Address by Senator Andrew Bragg | Liberal Senator for New South Wales
Rice Warner Symposium | Monday 12 August 2019
Thank you, I am delighted to address this conference as a newly elected Senator for New South Wales.
I acknowledge the contribution of Michael Rice to public policy in Australia. Michael is fiercely independent. He has helped us to better understand the challenges of our aging population.
This conference is looking at the key challenges facing policymakers and the super industry which include:
- Fewer taxpayers relative to retirees;
- Increasing longevity;
- Ballooning fiscal pressures; and
- Keeping the nation competitive.
Having spent almost a decade inside the financial sector, I have a rudimentary understanding of these challenges.
Our Government is using the budget and our broader economic policies to address the challenges. But there is more to do and the super sector can help our country to meet the challenges.
The Morrison Government was re-elected in May because of our superior economic record: we are about to get back to surplus, we have cut taxes, concluded trade deals and have taken tough decisions… such as improving the sustainability of the super system.
I am proud to be a new member of a Government which has achieved a significant fiscal consolidation.
We have a large agenda in this space which is driven predominately through the implementation of the recommendations of the Royal Commission into Banks, Superannuation and the Financial Industry.
There are also recommendations falling out of the Productivity Commission’s review into superannuation.
Today I offer you three reflections from my time in the industry, and now as an elected representative.
The first reflection is the super sector is the only part of our economy which receives guaranteed growth – and this has distorted the focus of the sector.
Super funds take almost 10 per cent of everyone’s salaries and wages each and every year. The door opens and 9.5 per cent of everyone else’s money falls in.
This has bred a culture of introspection and navel gazing. The lack of retail and wholesale competition has engendered a lack of dynamism, efficiency and member service improvements.
The slew of reviews into the sector under both Coalition and Labor Governments confirm this point.
There is no doubt super has underwritten the growth in the financial sector.
Since 1992, the financial services sector has grown from 3 percent to 9.5 percent of the nation's Gross Value Added.
This represents an annualised industry growth rate of 4.6 percent since the super guarantee was introduced.
Globally, this is the fourth largest pool of private pensions, but has also spurned enormous custody, asset management and insurance sectors.
These are good industries to have - especially as we look to export more services to Asia.
But it worries me that too few in the industry are working on initiatives to deliver on the primary purpose of super.
Whilst we can have a technical debate, the primary purpose of super must be to reduce public sector costs from an aging population and to improve quality of life in retirement.
We want the industry focused on how to achieve this. Member focused, consumer focused, client focused.
Yet so much industry activity is focused on stopping positive changes, on regulation or Canberra. Or all of the above!
The Bill presently before Parliament to stop life insurance premiums from draining retirement savings is a great example.
Compulsory super provides significant resources to lobby groups to propagate myths.
Half a dozen major lobby groups are constantly decamped at Parliament House Canberra.
The common themes espoused by the groups include:
- More super is always good
- More super is the solution to everything
- The system is good as it is
The recent Senate Inquiry into a life insurance in super bill provides an example of how the current system fails to advocate for members.
Of the 46 Inquiry submissions, 70 per cent argue the system is basically working well.
These respondents benefit from the current system and fail to address the fact that unnecessary insurance drains $1.9 billion from super each year.
The leadership opportunity for this industry is to engage in our forthcoming retirement review with a consumer focus. It is time to jettison the industry focus.
To promote a focus on member outcomes, I proposed two questions in my First Speech to Parliament:
- Will more super reduce future pension costs to Government? If so, by how much?
- How much better would retirement standards be if we had more super?
I pose these questions in a constructive way. I believe these questions will help the industry respond to future challenges such as the Intergenerational Report.
I do not believe childish responses from the industry such as accusing people of being “anti vaxxers” will help superannuation’s cause.
It looks arrogant, self-serving and entitled. The industry would be far better investing in modelling and policy options than name calling.
- A culture war
The second reflection is the culture of introspection has created a culture war.
Super funds are clearly focused on internal constituencies - often financial sector conglomerates or unions.
The funds participation in civil wars has been a prominent feature of significant advertising campaigns.
I spent part of my pre-Parliamentary career participating in this civil war.
I can now see how unproductive this activity was compared with focusing on outcomes for savers.
There remain many questions on fund transparency but these are secondary compared to outcomes for savers.
My advice for the industry is to set the civil war aside because the effectiveness of the whole system is the only thing that matters to policy makers.
As I outlined in my First Speech to Parliament:
“We do not stand for any business or any vested interest.
As Menzies himself said, we stand for the Forgotten People – the great Australian middle class. They were (in his words) ‘the salary earners, shopkeepers, skilled artisans, professional men and women.’
We support enterprise. We believe in markets. And we believe in some regulation of industry. We believe markets must serve the public interest.”
I have no interest in participating in the super culture war.
Certainly the electors of New South Wales expect that I take my own advice and focus on the interests of the electorate as a whole.
Accordingly, the whole industry, not industry sectors, should always be the focus of members of Parliament.
The forgotten people have no interest in wars between highly superannuated tribes. I reflected on this deeply when I was drafting my First Speech. I read Deakin, Menzies and Theodore Roosevelt.
We on the centre-right have a fine tradition of being the workers’ champion - a culture war would undermine our capacity to be that champion.
Ultimately, the class war is a fool’s war. The idea that super funds represented by industry wide labels are homogenous is actually untrue. There is little in common between the largest and smallest industry or retail fund.
That is a discussion for another day but the fact remains, if the culture war continues; only the sector suffers.
- Domination of the economy
The third (more obvious) reflection is that super is on the way to dominate the economy.
The total value of assets in Australia’s superannuation system is $2.8 trillion, which is about 150 percent of GDP.
The current pool of superannuation funds under management is roughly 1.4 times the size of Australian equities market capitalisation.
Superannuation funds under management are expected to reach $5.0 trillion by 2028, or 167 percent of GDP in that year.
Rice Warner research also expects Australian super funds will own 20 percent of all listed Australian companies by 2034.
This places a huge burden on a sector which has often struggled to act maturely.
Certainly during my time at the Business Council of Australia, there was concern about the focus of super, what it was doing to capital formation and the increasing level of inappropriate activism.
The Government has rightly sounded the alarm on financial activism with the prudential regulator.
Third parties have been inappropriately pressuring superannuation funds to use their leverage over listed companies and their management. This is outrageous.
The ACTU-backed Maritime Union has been putting undue pressure on BHP and BlueScope though a super fund. This is an example of the system failing members.
Our Government has said this is a “dangerous development” and that super was “not a plaything for union bosses nor a platform to push their industrial relations agenda”.
APRA said it “expects that trustees will carry out their role and meet their responsibilities free from influence of sponsoring organisations or any external parties.”
The superannuation system must be transparent, accountable and always prioritising outcomes for members, not directors, employees or banks or trade unions.
The sector needs to mature and ensure these events are not repeated.
No supporter of the super industry wants the community to think that banks or unions were forcing super funds to do their bidding.
CURRENT REGULATORY INITIATIVES
Hayne Royal Commission
The Royal Commission and Productivity Commission have delivered a strong base of evidence for change.
It would appear that fees are too high, there is not enough competition and there is insufficient transparency.
The Government’s principal focus is on restoring trust in the financial system, delivering better value for consumers and promoting competition.
We must ensure the superannuation system maintains community confidence.
Since the Hayne royal commission, the Coalition Government has already passed legislation to:
- Extend civil penalties to superannuation trustees and directors for breach of their best interest duty;
- Ban superannuation funds from inducing employees;
- Proactively reunite superannuation members with their low balance accounts; and
- Ban superannuation exit fees and cap fees.
Productivity Commission inquiry
The PC’s report into superannuation industry’s efficiency and competitiveness has given us a new outlook to make the system work better.
The Commission found that across the industry, members are earning very different returns in the long term.
Seemingly small annual differences can result in large losses of income by the time a worker reaches retirement, contributing to generational wealth inequality.
The report outlines three key areas that affect the outcomes of Australians by the time they reach retirement: fees, unintended multiple accounts and opt-out insurance policies.
The Commission stated that current regulation “focuses too much on the interests of funds and non-members.” It also found instances of “subpar data and disclosure inhibiting accountability to members and Government.”
In some cases, by the time a member reaches retirement, 12% of their superannuation balance can be eroded by a fee increase of 0.5%.
In the case of unnecessary opt-out insurance policies, members can lose between 14 and 28 percent of their balance by the time they reach retirement.
This simply is not good enough. We need to assure Australians that this system works for them—not against them.
The Productivity Commission has recommended:
- Providing products and information that suits a member’s needs;
- Consolidating duplicate accounts; and
- Ensuring that insurance policies are in a member’s best interests.
Duplicate accounts in particular have been referred to as an ‘absurdity’ and an avoidable problem by the Productivity Commission.
Our Government is still considering the outstanding issues in the report and will respond in due course.
Consistent with the recommendations, the Government has flagged an inquiry into the retirement income system.
The Commission recommended that this review cover retirement income and its interaction with superannuation, pensions and taxation.
This is an opportunity to consider how we can improve retirement outcomes in Australia.
Initiatives before Parliament
The recent Putting Member’s Interest First Bill 2019 (insurance) is a tangible example of how we are getting on with the job.
The Bill will end the gravy train of unnecessary insurance fees currently eroding balances.
Compulsory life insurance inside superannuation is not working for all Australians. That is the view of the Productivity Commission, Choice and the Consumer Action Law Centre.
Arguments against changing insurance – such as that vulnerable people will be uninsured and workers in high-risk jobs won’t have coverage in the event of a permanent disability – are being run by Labor and the Unions.
Indeed, multiple reports have found compulsory life insurance is actually working for the insurance industry, not Australians.
If you listen to those who stand to benefit from current arrangements, you could be forgiven for thinking the world will come to an end if changes are made.
Take super fund REST, which proclaims: “The burden will fall on the Government to provide financial support and services for those members who suffered a disability and did not receive any insurance.”
The Government’s plan to fix this was stymied in the Senate at the end of the last Parliament. But we are still seeking to enact precisely what the PC recommended: “Insurance should be made opt in for members aged under 25 rather than opt out, as is currently the case.”
There are two reasons why this bill is good for members.
First, the current system is unfair.
If you are young, you probably don’t need insurance. Consumer group Choice says that “for most under 25s life insurance, particularly death cover, will offer little to no value”.
It is also unfair because it encourages a “she’ll be right” mentality, which is most likely to hurt people with lower levels of financial literacy.
Government and insurers cannot foresee people’s insurance needs. Most insurance in super policies will pay out between $100,000 and $200,000 in death benefits.
But in reality, full-time workers with young children should have around $600,000 in insurance coverage according to Rice Warner Actuaries.
That is a big gap.
Second, it undermines the purpose of super. Poorly targeted insurance is working against the objectives of super.
The most recent Intergenerational Report estimated that at the current rate, most Australians are still on track to require some form of pension by mid-century.
To get more people off the age pension, we need higher super balances, not poorly targeted insurance policies draining their accounts.
Competition keeps prices low and customer service quality high. Yet the Commission found competition to be lacking in the super industry.
Competition in super can only improve member outcomes.
In calling for the Fair Work Commission to be stripped of its role selecting default funds, the PC has given a strong evidence base for a major transformation of the superannuation sector.
I am regularly reminded that consumers are free to choose whether or not to join a union – and a record 85 per cent of Australians have decided not to do so.
However most consumers would be unaware their retirement savings may be skimmed to help fund trade union operations and their political campaigns, run by the likes of the lawless Construction, Forestry, Maritime, Mining and Energy Union.
We must not forget what CFMMEU boss John Setka once said:
"We get fantastic pay rises and good conditions for our members because we fight it outside the law.
And if that sometimes brings us on the wrong side of a bad law – and there [are] bad laws – then so be it."
Unfortunately, hard-working non-unionised, law-abiding workers are helping contribute to the CFMMEU's $15 million legal bill for breaking our laws.
One super fund has actually paid $13 million of workers retirement savings to the CFMMEU in recent years according to the Australian Electoral Commission.
You have to wonder how this can happen without clear member disclosure.
Award winning journalist Adele Ferguson was right to question how much longer the "super gravy train" of fees, related party transactions and sub-scale funds that erode consumers' balances, could keep running.
The fact that these examples are not well understood shows there is scope for more transparency.
Superannuation is a huge part of our economy. We want it to work better and harder for Australian workers and retirees.
We, the federal Government, are heavily invested. Not only do we compel Australians to save in super, we extend a significant tax incentive through forgone income tax revenue.
The biggest superannuation concessions reduced tax revenue to Government by an estimated $38.4 billion last financial year.
The major inquiries of the past few years have shown the system must improve. It must be more efficient, competitive and transparent.
There is a clear roadmap for improving the system as we work through the Hayne recommendations.
That’s why we have legislation before Parliament and more on the way. I urge you to work with us. We are well served by the Treasurer Josh Frydenberg and Assistant Minister Jane Hume.
As a member of the Morrison Government, I will work to support our team on the front line of implementation, especially through the Senate Economics Committee.
I urge you to take the opportunity to engage in this process and the forthcoming retirement review with a member first focus at all times.
I look forward to your questions.