Closing Address to
OECD/IOPS Global Forum on Private Pensions
3 November 2010
Good afternoon and thank you for that kind introduction.
I'd also like to thank John Laker and Ross Jones for inviting me to address this forum and congratulate APRA for hosting what I understand has been a very productive few days of discussions on pension reform.
Can I say here at the conclusion of the conference - and formally on behalf of the Australian Government – I do very much hope you have enjoyed your time here. You are very welcome guests in our country.
I understand that the Melbourne Cup, which is the horse race that stops the nation, briefly stopped the conference yesterday as well.
The question that you have been deliberating upon, the question of how we can provide a safe and secure retirement for our citizens – this question is a universal one.
In 1963 President Kennedy famously and eloquently spoke of our mortality and how we all cherish our children's future.
I believe President Kennedy's reflections ring true across half a century from the greatest generation, after World War II, to their children and grandchildren who were back then not even a twinkle in the Tennessee or Sydney skies.
And I am sure each and every one of us in this room today would happily agree that our children's future, which we cherish passionately, includes their retirement many years from now.
So retirement – and attaining comfortable retirement, happy retirement, active and healthy retirement – it's a question for us all to think deeply about. And think about in the context of a changing – and today a longer living – world.
The universality of the secure retirement question - or how adequate retirement means are to be achieved - is reflected in the breadth of nations present at this Forum.
Today, I want to speak briefly of the past, and also speak a little about the current state of economic circumstances we have here Down Under.
But mostly of course I want to talk about the future. For it's the future that we are ultimately all about.
As we move forward into the 21st Century, private pensions, or superannuation as we say here, will play an increasingly important role in the strength and resilience of the Australian economy.
We have emerged from the global financial crisis in a stronger position than any other advanced economy. And we as a Government, and a nation, are obviously very proud of this.
Three and a half years ago, Australia and the United States both had the same low unemployment rate.
Today, Australia's unemployment rate stands at 5.1 percent, compared with 9.6 percent in the US.
And Australia's net debt levels are a fraction of the levels seen in other advanced economies. Australian government net debt will peak at just 6 percent of GDP in 2011‑12.
Compare that with the collective government net debt of major advanced economies, which is expected to hit 90 per cent of their GDP in 2015.
Australia's impressive performance is due to several factors — the quality of our regulation, the strength of our banking system, the swift response of the Reserve Bank in cutting interest rates, the
Government's fiscal stimulus package and our strong ties to the rapidly growing Asian region triggering demand for our commodities.
Our success is also due to the hard work we put in before the crisis, the decades of economic reform.
Including reforms to our superannuation system which allowed us to build up a massive pool of savings.
Australia now has $1.2 trillion invested in superannuation.
Those funds supplement our need for us to rely on more foreign borrowing.
That national savings pool also allowed Australian companies to raise significant amounts of capital during the crisis and has helped our local financial services industry grow.
Another reason for Australia's resilience throughout the financial crisis is that we have some of the world's best prudential regulation.
I am tremendously pleased that we have such an internationally esteemed group of professionals here today, because I have no hesitation in saying our regulators are amongst the best in the world.
The Australian Prudential Regulation Authority has ensured the strength and of our banks and financial services sector. And the Australian Securities and Investments Commission, with the support of government, has been busier than ever over the past few years.
I know my predecessors in this position have said that the Australian "twin peaks" regulation model has worked very well and continues to work.
In other jurisdictions, where the regulators are combined, there is almost inevitably a dominance of prudential over financial markets - or vice versa - within the organisation.
The two functions do complement each other. But each do also need real independent focus, to ensure both are able to give 100 percent of their attention to their respective areas of regulation.
Regulatory experts have observed that Australia's successful and appropriately-balanced regulatory framework is one of the keys to us becoming a regional financial centre. And building this hub of financial services more and more in the times ahead is something that the Gillard Government is very committed to progressing.
In The Wealth of Nations, Adam Smith called for governments to prohibit excessive risk-taking that could jeopardise financial markets as a whole, something which people who quote him liberally (if you'll excuse the pun) in other contexts perhaps forget.
This Government has long held the view that our prudential regulation is a great asset to our free market based economic growth. This has been proven, I think, even more so over the last two years.
We have been through what the great Australian poet Les Murray calls 'the fire autumn', the landscape of burnt trees showing new leaf growth. And we have emerged in remarkably good shape.
That's why we can continue to have confidence about the stability and strength of the Australian economy — now and into the future.
The value of superannuation
Just as it is incumbent on us to ensure we get the macro-economic settings right as we come out of the GFC, so it is important that we continue to build our national savings.
Australia was the second country in the world to introduce a compulsory retirement savings system.
Chile, as I'm sure many of you know, was the first. And I understand representatives from Chile presented at an earlier session.
It is interesting to understand how the Australian system developed. A system where 93 per cent of workforce sets aside 9% or more of their wages solely for their retirement.
These savings are compulsory. These savings receive concessional tax treatment.
The Australian system is a product of political will and foresight on the part of the labour movement in this country. It was a true partnership between Government and the trade union movement to ensure that a comfortable retirement wasn't just the preserve of the fortunate few, but could be enjoyed by all Australians, regardless of income.
When the Labor Government, lead by Bob Hawke, took office in 1983, less than 40 in every 100 workers had some superannuation cover. In 1987, led by the ACTU Secretary Bill Kelty, a 3 percent superannuation benefit was included in most industrial awards, giving most workers some superannuation coverage.
By 1991, after the Hawke Labor Government had introduced major superannuation reforms, the proportion of the workforce with superannuation cover had increased to 72 in every 100 workers.
In 1992, the Keating Labor Government introduced legislation to establish the universal superannuation scheme that exists today to ensure that virtually all employees are accumulating superannuation savings.
This system is what we know as our Superannuation Guarantee (SG), which is currently set at 9 percent of workers' wages.
And many of you probably know that the Gillard Government is passionately committed to seeing the SG increased again to 12 percent - to improve the adequacy of our retirement savings pool.
Delivering this for 8.4 million hardworking Australians is my Number 1 priority in this new job of mine.
Delivering the increase in our SG from 9 percent to 12 per cent will once again take political will and community consensus. The role for us as a Government is to advocate, seize the opportunity, push through that door of opportunity and deliver.
Because the door is now ajar, the shaft of light of a better future is beginning to pierce the enormous debate we are in, and the answers being reached for.
Building the case, for this 12 percent compulsory increase in particular, is why I am so keen so speak with you today. Not just to describe how the Australian pension system is a good one – but to highlight to all who will listen – both internationally and domestically - that ours indeed can be a better system.
The primary motivator of our superannuation policy is – and must always be – a comfortable retirement income for Australians.
Over the past 10 years, more than US $345 billion has been paid out in lump sum and pension benefits to super fund members.
That is a massive amount, and reaps a massive dividend of comfort, security and wellbeing for older Australians. It helps them pay off the mortgage. It helps them buy wine and holidays, golf buggies, or tin runabouts, and lunches with friends at the RSL.
It nourishes the tree changers and sea changers. The grey nomads who are enjoying their retirement to the fullest - and in the process are supporting regional economies, the tourism industry and all sorts of small businesses here and there who eventually see superfunds spent.
This has not, of course, meant that improved retirement incomes for Australians have been the sole benefit of our superannuation system.
Superannuation has - and will continue to be - a very important part of private saving.
Both Treasury and the Reserve Bank have concluded that Australia's superannuation arrangements have added to household savings, thereby reducing our reliance on foreign funds.
Having such a large pool of domestic capital available for investment helped very significantly during the global financial crisis.
In the 2008-09 Australian financial year, at a time when capital was being rapidly withdrawn from financial markets around the world, Australian-listed companies managed to raise $88 billion in equity capital in our domestic share market.
To put this in context, a greater proportion of the total value of listed companies was raised in Australia than in any other major economy.
Investment capital, including from Australian superfunds, helped to inject funds into companies that, together, employ over 1.6 million Australians.
Moreover, having such a sizeable pool of capital to manage has been the key factor behind the strength and sophistication of Australia's financial services industry.
This may come as a surprise to some of you, but financial services employ twice as many Australians as mining – almost 400,000 Australians compared to around 200,000.
Australia has strength in investment management, pension fund administration, life insurance and trustee education. We also have a sizeable accounting and financial planning industry.
The development of such a strong and sophisticated wealth management industry would simply not have been possible without compulsory superannuation.
The events of the last few years underscore the value of building a large pool of patient investment capital that can be re-invested in the domestic economy.
Consider how much better-placed so many economies around the world would be if they could point to a deep pool of private capital, standing at 100 per cent of their GDP, set aside specifically for their citizens' retirement… if they could point to a pool of patient capital that would stay invested in the domestic funds management helping to generate the next wave of jobs and growth.
The demographic and related fiscal challenges that we all face are pretty well known.
In many countries around the world, the number of older people is expected to grow more rapidly than the working age population.
Here in Australia, we have to face up to some tough realities.
By 2050 there will only be 27 working aged people for every 10 of our citizens aged 65 and over. This compares to 50 workers for every 10 retirees today.
It's the double edged promise of longer life and the commensurate pressure placed by an older population on society.
Sooner or later we have to get to grips with it.
Those pressures are intensified by the fiscal positions of our international counterparts in the post-crisis environment.
Just a couple of weeks ago, we saw media reports about civil unrest in France in response to the announcement that the French Government proposed to raise the legal retirement age from 60 to 62 years.
According to 2010 OECD data, the life expectancy for French men is about 78 years.
In other words, after the retirement age is raised in that country as proposed, a Frenchman could expect to live on the pension for nearly 16 years.
The gap between legal retirement age, average retirement age, and life expectancy is more marked in other countries.
The fiscal pressures of ageing populations are intensified by growing life expectancies in different cultures, different climates, different war zones, the different circumstances of communities through from A to Z.
In fact, life expectancy at birth has increased dramatically across OECD countries, countries with good health care who live in peace.
A baby boy born in Australia in 1961 could be expected to reach the age of nearly 68 years. But a male born here in 2007 had a life expectancy of just over 79 years.
That extra 11 plus years of life for Australian men sounds remarkable, but is in line with the OECD average.
The ageing of the population will put additional pressure on Government Budget expenditures, most obviously in the areas of healthcare and state pension provision.
Faced with this outcome it is critical that Government takes action now to ensure that the nation and its citizens are well prepared for the future.
The Australian Government's 2010 Intergenerational Report highlighted the need to address issues raised by our ageing population and to ensure that workers save enough to meet their retirement needs.
The Intergenerational Report also highlights the impact of these trends on Government spending.
For example, over the next 40 years:
- spending on age-related pensions is projected to rise from 2.70 percent to 3.9 per cent of GDP;
- spending on health is projected to increase from four percent to 7.1 per cent of GDP; and
- spending on aged care is projected to more than double, rising from 0.8 percent to 1.8 percent of GDP.
Australia, I believe, is well equipped to meet these challenges.
For as the Australian superannuation guarantee system matures — that is, as we move closer to the time when workers will be retiring with the benefit of superannuation contributions at the full rate over their working lives — the average value of superannuation balances will increase dramatically.
Plans for the future – super reforms
The Gillard Government is carrying on the Labor tradition of building wealth, or what might be called a modest prosperity for all, through our superannuation system.
And we are working to ensure that our superannuation system can meet the challenges of the future.
For the Government, the key challenge is adequacy of our retirement savings.
Put simply, we do not think that saving 9 percent of wages will provide most Australians with adequate retirement savings.
Our long-term superannuation reforms, announced on 2 May this year, will deliver substantial improvements in retirement savings' adequacy.
Superannuation Guarantee increase
We are increasing the Superannuation Guarantee (SG) rate from 9 to 12 percent to address the challenges of our ageing population, and increase private and national savings.
The increase in the SG per cent will be gradual, commencing on 1 July 2013 and reaching 12 per cent by 1 July 2019.
This will boost the long-term adequacy of retirement savings for around 8.4 million people. And bring broader benefits to the community and the nation.
Analysis suggests that, over time, Superannuation Guarantee increases have come out of wages, rather than profits.
Future wage productivity increases are expected to be sufficient to ensure that real wages continue to grow.
An average full time worker now aged 30 can be expected to have an additional $108,000 in superannuation at retirement as a result of our reforms.
In addition to these reforms to improve the adequacy of the superannuation system, the Government also commissioned a review into how the super system could be made simpler and more efficient.
This review has become known as the Cooper Review and the Government released it on 5 July this year.
The Government has already adopted a key recommendation of the Cooper Review and will introduce a simple, cost-effective superannuation product called "MySuper" from 1 July 2013.
MySuper will be provided by private sector companies, but the key features of the product will be set-out in legislation and enforced by APRA. Other superannuation savings products will continue to be offered.
MySuper is designed to provide a diversified investment portfolio, suitable for the vast majority of Australian workers who do not actively choose an option for their superannuation savings, but rely on their employer to choose a default fund for them.
I firmly believe that if you're not actively involved in your super fund, you shouldn't be charged fees as though you are.
Treasury estimates that about 4.5 million Australians will hold MySuper accounts when fully implemented.
The super industry processes an estimated 100 million transactions a year at a total cost of US$3.5 billion. So each transaction costs around US$35.
Contributing to this inefficiency, each working Australian has, on average, three superannuation accounts.
Clearly, we can make improvements.
The Cooper Review also made a series of recommendations on how to improve the administration of superannuation industry through initiatives like common data standards.
- These so-called "SuperStream" recommendations are a welcome contribution to the debate on what needs to be done to make the simple things in superannuation easier.
- An important first step is better use of a universal customer identifier to locate lost accounts and help members consolidate and switch accounts.
The Government has made some early progress in this area, by announcing that from 1 July 2011, an individual's Tax File Number will be the primary identifier of member accounts. This will be subject to strict conditions to ensure privacy and security of information.
From the MySuper and SuperStream proposals, a 30-year old worker on average weekly earnings could see an increase in their end benefit after a 37 year career of about $40,000, that's in addition to the $108,000 I mentioned earlier that rise in the SG to 12 per cent would deliver.
Consensus on SG increase
I talked earlier about the value of a community consensus on reforms.
We are consulting closely with industry on changes to the superannuation regime. And we will continue to consult as we consider further reforms.
But consultation precedes reforms. It does not replace them. And in this case, believe me, it will not greatly delay them.
A national poll recently conducted by Brandmanagement and commissioned by the Association of Superannuation Funds of Australia (ASFA) shows that almost 90 percent of working Australians believe that the Government has made a good decision in increasing the Superannuation Guarantee from nine to 12 percent.
And interestingly, the poll showed almost universal support among 25 to 29 year olds. In my observation, people don't tend to become interested in their super until they start thinking about retirement.
But this is a generation that thinks ahead - like the kids in The Social Network, a film you should see.
According to ASFA estimates, after taking into account the availability of the age pension, a couple household with combined salaries of $100,000 a year would need to make contributions at the rate of 12 percent or more to achieve a "comfortable" standard of living in retirement.
The ASFA survey results indicate that only just over 10 percent of current working Australian households have achieved that level of superannuation savings.
Clearly, the Government's superannuation reforms will go a long way towards giving average Australians the opportunity to enjoy a more comfortable retirement than the age pension alone would provide.
Ladies and gentlemen, the Government's vision for superannuation works on three levels.
Our vision works for individuals — because this vision creates better, more adequate retirement savings and a simpler investment product.
It works for business — because superannuation provides more certainty in wage planning, and the availability of a bigger savings pool for borrowing.
And our vision works for the country — because the savings pool created by superannuation:
- helps to lower the cost of borrowing,
- it provides capital for infrastructure projects,
- the savings underpin a strong and sophisticated local financial services industry
- and these savings helps keep inflation down.
This vision is the future, and the better future we yearn for, and we should wholeheartedly embrace them.
Thank you again to APRA for hosting this event and to all the local and international delegates.
I wish you all the best with the next Forum in Capetown.