, analysed and monitored by an independent body, outside of politics and outside of the electoral cycle. The Council would report every five years, to the Government of the day, on the key areas for reform in super.

In 2013, the then Labor Government commissioned a report to investigate the merits of the idea, and to establish how it would be established and funded. The report was authored by a panel of superannuation experts and chaired by Jeremy Cooper. The Report found that there would be considerable benefit in Australia having a body which advises Government on long-term super policy.

The Council would be governed by a Charter providing a set of principles to guide superannuation policy-making, including appropriate consideration and consultation. Not only would the Council use Treasury research, it would conduct its own, publish statistics and form its own conclusions about Treasury’s assumptions, models and conclusions.

What the proposal doesn’t mean is that Government exits the stage from superannuation. The Government would retain its role of developing and implementing policies which go to the legislature, and to refer super policy ideas and priorities to the Council for consideration and analysis.

Nor does it mean that we take all the politics out of super. This isn’t desirable. A portfolio area this important should be debated vigorously by political parties.

But the hope is that the Council would help to deliver big changes which are considered and consultative, rather than ad hoc and developed in the weeks prior to the Budget.

It would bring more voices – independent, consultative voices – into the room to develop and analyse super policy.

It makes it more difficult for any Government to justify myopic, short-term changes where they have not been considered by the Council. By contrast, it would make it easier to justify good policy with the weight of the Council’s support behind a Government.

Ultimately, Labor sees the Council of Superannuation Custodians as a means of striking the balance between the needs of industry and consumers for stability, and the imperative of Government to address areas of improvement in the system.

Labor remains committed to the principle of a Council like this to improve certainty in the super system, and I encourage you to get behind it.

CONCLUSION

In summary I think we can agree on three things:

• Firstly, that there is work to be done to improve super adequacy, reduce the future cost of the age pension and provide a dignified retirement to more Australians.

• Secondly, there’s room to improve the distributional impact of super tax concessions, to deliver better retirement savings outcomes for the majority of Australians, including those in lower and middle income groups.

• Thirdly, in an environment where most women outlive men but retire with little more than half of the superannuation, we need to address the severe problem of the gender divide in super.

In my broad discussions and consultation with more than 120 different stakeholders – industry funds, retail funds, consumer groups – these have been some dominant themes and areas of agreement.

It’s been disappointing that these key issues have not had the discussion or consideration they deserve from the Government.

I won’t pretend there aren’t some legitimate differences of approach between different players in the financial services industry. But as I have said – publicly and privately to many of you – there is no upside to descending in to what I call the ‘warring tribes’ approach of public policy making.

There is so much we all agree on and a constructive role for us all to play in making financial services and super work for more Australians, and that should be our focus.

Thanks again for the opportunity to speak with you today.

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