Efficiency and Competitiveness of Superannuation – Kelly O’Dwyer

Kelly O’Dwyer the Minister for Revenue and Financial Services talks to Ross Greenwood about the review into the efficiency and competitiveness of the superannuation system

 

Introduction: Efficiency and Competitiveness of Superannuation

Ross Greenwood: Welcome back to Work Life Money, right around Australia. Look one important aspect of you superannuation is just the constant changes that seem to be happening. Different governments come through there are changes made. Now to me, I think it’s inevitable that there will be changes to our superannuation system. The reason I say that is only because as our population ages, the pressure really does go on to government because there’s more people perhaps qualifying for age pensions.

There are people who clearly have got large lumps sums of money in their superannuation funds. But if they’re not really accessing that as readily, then that’s a problem. There’s also the situation where people are going to be working longer. As a result of those people working longer, they’ve got to be able to try and balance up their own wage with the amount of money they might get out of a superannuation fund.

Then you get all the way to the other end of the scale, to young people starting work. Of course, very young people when they start working, they’ve got massive help debts, their education debts. In many cases, they’ve got big superannuation obligations on their wages, but then they’ve probably got credit cards that they help to fund themselves through University or tertiary education.

Against that background, the government right now has a series of inquiries going on. One is a review by Treasury called the MyRetirement View. Then the Productivity Commission is going to look at the robustness of the scheme and understand why this is important. There is two trillion dollars in superannuation funds right now. So $2,000 billion, try and write that down today as you’re thinking about that amount of money. Well, the person responsible for this in government is the Minister for Revenue and Financial Services who is Kelly O’Dwyer on the line right now.

Many thanks for your time Kelly.

Interview: Kelly O’Dwyer, Minister for Revenue and Financial Services

Kelly O’Dwyer: Great to be with you and your listeners Ross.

Ross Greenwood: I’ve tried to set that up a bit, to try raise the issue about the constant changing of superannuation. When you were going into the last election there was significant criticism of the government for the changes that you were trying to bring through which have largely gone through the parliament now. The fact is every time government of any persuasion tries to change there’s going to be criticism because it affects somebody’s planning.

Kelly O’Dwyer: Well look the reason people are so interested in superannuation is for the very good reason that it is the second largest financial asset for most Australians, after their home. As you’ve quite rightly pointed out at the two trillion dollar industry and it’s one that is growing. As you’ve also pointed out Ross in your introduction, the needs of people are actually changing over time. You talk about people working for longer but the way that they work is also changing.

And we need to be able to have a superannuation system that is able to respond to that. One that offers greater choice, transparency and also accountability from an industry point of view as well. That’s why we are so focused on making sure that it delivers for individuals, for moms and dads who’ve got their money in superannuation. I certainly know that they have been occasions where for many Australians it hasn’t delivered.

I received a letter after the last election where there was an individual who’d done some part-time work for the AEC. Now they managed to meet the conditions for release for the superannuation’s guarantee that was paid into a superannuation fund. When they looked at the money that they were going to get out after having done that work, they found that in fact the fees and exit charges that were being applied to them were actually higher than the balance that they had in the fund.

Now that seems a bit ridiculous, which is one of the reasons that we’re actually looking at fees and charges amongst a whole range of other issues.

Ross Greenwood: Could I raise something with you and it’s a bit of basic maths? The ordinary person might not stop and think about. But we very glibly said that there’s two trillion dollars in superannuation. Now we know that the fees and the charges on your superannuation fund well they can be depending on where you’re investing anything up to 1%. It can be less it can be a little bit more.

Let’s take 1% as an average on this and you’d like to think the fees are coming down. One percent on 2,000 billion dollars is 20 billion dollars a year in fees that could potentially come out of superannuation funds. Now 20 billion dollars is a massive industry and you can understand why every funds manager in the world has flocked to Australia. The question is whether Australians are getting good value for the fees that they pay.

Kelly O’Dwyer: Indeed and that is absolutely right. There are a lots of people in the industry who think the system is perfect and there should be no change whatsoever. The truth is when you look very closely at it the industry has done very well for itself. The question is, are individuals themselves getting the retirement income that they deserve for the money that they’ve actually put in? Are they being appropriately protected, given that this is a mandated system? Are they being given appropriate choice?

You talked about young people before. There are many young people who by virtue of lots of different part-time jobs accumulate a range of superannuation funds. Because of enterprise bargaining agreements, they might be forced to be in multiple funds. The default arrangements as they’re set up right now force those young people to pay insurance premiums. Now if you’re paying out multiple insurance premiums right from when you first start your job, you can find that that still erodes the retirement income you will ultimately get in the years to come. Instead of in fact consolidating into one particular account.

Ross Greenwood: Well see I’ve got a letter here, coincidentally, which goes to exactly this point. He’s Grant who is in Bondi says, hi Ross my 17 year old son’s been working part-time for the past two years while attending his final two years of school. I’ve extolled the need to start saving early and that includes superannuation. After two years his fund recently sent a statement with a zero balance. Why? Because he had compulsory life insurance, have several hundred thousand dollars for the past two years that he has no need for, eating away at his superannuation balance.

The super fund gets a commission of 20% plus every month in his life insurance contributions. What a joke. The solution, anyone under 25 is entitled to opt into life insurance in their superannuation and for it not to be automatic. What 17 year old needs $300,000 in life insurance? No debts, no commitments, no dependents, simply a rot. Your thoughts. Appreciate it. Well, you can tell my thoughts by the fact I’m even reading that to you.

Kelly O’Dwyer: Well I think the point is strongly made and well made. This is exactly the reason why the government has asked the Productivity Commission to look at this very specific issue. The issue around the impact of insurance premiums from retirement incomes. Particularly for those people who are young people and whether in fact we ought to have opt in rather than opt out arrangements. As I said before the default arrangements are that you have to opt out and it’s very hard. I can give you a personal example, last year I was actually looking at my own superannuation arrangements.

I’m looking at consolidating one of my accounts and I was looking at how I could do that particularly in relation to insurance. You can’t do any of this stuff online easy either, it’s actually quite difficult to do it. You actually have to write in and make those changes, by writing an old fashioned letter and actually getting the fund to actually change your arrangements. Now in today’s day and age is that really acceptable? Why are we making it so difficult for people to be able to make these choices about their funds in their arrangements?

Ross Greenwood: You know there’s one small thing about this and you and I both understand this. As we get a little older we perhaps understand a bit more. That is young 17 year old I spoke about or indeed the person who’s younger locked into that life insurance arrangement is basically subsidizing the life insurance of somebody who’s much older and potentially much more wealthy. The reason for that is because it’s a pooled arrangement.

So everybody’s in the pool and of course, the person most likely to climb is somebody who is older, not somebody who is younger. But everybody pays the same premium so it keeps down the rates for insurance for older members, more wealthy members. It means younger people probably pay an inordinate amount as compared with what they probably should pay themselves.

Kelly O’Dwyer: That’s exactly right and that’s exactly how it works right now. The question is, is it in the best interests of the members of the fund? We’re asking that question and we’re asking the industry to justify some of these arrangements. There also arrangements where there are profit share arrangements with a number of these funds as well. Again the question is are individual members actually getting the benefits of that or in fact is the fund itself getting the benefit and that not being passed on?

Ross Greenwood: A final one I want to ask you about because I know that the treasuries MyRetirement review right now is another one that’s being undertaken. The Actuaries Institute and I’ve spoken with them in the last little while have indicated that they believe long-term the whole system of retirement savings should change from accumulation or if you like lump sums when people retire to basically being ongoing pension style payments.

Now the question is I wonder whether the public would cop this or not or indeed whether this is where the way the government would prefer people to start to treat their superannuation?

Kelly O’Dwyer: Look, I think it’s important for people to be able to have flexibility about their arrangements. I think it’s important for people to be able to have choice. The point is well made that over time people are potentially going to want different things, at different points in time. We need to have products that are able to meet those needs. Right now, I think if we are being quite honest, we don’t have the sort of products that many people would actually want in their retirement, to give them an income stream in retirement that they can rely on at certain points of time in their life.

It might be, for instance, that someone who’s very compos mentis, who’s very actively engaged in their superannuation wants to actively manage their superannuation retirement savings through an SMSF. Later on, they may want at the age of 80, to have a retirement stream kick in for them that they can rely on where perhaps they are less actively engaged. We want people to be able to have different products that are more innovative. We are looking at how we can help to provide the right framework where those products can be developed.

Ross Greenwood: There’s no doubt there will be changes as the demographics and as the age of our population does alter as well. The government, of course, has got to keep on top of this. Otherwise, remember, those aged pension payments that the government will end up making will skyrocket and balloon out of control, which affects other future taxpayers as well. Kelly O’Dwyer is the Minister for Revenue and Financial Services. As always, Kelly, appreciate your time on the program.

Kelly O’Dwyer: Great pleasure, Ross.

 

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