The Senate

Superannuation Legislation Amendment Bill (No. 1) 1995

Superannuation Legislation Amendment Act (No. 1) 1995

Small Superannuation Accounts Bill 1995

Superannuation Laws Amendment (Small Accounts and Other Measures) Bill 1995

Second Reading

Debate on Superannuation Legislation Amendment Bill (No. 1) 1995 resumed from 6 June, and debate on Small Superannuation Accounts Bill 1995 and Superannuation Laws Amendment (Small Accounts and Other Measures) Bill 1995 resumed from 1 June, on motions by Senator Crowley and Senator Schacht:

That these Bills be now read a second time.

Senator Watson (Tasmania) (10.48 a.m.)--In the 15th report of the Senate Select Committee on Superannuation, Super Guarantee: its track record, the committee addressed certain aspects of the small amounts problems and put forward a number of recommendations. Since the introduction of the superannuation guarantee charge, the overwhelming concern of people contributing small amounts was the problem of the erosion of the capital contribution of the employer by fees and charges, especially for those people who changed jobs frequently or who were on low incomes.

The Superannuation Legislation Amendment Bill (No. 1) 1995 and cognate Bills, which are currently before the Senate, specifically address the small amounts problem. However, I believe it would also be useful to include in this debate the related further issue of the superannuation transfer protocol, which will be introduced not through legislation but through regulation. Therefore, to fully appreciate the total picture of the small accounts issue, I think we have to refer during this debate to both this legislation and the transfer protocol.

As I said earlier, perhaps the greatest criticism of the superannuation guarantee charge surrounds the reduction of small balances by fees and charges. As evidence of the maturity of the industry, it is pleasing to report that the industry has been working with the government to devise further ways of achieving better outcomes for members with small account balances.

In the past members have been faced with difficult administrative procedures in transferring their superannuation benefits, particularly when they change employment. The focus of the interaction with the industry and government has been to find wasl to streamline and transfer processes as members change jobs--and I welcome that.

The Senate Select Committee on Superannuation sees the lodgement of small amounts with the Taxation Office as an interim or short- term measure--and just how interim is a matter of some question. But the Liberal and National parties perhaps take a harder line, and I am foreshadowing a committee stage amendment of a sunset clause in terms of the role for superannuation of the Taxation Office in handling small amounts. But once the concept of the ATO was introduced in terms of handling small amounts, the industry responded very quickly, and it was perhaps the industry superannuation funds that took the lead in accepting small amounts without reduction of the capital contribution by way of fees and charges.

This process essentially has meant some degree of cross- subsidisation, which is not always welcome but under the circumstances was deemed necessary and desirable. Naturally, other funds have followed some of the leading industry funds in adopting similar processes.

Perhaps the most important Bill in this package of Bills with which the Senate is dealing is the Small Superannuation Accounts Bill 1995. This establishes a reserve, known as the superannuation holdings account reserve, to facilitate the collection of small amounts by the Taxation Office.

The cost of the establishment of such a reserve will be in the order of $5.6 million, while the annual cost of administration will be between $7 million and $7 1/2 million. Those running costs of between $7 million and $7 1/2 million will be offset by the earnings of the moneys in this reserve fund. But I must point out that there will be no erosion of the capital contributions made to Taxation Office holding accounts where an employer cannot find a fund that will accept small contributions. I must say that it would be fairly difficult for an employer not to find a fund nowadays, but this facility is there that will accept such money.

Member protection rules will protect amounts under $1,000, and measures will be in place by 1 July 1995, hence the importance of getting this legislation through before the Senate rises. In fact, funds that decide not to operate under the new rules will not be able to accept small superannuation amounts from new members and, therefore, will be required to transfer existing balances below $1,000 to a fund which will protect employees.

The Association of Superannuation Funds of Australia has provided a list of those who provide member protection. For the purpose of this debate, I think it might be useful to incorporate such a list in Hansard. I seek the leave of the Senate to do so.

Leave granted.

The list read as follows--

Industry and public offer funds which have advised ASFA that they intend to member protect
funds included on this list have agreed to be published in Superfunds magazine. The list will also be used by the ATO and ISC in answering employer enquiries
funds which did not appear on this list may intend to "member protect." Many funds are still considering the implications of the recently introduced SIS regulations
ASFA will continue to add to this list as it receives information
trustees of funds (including company/enterprise funds) intending to "member protect" who are not listed below should contact ASFA by fax on (02) 264 8824 to ensure inclusion in future updates
this list is current as at 17 May 1995
Accountants Superannuation Fund ASF
Advance Superannuation Plus
American International Assurance
Self Employed Super Fund

AIA Universal Super Fund
Retiresafe Master Trust

Allied Construction Employees Superannuation Scheme ACE
Allied Unions Superannuation Trust (QLD)

AMP Masterplan

Archdiocese of Canberra and Goulbourn Super Fund
Armstrong Jones Life SuperEasy
Australian Farm Superannuation Plan AFSP
Australian Meat Industry Superannuation Trust AMIST
Australian Public Superannuation Fund
Australian Retirement Fund ARF
Australian Superannuation Savings Employment Trust ASSET
Australian Superannuation Trust AST
AUSTSAFE Superannuation Fund
Bankers Trust Employee Superannuation Fund
Building Unions Superannuation Scheme (QLD) BUSS
Bus and Coach Superannuation Scheme BACSS
Bus Industry Superannuation Scheme BISS
Construction and Building Union Superannuation C+BUS
Clerical & Administrative Employees Superannuation Plan CARE
Club Plus (ACT)
Club Plus (QLD)
Club Plus Superannuation (NSW)
Community Services Superannuation Fund CSSF
Concept One Superannuation Fund
Credit Union Employees Super Fund CUE SUPER
Furniture Industry Retirement & Superannuation Trust FIRST
Gas Industry Superannuation Trust GIST
Golf Employees Superannuation Trust GEST

GI0 Business Super Plan
GI0 Lifetime Super & Rollover Plan

Group Superannuation Fund
Health Employees Superannuation Trust of Australia HESTA
Hospitality Organisation - Portable Liquor Union Superannuation HOST PLUS
Host Plus (QLD)
Host Wets
Independent Schools Superannuation Trust ISST
Insurance Industry Superannuation Fund INSUPER
James Hardie Securiplan
Journalists' Union Superannuation Trust JUST
Labour Union Co-operative Retirement Fund LUCRF
Law Industry Superannuation Trust
Legal & General

Direct Super
Umbrella Plan
Master Trust

Mercantile Mutual

Pooled Super MasterFund
Pooled Super Group MasterFund

Metal Trades Industry Assoc. of Australia Staff Superannuation
National Association of Personnel Consultants NAPC
National Mutual

National Preservation Trust
Simple Superannuation Fund
Tailored Superannuation Fund

National Superannuation Plan
Nationwide Superannuation Fund
Non-Government Schools Superannuation Fund
Nursery Industry Superannuation Trust NIST
Olivetti Australia Limited Superannuation Fund
Olivetti Australia Productivity Superannuation Plan
Portable Liquor Union Superannuation Fund PLUS
Printing Industry Superannuation Fund PISF
Professional Real Estate Agents Fund
Queensland Retail Traders & Shopkeepers Superannuation QRTSA
Queensland Independent Education & Care Superannuation Trust QIEC
Queensland Law Sociely Superannuation Scheme QLSSS
Queensland Building Employers QUEST
Real Estate Institute of Australia Superannuation Fund
Retail Employees Superannuation Trust REST

Business Class Super Fund
Eligible Roll-Over Fund

Slaters and Tilers Retirement Fund
STATEWIDE Superannuation Fund
Sugar Manufacturers' of Australia Retirement Trust SMART
SUNSUPER Superannuation Fund
Superannuation Plan for Electrical Contractors (QLD) SPEC (Q)
Superannuation Trust of Australia STA
TASPLAN Superannuation Fude
Tertiary Education Superannuation Scheme TESS
The Aviation Industry Superannuation Trust TAIST
The Industry Superannuation Fund
Timber Industry Superannuation Scheme TISS
Transfield Retirement Fund
Transport Workers Union Superannuation Fund TWU SUPER
Tyndall Life Optimum Super Masterplan
Wealthpac Master Fund
Westpac Financial Services - Westpac Mastertrust - Westpac Masterplan
Westscheme Superannuation for Western Australians

Senator Watson - The arrangements of the reserve will not be a superannuation fund and, therefore, not subject to the costly prudential standards of superannuation funds requiring trustees, et cetera. The reserve will accept both mandated--that is, award-- and superannuation guarantee contributions plus voluntary employer contributions, referred to as deposits, on behalf of an employee. Moneys paid into the reserve will be allocated to an account of the employee and will be maintained for that employee's benefit.

When the member's account accumulates to a sustainable balance of $1,200, the balance can then be transferred to a complying superannuation fund of the member's choice. This amount will be treated as an employer contribution to that fund and will constitute a taxable contribution of the fund.

Generally, employees will not have direct access to their account balances. However, in order to facilitate and encourage the transfer of accounts that exceed $1,200 to a superannuation fund, interest will not be credited on amounts in excess of $1,200. However, deductions for employer contributions made to the reserve will only be available where those contributions do not exceed $1,200 per employee per year. On the other hand, amounts in excess of $1,200 can still be contributed but without the benefit of an allowable deduction to the employer. The Small Superannuation Accounts Bill therefore provides a legislative framework for employers to make payments to a superannuation holding accounso reserve, instead of making the small superannuation contributions to a superannuation fund.

Those employers most likely to use the relevant reserve account with the Taxation Office are those who employ casual employees or regular part-time people, or those who work intermittently. Essentially, the employer's contribution will remain protected from fees and charges until it grows to a sustainable level of $1,200 that can be transplanted into a compliance superannuation fund.

It is possible for an individual to apply to the commissioner for payment of his account with the reserve, on the grounds that he is suffering severe financial hardship or on the grounds of disability, providing he has retired from employment due to that disability. On the other hand, when an individual attains the age of 65, he may request that the commissioner pay the balance of his account, with a reserve to him. There is no dollar limit on the account balance when the individual has attained the age of 65. Also, when an individual satisfies the commissioner that he or she is no longer resident in Australia, the amount can be transferred out.

Perhaps this is an opportune time to raise an issue that was also raised in the committee's 15th report, which looked into the superannuation guarantee. Firstly, the committee recommended that the tax office's scheme should be limited to those employers unable to find appropriate funds offering member protection or unable to utilise existing employee accounts. Further, we recommended that PAYE forms should be utilised to simplify employers administration of their superannuation guarantee obligations. I trust that the Government will pick up this recommendation, although it is not in the Bill.

It is also pleasing that the government has accepted the recommendation of appropriate transfer protocols, which will also be in place by 1 July. However, one committee recommendation still has not been addressed; that is, that the government should look at the removal of the contributions tax, particularly from the early contributions. I believe that would also alleviate the small amounts problem. In other words, the government has asked industry to bear a cost, and we think the government should bear a cost in taking away some of the tax, particularly from the initial contributions.

I think we must acknowledge that Australia now has a superannuation system similar to those in other developed countries, but it is unique in a number of ways, given that the payment of the compulsory superannuation is operated through private sector organisations rather than through a central fund of pay as you go basis. There is, therefore, an element of competition.

The Select Committee on Superannuation that I chair undoubtedly received conflicting evidence about the acceptance of the superannuation guarantee system. However, I must say now that the emerging and perhaps dominant view is that the progressiveness of the superannuation guarantee system has been widely accepted. That acceptance is firming over time. The issue now is really to finetune the arrangement. That is important because we have to protect those funds. They are now worth approximately $200 billion and could increase tenfold into the first part of the next century. From a prudential aspect, the biggest challenge at the moment is therefore handling what I believe is the potentially explosive issue of derivatives.

This is a cognate debate encompassing changes to a number of Bills. Given the limited time available, it is absolutely impossible to address all the issues. I will look at the more fundamental ones, and I may seek the opportunity to extend the length of my contribution. I have looked at these Bills cognately rather than taking 20 minutes on each Bill, so I believe that, under the circumstances, that may not be an unreasonable request.

As a consequence of the Small Superannuation Accounts Bill currently before the Senate, it is also necessary to amend a number of other pieces of legislation. These include the Frinea Benefits Tax Assessment Act, the Income Tax Assessment Act, the Superannuation Guarantee (Administration) Act, the Taxation Administration Act and the Superannuation Industry (Supervision) Act 1993. Firstly, it was necessary to repeal the Superannuation (Rolled-over Benefits) Levy Act 1993, which permitted prescription of the levy of recouping of costs associated with a register of lost members from eligible rollover funds.

This gives you some idea of the complexity of superannuation legislation. This change will bring about so many consequential changes to so many other acts. It is not surprising that we continually hear the story, `There are too many changes to superannuation. We can't understand it; it is just too complicated.' We also hear people say, `The funds aren't performing well enough.'

If we look at another Bill in question, which is the Superannuation Legislation Amendment Bill (No. 1) 1995, we see that the purpose of that Bill is to amend four acts dealing with superannuation for Commonwealth civilian sector employees; namely, the Superannuation Act 1992, the Superannuation Act 1976, the Superannuation Act 1990 and the Superannuation Legislation Amendment Act. It also includes some formal amendments to the Parliamentary Contributions Superannuation Act. That means further change and further complication, but it is all in the right direction.

These amendments are important because they will continue to ensure that the process of Commonwealth superannuation arrangements complies with the Superannuation Industry Supervision Act. What we are trying to do is bring all of these various acts and schemes associated with the Commonwealth into line with the basic requirements of what are known as the SIS rules.

Only this week the Australian Retirement Income Streams Association submitted to the committee that perhaps one of the most effective ways of overcoming the problem of small amounts is for employees to be given ownership of their superannuatins arrangements through the operation of an account with their chosen public offer fund to which all employer contributions are placed. It also points out that the bias towards industry funds actually runs counter to other areas of government policy where the government has sought to deregulate industries and public utilities and to encourage greater competition, and this has certainly been in line with the Hilmer recommendations.

I introduce this point because I think this is one way of addressing the small account superannuation, but there are other ways of addressing it. One of the other ways of addressing it, as I have just mentioned, was put forward in a submission to the Senate Select Committee on Superannuation by the well-informed Australian Retirement Income Streams Association. I acknowledge its pioneering work in terms of the particular products that it has developed for retirement incomes and, particularly, for what I call allocated pensions, which are a very valuable and useful product.

The simple thrust of the submission form ARISA, the Australian Retirement Income Streams Association, was that the current system does not recognise the basic proposition that people should have control over arrangements which they themselves are funding, whether that funding is direct or indirect. So this sort of proposition is, of course, not far from the Liberal Party view, which is that there should be more competition in terms of giving people the same control over their superannuation fund and their right of choice. Certainly, the advance in electronic transmission of funds through the banking system or through Australia Post does provide a very low cost and efficient facility where funds can be dispatched almost instantaneously right across a number of funds from the employer.

I think the coalition took a courageous stand when it decided that rather than making, for example, retirement savings accounts conditional on this legislation, it would leave it as an election issue. It is just so important to get the small amounts in plaef before 1 July that we really did not want to be seen to be hindering the timing of putting into place what I call the intermediate step of the arrangements of the holding accounts through the Australian Taxation Office system.

The Liberal Party believes there is a role for retirement savings accounts. However, my personal belief is that they are better situated at the bottom end of the spectrum. Once the amount starts to grow, they should be subject to the same prudential guidelines and trustee control that most other superannuation funds are subject to. This is something that I think should be put to the electorate at the next election rather than holding up this important Bill, and I commend Mr Connolly for acknowledging this. Mr Connolly is the coalition spokesman on superannuation and is doing a very good job.

We should also look at this question of choice, because choice is inevitably involved in this whole question of superannuation. I must point out to the Senate that there are actually two aspects of choice. Firstly, there is beneficiary or member investment choice, which is allowed under SIS but which must be not only within the investment strategy guidelines laid down by the SIS rules and regulations themselves but also under a strategy determined by the trustees.

Secondly, and quite distinct from the first--people often confuse this point--there is a choice of fund. I issue a warning in relation to the issue of choice of fund. I do not want to see people locked into poorly performing superannuation funds day after day or year after year.

The concept that the government introduced of providing temporary capital gains tax relief for those funds that rollover or merge with each other is indeed welcomed, but what the government must do is extend this exemption from capital gains tax where funds do decide to merge. Over time there will be poorly performing funds and, in some cases, there should be pressure to encourage them to merge.

The big problem is: when should trustees send the message ott that there should be a merger. This is always somewhat difficult. Therefore, I think the concept of temporary capital gains tax relief should be extended to a permanent arrangement. I believe we should also extend the scope of the concept. For example, approved deposit funds get an exemption from capital gains tax if they merge into a superannuation fund, but not necessarily if they merge into another ADF.

One of the difficulties at the moment with superannuation funds is the emphasis on what I call short termism which results in fund managers jostling for poll position in terms of quarterly returns. What we must do is develop a long-term reporting process. I would like to see something incorporated in the annual statements. Members really need to know how their funds are performing in the long run in relation to other funds. (Extension of time granted)

There is a suggestion that a long-term or five year figure produced by the Insurance and Superannuation Commission or the Association of Superannuation Funds of Australia, which is an umbrella organisation which plays a valuable role in setting the direction for superannuation in this country, could be included in each fund's member reporting mechanism when they are looking at the particular year under review. Members could then see how well their fund is performing compared with the overall average.

There are arguments against this, but people need to look at this issue more realistically than on a short-term basis. People get worried about short-term results in the paper. There have to be mechanisms where members can transfer with minimum cost and inconvenience. There also have to be mechanisms for the transfer or merger of those funds which are, on a long-term basis, consistently under-performing.

With the prolific increase in do-it-yourself super, commonly known as DIY super, it is not surprising that professional fund managers are worried about the outflow of their retail funds to d-b it-yourself super. People with some investment knowledge who have been sensible enough to access the necessary technical and outside skills and resources should be able to continue with do-it- yourself super.

I remind the Senate that there are two reasons for this outflow of moneys from the retail sector of super into do-it-yourself super. The reasons are the poor investment returns and the concern of members about fees and charges. The investment manager should be, rather than curtailing the operations of do-it-yourself super, addressing the two issues that I have just spoken about.

Some of the leading superannuation funds are performing quite well. I wish to use the opportunity to acknowledge the role and performance of a number of industry funds that have certainly been quite remarkable in their attempt to both contain costs and maximise returns. This leads me to the whole question of competition. I believe that there are certainly economies of scale. If we tend to encourage too many of these smaller superannuation funds or encourage superannuation to go in particular directions, we may not necessarily be doing what is best in the long term. There are obviously warm fuzzy feelings about certain types of investments in the short term, but they may not necessarily be best in the long term.

In conclusion, this leads me to address the issue of derivatives. The injudicious use of derivatives has the potential to reduce sizeable superannuation investments into small amounts. The Senate committee is pressing the ISC for a quicker response to the establishment of standards to regulate the uncontrolled use of derivatives. I have yet to see evidence of self-regulatory or prudential supervision that gives me sufficient confidence that another Barings type fiasco is less likely to occur in the future than it has in the past.

We are all aware that the rate of change in the investment industry has been absolutely enormous. It was only two months ago that assent was given to the Corporations Law (Securities and Futures) Amendment Bill, which facilitates the trade of share ratios on Australian securities and futures exchanges. Products that were unknown 10 years ago are now part of that vocabulary. The issue is how parliament can keep control of these fast-moving changes in the commercial community and the application of these new products to superannuation and the risks that they may involve.

Nevertheless, partly in response to the rate and extent of change in this industry, it is clear that there is a degree of concern and conflicting sentiment as to the balance of utility and security that derivatives afford. It is amongst this debate that I wish to put a special case for superannuation. One of the better performing investment managers, Maple-Brown, does not use derivatives.

Again, my time has run out, so I must conclude now. While the gains that leverage can make for investments are enticing, their potential to lose similar amounts represents, I believe, an unacceptable risk to superannuation funds. Superannuation, arguably more than any other form of investment, is an investment that recipients cannot afford to lose. In this debate on the small accounts issue, I have addressed a wider number of issues. They are all related to the safeguarding and security of an investment that is put away and which is so necessary not only to provide a stable, secure retirement income flow but also to increase national saving.

I commend the Bills to the Senate.