Address by Senator Andrew Bragg | Liberal Senator for New South Wales
The Future of Wealth Management Conference | Thursday 15 August 2019
Thank you for inviting me to speak at The Future Of Wealth Management Conference here in Melbourne.
As I said in my maiden speech recently … I first discovered my love of Australia in Victoria.
My upbringing in Shepparton featured footy, fishing and working in orchards, a cannery and a dairy.
I may live in Sydney these days but I still follow Geelong!
Our government is using the budget and our broader economic policies to address the nation’s economic challenges.
But there is more to do and the super sector can help our country 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.
In short, I am passionate about super and intend to be proactive in much needed positive reform.
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 ageing 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 resourcing 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 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.
Further, 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 homogeneous 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.
Let’s call it for what it its ... 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 as at June 2019.
Superannuation funds under management are expected to reach $5.0 trillion by 2028, or 167 percent of GDP in that year.
Actuarial Firm Rice Warner 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 rightfully sounded the alarm on financial activism with the prudential regulator.
Third parties have been openly pressuring superannuation funds to use their leverage over listed companies and their management. This is outrageous.
APRA has also stated that 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 prioritise 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 would want the community to think that banks or unions were forcing super funds to do their bidding.
Our government’s efforts will be focused on getting a better deal for members – both workers and retirees.
There is a large body of work we intend to draw upon from the last Parliament.
In the accumulation phase, we want to improve the operation of the market to drive better member outcomes.
In the retirement space, we want to encourage better use of accumulated savings to drive a better deal for members and the taxpayer.
More broadly, we have decided to adopt a Productivity Commission recommendation to review retirement incomes policy.
One key design feature of the accumulation phase is the provision of compulsory contributions by employers.
The lack of both wholesale and retail competition has unnecessarily inflated fees and kept too many Australians in underperforming funds.
The wholesale market refers to the operation of the scheme at the workplace level – whilst the retail level is individual, consumer market.
We are not waiting for any further advice, research or studies on how to proceed with the retail market when it comes to choice of fund. In 2019, no serious person can advance an argument against people being allowed to choose their own super fund.
As many of you will know, some employees do not have the opportunity to choose their own superannuation fund ... where an employer makes contributions in accordance with an enterprise agreement or workplace determination.
The agreements or determinations may specify a given superannuation fund that an employer is to contribute on behalf of the employee.
In 2019 there is still around 30 per cent of the working population that cannot select their own fund due to their respective industrial award or enterprise agreement under which they are employed.
Let me give you some examples...
Pfizer Melbourne’s 2018 Enterprise Agreement states that employees can only ‘choose’ from the National Union of Workers aligned LUCRF Super or Equip Funds.
Quant Australia’s 2018 Enterprise Agreement states the employer is required to make payments to Australian Super or CBus.
And the Coles 2018 Enterprise Agreement superannuation clause states ... “all entitlements will be directed on a monthly basis to the LUCRF Fund, unless the team member elects to contribute to any other complying fund.”
But, the Enterprise Agreement goes on to say ... “the ability to opt in and out of the fund as provided within the Superannuation Guarantee Act 1992 and the applicable regulations shall not apply.” ... effectively nullifying protections.
These are but a few examples of where blatant over reach is present by the unions and big business...stifling market competition at the expense of hardworking middle Australia.
Let me be clear ... the Morrison Government wants to make sure the super system is best tailored to reflect that of workers... not government or vested interests of super funds.
It is unsustainable for workers to have their rights stolen.
How can anyone possibly resist allowing workers to choose where their money goes?
Only a few weeks ago, our government passed legislation on open banking. From next year, consumers will have a new data right which will allow competition institutions to access data to facilitate competition.
Consumer data rights start with banking and will eventually move to telecommunications and energy.
The Morrison Government wants to facilitate competition in our economy and in the financial services sector be it banking or super.
Our government tried to fix this anachronism in the last Parliament.
We were unsuccessful but will saddle up again shortly.
There are broader issues in the market structure …The Productivity Commission also found current default arrangements were “clearly not putting members first.”
Citing that current policy settings create an “unlucky lottery” for members by failing to ensure they are placed in the best performing funds.
Currently more than 5 million member accounts are in funds that exhibit serial underperformance!
This has a significant impact on members and ultimately their quality of life in retirement.
The tying of defaults to the employer rather than the member has resulted in the undesirable reality of members accumulating multiple accounts ... and by extension paying duplicate sets of fees.
As I outlined in the earlier examples, any system in which employers play such a central role in the appointment of a default fund runs the real risk of rewarding the wrong incentives.
And there’s evidence that some funds offer benefits to influence employer’s choices.
Offering direct incentives to change superannuation funds is illegal … that’s why we had it banned.
A 2012 review of the super system by the PC found executives could be enticed to sign over employees’ savings in return for preferential deals on financial products and accounting services.
It’s outrageous … and to address it the Government has provided ASIC with new powers to put an end to corporate hospitality at the expense of members.
It’s a problem which is both hard to observe and regulate.
There is wide variation in performance …inevitable given the large number of funds, and the current way of allocating defaults.
Sustaining a high level of performance and spreading it to more members is only achievable by providing incentives to innovate and meet new demands.
As you are well aware, the Morrison government has flagged our intention to review the retirement income system. The Treasurer has said:
"I am positively disposed to a review of the retirement income system as recommended by the Productivity Commission."
Historically, a disproportionate amount of time has been focusing on policy settings for Australian super during the accumulation phase and has left the retirement phase underdeveloped.
This has been recognised in reviews dating back to 2010 ... with the Henry tax review, the Cooper review of super and Murray’s root and branch Financial System Inquiry.
We want the super system to be better aligned with the overall objectives of providing retirement income.
The government is addressing this through the development of a retirement income framework.
We have also proposed allowing a wider variety of post-retirement products to be purchased within the super system.
These changes have now been supported by new age pension means testing rules, which came into effect from July 1 this year.
The rules outline how eligible retirement income products will be treated for under the age pension means tests.
According to Roy Morgan, an estimated 439,000 people will retire this year ... an increase of 6 per cent compared with 2018 ... and an increase of 11 per cent compared with 2017.
By 2029 the 65plus cohort will be bigger than ever before... making up 18 per cent of Australia’s population.
This is an increase from the 14 per cent we have now.
The last of the baby boomers are reaching retirement age ... and the weight of super money is shifting to retirement phase.
Yet there is no detailed structure in the drawdown phase of super.
Under the current system, retirees can take all of their money up front.
If they elect to do nothing they are usually defaulted into receiving an ‘account-based’ pension from their super fund.
An account based pension is not guaranteed to last ... the balance depletes based on how much is withdrawn each year, investment returns, and fees.
As demonstrated after the global financial crisis, a market crash can wreak havoc on an account-based pension.
The ability for superannuation balances to recover from significant market events are limited when you have entered retirement phase and there are no longer salary contributions that tops up the balance.
In short, managing risks in retirement is a different proposition to accumulation.
Longevity risk, market risk, inflation risk and an inability to diversify are highlighted in the drawdown phase.
That is why our government announced a retirement income framework in the budget.
This includes a requirement for super fund trustees to develop a strategy to help their members achieve their retirement income objectives.
It will also require trustees to have a Comprehensive Income Products for retirement ... products which will provide retirees with income for life ... addressing key longevity and market risks that may have previously pushed a retiree onto the Aged Pension.
The framework will also improve the disclosure requirements for Super by introducing simplified, standardized metrics in product disclosure ... to help retirees make informed choices about financial products in retirement.
This is a good policy which I look forward to supporting through the Parliament in due course.
Across the board, our focus is on getting the best deal for workers and retirees… whilst ensuing the taxpayer’s investment in super is protected.
I look forward to engaging with the sector as we work through our sizable agenda as a member of both the Senate Economics Committee and Joint Parliamentary Committee on Corporations & Financial Services.