I spoke last week on some useful reforms to public sector superannuation.
(Update: The bills passed both houses on 21 June.)
Governance of Australian Government Superannuation Schemes Bill 2011
15 June 2011
The bills before us concern the retirement savings of people who serve our nation. The good men and women of our military, as well as those in our public service, many of whom reside in the ACT in my electorate of Fraser or in the neighbouring electorate of my good friend and colleague the member for Canberra, will benefit from the changes in this legislation. The bills seek to consolidate the main civilian and military superannuation schemes under a single trustee. The merger will see the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme, the Military Superannuation and Benefits Scheme, the Defence Force Retirement and Death Benefits Scheme and the Defence Force Retirement and Benefit Scheme all administered by a single trustee, the Commonwealth Superannuation Corporation, or CSC. The CSC will be a statutory agency, as will ComSuper.
The consolidation of these schemes will help modernise the governance arrangements. The outdated position of Commissioner for Superannuation will be replaced by a chief executive officer. A board of 11 directors will govern the CSC. The governance model is in keeping with a common model used right across the broader superannuation industry. The CSC board composition will reflect member interests as well as employer interests. There will be three nominees from the ACTU, two nominees from the Chief of the Defence Force. and five nominees from the Minister for Finance and Deregulation with input from the Minister for Defence. The government will also appoint the chair.
I note in passing that those opposite have raised the bogeyman of the ACTU having representation on the CSC board. It is sort of odd, is it not? They are quite happy to have their positions on health dictated by British American Tobacco and they are quite happy to have their positions on the mining tax dictated by a few mining magnates, but they are not happy to have workers representatives—representatives of millions of Australian workers—on a superannuation board.
I note that some in the community, particularly the ex-service person community, have raised concerns that amalgamated trustee arrangements might not recognise the uniqueness of military service. This concern was raised about the original 2010 bill. Submissions to the Senate Finance and Public Administration Legislation Committee raised this issue of ensuring that ADF personnel were adequately recompensed for the unique role they play in the defence of our nation. It is important to note that the bills before the House do not disturb, and the previous incarnations of these bills did not ever disturb, members' entitlements or benefits. No existing features or benefits of military schemes are disturbed. There is no change to scheme entitlements for ADF personnel and there is no change to scheme entitlements for Commonwealth public servants. The 2010 bill recognised the uniqueness of military service, something noted by the Senate committee report's citation of the joint submission by the departments of finance and defence. That submission concluded:
Overall, the Bills seek to recognise the special nature of military service (noting that this principle is relevant to all aspects of military conditions of service) without taking away from a superannuation trustee's essential function of managing the superannuation schemes for which it is responsible on behalf of all scheme members and safeguarding members' benefit until they retire.
The submission of the Defence Force Retirement and Death Benefits Scheme Authority, or the DFRDB Authority, to the Senate committee acknowledged that the uniqueness of military service was recognised by the relevant scheme rules and not by the composition of the board. The DFRDB Authority concluded:
In the context of the above, the DFRDB Authority accepts the assurances of the Australian Government that the interests of the DFRB and DFRDB members will appropriately represented by the CSC. Therefore it is the view of the DFRDB Authority that it is not necessary to retain a separate board to administer the military superannuation schemes.
The government recognises the unique nature of military service. I recognise that too. One of the great privileges of this job is having the opportunity to honour those who have sacrificed their lives for our freedoms and to acknowledge the work that many of our service people make on our behalf. It was never the intent to dispel this recognition with these administrative changes.
Recognising the concern, the government engaged with our military community on the proposed administrative changes. These consultations have led to changes to make clear the uniqueness of military service. The bills before the House require the CSC board to have regard to that uniqueness, as provided for in the schemes established by the relevant military superannuation acts, when acting under such legislation. Further, when the board is making decisions concerning matters solely related to the military schemes, at least one director appointed by the Chief of the Defence Force must be present. As I outlined previously, the CDF will appoint two representatives to the board and the appointment of the employer representatives by the finance minister will be in consultation with the defence minister. The bills also provide for the establishment of the Defence Force Case Assessment Panel within the single trustee model. The panel will undertake functions currently performed by the DFRDB. We will also review the arrangements after the first five years to ensure that the changes have been effective.
The consolidation of these government super schemes into a single trustee arrangement is not occurring in isolation. There has been a trend in our local superannuation industry towards consolidation. In 2006, the merger of the Australian Retirement Fund, the Superannuation Trust of Australia and Finsuper created AustralianSuper, one of our largest industry super funds. This was followed in 2008 by the creation of Media Super from the merger of Print Super and JustSuper. In 2009, the Stevedoring Employees Retirement Fund and the Seafarers Retirement Fund consolidated into Maritime Super. Consolidation, particularly for smaller funds, allows the benefits of economies of scale, economies which some fund managers believe necessitate funds having at least $5 billion under management to survive effectively.
The advantage of scale is backed by studies and the experience of funds not only here but also overseas. A study by the Australian Prudential Regulatory Authority, APRA, found that large funds outperform medium and smaller funds by at least half a per cent and in some cases by a full percentage point. The APRA study, based on data over a 10-year period, was consistent with studies overseas. For example, a US study of pension fund data showed larger funds outperformed smaller funds by over four percentage points.
Scale has the potential not only to deliver higher investment returns but also to reduce administration costs. A 2009 study by Deloitte Actuaries and Consultants examined the public disclosure statements of 60 industry superannuation funds. That study found that:
operational costs, which largely relate to the number of fund members, in a fund with more than 500,000 members can be reduced by about 32% when compared with a fund of between 100,000 and 500,000 members. These costs are reduced even further (about 44%) when compared with a fund of between 50,000 to 100,000 members; and
investment fees as a percentage of total fund assets, using the default investment option, were 0.57% in a fund with over $10 billion in assets, compared with the higher 0.76% in a fund with between $1 billion and $2.5 billion in assets.
In investigating the net benefit of consolidation, the Department of Finance and Deregulation's actuary, Mercer, calculated that based on the 2008 figures net investment returns had the potential to be $10 million better in 2008, $15 million better in 2018 and $19 million better in 2028.
The bulk of the potential return of $10 million in 2008 would have benefited the military schemes as $7 million of the net return is related to those schemes.
While all funds in a consolidation benefit, it is the smaller funds that achieve the greatest benefits. There is a future risk that, without this consolidation, the military schemes could become smaller relative to other funds and then have problems obtaining good investment returns.
The larger the fund the greater the ability of a trustee to pool funds and thereby lower investment costs and drive higher returns. This is because a merger sees a better spread of age profile of members amongst all the schemes. That allows a better spread of assets across age bands and risk categories. The practical implications for fund members will be an increase in the super savings of over 90 per cent of our current serving personnel. Just a 0.5 percentage point increase in the net return of a cadet who joins the RAAF and retires as a group captain will be $95,000 if that person serves a full career or $41,000 if they serve for a decade. The benefits, though smaller, will also flow through to the government's main civilian superannuation schemes.
It is easy to forget that if those opposite had their way we would not be talking about administrative changes to strengthen investment returns for those who serve our nation. Those opposite have always stood against superannuation reforms. I would like to draw the House's attention to a terrific after dinner speech delivered last night in Parliament House by the Assistant Treasurer—who I am pleased to see in this place—in which he took the audience through the history of superannuation and pointed out that when Bob Hawke took office in 1983 just 40 per cent of the workplace had super cover and that by 1991, after the Hawke Labor government's major superannuation reforms, 72 per cent of the workforce had superannuation cover.
But the Assistant Treasurer also pointed out some of the statements of those opposite when Labor under the Keating government moved to introduce a superannuation guarantee levy. The Assistant Treasurer said:
… Wilson Tuckey drew on his 'long history in the racing industry' to compare the legislation to the 'worst type of jockey … both stupid and dishonest.'
Wilson Tuckey continued:
'When the poor old employer levy gets to 12 per cent, what will it deliver? Luckily, it might deliver an overseas holiday and a few presents for the kids, but it will not deliver a retirement income at the inflated costs of those days.'
As the Assistant Treasurer pointed out, a 12 per cent super guarantee will provide a worker now aged 30 on average full-time wages with a real retirement benefit of over $553,000 at age pension age. That is certainly more than 'an overseas holiday and a few presents for the kids.'
These sorts of statements of doom and gloom at the introduction of compulsory superannuation were not restricted to members who have left this place. Then Senator Bronwyn Bishop told the Senate at the time of a conversation that she had had with a small business person. That small business person had told Senator Bishop:
But now that this compulsory superannuation payment has gone through, yesterday I had to sack a part-time employee and turn a full-time employee into a part-time employee.
The late Senator Peter Cook, for whom I had the privilege to once work, interjected very speedily and said that, given that the law had not yet come into effect, it was difficult to see how small business people would have been affected by it. But Senator Bishop was as unmoved then, as she is now, by the facts. She finished the 1992 debate as follows:
I heard Senator McMullan said, 'The difference between our systems on superannuation is that ours is compulsory and theirs is voluntary.' That is very true. That is an essential difference. Our policy is designed to make it attractive for people to provide for themselves in later life whereas this Government's is designed to penalise business, to regulate it out of existence.
Of course, that is what those opposite have often thought about compulsory superannuation—that it is an imposition.
The Leader of the Opposition once called Labor's superannuation guarantee 'a con job'. Those opposite have been fundamentally uninterested in superannuation. Perhaps the reason for that is that it is so far in the future. When you are just focused on getting your face on the evening news, why should you be thinking about things that are going to happen a couple of decades hence? No, you want to focus on the here and now, the latest poll and the latest snappy grab.
But superannuation is about much more than that. Superannuation is about ensuring that Australians enjoy dignity in retirement. Because of the lag in investment accumulation, the decisions we are making now are going to affect people like my one- and four-year-old sons, who will enter the labour market possibly around 2030 and continue in it possibly as late as 2080. My little boys are among those who will benefit from having a good superannuation scheme. It is those long-run reforms—that many of us will not be around to see—which lie at the heart of superannuation reform. It can sometimes look like a technical detail but, let me tell you, it is anything but. It is about securing dignity in retirement and ensuring that Australians are able to enjoy their retirement, comfortable in not having to worry about being able to pay the bills. I commend the bills to the House.
(Update: The bills passed both houses on 21 June.)
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