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Reference: Superannuation and standards of living in retirement

              THURSDAY, 18 JULY 2002

                    BY AUTHORITY OF THE SENATE

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                             SELECT COMMITTEE ON SUPERANNUATION
                                           Thursday, 18 July 2002

Members: Senator Watson (Chair), Senator Sherry (Deputy Chair), Senators Allison, Buckland, Chapman,
Hogg and Lightfoot
Senators in attendance: Senators Hogg, Lightfoot, Sherry and Watson

Terms of reference for the inquiry:
  To inquire into and report on:
  The adequacy of the tax arrangements for superannuation and related policy to address the retirement income and
  aged and health care needs of Australians.

AGLAND, Mr Reece Graeme, General Counsel, National Institute of Accountants ............................. 476

ANDERSSON, Mr Michael Glenn (Private capacity)............................................................................... 456

BARRETT, Ms Jane Margaret, Superannuation Policy Adviser, CPA Australia ................................. 446

COMBET, Mr Gregory Ivan, Secretary, Australian Council of Trade Unions...................................... 418

COOGAN, Mr David Nicholas, Treasurer, Australian Institute of Superannuation Trustees............. 405

CORRELL, Mr Denys Edward John, National Executive Director, Council on the Ageing
(Australia) ..................................................................................................................................................... 433

DYSON, Ms Helen, Vice-President, Australian Institute of Superannuation Trustees ......................... 405

GALBRAITH, Ms Fiona Anne (Private capacity) .................................................................................... 456

GODDARD, Mrs Elizabeth Jane, Head of Research, Corporate Superannuation Association............ 463

GUTHRIE, Ms Jennifer, Member, Corporate Superannuation Association.......................................... 463

HEWETT, Ms Helen, Fund Secretary, Cbus ............................................................................................. 485

KELLEHER, Ms Noelle Eileen, Member, Superannuation Centre of Excellence, CPA Australia ...... 446

McKENZIE, Mr Angus, Committee Member, Corporate Superannuation Association....................... 463

ORD, Mr Gavan Russell, Technical Policy Manager, National Institute of Accountants...................... 476

PARTINGTON, Mr Robin Nyren (Private capacity) ............................................................................... 456

REYNOLDS, Ms Fiona, Executive Officer, Australian Institute of Superannuation Trustees............. 405

RUBINSTEIN, Ms Linda, Senior Industrial Officer, Australian Council of Trade Unions.................. 418

SHEEN, Ms Veronica, Deputy Director, Council on the Ageing (Australia).......................................... 433

WYATT, Mr Murray William, Chairman, Superannuation Centre of Excellence, CPA Australia..... 446
Thursday, 18 July 2002                   SENATE—Select                              SUPER 405

Committee met at 9.01 a.m.

   CHAIR—I declare open this fifth hearing of the Senate Select Committee on Superannuation
in its inquiry into superannuation and standards of living in retirement. We will hold a hearing
tomorrow, 19 July, in Canberra and another hearing in Sydney at a later date. Under its terms of
reference, the committee will inquire into the adequacy of the tax arrangements for
superannuation and related policies to address the retirement income and aged and health care
needs of Australians. The inquiry is broad ranging and is considering such issues as how much
income is enough in retirement and what it needs to cover; what superannuation contribution
levels and other sources of income are required to meet retirement needs; the overall fairness of
the taxation of superannuation, to ensure that individuals and groups are treated equitably with
respect to end benefits; and how to streamline the operations of the system to reduce costs and
improve member understanding. The inquiry will also consider how to improve the
coordination of superannuation with the policy outcomes of other social security measures that
concern the lives of older Australians, including health and aged care.

   Today we will take evidence from representatives of some superannuation funds and
associations, peak accounting bodies, a peak body representing employees—that is, the
ACTU—and the Council on the Ageing. All of the witnesses who appear before the committee
are protected by parliamentary privilege with respect to the evidence they shall give. This
means that witnesses are protected from action arising from what is said and that the Senate has
the power to protect them from any action that disadvantages them on account of evidence
given before the committee. The committee prefers to conduct its hearings in public; however,
if there are any matters that you wish to discuss with the committee in private we will consider
your request.

COOGAN, Mr David Nicholas, Treasurer, Australian Institute of Superannuation

DYSON, Ms Helen, Vice-President, Australian Institute of Superannuation Trustees

REYNOLDS, Ms Fiona, Executive Officer, Australian Institute of Superannuation

  CHAIR—We welcome our first representatives this morning and we invite you to make a
short opening statement outlining the main features of your submission.

   Ms Dyson—Thank you. Certainly I think there has been enough evidence given to this
committee, along with the material contained in our submission, that demonstrates that most
people retiring within the next 20 years are unlikely to have a retirement income sufficient to
allow them to self-fund their own retirement and that they will need to rely on other sources of
income such as the age pension. That is on the basis that most surveys and commentators
suggest that retirement income would need to be between $20,000 and $30,000 per annum to
provide a sufficient income in retirement.

  Our submission has recommended a couple of measures to address those issues, which we
believe should be considered by the committee. We strongly recommend that the committee
consider the phasing out of the 15 per cent contributions tax. Unfortunately, that tax targets

SUPER 406                               SENATE—Select                  Thursday, 18 July 2002

superannuation contributions in their accumulation phase. There is quite a bit of material to
suggest that taxing it at that early phase does have a negative impact on the accumulation and
the ultimate benefit. There is a suggestion that, for a person on average weekly earnings, it
could reduce their final benefit by in the order of $40,000 or $50,000, so we certainly think
consideration should be given to removing that contributions tax.

   We also suggest that the committee support the transfer of the administration of the
superannuation surcharge from superannuation funds across to the ATO. The reason for that is
that the administration of the surcharge does impose a significant compliance burden and a cost
burden on superannuation funds. We suggest that that cost burden is disproportionate to the
benefits gained from the tax in terms of its objective of producing greater equity. That cost
burden falls on all members of superannuation funds, not just those members who are paying
the surcharge. Because it is an increased cost, it does reduce the investment returns and,
ultimately, the retirement benefits for the members in those funds. We think a more efficient
way of administering the surcharge would be to transfer it to the ATO.

   AIST also recommend—this is quite topical given the current debate on paid maternity
leave—that there be a public payment equivalent to nine per cent of average weekly earnings
into superannuation for women on maternity leave. With the current debate on paid maternity
leave, we certainly believe that superannuation contributions whilst on maternity leave should
be considered. If it were to be funded from the public purse, there may be suggestions that
superannuation should not come into the equation; however, we suggest that it is a very
significant element, particularly for women who have broken working lives. Research has
shown that women are one of the groups that are most disadvantaged under the current
arrangements in accumulating adequate retirement incomes.

   We also believe that the committee should consider whether the government should undertake
a cost-benefit study on paying a basic superannuation contribution for people on unemployment
or sickness benefits or carers’ allowances, because these are people who are disadvantaged.
They are out of the work force, which means they are not getting superannuation contributions,
and this reduces their ability to accumulate retirement income.

  Another recommendation in our submission is that the government should assist industry to
undertake a broad public education program aimed at encouraging members of superannuation
funds to amalgamate their superannuation benefits. Research suggests that many members have
more than one account, and those accounts are generating fees. Amalgamating their
superannuation benefits into one account, particularly into a low fee fund, should assist
employees to maximise their superannuation benefits and to reduce the cost element they incur.

  Senator LIGHTFOOT—You would not actually reduce the fee; you would reduce the
percentage of the fee that was paid on the superannuation.

  Ms Dyson—Yes. Another initiative that AIST proposes, in conjunction with the Australian
Taxation Office, the Conference of Major Superannuation Funds, Women in Super, the
Australian Preservation Fund and Super Partners, is a public education campaign to encourage
members to trace their missing superannuation. There is approximately $4 billion of lost
superannuation sitting out there. We believe that it would assist in advancing the aims of this
committee to ensure that members obtain all the superannuation they are entitled to and that

Thursday, 18 July 2002                    SENATE—Select                               SUPER 407

they consolidate it and earn investment returns. Ultimately, this would assist in ensuring that
they do get adequate retirement incomes. We seek the support of the Senate select committee
for the initiative of the lost members week, which we are proposing to run later this year.

  CHAIR—Thank you very much. You have raised some very interesting concepts there.
Firstly, can I take you up on the transfer of the administration of the surcharge to the Australian
Taxation Office. If it is the government’s intention to get rid of the surcharge in the foreseeable
future, is that a cost-effective way of implementing such a radical change?

   Mr Coogan—I guess, from a practical point of view, if the government was looking at
eliminating the surcharge in total then I take your point. But at the moment our understanding is
that there is a phase down to 10½ per cent so the surcharge is still there. Our point is really that
from an administration point of view, particularly where people are moving from one fund to
another and there is this constant catch up of chasing people on the surcharge between different
funds, it would be a lot more efficient cost wise for it to be done through normal PAYE

  CHAIR—So what is your suggestion of the sort of time frame that would be realistic? If the
government, for example, does not intend to get rid of the surcharge in a five-year time span
then should we consider that or a longer time span? What sort of time span do you think would
be reasonable? There is quite a cost and an upheaval to have such a transfer, isn’t there?

  Mr Coogan—We would have thought probably about 12 months in terms of the changeover

  CHAIR—You think the transfer to the tax office could be bedded down within a 12-month
period, do you?

  Mr Coogan—We have not consulted with the tax office on this issue but we would have
thought that that would be reasonably achievable.

   CHAIR—I will certainly take that up with Mr Bator and his colleagues at the tax office, I
think, because it is a tax where the administrative cost is disproportionate to the amount of
money that it raises. A lot of those costs, of course, are also borne by the lower income earners,
aren’t they?

  Mr Coogan—Yes.

  CHAIR—Thank you for raising that. This is an interesting one: the public purse should pay
for the payment of maternity leave. What period of time did you suggest that that payment
should be for?

   Ms Dyson—With current arrangements for maternity leave, most companies offer unpaid
maternity leave for 12 months. We are suggesting that a lot of the debate around paid maternity
leave has suggested a period of maybe 14 or 15 weeks—about three months. If that is the
amount that the public and business generally think that they could accept for paid maternity
leave arrangements, we would certainly support that on the understanding that superannuation
contributions would form part of that payment.

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  CHAIR—For the purpose of the status of this payment, do you suggest it be a payment from
the public purse? Would it be regarded as an employee contribution or an employer

  Ms Dyson—That is a good question. It should probably be regarded as an employee

  CHAIR—That does not attract the contributions tax.

   Mr Coogan—That would have to be sorted through, but I guess if they were being employed
in the normal course of business they would be paying contributions tax, so it probably makes
sense for the contributions tax to be deducted as well.

  CHAIR—To be deducted?

  Mr Coogan—Yes.

  CHAIR—So that effectively lessens the benefit, doesn’t it, up-front?

  Ms Dyson—Yes. But of course if the committee accepted our suggestion of removing the
contributions tax up-front that would eliminate that problem.

  CHAIR—Of course, but as you said in your submission you thought it would be on a
progressive basis because of the tax implications. Have you considered how the government is
going to raise alternative revenue?

   Mr Coogan—I guess a quick answer is no but, looking at the long-term growth in the funds
under management within the superannuation industry, obviously over time government will
still be receiving a lot of tax through the superannuation system, particularly—

  CHAIR—On investment income.

 Mr Coogan—on investment income and also on lump sum payments and pensions on the
way out through the system.

  CHAIR—Have you any idea of the relativities between the two at the moment?

  Mr Coogan—We did put some numbers in our proposal. From memory, we talked about the
government currently collecting about $4½ billion through the superannuation system, of which
roughly 15 per cent was to do with contributions. But we would need to check that.

  CHAIR—Contributions tax is $2½ billion, but how much is the government getting from
income from superannuation investments?

  Mr Coogan—We would have to take that on notice—

  CHAIR—That would be handy.

Thursday, 18 July 2002                    SENATE—Select                              SUPER 409

  Mr Coogan—or look at that through the tax office, but I think it is about 50 per cent of what
has been collected.

  Senator SHERRY—Going back to the issue of women and maternity leave, let us assume
government makes some contribution in the form of paid maternity leave. Wouldn’t it then be
logical that, whatever that figure is, government should contribute nine per cent SG equivalent
of that figure to the employee’s superannuation fund?

  Ms Reynolds—Yes, that is what we are suggesting.

  Senator SHERRY—On the issue of adequacy, there appears to be a very significant problem
for people who are 35 or 40 years of age and older, because they have only been in the
compulsory superannuation system for approximately 15 years. Very clearly, there is not going
to be sufficient income accrued for that group of people—obviously low-income to middle-
income earners right across the board, but predominantly women. Do you have any specific
policy suggestions to deal with maximising the retirement income of this particular group who
are expecting, as you say, $20,000 to $30,000 when they retire and are not going to have it?

   Mr Coogan—We have made a number of points in our submission. One is to address the
issue of trying to reduce the contributions tax, which will indirectly increase the level of
effective contributions quite substantially. The other issue is tax incentives for people to put in
more voluntarily. We know there are already tax incentives, but they could be broadened.

   Senator SHERRY—We have seen some of the figures for this group who have only been in
the system for a small part of their working life. The bulk of them are there because of
compulsory superannuation, so it appears to me that voluntary incentives are not going to make
a lot of difference. What about reducing the contributions tax based on the age of a person to
maximise the tax reduction for those who need it most because of this ageing problem?

   Mr Coogan—We would support that. We understand that one of the other presenters has put
in a similar proposal.

  Senator SHERRY—Ms Dyson, are you a trustee of the Coles Myer super fund?

  Ms Dyson—Yes, I am.

  Senator SHERRY—Which employees does this cover?

  Ms Dyson—It mainly covers managerial employees and the more senior staff but it extends
down to some people in distribution centres and stores.

  Senator SHERRY—Can you tell me approximately what your administration fees are?

  Ms Dyson—Because the administration is handled in-house, they are quite low. I think the
overall costs of running the fund are about 33 basis points but I would prefer that that matter
was kept confidential.

SUPER 410                                SENATE—Select                   Thursday, 18 July 2002

  Senator SHERRY—It is a bit difficult to do that on the public record, but we can take that as
an approximation. Whatever the figure, do you believe that it is a cost-effective fund—that it is
value for money?

  Ms Dyson—Yes.

  CHAIR—Ms Dyson, everything that is said here is on the Hansard record, which is
available, so you might want to consider your answers.

  Senator SHERRY—If I were you, I would be boasting about an administration cost of that

  Ms Dyson—We like to think it is very favourable, but obviously it has to be balanced
between costs to the company and costs to the member et cetera.

  Senator SHERRY—Why can you achieve such a cost-effective administration and
management charge when the average in the industry is 1.2 per cent? Yours is significantly
below that. Of course, averages themselves are misleading. We know there are many people
who are paying significantly more than one per cent costs. The importance of one per cent is
that it reduces the final balance by 10 per cent. Can you tell me why you can get a management
fee that low?

  Ms Dyson—Because the administration is done in-house. We do not have a large number of
people handling the administration—but it is managed very efficiently. Also, a lot of the day-to-
day operational issues in relation to the fund are handled by employees utilising resources
within the company, such as the company’s treasury, and the company’s legal team for
negotiating agreements. That is one of the ways in which the costs are kept down. Obviously,
not all funds are in that position. That is the reason the costs can be kept down, but I am not
suggesting that that is a model suitable for the majority of superannuation funds in this country.

  Senator SHERRY—Approximately how many members are there in the fund?

  Ms Dyson—About 15,500.

  Senator SHERRY—With members numbering 15,500 it is a large fund. Do you believe
there is an advantage in size in terms of negotiating investment fees and charges and those sorts
of costs?

  Ms Dyson—Definitely.

  Senator SHERRY—So you can get a better deal for your 15,500 members by a group bulk
purchase, if you like, than if they went out and bought it themselves as individuals?

  Ms Dyson—Yes.

  Senator SHERRY—I am not going to go into detail on this today, but could you take on
notice a question which we will be pursuing on another day: what would be the implications of

Thursday, 18 July 2002                    SENATE—Select                               SUPER 411

the so-called choice of funds legislation for the Coles Myer fund? I anticipate further hearings
on that legislation, so we can deal with the detail of that on another occasion. I would like to go
back to the issue relating to women. I agree that it is an important principle that women should
receive that contribution to superannuation if paid maternity leave is introduced, but isn’t it the
reality that it is a very small contribution given the significant disadvantages that women face?
Their average wage is lower and they spend significant periods of time out of the workplace,
which would not be paid, even if you had modest maternity leave, because of broken leave
patterns. Have you thought about any other strategies to address the imbalance that exists for
women in and out of the work force?

  Ms Dyson—We think this is a hard issue because currently superannuation is linked to
employment. We do not really have any answers as to how that could be overcome, except for
the government to make contributions for those people. We recognise that things such as
splitting might be able to help. Regarding the surcharge—because it does affect women who are
coming back into the work force on higher incomes but have not been in the work force for as
long as men—one of the other recommendations that we have made is that the surcharge should
be applied on the basis of your account balance rather than your assessable income.

  Senator SHERRY—We had that suggestion yesterday, but I come back to you, Ms Dyson,
because you are hands-on in terms of the Coles Myer fund. Of the 15,500 members in the fund,
how many women approximately would be at surchargeable income levels?

  Ms Dyson—I would need to take that question on notice. I am really not certain but I would
suggest that there is not a significant number.

   Senator SHERRY—You can take that on notice and you can provide that to the committee
confidentially. I am not seeking to embarrass Coles Myer or anything like that; I am just
interested in a practical working example of what happens in this area. My understanding is that
the number is, as you say, very small.

  Senator LIGHTFOOT—Ms Dyson, you said that $4 billion or thereabouts was lost—
‘unclaimed’ may be a better term. How would you propose that those people be notified? How
would you propose that they become aware of that amount that has been lost? It obviously
belongs to someone, every last dollar of it. What is the machinery that you would recommend
be put in process so that people know?

  Ms Dyson—I would like to suggest that Fiona Reynolds may be able to answer that question.

   Ms Reynolds—I think the figure is actually about $5.8 billion. In conjunction with a number
of funds in the industry, the ATO and some of the industry bodies, we are holding an unclaimed
super recovery campaign in October—we are not calling it ‘lost members week’ anymore.
There will be radio and newspaper advertisements that tell people about unclaimed super—
telling them about the amounts out there, suggesting that they could possibly be someone who
does have unclaimed super and encouraging them to roll their super over. They will dial a 1800
number and will be sent out information about the lost members register, how to find their super
and how to roll it over into one fund. We will also focus on the importance of consolidating
super, because of its being eroded by fees through having it in multiple accounts. We are

SUPER 412                                  SENATE—Select                    Thursday, 18 July 2002

running expos in each state and will be in shopping centres. Members from the tax office will be
there and they will have the lost members register on hand.

  Senator LIGHTFOOT—But you are speaking on behalf of the Australian Institute of
Superannuation Trustees, aren’t you?

  Ms Reynolds—Yes, but we are involved in this project.

  Senator LIGHTFOOT—Why is the ATO there? Are you doing a joint venture with the

  Ms Reynolds—Yes.

  Senator LIGHTFOOT—Are they partly funding it?

   Ms Reynolds—They are funding the staff at the expos and in shopping centres, and the
infrastructure costs of having the information there. The industry is paying for the rest of it.

  Senator LIGHTFOOT—Are you going online?

  Ms Reynolds—Yes.

  Senator LIGHTFOOT—So someone could look up your call sign, find out if their name is
there and find out how much money there is?

  Ms Reynolds—Yes.

   Senator LIGHTFOOT—What do people do once they find out they actually have a
transportable, say, $5,000 worth of superannuation funds?

  Ms Reynolds—If it is on the lost members register?

  Senator LIGHTFOOT—Yes.

  Ms Reynolds—They would then be encouraged to get financial advice to consolidate all of
the money and put it into a fund, or leave it where it is but at least consolidate it all.

   Senator LIGHTFOOT—So if they have a superannuation fund they are currently obliged
to, if they are still being employed, because of its portability, could they transfer that to the fund
that is currently alive?

  Ms Reynolds—Yes.

  Senator LIGHTFOOT—What sort of process is needed to do that? Do they need statutory
declarations or do they merely go to you and give you their ATO number; what is the process?

Thursday, 18 July 2002                   SENATE—Select                               SUPER 413

   Ms Reynolds—You have to fill out the appropriate roll-over forms to roll over the money

  Senator LIGHTFOOT—Do you have those forms?

  Ms Reynolds—We will have those forms?

  Senator LIGHTFOOT—Would you post those forms out or fax them out to these people?

  Ms Reynolds—Yes—or if you were at the expo you could do it then. If the forms were there,
you could do it there for the fund that you wanted to go into.

 Senator LIGHTFOOT—So it is not going to be too difficult, where people will say, ‘It’s too
much trouble; I’ll give it away’?

  Ms Reynolds—Our aim in having the expo is to try to assist people to do it on the spot so
that they are not just getting the information and then saying, ‘Well, this all looks too
complicated; I don’t know what to do.’

  Senator LIGHTFOOT—When will you be going online?

  Ms Reynolds—We will be online at the expo.

  Senator LIGHTFOOT—For the record, what dates are the expos?

   Ms Reynolds—In all states except Tasmania the dates are 25 to 27 October. We are running a
test in Hobart on 23 and 24 August.

   Senator LIGHTFOOT—Thank you very much; that is very good information. I think I am
obliged to place on the record that I have been a client of PricewaterhouseCoopers for 25 years,
but I have never met Mr Coogan before—not that I am aware of, anyway. All politicians would
like to see the phasing-out of the 15 per cent surcharge that you mentioned. You suggest that in
other areas there is going to be an impost on taxpayers. Where is the growth in taxation
collections so that you could contra the phasing-out in order to introduce something else? You
have said on the one hand that the revenue should be depleted and on the other hand that we
should be spending more. Where is there an area of growth so that you could possibly contra

   Mr Coogan—There are a number of elements. One is the surcharge, one is the contributions
tax and then there is the normal investment income within the various funds which is taxable as
well. You have to look at them in totality. But if you are looking purely at eliminating the
surcharge, perhaps, there is still the ongoing contributions tax income and investment income
within the system. Regarding the funds under management, the recent increase from eight per
cent to nine per cent in SGC will fuel additional tax income to the Taxation Office through the
system. The other point which we are making is that, if this is an issue, let us work on trying to
find a way of phasing it down over a reasonable period of time, which would allow for the point
you raised. There might be another way of benchmarking it besides benchmarking it to the tax

SUPER 414                                SENATE—Select                   Thursday, 18 July 2002

that is on the superannuation system—for example, some other benchmark within the economy.
One of our points is that there is going to be a huge acceleration in the amount of tax revenue
that the Taxation Office will effectively take out of the superannuation system. It has only just
started to take off, but it is going to keep on going like that

   Senator LIGHTFOOT—To express it graphically—without putting too fine a figure on it—
it is possible to contra any move to phase out the 15 per cent surcharge by increases within the
same industry in taxation collections?

  Mr Coogan—That is right.

   Senator LIGHTFOOT—That is very good. Ms Dyson, you spoke about the broken working
lives of women. Were you proposing that the superannuation should continue for the 90 days—
or the figure that you spoke about—paid maternity leave? That is, that superannuation
contributions would continue and would be paid by the employer?

  CHAIR—No, by the government.

  Senator LIGHTFOOT—The government would pay them. So the employer would not pay
any of those contributions at all?

  Ms Dyson—If employers are already offering paid maternity leave then, yes, the employer
would pay. But I think we have to be realistic about this and recognise that not all employers are
going to be in a position to offer paid maternity leave. That is one of the reasons we suggested
that the government could fund paid maternity leave and a superannuation contribution.

  Senator LIGHTFOOT—As well?

  Ms Dyson—As well.

  Senator LIGHTFOOT—I am still not quite clear. You are saying that where the employer,
not being the government, cannot pay—SMEs, for instance, may not be able to pay—the
government should pay the maternity leave and the superannuation contribution?

  Ms Dyson—Yes.

 Senator LIGHTFOOT—You are saying that where private sector employers, including
SMEs, could pay, they should pay?

  Ms Dyson—Where employers are already offering that paid maternity leave benefit they
would be making superannuation contributions as part of that arrangement. Given that they
have decided to offer this payment—as part of their business case they have obviously done an
analysis and found that there is some benefit for the organisation in doing so—I would assume
that they would be quite willing to continue to do so. But that is a policy matter. Perhaps the
committee may want to have some discussions with employer groups to clarify that aspect.

Thursday, 18 July 2002                   SENATE—Select                              SUPER 415

  Senator LIGHTFOOT—What if the balance of the 12 months was unpaid leave? Are you
suggesting that there should be anything by way of superannuation contribution during that non-
paid period? Is that something that the woman would have to bear, or is it a good term, seeing as
she is off having a child?

   Ms Dyson—We have not really considered that issue in any detail. I would like to suggest
that the government consider funding a maternity leave contribution for the balance of that
leave. Obviously that would need to be balanced, because of the demand on the public purse et
cetera. Certainly it would benefit women in particular, because it would ensure that their
superannuation continued while they were out of the work force and on maternity leave. It could
go some way to alleviate the disadvantage that they currently suffer when they leave the work

  Senator LIGHTFOOT—Yes, there is a definite disadvantage there.

  Senator HOGG—In your opening statement you referred to a group of people who are not
currently covered by superannuation, and that is people such as the unemployed and people on
carer’s allowance. What other people did you throw into that pool?

  Ms Dyson—It was people on unemployment benefits, sickness benefits or carers allowances.

  Senator HOGG—How do you advocate that those people would be handled in the system?
You are one of the first groups to mention them.

   Ms Dyson—Because they are on social security there is a way of tracking it. But, again, I
consider that it probably would need to be dealt with in a similar way to the government
funding a maternity leave benefit. It would come from the public purse, and it perhaps would
have to be administered in conjunction with Centrelink, because they would be aware of the
time when they were on benefits.

  Senator HOGG—So you would see this as an additional benefit payment to them?

  Ms Dyson—Yes.

  Senator HOGG—I do not want to complicate it, but in effect it would be an additional
benefit payment which would be put into an account for them for retirement?

  Ms Dyson—Yes.

  Senator HOGG—In other words, you are looking more at universality in retirement policy.
You are looking at having everyone covered rather than having a number of people excluded, if
one takes into consideration women with broken work patterns and everything else. Would that
be a fair comment?

  Ms Dyson—Yes, that is a fair comment. The government too are perhaps moving that way
with some of their recent proposals to allow for superannuation contributions for children and

SUPER 416                                SENATE—Select                   Thursday, 18 July 2002

spouses. We are moving towards universality of coverage. I think our suggestion is not
inconsistent with the way that government policy is moving.

  Senator HOGG—The real issue then is that if we are to meet—not in their entirety but in
some way—the retirement needs of people a fair way down the track, we will need a broader
response to contributions on behalf of those people who may well miss out currently.

  Ms Dyson—Yes.

  Senator HOGG—How do you deal with the current issue where for people who earn $450 a
month there is no obligation to pay the SG? Do you people have a view on that? If you do not, I
am quite prepared for you to take it on notice and get back to us, but if you have an answer I
would be interested in hearing how we should handle those people, because they are not an
insignificant number of people either.

  Ms Reynolds—We believe that you should pay superannuation contributions on all money
earned, so there should not be a $450 opt-out limit.

  Senator HOGG—If that is the case, the $450 and nine per cent work out roughly at $10 a
month. How do you deal with those people who might be getting a limited number of hours of
employment? In some cases it may well be contrived and in some cases it may well be their
choice. Do you set a minimum level of contribution? The superannuation industry may well
argue that it is not really practicable to take $6 or $4 a week off someone. Do you set a
minimum limit that has to be contributed each week? That may well be higher than nine per
cent in the case of some people’s wages.

  Mr Coogan—We are saying that we should make the contributions into superannuation
universal irrespective of the amount so that the compliance issues out there are reduced. Even
with SGC there are all sorts of issues in terms of enforcement and compliance. If we make it
universal then there is no way of opting out; everyone is in there. Picking up on your point
about small balances, a lot of research has been done in the past on the impact of even $1 of
contribution or $1 of administration fee and the impact of that on a compound basis over a 30-
year period. It is still quite significant.

  Senator HOGG—I take your point, but I am looking at whether you would recommend to us
that there should be a minimum level of contribution. If there is not I am not worried about that,
but should it be a minimum level of $5, $10—or whatever it might be?

   Mr Coogan—We would suggest that that would be something to have a look at, particularly
in light of the administration costs. If we are talking about $1 a week in administration costs,
obviously contributing anything less than $1 or even $1 a week is pointless.

   Senator HOGG—That is right. It may well be that in the proposition you put forward you
would need to look at a bare minimum contribution of, say, $5. One dollar of that you know
goes into administration and the other $4 at least is going to some form of accumulation for
retirement. Whilst that would apply to people on carer’s allowances, people on pensions, the
unemployed and people on sickness benefit, would it apply to those people such as women who
are taking time off to perform a carer’s role for their children?

Thursday, 18 July 2002                   SENATE—Select                               SUPER 417

  Ms Dyson—That would need to be considered, particularly as we have identified that women
are one of the disadvantaged groups.

   Senator HOGG—That is right. A significant number of women take a break from
employment for that period of time whilst their children are young. Some might never go back
to the work force because of the circumstances of their families.

  CHAIR—We were talking about the public purse payment for maternity leave for up to
about three months. The committee is quite interested in this concept. Given the break in the
nexus between the work force and superannuation, in terms of equity, what about other people
who are not in the work force? Is there a case for payment for maternity leave and the SGC to
go into their account? Because increasingly we are seeing the growth of spouse and other

  Ms Dyson—I would think it would be something that would need to be considered. We have
suggested that maybe we need to consider universality of coverage, so that would be an issue I
would suggest should be considered.

  CHAIR—It just seemed a little unfair to give a benefit for those who are in the work force
compared with those who are not in the work force.

  Mr Coogan—I take your point.

   CHAIR—Thank you very much for your presentations today. They were very interesting. It
is always good to hear new views.

   During the lunchbreak I am prepared to open up the hearings to a round table for people who
have not submitted or who might like to make an additional contribution. From 12.30 or
thereabouts, when we have heard from our last witnesses—that will be from the CPA—the
committee will be quite happy to hear from individuals. Whether they want to say they are
representing themselves or organisations does not really matter. Some people might come from
a perspective that we have not heard from. For example, we regret the fact that we have not had
significant contributions from administrators—that sort of thing.We are just interested in getting
as much feedback as possible. So I would just put you on notice to organise your thoughts if
you want to come forward and express some views. Thank you.

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[9.45 a.m.]

COMBET, Mr Gregory Ivan, Secretary, Australian Council of Trade Unions

RUBINSTEIN, Ms Linda, Senior Industrial Officer, Australian Council of Trade Unions

  CHAIR—Welcome. I know that Ms Rubinstein is a regular attendee at our committee
hearings, but I think this may be your first time, Mr Combet.

  Mr Combet—I have attended a lot of committees, but I do not think I have been before this
one. I will just make some opening comments and then we are open for questions.

  CHAIR—You might even like to comment on some of the other submissions.

   Mr Combet—I think the committee is aware that Linda Rubinstein has principal carriage of
superannuation policy at the ACTU and, as you have observed, she has appeared before the
committee on a number of occasions previously. So I will open and then we will both endeavour
to handle any issues that you might have. We have made a submission that deals with a number
of the issues that are being considered by the committee as we understand it. It goes to the
adequacy of the current level of contributions to superannuation and what retirement income
that will lead to for people, the issues of equity and the simplicity of the system.

  The ACTU are concerned that workers have access to adequate retirement incomes—that is
the principal issue of interest to the ACTU and unions. Of course, this needs to be seen in
conjunction with the age pension, but we see superannuation as having an important role in
ensuring that people have an adequate retirement income. While there are debates about how
much is enough—and there are different models based on various assumptions—I think that,
when you consider the information before the committee and in public debate, it is quite clear
that the level of contributions we have now reached, which is a compulsory level of nine per
cent, is not going to be enough to ensure an adequate retirement income for many people. In
evidence before the committee, we understand that Ross Christie put some material that
estimated that an employee on around $40,000 for 40 years would require a 15 per cent
contribution to achieve a benefit of around $24,000 in retirement from the age of 60 to 87.
ASFA has also estimated that a person on around $50,000 a year would achieve a $30,000
benefit after 25 years in the work force contributing at nine per cent and after 20 years at 15 per
cent. So adequacy is a very important issue and our belief is that clearly nine per cent is not
going to do enough for people in retirement.

  The models that I have mentioned do not take into account the fact that it would be unlikely
for an employee to earn at that level over the whole of their working life when you look at the
current nature of the labour market. Most workers are earning far less in earlier years of their
working life and possibly in later years as well. People’s working lives are also broken at
various points in time, particularly for women when they have children and for many people
who are part-time workers. We were looking at some research recently by Bob Gregory and
others which shows that out of all of the net jobs created during the 1990s, 87 per cent of those
are paying less than $26,000 per year and 48 per cent are paying less than $15,600 per year. All

Thursday, 18 July 2002                    SENATE—Select                              SUPER 419

of the net jobs created are part-time casual jobs. For people in part-time casual work on those
sorts of earning levels you can well understand that nine per cent is not going to get near
enough for them.

  Senator HOGG—Can you run through those figures again?

   Mr Combet—They are: 87 per cent of the net jobs created are paying at 2000 prices—less
than $26,000 a year—and 48 per cent are paying less than $15,600 per year. We can give you a
reference to that research paper. The ACTU believe that a minimum contribution of 15 per cent
is required to fund adequate retirement incomes, and we also argue for additional assistance for
low-paid workers or for those whose employment is broken during their working life,
particularly for reasons associated with child-rearing. Our submission covers a number of issues
which are relevant to retirement incomes, one of them obviously being minimum contributions;
another being fees and charges; and, thirdly enforcement. I will briefly go over those areas.

  Firstly, a number of options exist to increase minimum contributions from the present nine
per cent. We are open to a debate about the nature of how the minimum level of contributions
can be increased, but a number of obvious things now start to arise. One of them, speaking from
a union standpoint, is obviously that employees, through their unions, will seek to bargain with
their employers for additional employer contributions. That has been happening for some years.
There are parts of the work force where a 15 per cent level of contributions has been achieved.
That goes back over some time, as the committee will be aware. Now that the SGC has reached
nine per cent, industrial bargaining for greater employer contributions is likely to become more
of an issue in the years ahead.

   Another option is to extend the proposed government co-contribution for employees on less
than $20,000 a year, to include that concept to employees earning at least $50,000—that is,
some sort of co-contribution concept that might assist lower-income and middle-income earners
to make additional savings, which would involve a government co-contribution. Another option
is to deal with direct government contributions through means such as cutting the contributions
tax. That is an obvious area of interest. The ACTU support a Labor Party proposal that was
articulated recently to cut the contributions tax from 15 to 13 per cent as an alternative to what
we see as an inequitable and regressive step of reducing the surcharge on high-income earners.
If you are going to change the taxation arrangements they should at least be a progressive step,
not a regressive step.

   The issue of fees and charges has been well traversed in a number of forums and it has been
well documented, including, as we understand it, in evidence before the committee. In
particular, the ACTU believe that no case can be made out for high fees on mandatory super
guarantee contributions. We would support measures to prohibit the charging of agents’
commissions on SG contributions and to cap the level of fees charged wherever fees obtain.
While the establishment of the industry funds which have union involvement has done a great
deal to bring down charges associated with super, particularly in relation to administration costs,
in our view there remains a lot that can be done on that front. It is difficult for us to see, for
example, why funds managers should be able to charge fees based on a proportion of assets
under management, even where an increase in the funds available does not result from their
endeavours. We just cannot see how that is justifiable. One reason for our concern about the so-
called choice of fund proposition is the huge marketing efforts which will go into promoting

SUPER 420                                  SENATE—Select                    Thursday, 18 July 2002

funds, all of which will be paid by employees out of their superannuation savings. It is simply
not necessary. It will be a waste of people’s money.

  The third area that we will address briefly is enforcement. It is our view that more needs to be
done to ensure that employers meet their super guarantee obligations. The Senate recently
passed legislation dealing with quarterly payments. Employers reporting to employees is very
welcome. We think that is a very positive step forward, as is the Senate’s rejection of the
proposal to change the minimum monthly earnings threshold to a quarterly one. All those things
have been recent positive steps by the Senate.

  Increased government support for campaigns to unite members with their lost accounts and
money is extremely important. The consolidation of multiple accounts is also very important.
That would be of enormous assistance in maximising retirement incomes. These are things that
can be done with strong government support. The ACTU would prefer to see the government
putting effort into that than promoting the ‘choice’ legislation which we believe will be a
considerable cost to members.

   We obviously support the regulation of superannuation funds but we share the concerns about
the proposal for increased capital requirements from the sponsors or shareholders of
superannuation funds, including the not-for-profit funds. The fact is that organisations like
ourselves, and employer peak bodies, churches and other not-for-profit organisations are going
to find it very difficult to meet a capital requirement when we do not have access to millions of
dollars and when the funds are already well managed and large. There is simply no evidence of
the need to impose that type of capital requirement on those funds. We do not support that or
see any case for it. It seems to us that it is there to help the for-profit sector. I want to make the
point that no fund with effective union or employee involvement has failed. We believe that
there is no evidence to suggest that there needs to be a capital requirement of that nature. With
those opening remarks, it is over to you for some questions.

  CHAIR—We note that you recommend that contribution levels should be increased to 15 per
cent without trade-offs. If we go down that course and increase employer contributions by an
amount, would that increase the likelihood of there being more rather than fewer independent
contractors? One of the reasons people go for independent contractors is to escape the
superannuation guarantee charge.

  Mr Combet—I do not think you can regulate independent contractors through
superannuation policy. There are many issues associated with the growth of independent
contracting, including the desire to avoid things like workers compensation payments, super
payments or other requirements such as paid annual leave and so on. You cannot formulate
super policy purely on the basis that some employers may endeavour to contrive arrangements
that avoid an employment relationship. It is really a question of regulation and properly seeing
that people in the work force, no matter what their status, have access to and are properly
protected by a universal system of superannuation contributions. I do not think that is the basis
upon which we should be formulating policy about getting the contributions beyond nine per
cent. I would be surprised if that was the driving factor on any empirical basis for the growth of
independent contracting in recent years. No doubt there is an amalgam of reasons, but generally
where an employer sets out to avoid the employment relationship, it is for a wide range of

Thursday, 18 July 2002                    SENATE—Select                              SUPER 421

  CHAIR—I was not suggesting that it should be a basis for formulating superannuation
policy, but at the same time our committee must be cognisant of some of the side effects that
may result, for example, whether it is the matter that tips it just slightly the other way for some
employers. It may be a matter that just cannot necessarily be completely dismissed. However, I
acknowledge that it should not be a matter that contributes to superannuation policy.

   Mr Combet—That is one of the reasons why we have to have a debate about how we get
from nine per cent to 15 per cent. What are the methods by which it can be achieved? What is
the responsibility of the employer community? What role do employees play in the relationship
and what role does government play, particularly in order to encourage and support people at
the low and middle-income levels?

   CHAIR—Would you support the concept of a phase-in of employee contributions provided
there was tax support in the form of that tax support flowing back into the superannuation fund
itself rather than being given as a refund?

   Mr Combet—We have not ruled member contributions out. At one point the Keating
government had proposed a co-contribution arrangement with employees. One thing that is of
particular concern to us, though, in any discussion about the issue is the capacity of many low-
and middle-income earners to meet any compulsory requirement. People are not only spending
all of their disposable income when their income levels are such as I identified earlier, but they
are generating debt in order to meet their household expenditure. We have to be very careful
about that and we would approach any proposition for a compulsory employee contribution
very cautiously for that reason.

   There is the capacity for dialogue and debate about the issue and I think it is particularly a
responsibility of government to articulate a plan for how we can get there. As we have said, it is
generally held that nine per cent is not going to be good enough for our community. We have a
very good system that has been established but we need to build upon it now and I think there is
a role for government to support and facilitate debate and have a look at all of the options. We
are very prepared to engage in that discussion but we obviously bring with it particular views.

  CHAIR—Health care costs are going to be much more significant the longer people live. Do
you think we should be establishing a special health bond or a component of superannuation to
cover such aged care costs by setting aside one or two per cent? If so, should it be separate from
superannuation or have a separate account within the superannuation account with the relevant

   Mr Combet—We are not especially attracted to that proposition for the principal reason that
the superannuation system has to be designed to deliver people a decent retirement income and
at the moment we are not there. People have various ways of providing for health. There are
substantial public subsidies that go towards private health insurance. Our philosophical
approach to the issue is that we want a decent retirement income to be delivered through the
superannuation system and we support a universally available medical health system, which is
Medicare, and we would like to see that properly resourced. We think that is fundamentally the
responsibility that the government should take. We understand the argument for encouraging
people to provide for the cost of aged care and its relationship with people in a post-retirement
period, but we are very cautious about the sort of proposition that you are floating.

SUPER 422                                SENATE—Select                  Thursday, 18 July 2002

  Ms Rubinstein—I would like to add one thing to that. If you are linking the need for
payment for health care to living longer and you are talking about the health needs of ageing
people, in most cases they would have access to their superannuation anyway and it is a matter
of just building that up to a sufficient level. So on the debate, such as it is, about health
accounts, it would seem to us that it would really have to be about the use of superannuation for
health related matters prior to retirement. That would perhaps be more likely to be about the
dentistry needs of children, for example, or other such needs rather than related to aged care.
The problem could, in fact, be made worse by having early draw down. When people’s health
needs actually increase in the last 20 years or so of their lives, it will not be there.

   CHAIR—There is one thing in particular about those old folk who come into your office.
They may have a particular eye difficulty which is affecting their sight, and they say, ‘For a
couple of thousand dollars I could have my operation done tomorrow, but I have to wait for 12
months.’ Their quality of life is going to deteriorate enormously under those circumstances. I
just thought that if there were a pool of money which they could draw from, their quality of life
in retirement would be so much better.

  Ms Rubinstein—Have these people not retired yet?

  CHAIR—Yes, they are retired.

  Ms Rubinstein—In that case they have got their superannuation. They do not need to draw it
down separately.

  CHAIR—They are having trouble living on it.

  Mr Combet—Then that is a question of adequacy.

  Ms Rubinstein—Because it is not enough.

  CHAIR—It is their day-to-day problem; they just do not have enough.

   Ms Rubinstein—But they need more money. Whether you segregate it into a separate health
thing or—

  CHAIR—That is what I am trying articulate.

  Ms Rubinstein—People have different needs in retirement. Some people have health needs
and other people have housing needs. I do not think we ought to mandate for people how they
use their retirement savings. The point is that people do not have enough money. It illustrates
two points. It is disgraceful that, in a society like this, old people are suffering from eye
problems, hip problems—any of those things—without proper access to public facilities.
Leaving that aside, if you are saying that they should provide for it privately, then, they need
more money. It does not need to be labelled or split off in any way.

  CHAIR—So you are against the concept of labelling for health care costs?

Thursday, 18 July 2002                    SENATE—Select                              SUPER 423

  Ms Rubinstein—I am sorry—against the concept of?

  CHAIR—For health care costs; it should be part of the one package.

   Mr Combet—In our view it comes back to the question of adequacy. Are the retirement
savings plans that we have now adequate? Is nine per cent adequate? We say no. Upon
retirement people have access to those retirement savings, and they need to be adequate to
provide them with the opportunity to make choices about how they use their funds. One of the
choices they may have available is to do exactly what you are outlining. We are very hesitant
about mandating, as Linda described it, for a particular purpose, and using the superannuation
system to mandate savings for a particular purpose. The purpose, ultimately, is to make sure that
people have enough money in retirement and that they have the capacity to expend that on their
needs. We have to get the level up.

   CHAIR—What about the surcharge? Earlier today you heard a witness talk about
transferring administration of that to the tax office. Can we have your views on that? That cost
spills over and impacts on the retirement savings of other low-income workers.

  Ms Rubinstein—The ACTU has had a consistent position on that question. We did not have
an objection in principle to the surcharge itself. We had a very strong objection to the method of
collection, simply because it would be so costly. Certainly for some superannuation funds with
very large numbers of low-income employees, I suspect the cost of collection will outweigh the
revenue to government that comes from the members of that fund. Of course, there are also
people who are paying it because the fund has not got their tax file numbers for one reason or
another when they ought not be paying it, and they do not know. A change to administration
through the PAYE tax system, which I imagine is what you are talking about, was advocated by
the ACTU from the beginning of the proposal for the surcharge, and it was advocated by many
others. If there were to be that change, it would be a recognition of the failure of the way in
which it was done. As we understand it, at the time it was really the government’s reluctance to
say that what it was doing was introducing a tax.

  Senator SHERRY—I would like to go to two issues: firstly, the issue of enforcement, which
you have mentioned. I notice that, in the last week or so, there has been yet another corporate
collapse, Coogi garment industries, where approximately 350 employees are likely to become
unemployed, and there is an outstanding amount of $600,000 in superannuation that has not
been paid into the fund. My understanding is that the current Liberal government’s employee
protection scheme does not cover outstanding superannuation payments, which can be a very
substantial amount of money, and obviously is in this case. Does the ACTU support employee
protection for outstanding superannuation payments when a company goes bankrupt?

   Mr Combet—We certainly do. Typically, what we are finding with these company collapses
is that if you take away the requirement to make the contributions on a regular basis other than
annually, companies start to defer that payment and use that cash to keep the business going.
When things go belly-up, the employees miss out—their super contributions disappear, as in
this case. Not only is it therefore important to enforce the regularity of contribution payments to
the employees’ fund; we also support the extension of GEERS—the government’s General
Employee Entitlements and Redundancy Scheme. You are right, Senator, to say that it does not
include super contributions. We think it must be extended to include them. The scheme

SUPER 424                                 SENATE—Select                   Thursday, 18 July 2002

presently covers unpaid wages, annual leave, long-service leave, pay in lieu of notice and eight
weeks redundancy pay, but it must be extended to include unpaid superannuation contributions.
I think that is fundamentally important.

  Senator SHERRY—Doing a quick calculation, a worker on an average wage of $40,000 and
an SG of nine per cent will lose $3,600-plus if the company goes bankrupt and its
superannuation contributions are outstanding for a year, as is often the case. If they are in their
20s or 30s, the loss of that $3,600 because it is not covered by employee protection means that
they will lose over $10,000 in retirement income by the time they get to retirement age.

   Mr Combet—Yes. That is scandalous and it must be rectified. That is an example of a
situation where the super guarantee is operating. Some employees have of course been involved
in corporate collapses where there are defined benefit funds, which can be an absolutely
calamitous situation for employees because a shortfall can appear in the fund. This is a very
serious problem for employees, as is particularly evidenced by the corporate collapses we have
seen in recent times, and it is very important for government policy to take account of it and
address it. We want to have a good, sound retirement income system for employees, and this is a
major gap in it.

  Senator SHERRY—Coogi is the latest in a long line of collapses where superannuation
moneys have been outstanding, and I am aware of other cases. Could you take it on notice to
provide the committee with a list of some of the corporate collapses the ACTU has been
involved in and the approximate quantums, where they are known, of superannuation
contributions outstanding that have not been covered by the government’s so-called employee
protection scheme?

  Mr Combet—Yes, we will do our best to do that.

  Senator SHERRY—And the number of employees affected.

  Mr Combet—Yes.

  Senator SHERRY—I would like to turn to another scandal. You have highlighted the issue
of fees and charges. The committee has received evidence that the average fee and charge is 1.2
per cent and that the current structure of superannuation provides for the majority of the work
force to be in low-cost corporate industry or public service funds because we have a regulated
system. But some employees are in funds that are unregulated products in terms of fees and
charges. I have here two examples and I would like your response about whether this sort of
behaviour should be allowed. These are not industry funds; these are master trusts sold to
individuals. I will not embarrass the companies by naming them but I have the statements here.

  Mr Combet—You can tell us; it is okay.

  Senator SHERRY—They are two major companies. One individual accrued $34,311.44 in
an industry fund which they then transferred to a personal superannuation product and were
charged an up-front fee and commission of $1,715.57. So they had already paid an investment
fee when their money was in the industry fund, but when they were convinced to transfer it to a

Thursday, 18 July 2002                    SENATE—Select                              SUPER 425

personal master trust product, they were charged $1,715.57—and there are ongoing fees and
charges on top of that which are not identified.

  CHAIR—What is the exit fee?

   Senator SHERRY—I do not know the exit fee, but the entry fee is enough. I would like to
come to another example. Again, it is not an industry fund, it is a master trust. The employee
concerned received SG contributions for seven months which amounted to $1,609.02. They
paid the contributions tax of $44.34 and insurance premiums totalling $1,313.39 leaving a
closing balance for retirement of $261.29. We have an example of entry fees and charges in the
first case of five per cent. In the second case, we have an example of insurance costs consuming
about 90 per cent of the superannuation guarantee contributions and this is in the unregulated
market. The insurance premium covers death and disability insurance and salary continuance.
Sorry about the long introduction, but my question is this: should the law allow these sorts of
fees and charges to be debited against superannuation guarantee contributions?

   Ms Rubinstein—In the submission and introductory remarks, we made it clear that we do
not think so. There is simply no justification for these kinds of charges to apply to what are,
after all, mandatory contributions. The funds are doing nothing to produce the money for the
employee. The employer is doing that as a consequence of law. Our concern is that the choice
legislation will make that position worse. Those funds will be in a position to advertise and you
can see the kind of advertising that there will be. It will say, ‘Take control: superannuation for
you’—that kind of idea. ‘Something especially tailored to you.’ They will be fund names that
people are familiar with—the banks and the major life companies—which will give them a
belief in security and in being looked after and it being individually tailored to them.

   The idea of spending $1,000, which is $20 a week on insurance, for somebody who has a
very low balance and presumably not a high income is extraordinary. Even with salary
continuance, the industry funds provide basic death and disability insurance for $1 a week, and
in some cases salary continuance for more than that—maybe $2, $3 or $4 a week—but nothing
like $20. So the idea of using that to sell insurance to people, which is beyond their capacity and
probably their needs, is obviously outrageous and does need to be regulated.

   Senator SHERRY—Just one final question—you might take this on notice, because I do not
see a specific proposal in your submission on this. We have a very significant problem with the
transition phase in of SG in terms of the outcomes for employees and remember that
compulsory super came back in the late 1980s because of the Labor government’s initiative at
the time. If there is a problem, people who are over the ages of 35 or 40 will have a massive
problem in terms of adequacy in retirement as they have not been in the system long enough.
You might consider some possible specific solution or part solution to deal with this group of
workers who are the so-called baby boomers on the edge of retirement, the majority of whom
are women, who face a pretty bleak retirement. In terms of adequacy, I am particularly keen to
find at least some partial solution to resolving the obvious worry they are going to have.

  Mr Combet—Obviously that is a concern for us, too. Adequacy has to be built up over time,
but one area that needs to be examined is the taxation treatment of superannuation. You are
taxed on contributions and earnings, and you are taxed when you take the dough out. It has to
be carefully considered. To get adequacy up and to meet the sorts of circumstances that you are

SUPER 426                                 SENATE—Select                   Thursday, 18 July 2002

outlining, tax options can be considered by the government to at least assist people and to make
sure that, in the transitional period, that demographic of people have a bit more available to
them. It is very important to do that and it is fundamentally an issue of government policy.

   Senator SHERRY—Just going back to the fees and charges issue, the committee received a
complaint from a person with a personal superannuation product, not an industry fund or a
corporate fund, in which there was a $60,000 balance with an exit fee of approximately
$12,000. So if the person is not happy and they want to get out of the product, they lose $12,000
of their $60,000. That is just an incredible sum of money—effectively, you are locked in. In
terms of the point you make about commissions and entry fees, do you also think that the issue
of exit fees has to be tackled?

   Mr Combet—Absolutely. It is a scam as far as we are concerned. This is what people are
going to be confronted with if the choice environment that the government is advocating
eventually prevails. As Linda Rubinstein indicated earlier, people are going to be confronted
with marketing campaigns of that nature. Employers will be approached by financial institutions
to seduce them towards particular products on behalf of the employees they employ. If a
regulated approach to this issue is absent, people will be subjected to all sorts of fees, charges,
commissions and exit fees that are basically going to fleece them of their retirement income, or
a substantial part of it. The government and public policy cannot close their eyes to this issue.
The financial institutions are very powerful institutions in this society and they are very
effective lobbyists. They are pushing hard to get access to people’s retirement savings and you
will see a lot of it disappear in these fees and charges. It is a scam that is not justified and it
needs to form the focus of a lot of the attention of this committee and the public policy making
process. It must be regulated.

  CHAIR—I have just had a chance to look at a lot of these documents. It would appear that
the person in question is taking an exorbitant amount of life, death and disability cover. What
are the rules? I know that the sole purpose test is waived in terms of reasonable cover for these
sorts of items. Generally, what do your funds insure for—up to what sort of amount of money?

  Ms Rubinstein—They vary. We do not have any funds, but I assume that you are talking
about industry funds.

  CHAIR—Yes. What is the norm?

   Ms Rubinstein—It varies with age. I think that for younger people it is generally $1 a week.
It depends on the industry as well—there are obviously different issues for building workers
compared to the retail workers Senator Hogg would be familiar with. But I think that, for a
younger person in their early twenties, for $1 a week a death benefit of between $50,000 to
$80,000 would be normal. Then it would go down according to age, tapering down to much less
at around 50. That would be compulsory. People would then be able to take additional units of
insurance, generally without a medical, when they join the fund, so they could have multiples of
those amounts for another $1 a week for each multiple. Some funds also have salary
continuance, which is more expensive but nothing like that, and which is sometimes available
on a voluntary basis. But that is usually confined in funds to the higher levels of management
and people whose jobs are seen as safer.

Thursday, 18 July 2002                   SENATE—Select                               SUPER 427

  CHAIR—All of this comes out of superannuation guarantee moneys?

  Ms Rubinstein—It would come out of superannuation guarantee. Most members of industry
funds would spend $1 a week on insurance.

  CHAIR—One dollar a week is all right. In terms of people being able to add significantly to
that, isn’t that going to add significantly to the cost and result in a reduction in their final

  Ms Rubinstein—Yes, it is. Generally, anything above that is voluntary and is understood by
people when they do it and they can evaluate their needs.

  CHAIR—At what level do you think a sole purpose test is breached in terms of these other
costs for insurance? There has to be a limit, hasn’t there?

   Ms Rubinstein—Yes. You would have to look at that. I do not know that we could put a
figure on it.

  CHAIR—We are just asking for your advice. I think it is a matter on which we should
consult with the regulator.

   Ms Rubinstein—Clearly, once you are getting up to more than 10 per cent of the
contribution, that would be a problem. But you would have to look at it. It is not something that
we have specifically considered. But it could be a breach of the sole purpose test—you are quite
right about that—and perhaps it ought to be referred to the appropriate regulators.

  Senator SHERRY—The particular example of what I would describe as excessive insurance
costs is being sold by a major Australian company.

  Ms Rubinstein—Is that a life company or an insurance company?

  Senator SHERRY—It is an insurance and life company.

  Ms Rubinstein—They would, wouldn’t they? That is their business.

   Senator SHERRY—It is a person in the computer industry. So I am assuming the death rates
from tapping computers are particularly high compared to the building industry and others
where the premiums seem to be massively lower.

   Ms Rubinstein—Again, you do not know what they are getting for that. If they are being
signed up to that level of insurance without options and without it being properly explained, that
is obviously an issue. Sometimes you have people who, if you like, self-select. They know they
have a problem or a risk factor and they will select higher insurance, particularly when that can
be done without any kind of disclosure or medical examination. You would need to know the
facts behind the case. But if they were just signed up to it with no options and no disclosure,
that is clearly a problem.

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  CHAIR—You could make deductions from superannuation guarantee moneys for salary
continuance, death and disability and all these sorts of things.

  Ms Rubinstein—That is right.

  CHAIR—But we are looking to adequacy. If we are starting to siphon away these amounts, it
reduces the amount available.

   Ms Rubinstein—That is right. Superannuation is not a mechanism for people who consider
themselves to be at high risk to obtain higher levels of insurance than they might be able to get
in the market.

  CHAIR—They could still use their membership to access the fund and pay it separately,
couldn’t they?

   Ms Rubinstein—But they might not get that level. It just depends on the facts of the

  CHAIR—It just makes the selling of insurance so much easier if you allow unfettered access.

  Senator HOGG—You would have heard me ask the previous witnesses a question about the
level of $450 per month. If we are talking about adequacy in retirement—and even based on
their limited evidence that some contribution is better than no contribution at all and that that
contributes significantly in the end towards people having a reasonable retirement benefit—
what is your attitude to the level of $450? Should there be a minimum contribution for those in
the paid work force?

   Ms Rubinstein—People earning less than $450 a month are generally doing that for a
relatively short period of time. They are not doing it over their whole working life. Often they
are students or parents of small children who are doing small amounts of work and later that
will increase. The $450 minimum was imposed by the Democrats at the time of the introduction
of the SG because of a concern that people’s funds would be eroded by fees and charges. The
member protection rules that we now have mean that that does not occur. Even small amounts
of superannuation contributions, through what we know as the miracle of compound interest,
can actually have quite a dramatic effect on final retirement incomes. Should there be a
minimum contribution? The problem with that is that you would be imposing a higher
percentage on low-income workers than you impose on higher income earners. That could be a
problem. Perhaps there ought to be a minimum so that the cost is not completely derisory.

   Senator HOGG—If you cannot put a figure on that today, would you take it away and look
at it and give us an idea of what you think the minimum should be? The other issue that is very
close to this one is that some employers contrive employment patterns which will enable them
to avoid any obligation anyway. It would seem to me that if we remove a ceiling such as the
$450 per month that that will get rid of a number of contrived employment arrangements which
exist out there in the workplace.

  Ms Rubinstein—I am just thinking further about minimum contributions. What I meant by
‘derisory cost’ was monthly contributions of $1 or $2. But, by and large, that is not going to

Thursday, 18 July 2002                    SENATE—Select                               SUPER 429

occur. Even someone who is earning $100 in a month would have a monthly contribution of $9,
which is well in excess of any administration costs associated with it and, of course, it would be
member protected. Yes, some employers do manipulate things and I am told that that occurs
particularly in the pastoral industry. In fact, it was as a result of representations from employers
in that industry that the government looked at changing the minimum threshold to a quarterly
threshold. That would have had the effect of making it far easier for employers of shearers and
other agricultural workers to enter into those kinds of arrangements.

  CHAIR—Shearers are bound by an award where they are obliged to pay in.

   Ms Rubinstein—The SGC is enforceable through their award but it is still only the SGC—so
if they do not earn $450 in a month, they do not get it. But the point I wanted to make was that
the union that covers those workers have expressed their very strong gratitude to us about the
position that the Senate took on this issue which was of very great concern to the union and to
the workers in that industry.

  CHAIR—They certainly do in Tasmania. It may be that that is an arrangement with the
Tasmanian Farmers and Graziers Association. If you pay a shearer $100 per day and that is all,
you have to make a superannuation guarantee payment.

  Ms Rubinstein—Out of that $100?

  CHAIR—Not out of it—in respect of that earnings of $100.

  Ms Rubinstein—Even if they are under $450 a month?


  Ms Rubinstein—I was not aware of it. That is certainly not universal.

  CHAIR—I have a final question. Do you expect that the high investment returns that the
superannuation funds have received over the last eight years will continue into the future?
Given the exponential growth that is going to occur in terms of investment in superannuation,
do you foresee increasing amounts of that going overseas and what impact is that likely to have
on the Australian economy and the employment of your members?

  Mr Combet—A minor question! Obviously we aspire to see very good returns—and it is no
secret that this year is going to be a disappointing year, to put it very euphemistically—but
everyone wants to work very solidly towards ensuring good returns for members of
superannuation funds. Yes, the investment pool will grow. Funds will look for effective vehicles
in which to invest. Anecdotally, funds are looking to overseas markets as opportunities to
diversify their portfolio of investments. I do not think it is necessarily the case that people will
take money overseas.

  I think something that is of interest to superannuation fund trustees and investors is the
question of how to diversify the Australia market. How do you meet the sole purpose test, get
good returns for members and diversify the Australia market for investment so there is a good
contribution to the Australian capital market and the investment is in things such as

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infrastructure? That is an issue that is being kicked about, but I do not think that it is necessarily
inevitable that funds will look towards overseas equity markets. They will do so as part of
naturally diversifying their portfolios but there is also a debate about how you can diversify
within Australia.

  CHAIR—I have two further questions, one of which is a follow-up. We have been told that
about $100 million a year is flowing from the country principally into Sydney and Melbourne
and a lot of that finds its way outside of Australia. One of the reasons for the decline in the
Australian bush is this big outflow of capital. If we take that on a national scale and consider the
fact that further amounts go overseas, will that add to the dilemma that there will be a smaller
amount of money available for investment in Australia? You might be able to keep your returns
on your super funds, but at the same time you have to protect your own members in terms of the
jobs that are available. How do we balance the two?

   Mr Combet—That is the nature of the debate that has started and which will continue, and it
is a valid debate. As a society and a community, we must be considering how to maximise
investment opportunities within Australia to promote the economy, development, the regions,
infrastructure and jobs to support industries like manufacturing. Public policy must also
consider that. However, at the same time, we must make sure that those funds are invested
securely, responsibly and with great prudential authority. They must meet a maximisation of
returns for fund members. That is an important discussion to have and there may be a role for
public policy to consider how to facilitate that debate and process. It is not inevitably the case
that funds will send money overseas. People have an interest in, and a responsibility to, our own
community and they will be looking to invest funds responsibly within Australia.

  CHAIR—Do your members give those sorts of directions to your investment managers?

   Mr Combet—The fund I sit on recently carried out extensive research on member attitudes
and it asked questions along those lines. The members of the fund I sit on are principally
employed in the manufacturing industry and, although this is a very general observation, they
expressed a strong interest in being able to see their retirement incomes invested in their
industry. I believe that would be replicated across a lot of funds. People naturally want to see
their own community developed and the development of job opportunities and infrastructure in
our society. The vehicles by which that can occur are being developed and there will need to be
further debate about them. They are occurring in all sorts of forums, including in public policy
debates about public-private partnerships and about particular vehicles for investment in
property and infrastructure. The debate has to continue to develop and mature and it has to have
regard to our community interests. I am sure that funds will participate constructively in that. I
have no doubt that members of the industry funds in which we participate have a very strong
interest in seeing their own moneys invested responsibly within their own communities.

  CHAIR—As you will be aware, there have been a number of problems with certain firms
about lack of proper corporate governance. Is there a role for super funds to be more proactive
in terms of issues such as share options for senior executives? Is there a role for large
superannuation funds to ensure that those costs are expensed to profit and loss so the true cost is
shown in the profit and loss statement? In terms of the problems that certain sectors of corporate
Australia are facing there is a role for more proactivism, in the same way that one or two
insurance companies some years ago just touched the tip of the iceberg in relation to Coles

Thursday, 18 July 2002                    SENATE—Select                              SUPER 431

Myer, but their action there was fairly decisive and, I believe, was very much appreciated by the
general public.

   Mr Combet—I am on board with some comments that George Bush made recently about the
importance of ensuring the integrity of the operation of the system. As you know, the industry
funds in which we have an involvement place funds in the hands of funds managers who carry
out investments. There is certainly debate about the extent to which the super funds and their
trustees can be involved in issues of corporate governance; that is, the level to which they can
take involvement and responsibility in that matter and the responsibility of funds managers.
That debate will continue to mature. We will find responsible ways of articulating the interests
of funds members to funds managers and to companies in which funds are invested. At the end
of the day, this is a very important public policy issue in which the government and the
community have an interest. It will require leadership from government, the business
community and other institutions, not least of which are unions. Unions have a direct interest in
corporate governance because we have seen the impact of corrupt practices, inappropriate
practices and practices that leave employees vulnerable to the loss of their jobs and their
entitlements. As a community we need to debate this issue and to take it further.

   One of the most signal and unpleasant aspects is the level of remuneration and issues such as
the share options that we have seen senior executives awarding themselves and enjoying in
recent times. It has been a most obscene signal to send to the rest of the community. People who
are struggling to make ends meet are seeing things go on that have no apparent attachment to
the performance of the company or to the integrity of its conduct. I was interested also to see the
retiring CEO of BHP, Paul Anderson, indicate that this issue needs attention not only in the
United States, where he is returning to, but also in our community. It is another area of debate
that will mature. Inevitably, investors will look towards indications from companies and from
funds managers as to a corporate governance code.

   CHAIR—You are putting the emphasis on fund managers, but the investments are held in the
name of the trustee company. Therefore they, not the fund managers as such, have the decision
in terms of their voting strength.

 Mr Combet—The point I was making is that authority has been delegated to funds

  CHAIR—The ball is in your court now.

  Mr Combet—It is, and it is increasingly being recognised as such, but traditionally it has
been delegated to funds managers and the debate that is taking place now is how those funds as
investors can take greater responsibility for and interest in corporate governance issues. It will
progress carefully and responsibly, but it is on the agenda and it is being discussed. As you
know, industry funds are joint employer-employee representative arrangements. I can assure
you that it is an issue that employers and employee representatives have on their agenda for
discussion as to how a more active role can more responsibly be taken as trustees.

   Senator HOGG—Earlier, the issue of fees and charges was raised, and Senator Sherry
mentioned an average level of 1.2 per cent. Where mandatory funds are being dealt with—that
is, SG funds—should there be a fixed cap? If so, what level do you suggest it should be?

SUPER 432                                SENATE—Select                   Thursday, 18 July 2002

  Ms Rubinstein—It can be difficult. One per cent has been suggested. As we understand it,
one per cent is the cap on fees in the United Kingdom stakeholder pension funds. You would
need to see more evidence and to debate it. Certainly, with SG funds that could be a reasonable
level for administration fees and charges.

  Senator HOGG—What about for voluntary contributions where there might be an associated
fee or charge? Should there also be a cap or should that be left to the marketplace?

   Ms Rubinstein—It will be very hard. People making voluntary contributions will look a
what is happening. Disclosure is so critical that it cannot be overestimated. There ought not to
be large costs associated with voluntary contributions because the basic administration work has
already been done. Disclosure would be critical in that. You might say that there should be a cap
on all fees, and that is something that we could support, but the case is much stronger in favour
of mandatory contributions because there is no choice involved in that whatsoever.

  CHAIR—I think we could take disclosure as read. The question is, what is the most effective
form of disclosure, so that people will not make a wrong decision? That is what we are
grappling with. We are not arguing against disclosure. What does worry us is pages and pages
of disclosure that mean nothing to people.

   Ms Rubinstein—That is right, and how it happens is very important. But the point about
mandatory SG contributions is that they just happen. That is the area where people have the
least interest and are least likely to go through stuff. If you are voluntarily putting money into
something then you are going to give it more thought.

  CHAIR—Thank you.

                    Proceedings suspended from 10.46 a.m. to 11.07 a.m.

Thursday, 18 July 2002                   SENATE—Select                              SUPER 433

[11.07 a.m.]

CORRELL, Mr Denys Edward John, National Executive Director, Council on the Ageing

SHEEN, Ms Veronica, Deputy Director, Council on the Ageing (Australia)

  CHAIR—Welcome. Thank you for your submission and for your appearance before the
committee today. We invite you to make an opening comment. Following that, the committee
members will ask you some questions.

   Mr Correll—We would like to congratulate the committee on the breadth of the terms of
reference of this inquiry into superannuation and other factors. We have always had the view
that retirement living is certainly a lot more than just superannuation and old-age pensions; it
involves those other things which you have included in short in your terms of reference. Having
a reasonable retirement means having that superannuation—having an adequate pension—but it
also means having access to non-cash services such as the Pharmaceutical Benefits Scheme,
universal health coverage and other services that are provided through government. Our view is
that if any of those items were to diminish—for example, if there was a cutback in the
Pharmaceutical Benefits Scheme which increased costs to the individual—there would need to
be a reciprocal increase in the individual’s income to make up for those losses, particularly for
people on low incomes.

  We have been somewhat perturbed by the way in which the government has been handling
the move towards an older population. We welcomed the National Strategy for an Ageing
Australia but were perplexed by the Intergenerational Report that came out at the time of this
year’s budget. We found some of the decisions erratic in terms of an ageing population. In the
2001 budget there were substantial increases to benefits for higher-income older people, but this
year’s proposed cutbacks to the Pharmaceutical Benefits Scheme were targeted particularly at
lower-income people.

  We believe there are a lot of myths associated with an ageing community. Yes, there is
evidence of increasing poverty in some of the ageing population, but also in the figures
produced by NATSEM the older population is also the highest holder of wealth, particularly in
housing. So there are quite strong disparities between high income high wealth and low income
low wealth. We have also been doing some quite extensive work in mature age employment,
and Veronica Sheen, who has been conducting a project with the Department of Employment,
will comment on that before we finish our introductory comments.

  Ms Sheen—We have recently done a project involving about 350 people in the 50 to 65 age
group. The idea was to promote some information to them about the changing nature of the
labour market. The people involved in the workshops were largely unemployed or
underemployed mature age people. What we found in the group was very revealing. There was
a lot of frustration about government policy in many areas, which meant that many of them
were whittling away their savings or their retrenchment packages for current living costs.
Basically many people in their 50s and early 60s not in the labour force or chronically

SUPER 434                                SENATE—Select                   Thursday, 18 July 2002

underemployed are living off their retirement savings nest eggs for current living costs. It is
only at the point in retirement that the nest egg is whittled away that they are actually eligible
for some sort of government assistance. That is a source of great frustration amongst the group
and a great concern for us in terms of the long-term prospects of that group in their retirement.
If they are using up their assets in their 50s, what does that actually mean for them when they
are in their 70s or 80s?

   We have heard recently about employer concerns around the ageing of Australia’s population.
There was an article in the business section of Monday’s Age about that, that the ageing
population is a growing concern amongst business. But we know from our work that a lot of
older workers are not getting a fair go from those very same employers and businesses and there
is systemic and endemic age discrimination in the Australian work force. We need to start
building some links between employer behaviour and their need to start thinking about their
work force strategies and the age balance in the work force. We need them to understand that
that behaviour does have an impact on the whole retirement income system and the capacity of
the Australian economy and the government to fund a decent retirement income stream for
everybody and for older people to be able to fund themselves in their later years. That is a broad
overview of what we found from our recent work with mature age people.

   CHAIR—Thank you very much. You mentioned, apart from an income such as a pension or
income stream, some of the other benefits. One of those benefits which is growing
exponentially is pharmaceutical benefits. In terms of a message to the committee, which
obviously has to take a responsible view, what is the best way to try and contain the so-called
blow-out in those costs? What would your members view as the best way to do this? Would you
limit the access, for example, to new drugs that come onto the market and cut the cost that way?
A lot of these new drugs that are coming on are very beneficial but they are very costly.
Obviously on the one hand we have a responsibility to help those in their retirement years in the
relief of pain and to improve their lot in life. At the same time we have to take a responsible
attitude towards excessive blow-outs in costs. What should be the approach? You say the
government has had an erratic approach. What are the guidelines that you would like to lay
down in terms of trying to contain these pharmaceutical costs or cover them by some other

   Mr Correll—I have a few comments. For a start, if I remember the figures correctly, about
70 per cent of people who are beneficiaries of the Pharmaceutical Benefits Scheme are on some
form of concession, so we are largely talking about people who have low incomes. I think that
we already have within Australia a scheme that is reasonably solid in its design. The reason it is
solid is that we do have the single purchaser arrangement, which means that there is a very
rigorous process of determining price with the pharmaceutical companies in the first instance,
and we should retain that. The second thing is that there has not been enough rigour in having
price-volume agreements with pharmaceutical companies. In the last two examples—of
Celebrex and the other drug for smoking, Zyban—I do not believe there were very strong price-
volume agreements and both of those drugs caused about 50 per cent of the big blow-out in the
last year or so. To me, those price-volume agreements are absolutely fundamental if we are to
restrain costs in the Pharmaceutical Benefits Scheme.

  The other component is that we have worried in the past that sometimes new drugs have
taken the place of drugs that are well used by older people—such as dermatological creams and

Thursday, 18 July 2002                    SENATE—Select                               SUPER 435

inhalers, which are largely used by the older population—and then they have to buy them over
the counter. That is reflected in a higher cost to that individual. The area in which we would say
there is room for improvement—and we are aware that Senator Kay Patterson has mentioned
this—is the possibility of making consumers much more aware of the price of the drugs to the
government, so that the packet or the bottle identifies not the cost that they pay but the cost that
the government pays for that particular drug. That would make consumers much more aware of
the price.

  In terms of increasing the price of drugs to individuals, the Canadian studies that we have
reviewed have shown that that results in increased visits to emergency services and to general
practitioners, and increased hospitalisation. We have to realise that pharmaceuticals are an asset
to the community in helping health. The short-term objective may be to budget costs by
reducing pharmaceutical intake by forcing people to pay more, but there will be longer term
consequences in poorer health, which we then pay for as a community and as individuals. As is
usual with these things, there are no simple answers—they are usually convoluted answers. But
I believe we have a very strong scheme already. The very fact that the pharmaceutical
manufacturers do not like Australia all that much because we force the price down is probably a
very good indication that we might be on the right track.

  CHAIR—I should probably declare something of an interest on behalf of my wife who is the
chairman of a pharmacy—a friendly dispensary pharmacy, which is essentially a cooperative—
so we have interests both ways. It is very much consumer-oriented, of course, because of the
nature of the friendly society.

  Senator SHERRY—Just going back to your opening comments where you referred to the
erratic approach of the government when it increased benefits for higher income retirees in last
year’s budget, what decisions are you referring to?

   Mr Correll—One was extending the concession card to couples with incomes of up to
$80,000. A paper we gave at the ACOSS congress last year was very much about
intergenerational equity. As far as our organisation is concerned, our members are the parents
and grandparents of other generations and we do not like to see situations where one generation
benefits over another generation. We do not think that it is reasonable to provide concession
cards to people on higher incomes. The other issue was further tax concessions to higher
income retirees.

      Senator SHERRY—That is the pensioners rebate benefit—I cannot recall the exact name of

  Mr Correll—Yes. We had suggested that it be paid only to full pensioners—people with less
than $53 income per week—and the government provided it to all pensioners, which we felt
was incorrect. It is not good targeting.

   Senator SHERRY—So that is why we now regularly see advertisements in the newspapers
stating that retired couples can earn up to $58,000 a year tax free in retirement?

      Mr Correll—I am not a financial planner.

SUPER 436                                 SENATE—Select                    Thursday, 18 July 2002

  Senator SHERRY—Neither am I, but I have seen these ads very regularly. Are you aware of

  Mr Correll—There are certainly ways of adjusting people’s assets and income to maximise
their access to government benefits. When I say benefits, I mean the income benefits and also
the concession card which is highly prized because of the reduced cost of pharmaceuticals and
other concessions.

  Senator SHERRY—Going back to that issue, the example you gave of the extension of the
concession card to couples on an income of up to $80,000 added to the cost of the
Pharmaceutical Benefits Scheme, didn’t it?

   Mr Correll—Of course it did. We are saying that if the government is serious about looking
at the cost of an ageing population, it should not be putting in place things that are going to have
a long-term impact. I do not remember any reference in the Intergenerational Report, for
instance, to some of those extensions that were provided.

  Senator SHERRY—I was just going to take that issue up, but let us clear off the
Pharmaceutical Benefits Scheme issue first. I understand that last year the government extended
the pharmaceutical benefits to some higher-income retirees. This year it has attempted to rein in
the costs by hitting lower-income retirees in relation to the Pharmaceutical Benefits Scheme.

  Mr Correll—Correct. It is not only low-income retirees—I talked about intergenerational
equity—it is low-income people. A lot of these people are on multiple pharmaceuticals. A
number of issues came out of that particular measure in this year’s budget which we see as
having a very negative impact on people’s health. It also goes back to what we were saying
about it being poor targeting.

  Senator SHERRY—Going back to the issue of the Intergenerational Report, which I have
read, you are right that the tax concessions the government has given to higher-income retirees
are not modelled in the Intergenerational Report, so we do not know what they are going to cost
in 2042. Do you think the government should model the long-term impact of these tax
concessions and their costs?

   Mr Correll—It is not only modelling; we talking about rethinking what an ageing population
means. Veronica Sheen talked about the employment component that is in the same report. I
think we are talking about 52 per cent of that 55 to 65 age group.

  Senator SHERRY—I want to get to that issue later. The government modelled the long-term
costs of the pharmaceutical benefits and a number of other programs but it did not model the
long-term costs of tax concessions.

  Mr Correll—It should model all components, whether it be health care, pharmaceuticals,
employment, the impact of long-term unemployment, the impact of pension concessions—the
impact of all those. You cannot really talk about a model for an older population until you have
done the breadth of it.

Thursday, 18 July 2002                   SENATE—Select                               SUPER 437

   Senator SHERRY—Have you conveyed that view to the government or to the
intergenerational group within Treasury?

  Mr Correll—We have conveyed it more in an ad hoc way than in a formal submission and

   Senator SHERRY—Another issue we have received some comment on is home equity
conversion. Your comments on home equity conversion are in recommendation 21 of your
submission. A number of people have submitted to us that one way in which people in
retirement can increase their retirement income is to develop stronger consumer protection
codes where people can convert some of the equity in their home into an income stream for
retirement. Are you able to give us any examples or case studies of the sorts of problems that
exist or will potentially emerge in this area and why we need strong consumer protection?

   Mr Correll—First of all—to give a bit of colour to what we have put in the
recommendation—we have been developing, with an actuary, a different form of home equity
conversion which does not have some of the negative consumer impacts of the traditional form
where there is compounding interest and where people risk losing their asset. This is much more
of a fixed amount. Regarding the consumer protection issues, in developing our model with the
actuary we have been very anxious to ensure that the person is well advised and one of the
things that will be necessary before anybody signs an agreement for home equity conversion is
that they have sought and obtained separate financial advice to ensure they understand the
contract they are entering into. Can I also make it very clear that we feel that home equity
conversion should not be replacing what we see as government obligations. It is not to get
government off the hook to pay for pharmaceuticals, or off the hook in terms of what we see as
universal health care.

  Senator SHERRY—If people do it, it is to be entirely voluntary and if some people do it
there should be an appropriate regulatory structure to ensure that people get a good deal.

   Mr Correll—Yes. One target that we have in mind is the area of residential care. At the
moment, the way the system works is that you are obliged, if your house is counted as an asset,
to sell that house very quickly—and that can be in a negative market. Our view is that it would
be much better to get a home equity conversion and sell the house at leisure. There are a lot of
issues around that which we probably do not have time to deal with here, but we see it as being
a way of releasing capital. The work of NATSEM, once again, has shown that older people have
an enormous amount of asset tied up in a house, and it is not much use having it tied up and
living in poverty.

  Senator SHERRY—Could you give us some more detail about the sorts of consumer
protection parameters that are necessary? For example, we have had discussions before this
committee in which it has been said that you can draw an income stream, but it might be
capped; the equity draw-down might be capped at, say, half the value of the house. You can
only draw that much down, and the house must remain in the legal ownership of the person who
owns it; it cannot be transferred to the financial institution. Nothing would surprise me about
banks. You would not want banks evicting people from their own home when the equity is run
down. Those sorts of issues have been raised with us and I would like to get a list of protections
that you would like to see put in place in statutory or regulatory form.

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   Mr Correll—There are two ways of answering that. One is yes, the consumer protections
that we are currently negotiating with this actuary do limit the amount that they can take out
against the home. The amount we are looking at is a capital amount. If they want to convert that
into an income stream that is a separate exercise. There is not an attempt to combine the two. I
may recommend to you, Senator Sherry, if you are interested in following this through, the
name of the actuary, Peter Szabo. I think it is well worthwhile because I believe he has a very
interesting scheme. We are limited in how much we can say about it because we under a
confidentiality agreement with him.

  Ms Sheen—We also have a policy paper on home equity conversion which I am happy to
provide to the committee.

  Senator SHERRY—Thank you.

  CHAIR—US studies have shown an emerging trend. Some of their older folk are beginning
to return to the work force, often in a part-time capacity. Do you see this trend emerging in
Australia? What are the factors contributing to that?

   Ms Sheen—We see a trend whereby more older people in their 60s want to return to work
and need to return to work because basically they have run out of money. There has been
inadequate retirement planning for people who left the work force, say, in their 50s with
retrenchment packages, or who were retrenched and who just simply do not have enough
income to live on in their 60s or early 70s. The other thing that is emerging is that there is a
change in expectations. People have better health and have a longer life expectancy. People
want to have a better quality of life, and that is a very important issue for us too. Having a
narrow life based on a very limited income is just not what people want. Yes, they do want to go
back to work, but unfortunately the opportunities are not there, and this is the major concern.
Employer behaviour is still quite negative with regard to older workers.

  CHAIR—Why do you think there is a negative attitude to older workers?

   Ms Sheen—I should say that it is probably not so much an attitudinal problem because often
in surveys employers say very positive things about older workers. However, their behaviour is
the big issue. So even though they will say that they value their older workers, they will not
employ them. That comes back to a whole lot of issues around Australian culture and business
practice. Clearly, the retrenchments and the restructuring in the economy over the last 10 years
or so have left management structures much younger than they were 20 or 30 years ago, and this
is an ongoing theme in our work. Often a person who is 58 may be applying for a job in a
company that has undergone restructuring and the manager may be 35, and the 35-year-old may
be looking for somebody younger than themselves or one of their own colleagues or peers.

  CHAIR—Do you think there is a generational factor that really needs to be addressed?

  Ms Sheen—Yes, indeed.

  CHAIR—It certainly will have to be addressed as the participation in the work force reduces
because of the age factor, won’t it? Unless that is supplemented by increased fertility or

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immigration we are going to have to get the numbers into the work force by tapping into this
source, I would think.

  Ms Sheen—Yes. The fertility and immigration debates are very interesting, but there are
more practical solutions in the here and now to increase our labour supply and that is by
employing more of these very good, very well qualified and experienced people in the over-50
age bracket.

  CHAIR—This is the first time that I have heard this generational problem where younger
bosses are reluctant to employ more senior people into their work force. I can understand it, I
suppose, but we have got to break down a barrier, haven’t we?

  Ms Sheen—Yes.

  CHAIR—Thank you for raising that point.

   Mr Correll—When we have conducted groups we have found that quite often human
resources managers are in that younger age group too. So it is not just the managers. I remember
one man saying that the human resource manager said to him, ‘This is very difficult. You are
old enough to be my father.’ That almost intuitive reaction to having somebody that you are
interviewing who is old enough to be your father is a prejudice that we have to deal with.

  CHAIR—Do you think that the problems in corporate Australia at the moment with some of
the scams is due to the fact that perhaps some of these people are getting too quickly up the
ladder too soon in terms of their age?

  Mr Correll—It could make headlines if we answered that one.

  Ms Sheen—Let us put it this way: it is an interesting proposition, but who knows?

   CHAIR—And do you think that more mature leadership would lead to fewer problems in
this area?

  Senator HOGG—Good question, Chair.

  Mr Correll—Looking at our age group here, of course, maturity brings wisdom and

  Senator SHERRY—This is an argument that no-one in the Senate should be under 60, but I
bow to superior wisdom and experience.

   CHAIR—Moving on to another issue, you target the lack of a comprehensive national dental
health service as perhaps the greatest deficiency in our health care service. Can you expand just
a little bit on that? Obviously it is a big issue for you. We are interested in the numbers affected,
people’s quality of life, costs and all those sorts of things.

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   Mr Correll—When we receive information from our Seniors Information Service telephone
lines one of the issues that comes through constantly is lack of access to dental care. It has
impacts at all sorts of levels. It impacts on diet and comfort. I know the Labor Party scheme was
a time limited scheme, but we would have like to have seen it extended. Waiting lists have gone
up in most states. Some states have put in new programs, but generally we do need a national
dental health scheme. It seems crazy that one aspect of health stands outside the universal health
scheme when you consider dentistry is a fundamental to people’s health.

  CHAIR—Would it help to have government support for patients attending private clinics?
Are there enough dentists around, in other words, or is it just a scarcity of orthodontists?

  Ms Sheen—There is definitely a labour supply issue around dentistry and, yes, access to
private clinics may be one solution. But I think we need a broad national policy and very
concentrated assistance for older people through some sort of Commonwealth funded scheme in
conjunction with the states.

  CHAIR—What sort of structure are you looking at? Can you help us a little bit?

   Mr Correll—Probably a mixture of the current dental hospitals and subsidies used for private
providers—we do not have any particular view on which way it should go. I would say
structurally we do have a mixed system in health care so we would probably support a mixed
system in dental care as well.

  Ms Sheen—It is not really that important to us what the model is as long as the outcomes for
older people are much better in terms of access.

  CHAIR—There is no doubt there is a very strong correlation between deterioration of teeth
and deterioration of health—and you added diet, and that is interesting. We will certainly take
that on board.

  Senator SHERRY—Earlier you were as scathing as I have heard about the attitudes towards
employment of older workers—not so much in a context of the stated attitude of employers but
the outcomes. You might need to take this on notice, but could you give us some sort of outline
of the form of regulation legislation that may be required to stop this blatant discrimination
against the employment of older Australian workers? I think it is a really important issue.

   Ms Sheen—We are very pleased that the federal government are getting up a federal age
discrimination act at the moment. However, we need to recognise that there has been state
legislation for many years that has not been terribly effective and we do need to recognise that
the Australian human rights legislation is not terribly strong in terms of getting a resolution on
complaints. This sort of legislation, I believe , is always going to be a bit of a blunt instrument
to deal with the problem. It is useful to have it in there, but more important is decent education
of employers and getting that attitudinal change. Age discrimination is very difficult to prove,
but you have to work with employers on changing their attitude and at the same time working in
with the legislation. That would be my view.

  Senator SHERRY—I understand the two-pronged approach, but is there any program to
convince employers of the virtues of older workers and employing them?

Thursday, 18 July 2002                      SENATE—Select                                SUPER 441

 Ms Sheen—There are some small level things happening on the ground but, really, some
major funding needs to go into that attitudinal change.

  Senator SHERRY—We are talking about literally tens of thousands of employers. By the
time we get around to educating them, they will all be in their 50s and 60s and we will not have
solved the problem.

  Ms Sheen—It has to be a combination of local level initiatives and broader education

   Mr Correll—It also reflects the changing nature of business. As businesses absorb other
businesses, there have been problems of people understanding—certainly for older people—and
having the opportunity of re-education particularly in technology. There seems always to be a
preference to provide younger people with technology training so you almost get into a self-
fulfilling prophecy that older people are not able. And how do we look at education policy in
this country? It is much more targeted at younger people. There is a very solid argument that if
you are going to keep on moving, the way in which business works is that education should be
across all age groups particularly those of work force age.

  Senator HOGG—Yesterday we had self-funded retirees appear before us. They spoke about
those members of theirs who were wholly self-funded in their retirement as opposed to those
who are partly self-funded. I asked them if they had any idea of the mix. They said, quite
surprisingly, that they had no idea at all at this stage and that they were conducting a survey.
Would you have any idea as to the mix of those who are wholly self-funded in their retirement
as opposed to those who would be partly self-funded?

  Mr Correll—I think from Department of Family and Community Services figures that I have
seen—and Veronica Sheen may correct me if I am wrong—about 20 per cent of people over the
age of 65 are not receiving any form of government pension or benefit, including vets, of
course. I think it is about that figure.

   Senator HOGG—We have heard a figure of 15 per cent—so 15 to 20 per cent; it is in that
order. It seems to me, though, that something that we do not have in retirement policy are
targets that we should be reaching in terms of people achieving independence from the social
security system in the broader sense. What targets should we be aiming at? It seems to me that
20 per cent is a very low percentage of the population that are independent. Given that we now
have got nine per cent SG—and whilst it is in its infancy—by the time we reach 2042, which
seems to be one of the critical dates, what do you think our target should be for people who are
wholly independent and not reliant on the system?

  Mr Correll—We have not got a figure as such, but—

   Senator HOGG—Should we have a figure, because this goes very much to the issue of
adequacy? The reason I am asking is that people have appeared before us and said that nine per
cent is insufficient; we really need to boost it to 12 or to 15 per cent. But that really is not a very
good concept, necessarily, of itself for us to be embracing. It may well be that we need to look
at the number of people that will be made independent of the system by the policies that we put

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in place. That could be a combination of factors, and I do not know what all those factors might
be at this stage. I was just curious as to whether you had an idea of a target.

   Mr Correll—To answer in another way: we did a survey with the superannuation funds, just
a small qualitative study which they may have mentioned in their submission, and through the
survey we asked people how much they need to retire on, and it generally came down that
single people with under $20,000 were struggling to maintain any reasonable lifestyle. So we
have really started to think about that as probably about the right figure in present dollars.

   One of the issues that really comes across in community education is that it is quite often
talked about in terms of a percentage of your final salary. We find that that is a silly concept,
because if you have been struggling on $25,000 a year and then you are told that you can
survive on a percentage of that it does not make sense. It makes sense, of course, at top end
incomes, where you can live on a percentage. But for low incomes, we need to rethink the sorts
of levels that people need to live an adequate retirement.

   The other balance is between the generosity of government in terms of extending the income
and assets test, because when you are talking about the balances they are dependent too on
when people can access a pension. There was a comment made earlier about people with
financial planning still being able to get a pension with more than reasonable assets.

  Senator HOGG—But is it reasonable for this committee to make recommendations to
government—and governments change, so we are looking at long-term policy for governments
regardless of their political persuasion—to set various objectives and targets that should be
reached as a result of a broad retirement policy that should be embraced by the Australian
government? And what should those targets be? I hear what you say about $20,000, but do you
have an idea what the elements are?

   Mr Correll—The issues people have are their essential costs in retirement. In housing costs,
there is always a differential between the people who own their own homes and those who rent.
You get rental stress if you do not own your own home. What are the costs of living? We would
prefer to think in terms of the dollar amounts that are needed to live an adequate lifestyle in
retirement rather than the balance between how many self-funded retirees and how many
pensioners there should be. A number of people in the community will never be able to generate
superannuation anyway, because of broken work history, disability and so on.

  Senator HOGG—I will put the question another way. What would be an unacceptable level
of people dependent on the social security system in some way?

  Mr Correll—Over what period? Which time frame are you thinking of—long-term?

  Senator HOGG—Long-term. Is 80 per cent—

  Mr Correll—I do not think I am going to say a figure. What I will say is, looking at whether
nine per cent is sufficient to generate an adequate income, particularly for people on low
incomes—and that is the type of calculation which I do not think has not been done all that
adequately to date—what type of income can be generated from nine per cent. We make all
these assumptions based on a full-life working history, whereas the reality we have just talked

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about is that 50 per cent of people over 60, or 55, are not in employment, so you have broken
work history. It is very hard to ask what that percentage is when we do not really have a well-
constructed way of producing enough assets to live into retirement.

   Ms Sheen—I noted in the Department of Family and Community Services submission
yesterday that their long-term projections are that there is going to be quite a dramatic
diminution of the numbers of people reliant on a full age pension and a great increase in those
reliant on a partial pension and partial self-provision. I thought that was a very encouraging
outlook that they produced in their submission.

   Senator HOGG—Unfortunately, one of the things that I think is deficient in this area is the
issue of modelling. People appear before us and tell us, as you have just said, that nine per cent
is not enough but 12 per cent is if you work for 35 years in a full-time job. But the fact of life is
that very few people are going to meet those criteria in this day and age; there will be breaks for
one reason or another. Even a professional person will find that there is some form of break in
their employment. So, from where I sit, the modelling is deficient and I am curious as to what
targets, what objectives we should meet.

   Ms Sheen, you raised the issue of the expectations of people going into retirement. I have
raised this issue with some other witnesses during the inquiry. It is not an area that we as a
committee can get hold of; nonetheless, it is a very significant determinant of the sort of
retirement people that expect they will have, and there are a number of factors that would
influence that. Could you make a comment on that?

  Ms Sheen—Yes. One of the big growth areas in our work at Council on the Ageing has been
around older people’s access to IT—to the Internet—as part of their social participation. That
requires ownership of a computer, setting up an Internet service and ongoing Internet fees. That
did not exist 20 years ago, and it is just one example where we have a whole new need. People
want to take advantage of financial services. For a lot of those the cheapest way to do so is
through the Internet, but there are whole new costs in accessing that. The rest of the community
has that access, and if you do not have it you become marginalised.

   Another big factor is that a lot of families are now quite dispersed. People have to be very
mobile in employment and a lot of older people need to visit their family members interstate or
even overseas. Again, in the fifties or sixties that was not a consideration or a need. So our
retirement income system is really not geared for that extension of the requirements for a life of
active participation in the community.

  Senator HOGG—So you are saying that the model that we have in our minds at this stage is
really geared to a lifestyle that has long passed us by and that it is not much use us putting
together a retirement policy which is redundant already?

  Ms Sheen—Yes.

  Mr Correll—That is what I tried to say in the opening statement—as your terms of reference
say, retirement is much more than just superannuation or old age pension; it is a whole
combination of income and expenditure. The exciting thing that we hope this committee can
look to is trying to work out a new model, to use your word. Nobody has really got to it to date.

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When I looked at the submissions for this committee, I saw that largely they have focused on
inputs and not really on the breadth of what we see as being important for retirement.

   Senator HOGG—There is another problem that we also face, which is that in coming to
some sort of model—not necessarily deliberately wasting time but just being overburdened by
process, so to speak—we are losing valuable time for putting something in place that will meet
the long-term requirements of the nation. We have already got the base of the model there—I
think people will not deny that in any way—in that the SG provides a fairly solid base. It is
really from that base that we need to go, as I see it. Is that correct?

   Mr Correll—That is correct. People talk a lot about the three pillars. We concentrate on
superannuation, but then we look at savings figures and debt figures and we see that savings
figures have gone down and debt figures have gone up, younger people have less wealth than
they have had in the past. You cannot just concentrate on one part of the three pillars, but it has
had a large degree of the focus. That savings one is a worry, because it was an essential part of
the original World Bank model that they said we were doing so well with 10 to 15 years ago.

   Senator HOGG—The last issue I want to raise—and this has been raised with other
witnesses—is the issue of post-retirement income protection, where people have been in a
mandatory superannuation scheme such as the SG over a long period of time and then they
retire, and we have heard of people who have lost all of their super post retirement and therefore
have had no real benefit upon which to retire and live the rest of their retirement. Should the
committee be looking at that issue?

  Mr Correll—The protection of superannuation?

  Senator HOGG—The protection of superannuation post retirement.

  Senator SHERRY—It might have been stolen—solicitors’ mortgage funds, for example.

   Mr Correll—We would have to say that any way that people’s money can be secured before
retirement and in retirement is absolutely fundamental. The devastation for an individual where
money has disappeared is enormous, as we have read time and time again.

  Senator HOGG—Do many of those people come to you?

   Mr Correll—Not directly—I cannot say immediately that I have had anybody come in the
last months or so.

   Senator HOGG—I was just curious. It just seems to me that that is an area in which we as a
committee have experienced burgeoning problems—where people have saved for their
retirement through superannuation, gone into retirement and thought that they have invested it
wisely but then found that it has just vanished.

   Mr Correll—An issue that has been coming up constantly since the superannuation funds
have not been producing such good results is that people’s understanding of the monitoring of
their own superannuation is not very strong. People seem to think that they just put their money
into superannuation and forget it. They get a very nasty shock, particularly those who are

Thursday, 18 July 2002                    SENATE—Select                               SUPER 445

coming into retirement at this point in time, when they find they have a diminished amount of

   Senator SHERRY—But, in the case of theft and fraud, they are not going to know it is going
to be stolen, are they?

  Mr Correll—No.

  Senator SHERRY—That is where you need effective regulatory protection and

  Mr Correll—I totally agree.

   CHAIR—I have a couple of questions that I would like you to take on notice. We have had
some very forceful arguments about the need to wean people off this lump sum mentality and to
provide a greater emphasis on lump sum incomes. Given your statement about people entering
retirement these days with greater amounts of debt, how would you view that? Secondly, we
speak about the need to increase nursing home beds; do you think that raising the standards of
nursing home accommodation in recent years has restricted availability in that so much of the
money has had to go into replacing existing beds rather than into providing new beds? You
might like to look at that, because some people feel that perhaps the department has excessively
gone the other way. You might also comment on the amount of time that nurses have to spend
on administrative issues in those aged care areas compared with nursing responsibilities. Do
you perceive that there has been a shift of responsibility? They are fairly deep issues, and that is
why we want you to take them on notice.

  Mr Correll—We will do that.

  CHAIR—Thank you very much for appearing before the committee today.

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[11.57 a.m.]

BARRETT, Ms Jane Margaret, Superannuation Policy Adviser, CPA Australia

KELLEHER, Ms Noelle Eileen, Member, Superannuation Centre of Excellence, CPA

WYATT, Mr Murray William, Chairman, Superannuation Centre of Excellence, CPA

   CHAIR—Welcome, and thank you for your submission. We invite you to make an opening

   Ms Barrett—CPA Australia and its Superannuation Centre of Excellence are pleased to
appear before the Senate committee in support of our submission. We firmly believe that
tackling issues such as adequacy, taxation arrangements and health and aged care implications is
fundamental to ensuring that Australia has a world-class retirement income system in the future.
Superannuation has been, and continues to be, a priority area for CPA Australia. Our research
efforts in this arena are supported by our Superannuation Centre of Excellence, a research think
tank made up of industry leaders. Today, we have with us Noelle Kelleher, who is a partner at
Ernst and Young who primarily deals with taxation matters, and Murray Wyatt, who operates in
the self-managed superannuation funds business environment.

   We propose that three key principles should drive the outcome of any reforms undertaken: the
system must deliver sufficient funds for Australians; the system must be sustainable, especially
as the Australian population continues to age on a relative basis; and the system must be simple.
Employers, trustees, fund members and practitioners must be presented with a system that is
simple in its design as well as in its implementation. CPA Australia commissioned research that
deals with the adequacy issue. This research was prepared by the National Centre for Social and
Economic Modelling, and its report Superannuation—the right balance? concluded that,
although nine per cent superannuation guarantee contributions will raise retirement incomes
above pension levels, almost half of the cases will experience a drop in living standards in
retirement. It is only in the most favourable—and what we would consider somewhat
unrealistic—scenarios that living standards will be equivalent to those experienced before
retirement, for all illustrative cases. This assumes 40 years in the work force, retirement at age
65 and 5.5 per cent real superannuation earnings.

  Australians must increase their level of voluntary contributions to ensure they are able to
maintain their current standard of living in retirement, and it is evident that Australians are not
actively seeking to make voluntary superannuation contributions to support their compulsory
superannuation contributions. Given the importance of superannuation for Australia’s economic
and social wellbeing, CPA Australia has put forward a recommendation that the committee
consider the need for a whole of government task force to be established to take forward the
outcome of the inquiry in detail. The whole of government approach would include all relevant
government departments and agencies responsible for the portfolios of superannuation, taxation,
health and aged care services, and social security services. This would allow the keepers of the

Thursday, 18 July 2002                    SENATE—Select                              SUPER 447

information, as such, to cost proposals for reform in respect of their revenue implications, most
notably the effect on future government outlays.

  The report of the task force should be made public to encourage a bipartisan approach to
superannuation. CPA is at the front line, providing advice to the full gamut of groups and
individuals within business and community. Through regular focus groups, our members have
provided feedback on the system, and I would like to include some of that feedback. Responses
have been divided between conducting a full review of the superannuation retirement income
system and reviewing only those areas in most need of reform. The top three areas that should
be addressed are taxation of superannuation, complexity of superannuation and incentives to
encourage involuntary savings and promote confidence in the system.

  There was general support for the reduction of taxation, particularly in respect of SG
contributions. At the very least, the government should revisit the taxation of superannuation
arrangements so that we can put this issue to rest once and for all. There are not enough
incentives for the self-employed to make contributions. Members rated the overall level of
superannuation awareness and understanding of their clients as poor. Most clients do not
actively make voluntary superannuation contributions due to a lack of confidence. They do not
have the excess funds and there are not enough incentives in place to lock their money away
until retirement. The SG arrangements for employers are seen to be too complicated, and there
needs to be further simplification and education. Many clients who are approaching retirement
do not have sufficient savings to meet their expectations in retirement. Thank you. We are
happy to take questions from the committee.

   CHAIR—You are one of the few groups that support the abolition of both the 15 per cent
fund contributions tax and the earnings tax. Some of the earlier people have contended that the
increased earnings resulting from the scale and size of superannuation would offset a reduction
in the contributions tax. When you suggest that we should abolish both, I have to ask you as a
responsible organisation: where is all this revenue going to come from?

  Ms Barrett—In our submission we have only called for the removal or reduction of the
contributions tax not earnings tax.

   Mr Wyatt—What we are saying in relation to the survey that we conducted with practising
accountants is that one of the key issues was the front-end taxation of superannuation funds. If
you take a company tax rate of, say, 30c, the contributions tax affects not only the high-income
earners but also the low-income earners, particularly in relation to the superannuation guarantee.
If your marginal tax rate is below 15 per cent and you are putting in the nine per cent SG
contributions, it punishes the bottom end income earners. When you take that into account and
put it with the superannuation surcharge, it grossly affects moderate income earners—certainly
not high-income earners. Because of the way the adjusted taxable income is calculated, it
includes the superannuation contribution as well as wages, capital gains and all the rest of it. So
the contributions tax affects low-income earners and moderate income earners. When you
compare that from a practising accountant’s point of view, talking to clients across the desk they
say, ‘Why make a contribution to superannuation when I can retain it and pay 30c in the dollar
in a company.’

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   The other issue that needs to be looked at is in relation to the age based contributions, which
are inflexible and difficult to reconcile with the concept of a reasonable benefit limit. On the
one hand we are saying that we have the amount of superannuation money capped at a
reasonable benefit limit and on the other hand we are controlling the amount you can contribute
to superannuation in any given year under these age based concepts. The age based concepts are
out of step with family situations, the business cycle—for example, it is determined upon age
not whether it is a good economic year or a poor one—and with the changing work patterns of
particular individuals. With people having children later in life there is a restriction on their
earlier life regarding contributions into superannuation.

   In relation to that we have said that we should focus on not having both constraints and look
at making the age based contributions on a cumulative basis. If you are going to focus on
restricting the amount that people can contribute into superannuation, look at making
cumulative contributions so that it would more readily reconcile with those economic
circumstances, work patterns or changing family situations. We are focusing on these front end
charges and the ability to make contributions into the fund given that focusing on a reasonable
benefit limit and an age based contribution is attacking both ends of the problem. We either
have a limit on the amount of superannuation that you can put into that environment or a
restriction on the money going in but make it more flexible so that people’s superannuation
arrangements are much more in sync with their lifestyles. The front end taxing arrangements
really need to be closely looked at.

  CHAIR—With the reduced returns suffered by the bigger funds in recent times, have you
seen an increased interest in the small end of town—previously referred to as do-it-yourself

   Mr Wyatt—The returns from a superannuation fund are going to be dependent on the asset
classes in which they invest. One of the misnomers is that the DIY end of the market do not
invest in a broad spectrum of asset classes. They will invest in business real property but they
will always have participation in the equity and fixed interest markets. The returns flowing
through to the superannuation environment are dependent on your mix of asset class but they
are generated by that underlying asset class, which is generally—

  CHAIR—But you would have greater control, though, as to where it goes.

  Mr Wyatt—You have greater control and there has been the focus back towards business real
property where they do control their own destiny. One of the points that was raised in the
previous submission was in relation to where that money is invested. In the DIY market it is
very much in regional and rural Australia with those DIY funds that are there because they are
investing in business real property generally within their geographic area.

  CHAIR—You see no perceptible move towards do-it-yourself funds as a result of the
declining returns from the bigger funds?

  Mr Wyatt—I have not from a personal basis.

 Ms Kelleher—I would expect if there is going to be any move it will be in the next six to 12
months but—

Thursday, 18 July 2002                     SENATE—Select                                SUPER 449

  CHAIR—It is a little early, is it?

   Ms Kelleher—It is too early now because while there has been a lot of press coverage about
negative returns et cetera people have not actually seen how it has affected their member
account balance. I suppose the last time that there was a series of negative returns happening
within a lot of superannuation products it was probably a 12-month or two-year period, because
people left their money for a period of time to see whether it happened a second time around.
That is when they said, ‘Well, if I’m going to lose my money I prefer to be the one responsible
for losing it as opposed to it being with another set of people who may or may not be doing the
right or wrong thing.’ I think it is still far too early to see whether the current low returns are
going to impact on people shifting towards DIYs.

   CHAIR—With the transfer—in terms of the regulator responsible for the small funds moving
from APRA to ASIC—have you found that more cost-effective, more efficient and more

  Mr Wyatt—In terms of the small funds moving to tax from APRA?

  CHAIR—To the tax office—absolutely.

  Mr Wyatt—Yes. Again, it is a little early to tell. From my understanding, the tax office has
been in help mode for the past period of time. That may change as we go forward. So from my
perspective the jury is still out because they have been in a counselling process. I have not
noticed a great deal of change.

   Ms Kelleher—General feedback I have had from people is that the move to the tax office has
been a far more pleasant experience than they had anticipated. They have said that the tax office
has been quite cooperative and prepared to work with funds if there are issues in the funds and
that people have seen the move in a positive light. But it is still fairly early on in the piece and I
suppose the tax office have been going through a learning process in terms of what they are
dealing with et cetera. We still have not seen what is going to happen with the funds being there
for a period of time. When the funds were with APRA people were fairly comfortable with them
being there—they had been with APRA a long time and they knew how APRA approached
things. But then APRA got to the stage where they did not want to be dealing with a large
number of small funds so they decided to off-load them. Whether we are going to get to the
same situation with the tax office where they do not want to deal with a large number of small
funds or whatever, I do not know. We just have to wait and see what happens.

 CHAIR—There is a regulatory cost advantage of the tax office handling them compared with
APRA, isn’t there?

  Ms Kelleher—In terms of the levies?


  Ms Kelleher—Yes. It is $45 versus $400 as a comparison of the base fee in the tax office and
the minimum APRA fee, so from a cost or levy perspective it is certainly much better being in

SUPER 450                                SENATE—Select                   Thursday, 18 July 2002

the ATO environment. But that is not a driver when people are looking at setting up, say, a small
APRA fund versus a tax office fund. They are looking at things far broader than that.

  Mr Wyatt—They are looking for flexibility and control. A DIY fund provides that flexibility
and that control of your destiny so that people who are particularly looking for those aspects are
more prone to go towards those sorts of funds.

  CHAIR—We do not hear of too many problems with the small funds regulated by the tax
office getting into trouble, not paying out their commitments et cetera. Is that right?

  Mr Wyatt—No, you do not. That is right.

  CHAIR—Why is that?

  Ms Kelleher—I have not yet come across a self-managed fund that has not been able to pay
out benefits. I suppose they are all accumulation funds anyway so they are always going to have
assets in there. Whether the assets are producing the income they should or should not, I do not
know, but there will always be assets in there. Because the members are actually the people who
are looking after what is in the fund they are pretty careful with what they are doing in there.

  Mr Wyatt—A lot of the DIY funds have a portion of their assets invested back in this
business real property environment and they are quite aware of where that is going. They are
usually quite focused on it because, as I said before, it is usually within that geographical area
so they have a really good feel for where that asset is going in the marketplace and they are
controlling their investments. From their perspective it probably gets a six-monthly review.

  Senator SHERRY—I was going to raise this issue following on from your earlier comment
about DIY funds and regional investment. What if the business goes bust?

  Mr Wyatt—The asset base is still there. For example, traditionally the DIY fund has a rental
agreement with the operating entity, and that is purely a rental agreement. Since the introduction
of the amendments into SIS under SLA4 there is no borrowing so the fund holds that asset in its
own right—it may be a butcher’s shop, a hotel or a factory—and then it has a tenancy problem
and it does not have the loss of the asset.

   Senator SHERRY—But it is not as diversified an investment as you might otherwise see, is

  Mr Wyatt—That is one reason that the tenants in common arrangement was introduced. The
DIY funds can have diversification within their fund in terms of having, for example, a 30 per
cent mix in equities, 10 per cent in cash and the remaining balance in a tenancy in common
arrangement under a business real property and tenants in common arrangement with either the
other operating entity or others. Tenants in common and ungeared unit trust arrangements allow
that flexibility and diversification of asset classes through DIY funds.

  We have matured a lot. I have been a practising accountant for a number of years, and in the
early days you would see most of the assets in a DIY fund simply sitting in a bank account
unattended to. Over the last five to seven years, the focus has moved to the returns in those DIY

Thursday, 18 July 2002                      SENATE—Select                                 SUPER 451

environments and people are very careful about where that money goes in terms of reducing
risk through that concept of diversification.

  Senator SHERRY—Are there any surveys over the longer term of investment returns in DIY
funds versus other sectors of the industry? You might take that on notice.

  Mr Wyatt—My recollection is that there was a Rainmaker survey a couple of years ago and
that the DIY returns were generally above those of other types.

   Senator SHERRY—We will get a copy of that. Going to the administration of the so-called
surcharge, which I think after six years everyone has concluded is a tax, we heard a suggestion
earlier today that, whatever the rate of the surcharge, more of the administration can be shifted
from the fund—because it is very expensive to collect—back to the tax office. Do you have any
practical suggestions about how that could be achieved?

   Ms Kelleher—I could suggest going back to one of the original suggestions when the
surcharge was introduced: doing it via the group certificate mechanism as opposed to having the
fund involved at all. That was one of the much easier solutions. Inasmuch as employers are
already putting super on pay slips and things along those lines, in theory it should be a relatively
easy thing to do.

   Senator SHERRY—I do recall that, and of course the current collection mechanism is a vain
attempt to hide it by calling it a surcharge and getting the funds to collect it. I think the reality is
that most people know they are paying a surcharge now.

  Ms Kelleher—Yes.

  Senator SHERRY—You might give us some supplementary detail on the options for shifting
the administration from the funds—as we know, the considerable majority of members in most
funds do not pay it, but the administration cost is still significant—and transferring it back to the
tax office where it should have been in the first place.

  Mr Wyatt—We will take that on notice and put some time into it.

  Senator SHERRY—Good.

   Mr Wyatt—The surcharge, like the contributions tax, is a disincentive for people to provide
for their retirement, particularly in relation to the tax rates in those other entities. The surcharge
is a real disincentive, from a practical across-the-desk point of view, to individuals to provide
self-funded retirement. They say that they do not want to enter into an environment that is
basically seen as overgoverned, overtaxed and not understood by 99 per cent of the population,
where there is always the danger that the rules are going to change and people are going to lose
their money or be taxed in some new way. So the surcharge is seen as a very large disincentive
compared with other opportunities—for example, negatively gearing a property or some of the
mass-marketed tax arrangements.

  Senator SHERRY—I want to come back to that issue. You said that 99 per cent of people do
not understand the rules. Is that a general comment in relation to superannuation?

SUPER 452                                 SENATE—Select                   Thursday, 18 July 2002

  Mr Wyatt—It is a general comment in relation to superannuation from practical experience
of talking to people across the desk. They see it as being overtaxed, over-regulated and beyond
the comprehension of most people.

   Senator SHERRY—We continually hear people saying, ‘You have to simplify the system.’
Then we get into grandfathering and they say, ‘Don’t change the tax rules retrospectively; make
it all simpler so it’s easier to understand.’ Do you think we are ever going to get the point where
99 per cent of people are actually going to understand the system?

  Mr Wyatt—No. We might take that on notice.

  Ms Kelleher—If changes are made—if tough decisions are made—and it is clear that these
are what the rules are, people will be able to understand them.

   Senator SHERRY—We get this education line all the time—I am not criticising you—but
what about people who are functionally illiterate? Fifteen per cent of the population is a very
significant percentage. How on earth are people going to understand how to spell the word
‘superannuation’ let alone understand what it is all about? A consumer survey shows that 50 per
cent of the population do not know what 50 per cent is. We have got a pretty significant
education campaign, haven’t we?

  Ms Kelleher—That is right. It is a significant education issue, I suppose, and a sign of where
the system is at the moment and how difficult the education process is with the current system
when financially literate people do not understand superannuation. What hope does anybody
who is not financially literate have in terms of understanding it? The comments that have been
made to me over recent weeks in relation to super—bearing in mind that I was coming to this
hearing—have been along these lines: ‘We have had 30 years of complex changes in super.
Most of those changes have been negative changes. I do not understand what is going on and I
do not trust it.’ That seems to be the consensus out there.

  Senator SHERRY—I have my pub test, and I do get similar responses. The average
consumer—in this case, a beer drinker—is pretty confused when they ask me questions about
these matters in the public bar. So what hope have we got?

  Ms Kelleher—Yes.

  Mr Wyatt—It is pretty important that we do keep the concept of grandfathering because we
are talking about a retirement incomes policy not a revenue source. It is very important that we
do not focus on the retirement incomes policy and retirement incomes as something that ought
not to be grandfathered because, if the grandfathering principle is not adhered to, people will
become even more disenchanted with investing in superannuation. It is a key principle.

  Senator SHERRY—I understand that and I agree with it.

  Mr Wyatt—So I think we will take the complexity from that—

Thursday, 18 July 2002                   SENATE—Select                               SUPER 453

  Senator SHERRY—That was going to be my next point. I agree with you. I do not think any
government can retrospectively make a change. I think you have just got to it: it makes it more
complex, doesn’t it?

   Mr Wyatt—Yes. If you take the age-based limits, for example, logically they do not
reconcile with the needs and wants of Australians. In order to better reconcile with those needs
and wants—by definition making them cumulative—that would make it more complex, but I
think it would be better suited to the needs and wants of Australians.

  Senator SHERRY—I have two other quick points. In your opening comments you said that
there was general support for reduction in taxation contributions tax particularly on the SG
component. Why that response? Was it because, if there is a priority, that should be the priority?

  Mr Wyatt—What they are saying is that, if you have a compulsory superannuation guarantee
contribution going into a fund at nine per cent, by definition low-income individuals and high-
income individuals, or moderate-income individuals, must pay the tax. At the low end they are
paying a 15 per cent contributions tax, which may be in excess of their marginal tax rate, and at
the moderate end they are probably paying superannuation surcharge and contributions tax,
when those types of individuals may be able to retain in a company and be able to access that
money without all the constraints of that superannuation environment. So it seemed that the
taxation of superannuation at the front end is seen to be a very large disincentive to people
making contributions into superannuation particularly if you adhere to the three pillars policy
where you are saying that people who have the ability to contribute to super voluntarily should
get a tax incentive to do it.

  Senator SHERRY—We have a tight budget situation—the budget was in deficit last year for
the first time in some time. Senator Watson has pursued this issue: you have to prioritise tax
cuts; where do you start? Do you start with contributions tax?

   Mr Wyatt—If within that superannuation environment you are going to focus on certain
taxes, it should clearly be on the contributions taxes end because they are seen by the
marketplace as being a disincentive. The taxes within a superannuation fund are not generally
understood by the public at large. The back-end taxes, with more people going towards pension
streams, are not seen as such a dilemma as those front-end taxes. The front-end taxes are seen as
a real disincentive.

  Senator SHERRY—I have one last question. We talked earlier about people’s level of
understanding of superannuation. You obviously handle a lot of do-it-yourself cases. By that
definition people come to you, they choose that as an option and they clearly pay for the advice
you give. Do accountants trail commissions through DIY products or is it normally a fee for
service when you send your account?

  Ms Barrett—No, it is a fee for service.

  Mr Wyatt—I heard somebody on the radio recently say that they do not take a commission,
they charge a percentage of funds under management. By definition that is a commission by
another name. The accounting profession has a culture of charging on a fee-for-service basis.

SUPER 454                                  SENATE—Select                    Thursday, 18 July 2002

Even accountants who have moved into the financial planning environment find it difficult
culturally to move to the commission base. There tends to be a culture of fee for service.

   Senator SHERRY—That is something I would congratulate you on, because it struck me as
a bit odd—we have seen figures on the outcomes of these trailing commissions through the
whole life of a superannuation contribution over 20 to 30 years. One or two per cent is a
relatively common trailing commission. How can that be justified rather than a fee for service,
where people actually pay for it by an account?

   Mr Wyatt—The accounting profession has had that focus on the fee-for-service approach to
their clients. Accountants tend to have a very strong relationship with their clients—a very
strong trust and bond—and they typically charge on a fee-for-service basis.

   Senator SHERRY—I am not criticising accountants because it is not their practice, but we
have had examples where these trailing commissions can add up to $40,000 or $50,000 over the
life of the product. I find that an extraordinary sum of money. There does not appear to be a
very clear relationship between the delivery of service and advice from year to year—there just
appears to be this continuous money stream going out of the superannuation.

  Mr Wyatt—Those people who have based it on commissions do have to disclose those
commissions to their clients under their ASGs. There might be a 0.75 per cent trail—less than
one per cent—on the funds under management. Whether the client has reconciled those
concepts back to what it is actually costing them in terms of a fee for service and hours basis is
something that they need to address.

  Senator SHERRY—Yes, but from an accountant’s view, clearly you do not agree with this

  Mr Wyatt—Culturally, we have never done it that way.

  Senator SHERRY—Again, we have had evidence that a one per cent trailing commission
reduces the final retirement income by 10 per cent—not one per cent, but 10 per cent—and two
per cent reduces it by 20 per cent. These are staggering figures for commission.

   Mr Wyatt—Yes. That basically reconciles with the NATSEM report, where a one per cent
return on a fund earning rate reconciled to precisely those figures, so it has a significant effect in
the long term. If it is, say, a one per cent trail, the real issue is what that represents in terms of
dollars and what the client is getting back out of it. If there is a comprehensive review of their
asset allocations, their plan and where they are going in life, perhaps on a fee-for-service basis
there is not much difference. If it is a quick phone call, everything is all right and the adviser is
getting a one per cent commission, it is an inordinate amount of money for the service provided.

   Senator SHERRY—Let us focus on compulsory SG, which is at nine per cent now. Do you
think the average consumer understands the impact of a one per cent trail commission through a
product’s life?

  Mr Wyatt—No. I do not think that the average person out there understands that they are
probably tax disadvantaged. They would anticipate that something that is compulsory—the nine

Thursday, 18 July 2002                     SENATE—Select                               SUPER 455

per cent SG—ought to be taxed fairly and not in a disadvantaging manner, notwithstanding
whether they are at the bottom or moderate end of the income scale.

  Senator SHERRY—I accept that point. Nine per cent minus tax minus fees and charges is a
hell of a lot less than nine per cent. It can be six to seven per cent, depending on the level of the
fees and charges.

   Mr Wyatt—Yes. There is also an anomaly out there, from my experience in talking to people
from an advisory point of view. The nine per cent SG is a condoned figure so people believe
that that is the figure that is required. As the NATSEM report particularly showed, the
expectations of people on a modest but adequate level of income and how their goals pre and
post retirement reconcile with their actual funding is very difficult to understand. A lot of people
think that nine per cent is enough and it is clearly not, particularly if you want to maintain your
standard of living post retirement.

  The NATSEM report was basically saying that you needed to contribute the superannuation
for 40 years, have a fund earning rate after inflation of about 5.5 per cent and take the benefit
payment as a 50 per cent lump sum and a 50 per cent income stream. Most people cannot meet
those conditions. There are intermittent work patterns, either voluntarily or involuntarily
through sickness; the fund earning rate long term is a challenge; and a lot of people want to
reconcile how they take their benefit payments. So there is this security blanket called the nine
per cent SG that is probably not going to be a reality.

  CHAIR—Thank you for appearing before us today. We have noted the comments in your
report and they will be thoroughly analysed by our research staff.

SUPER 456                                  SENATE—Select                   Thursday, 18 July 2002

[12.31 p.m.]

ANDERSSON, Mr Michael Glenn (Private capacity)

GALBRAITH, Ms Fiona Anne (Private capacity)

PARTINGTON, Mr Robin Nyren (Private capacity)

  CHAIR—We will now move to a roundtable hearing. We invite participants who have not
submitted to come before us to present their views. We do request, however, that each
individual participant limit their comments to no more than five minutes. We want to open this
hearing up as much as possible, democratise it and make it as transparent as possible so we give
people who come to these hearings and listen to some of the comments an opportunity to
express their own views. We very much appreciate your preparedness in coming forward. I
welcome Ms Fiona Galbraith, Mr Michael Andersson and Mr Rob Partington. I would ask you
to limit your comments to five minutes. At the conclusion of that time, members of the
committee may ask you some questions.

  Ms Galbraith—My primary message today is that I would like to see a return to a focus on
superannuation being for retirement. I have a concern that it is increasingly being perceived as
being either a source of tax revenue, as opposed to the rest of the potential revenue base, or a
measure to address equity issues. An example of that is the surcharge and also the suggestion
that it might be used for aged health care when it is really for retirement.

   An issue that has also been raised before the committee over the last couple of days is the
increasing role of insurance in superannuation. I make the point that the sole purpose test allows
a ‘death benefit only’ super fund to exist as its sole purpose provided the death benefits are paid
before the person’s 65th birthday. So it is quite possible for there to be a super fund out there
that is basically a ‘risk only’ product and which has no investment component whatsoever and
that would meet the sole purpose test. It is not even an ancillary purpose. So the committee
might want to look at the sole purpose test for that very reason.

   I turn specifically to some issues that have been raised over the last couple of days. In relation
to surcharge, my personal opinion is that it should be removed. If it is there as an equity
measure, then there are better ways of addressing the equity concern, which appears to be the
inappropriate use of salary sacrificing to super so people on higher marginal tax rates pay an
effective lower marginal tax rate by putting it into super and the concern that there is there.

  My opinion is that that should be addressed at the source—that is, at the point of salary
sacrifice and not within the superannuation regime. I acknowledge that that may not happen and
refer to some of the suggestions that have been made about the mechanism for surcharge. One
suggestion that was made this morning was that administration be moved to the ATO. We were
not quite sure, on listening to that, exactly what that meant. Basically, we can see two things. A
half-measure may be to move the reporting of the surchargeable contributions to the employer
who, at the end of the day, has made those contributions and is usually claiming a deduction for
them. That would leave the funds free not to have to report the surchargeable contributions. But,

Thursday, 18 July 2002                    SENATE—Select                               SUPER 457

as long as the surcharge tax is imposed on the trustees of the fund, we will receive the
assessments, we will have to respond to them and we will have to either pay or reject them and
report where the funds have moved to.

   The only way to avoid the superannuation funds administering the surcharge is to turn it into
a tax on the individual, so the employers would report to the tax office the contributions they
have made. The tax office would always have a role to play, as it does currently, in matching up
the surchargeable contributions made with taxable income to get the adjusted taxable income.
Then it would have to levy that directly on the member through the tax assessment process. If
that is not put in place then the funds will always be involved at one point or another, as we are
currently. That is, I suppose, an administrator’s perspective on surcharge.

   Another point raised this morning was the possibility of age based contributions tax. While I
support that in principle, it would be a nightmare for us to administer. Currently, all
contributions go into a bucket and are deemed to be part of the income of the fund. They are put
with the investment earnings and allowable deductions are deducted, and at the end they are
basically all taxed the same. If we had to administer that at both a fund level and—as,
importantly, this tax comes out of each member’s account—at a member level, our system
would have to be able to do that. If we were to program our system to cater to that based on the
member’s age, that would be quite a significant change to our computer system. There would be
all sorts of issues: adjustment issues when contributions are paid late but belong to a period
when the member was younger and adjustment issues when people advise down the track that
their date of birth is wrong. It would be inordinately difficult to administer at that level because
we would have to deal with each individual member’s account.

   Another issue that came up this morning was lost members. I would like to give the funds’
perspective and to point to what might be a slight mismatch in perception. Funds have to report
all members who have either had mail returned to the fund or not made a contribution in two
years. They are deemed to be lost, and they are put on the lost member register. There are some
issues around that. The assumption, if somebody is on the lost member register, is that they have
lost their superannuation, that they have lost contact with their fund, that they do not know
where their superannuation is, that they do not know how to contact the fund or that they are not
aware that it is there. The only point I want to make is that the lost member register probably
overstates the number of lost members, although it would be impossible to gauge to what
extent. Often, people are on the register simply because they have moved house—that is, they
know where the superannuation fund is, they have been contributing to it for three or four years,
or whatever, and they have simply moved from address A to address B and forgotten to tell their
fund. They appear on the lost member register because we have had returned mail, but they may
well know which fund their money is in.

  Similarly, somebody who ceases to contribute for more than two years because they have
ceased employment or changed industry—whatever the circumstances may be—may be quite
well aware of where their superannuation is but will still appear on the lost member register. I
know there are concerns about the numbers on the register—both of individuals and dollars—
and I want to point out that it overstates the case. I do not know how you could measure how
many people out there are genuinely lost. A number of members do not contact the register to be
reunited with their money because, from the member’s perspective, they have never been lost.

SUPER 458                                 SENATE—Select                    Thursday, 18 July 2002

   The other issue that came up this morning was universal coverage—trying to increase
coverage for women. I think there was a passing reference made to the facts that, now that there
are child accounts, people can contribute their baby bonus and that there is the move to split
contributions coming in next year with spouse accounts. Again, the issue we have, in an
administrative capacity, is the complexity of the number of different rules as a kind of proxy for
occupational nexus. One in particular is the rule applying to people of ages 65 to 75, which has
been subsequently changed but is still complex. Trying to explain to somebody who is between
70 and 75 that they have to work at least 10 hours a week to be able to contribute and that then
it can only be employer mandated or personal, that it cannot be employer voluntary, or that if
they drop to 29 hours they must take all of their pre-65 benefit but not their post-65 employer
mandated benefit is incredibly complex. We would advocate that the rules be simplified,
particularly at that end, to be simply that you can contribute until age 70 or 75 and that at that
point the benefit is payable. That would be simple and straightforward both for us to
administer—so that we would not have to write countless letters and phone scripts and
explanations—and for people to understand, particularly if you are allowing child accounts to
come in.

   There are two equity measures, one of which is an age based deduction limit, but there are
also, at the end of the day, the RBLs. If we consider them to be a measure of a reasonable
benefit, then basically they should be relied upon. If Treasury has an issue that there may be an
inordinate number of undeducted contributions being primed into super, particularly later, that
are not caught by the RBL measure because they are undeducted, and they are worried that
people are putting in undeducted contributions and only paying 15 per cent tax and not what
they would otherwise pay out of the super system, then maybe Treasury should think about
introducing an undeducted contribution measure into the RBL. It would be a lot more equitable
to worry about that at the end than it would be for us to have to worry about various
contribution standards on the way in. It is becoming increasingly complex to write letters,
particularly to the members aged 65 to 75 years old, to explain in which circumstances they
have to claim at least some of their benefit but not all of it and in which circumstances they can
make which kinds of contributions. We have to write them quarterly or every six months, and
that is confusing them no end.

  Another quick point for the record, only because it came up yesterday, is the issue of what
happens with personal bankruptcy. The Bankruptcy Act provides that the amount of a person’s
superannuation up to the pension RBL is protected against the trustee in bankruptcy over a
million dollars. I would suggest that maybe the lump sum RBL would be a more appropriate
measure, but it is the pension RBL.

   A final issue is the disclosure of fees and charges. Personally, I would advocate that fees and
charges, and interest are the two determining factors. By and large, when people are choosing
between funds, it is the fees and charges they will have to pay and the historical interest that the
funds have returned that they look at. This area should be highly regulated in how they are
calculated and how they are disclosed. Given that members do have difficulties with concepts
like percentages, I think the only way is to prescribe, basically, a life cycle projection in which
you have a series of different assumptions that are made explicit. The assumptions would be the
same for every fund and their documentation should be explicit. For example, you have
somebody who puts in a thousand dollars at X net crediting rate and what it would look like
given the fees and charges of that fund at five years, 10 years and 25 years. You would do it

Thursday, 18 July 2002                     SENATE—Select                                SUPER 459

with amounts of $5,000 and $10,000 and with three crediting rates—something like that. At the
end of the day, we are talking about the amount that that person will have in 25, 35 or 45 years,
and that is really what the focus should be. If assumptions are standardised so that we are
comparing apples with apples, that would probably be more meaningful to people than

  CHAIR—Thank you very much.

  Mr Andersson—I would support most of those comments. With regard to complexity, I have
dealt with some RBL and surcharge problems, including recovery of surcharge, and
contributions pertaining to casual employment. I would have to say that the complexity that I
and other members of the family have as contributors mirrors those that administrators have,
much more than I would desire.

  I intend to make a written submission covering a number of points but, listening to some of
the issues raised today and the bit that I heard yesterday, I want to start by saying that, of the so-
called three pillars—the pension, SG and additional savings on top of that—the pension and SG
have been a safety net. It is a question of whether the government is carrying the risk or the
individual and whether or not you fund for the future or pay as you go. In response to the
question about targets that was asked earlier by Senator Hogg, I would think that, given the
current scenario, there ought to be a target to moving the number of people totally reliant on the
age pension down as low as is practicable, looking out to the long term. The SG is effectively
the policy measure being implemented to replace it and there ought to be a target and some
monitoring of progress towards achieving that policy. On top of that are the voluntary savings
that may be super but perhaps what is not discussed very much in these forums, given the nature
of the people making submissions, are the aspects related to non-superannuation savings.

   I go back to the pension and the SG and to the concepts of a safety net and of universality,
which has been argued from time to time both in terms of a universal pension—which on
balance I would support—and in relation to the SG. There was some discussion earlier
regarding people on low incomes and maternity leave for three months or something of that
order, but there are also self-employed people and those, typically wives, who do not earn. This
may change 40 years down the track but certainly in the baby boomer group, of which I am part,
wives who have very extended periods when they do not earn and are reliant on their husband’s
income do pose a problem in dealing with universality. It seems to me that that should be
recognised with some form of contribution, regardless of where that is sourced from. The same
goes for unemployment and all the other categories, but I mention in particular the wife who
may not work for 20 years. The alternative is that you are left with safety net provisions such as
the age pension for those people when they hit 65 or, if the wife is divorced, it becomes a matter
for a family court to pick up the tab. If there was a policy solution that would implement
universality in that context for the SG—because it basically existed in the social security
framework—that would seem to me worthy of pursuit.

  There are some demographic issues related to that as people progress through life. A number
of those are perhaps obvious. The submissions often appear to be talking about a single person,
but the reality is that at the point of retirement a lot of people are married and the partners
within that marriage quite often have different financial circumstances. Then within retirement
there will typically be a period when there is only a single person. Those issues are not

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addressed in a lot of submissions. Similarly a number of people—and I am one—have children
relatively late in life. I know some people who are over 65 and have children who are still
dependent. So there are some issues regarding adequacy there. The question of means tests, not
only in relation to pensions but also through working life and in relation to children, has been
raised from time to time—for example, it was mentioned in an earlier submission in relation to
the seniors health card—and it does impact on people’s behaviour. I think the whole question of
having fairly aggressive means tests across the board and the impact that has on people’s
behaviour needs to be revisited, along with the changing demographics and work culture in
society and where that is headed.

  Senator SHERRY—What do you mean by ‘revisited’?

  Mr Andersson—There has been a policy for quite some time, wherever there is some sort of
benefit or taxation, of having fairly aggressive means tests.

  Senator SHERRY—Do you want those loosened or do you want them tightened even

   Mr Andersson—I would suggest that they be loosened. They certainly have a substantial
impact, sometimes at the margins. For example, a shift worker who is asked, ‘Do you want to
work another shift?’ and is aware that the net benefit is zero per cent will say, ‘No, I don’t want
to work another shift.’ Sometimes this applies in relation to a whole job. This is certainly an
issue, for example, if you have early retiree status and have superannuation and taxation issues
but also have children—you find that there are means tests everywhere you look. You talk about
the growth in part-time work. I wonder to what extent that is an issue of supply of part-time jobs
and to what extent it reflects individuals deciding that they are better off working part-time than
full-time because of some of these means test issues. I raise that in the broadest possible

   CHAIR—You might like to put your other matters in a submission to us so that we can have
a chance to hear from Mr Partington.

  Mr Partington—I shall not ask for equal time and I will do my best. I will provide a little bit
of background. I am a self-funded retiree who was with the military superannuation scheme. I
took a lump sum and have been running my own super fund for the last seven years. One of the
questions that has come up repeatedly over the last two days is: what is adequate in terms of an
income upon retirement? I got very concerned when I suddenly went to six-monthly dividends
instead of a fortnightly pay packet—and I did my sums very carefully and I continue to do so.

   My subjective judgement is that the answer is something between $36,000 and $40,000 a
year for a couple. That assumes that you do not have to pay off a housing mortgage or anything
like that; it means you have no debts. It does not include what I would call discretionary
expenditure like drink, cigarettes, holidays and perhaps running a second car. It really is the
recurring expenditure that would have to be addressed by anyone in retirement running a
household and a family. We can adjust that a little bit but I do not think you will find the sums
vary much. You could go to the country where you pay more for fuel or come to the city where
it is less but, then again, you pay more in rates. So, from what I can see, it balances out. Those
figures came from Canberra and Melbourne.

Thursday, 18 July 2002                    SENATE—Select                              SUPER 461

  I totally agree with some of the points that have already been covered—the three pillars, for
example. But the question is: how do we bring all this together? I do not think there is anyone
who has a fair understanding of the wrinkles in the current superannuation scheme at the present
time—we have heard about them being altered ad nauseam over the last two days. I do think
that what we have to do is get a task force together. It would have to be a bipartisan task force
with experts that would not include officers from the Taxation Office—nor would it include the
Treasury. When you think about it, these people have separate vested interests and we need to
come to grips with what is required. I am the first to understand that we have to have taxation
and that the government has programs, but I believe that superannuation should compete with
these things in its own right.

  If at the end of the day what the task force produces is financially impossible then it comes
back for another iteration and we see what else can be done to bring it under control. There are a
few paragraphs in the Treasury submission which should have come out of a television episode
with Sir Humphrey Appleby. One of my biggest fears at the present time is that what is being
said in that submission is: ‘We have got this income and we are telling you that, if we lose it,
you are going to have to find it somewhere else.’ That is really what it is saying. There is
anecdotal evidence that says that the tax take from superannuation has gone up something like
300 per cent in the last five or six years. These are things that I reckon we should bring under
very close scrutiny.

  We have to make the rules simple. I find this even more complicated, and I was not standing
behind the door when they passed out the smarts and I am mathematically astute. But I find an
active effort in amongst the finance industry to suggest that they do not want you to know very
much about it. The attitude is: ‘You just put your money in here and we’ll sort it out for you.’
They sort it out to their own convenience, from what I can see, and it is a real problem that we
need to attack from both ends. We need to simplify the system so that people can understand
and we need to have plenty of promulgated information that shows people what goes on and
how it happens.

   My subjective judgement is that the advantage of going through the super funds rather than
making arrangements for your retirement through private investments is in the order of five or
six per cent. I would be open to any information from anybody else that says it is better. So we
do get terribly worked up on how important super is when we are not really putting up a
meaningful incentive for people to contribute to it. That is a major concern that I think a task
force is going to have to thrash out.

   I was one of the baby boomers, and I had a wonderful time. I was required to compulsorily
add to my super fund, so I am in a very fortunate position, and I am the first to admit it. But the
wheel turns and there is a major problem for a lot of these people. I think this has to be factored
in at about the time when people get plenty of money, if they have been working hard, and in
their final years of retirement they would be able to contribute to a super fund at a much higher
rate without attracting the superannuation surcharge.

  Perhaps there is some scope for us to look at how much information is available for baby
boomers and whether they should be contributing a lot more than they are doing. I think that
somehow we have to bring under control the amount of money that is going into super. No-one
ever tells you not to put money in your super fund, but there must be a certain stage we reach

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when that provides the adequate superannuation for an individual, and if they want more
comfort in retirement then they do it through the private system and be done with it. It is
something that needs to be considered. I am very worried about women in the work force. I do
not think they are getting a fair crack at this problem at all. I am surprised that there is not a
woman from the Senate on this committee.

  CHAIR—There is; she is not here today.

  Mr Partington—A lot of this complexity is being upped by the system because it means that
you then have a reason for your existence in the bureaucracy or in the finance industry. A lot of
people are not interested in making this business simple—I am sure of that. We touched on
older people. I do not know, Mr Chair, but you and I are probably of similar ages, and I get the
impression that the younger people want to be left alone to make the same mistakes we made 25
years ago. They do not really want older people to hamper them with the facts.

   Reasonable benefit limits is something I have made a separate submission on. I was required
to retire at 55. I will spend, on average, 10 years more in retirement than other people who retire
at 65, yet, with the reasonable benefit limit, it is finite; it does not reflect how long you are in
retirement. If we are going to have RBLs—which are just an incentive to avoid people estate
planning, as far as I can see—we should have a contribution limit. When people have
contributed to a certain level in their super fund and they are able to live comfortably then that
is where it stops.

   CHAIR—I think we have heard some very astute comments. It is often said that politicians’
best speeches are short, impromptu, off-the cuff, but made with conviction and experience, and
I think you have all brought that conviction and experience to the table today. We thank you for
your astute comments.

                     Proceedings suspended from 12.57 p.m. to 1.29 p.m.

Thursday, 18 July 2002                   SENATE—Select                               SUPER 463

GODDARD, Mrs Elizabeth Jane, Head of Research, Corporate Superannuation

GUTHRIE, Ms Jennifer, Member, Corporate Superannuation Association

McKENZIE, Mr Angus, Committee Member, Corporate Superannuation Association

  CHAIR—Thank you for agreeing to appear before us. We invite you to make some opening
remarks to the committee.

  Mrs Goddard—Thank you for the opportunity to appear before you. I would like to start by
apologising for the fact that Nicholas Brookes, our CEO, has been unable to attend, but we are
fortunate to have Angus and Jennifer to provide useful input.

  Senator SHERRY—We will still miss him.

  Mrs Goddard—I will let him know.

  CHAIR—But we welcome the new people.

  Mrs Goddard—We are here as representatives of the Corporate Superannuation Association.
The association represents Australia’s major not-for-profit corporate superannuation funds and
their corporate sponsors. The assets of the 51 association members amount to approximately
$60 billion, representing about 85 per cent of total corporate superannuation sector assets in
Australia and some 750,000 individual employee fund members. Because the interests of our
member corporates and their employees are aligned, we speak for the interests of a very large
proportion of employed Australians and for the bulk of those supported in corporate funds. Our
concern today is indicated in our submission but we would like to highlight the special
contribution that our funds make to the adequacy of retirement income and to raise the question:
why is this special contribution not recognised and encouraged more than it is?

  Our sponsoring employers are major players who have chosen to continue to maintain their
corporate not-for-profit funds for their employees. These major employer sponsored funds are
distinguished from other super funds by a higher level of employers’ support than is required
under legislation, lower costs because there is no profit component and best practice governance
under the SIS representative trustee regime. These characteristics ensure that our members’
employees will have the best possible super benefits and also ensure that these benefits are
safeguarded for the benefit of members and no-one else. In a context where there is a concern
with adequacy of general retirement savings, it seems that the increased employer support and
lower costs are a positive. Best practice governance must also be recognised as desirable given
that safety of super is a declared government objective. Our concern is that our funds’
contribution to enhanced adequacy be acknowledged and encouraged.

  We would like to expand a bit on the three major strengths exhibited by our funds. The level
of employer support is generally higher than the legislated minimum. Our employers provide
support at up to 23 per cent of salary. As an example of the effect of such additional support, an

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additional, say, five per cent in support level over the legislated minimum yields an increase in
final benefits of 56 per cent. Another way in which our employers provide support over and
above legislated obligations is through cost subsidies. In 34 out of 51 funds, administration and
insurance costs are met by the employer. These factors enhance the adequacy of the employees’

   Looking more closely at costs, another hefty contribution made by our funds to reducing the
retirement income gap is their success in minimising costs. The report completed by Phillips
Fox in April 2002 on superannuation fees and competition and appended to the submission
made to this committee on the current topic by IFSA, contains data on fees and charges
experienced by very large to large corporate super funds such as our members. According to
their survey, funds with over a billion dollars in assets have an average expense ratio of 0.6 per
cent of assets and funds of $250 million to $1 billion have average expenses of 0.8 per cent. Our
research supports these figures or even lower figures. Clearly benefits of scale operate here, but
where the employer sponsor and the members continue to be involved on the trustee board, the
trustee element of cost is minimised. There is no profit component.

   A further benefit is that the SIS representative trustee system in corporate not-for-profit funds
prevents conflicts of interests. Where the trustee is a professional—that is to say, a commercial
provider—there is always a risk of bias in favour of related entities in the selection of other
services. Where there is such bias, competition is reduced and service costs tend to increase. A
further concern is that, if our corporate member funds retreat from the not-for-profit provision
of super, and once superannuation savings enter the retail market—and this could happen in a
big way if the current choice of fund proposals are implemented—further layers of costs will be
added, including distribution costs to the adviser or planner. Fees may climb to an average of
2.34 per cent for personal super products and 2.5 per cent for RSAs. The difference between
total costs of an average of 0.8 per cent and total fees of 2.5 per cent should not be ignored
because, in the context of a nine per cent contribution rate, the difference results in a loss of 19
per cent in final benefits.

  Under the proven SIS regime our funds also have a strong corporate governance with
independent trustees. The governing trustee bodies represent the interests of members and
sponsoring employers. Consumer protection in these entities is, to a major extent, built in
through the extensive cooperative involvement of employers and members in the governance of
the funds. This particular layer of protection is absent in retail funds and either absent or
compromised in master funds. In a world where corporate accounting is under scrutiny and
emphasis is being placed on independent directors, such safeguards should be accorded
appropriate value.

  We would hope that the corporate super model with the above strengths would be recognised,
encouraged and protected by the government given the current concerns with adequacy and
with safety of super benefits. Surprisingly, however, this has not been the case. Take, for
example, the outcomes of financial services reform. Recent developments in the for-profit funds
management industry have resulted both in the widespread offering of interest in retail funds
and in the absorption of smaller funds under umbrella structures provided by financial
institutions. These offerings are provided with the primary motive of maximising profit to their
provider. Immediately such funds are removed from the not-for-profit independent fiduciary

Thursday, 18 July 2002                              SENATE—Select                                        SUPER 465

model of traditional employer sponsored superannuation, this is to the detriment of employee

  Recent legislative developments simply do not seem to distinguish these products from the
not-for-profit model of superannuation provision. The recently enacted FSR changes have been
designed to regulate entities very different from employer sponsored funds. They have as their
focus true financial products offered by financial institutions with or without intermediary
advisers focused not on the maximisation of long-term savings but on the maximisation of
member numbers and funds under management—a situation where the warning ‘caveat emptor’
applies. Not unreasonably, the FSR legislation has been tailored to facilitate compliance by
entities operating for profit. But the insistence on drawing employer sponsored super within this
net has created very significant difficulties for the not-for-profit sector. For not-for-profit
entities, complying with legislation which is directed at regulating the offering and provision of
products for profit is difficult and costly and has the effect of discouraging employers from
continuing to offer corporate super for their employees.

   Other recent legislative proposals create more difficulties for employer sponsored funds. The
proposal of the super working group, in particular for licensing and regulatory change, would
result in needless increases in compliance costs and complexity without apparent benefit for the
large corporate funds we represent. In the words of John Howard reported this morning in
relation to corporate regulation:

I don’t believe that because there have been some failures in certain areas, you dump a whole lot of additional regulation
on honest, ethical, law-abiding business men and women.

To return to other proposed legislation, in the recently introduced choice of fund legislation,
there is an implicit assumption that employer support is always provided at minimum legal
levels. There is no recognition of, and no provision for, the significant additional support
provided by our member corporations. Despite the fact that the employer sponsored funds of
our members provide significantly better benefits than those provided by others, the FSR
changes make it almost impossible for employers or trustees to communicate this to employees.
This intensifies the complexities and increases costs for those providing additional benefits to
the extent that our member employers are calling into question the viability of continuing. This
would have a significant effect on adequacy of benefits for their employees.

  On the topic of choice of fund, we wish to refer the committee to the UK Treasury’s Sandler
review of the United Kingdom market for medium- and long-term retail investments. This
review provides an insight into the experience in the UK after the operation of choice for a
considerable period. The impact of widespread retail commission-based sales of medium- to
long-term savings products has operated to the detriment of the consumer. We can learn from
that experience.

  In our view, the choice proposals, in the absence of any encouragement or recognition of not-
for-profit super, increase the likelihood that our employers will reduce their support to minimum
legal levels. This will have a major impact on the retirement benefits of up to 750,000
Australians. In addition, there is a danger that forcing an inappropriate standard model on
employer sponsors, in combination with an ill-fitting and costly regulatory environment, will
simply mean that employers will withdraw from the provision of super through their not-for-

SUPER 466                               SENATE—Select                  Thursday, 18 July 2002

profit funds. The result will be increased costs, again with significant impact on benefits.
Further, if all super entities end up operating for profits we will be deprived of a system of
corporate governance which has stood the test of time and which still plays a vital part in
maximising and safeguarding the retirement savings of those Australians still fortunate enough
to be members of employer sponsored not-for-profit funds.

   We urge that the focus of current and impending regulatory change be rethought so as to
consider and retain a place for the valuable benefit provided by our members’ not-for-profit
funds. We believe that the financial services reform regime should be restricted to for-profit
financial products and that the not-for-profit funds should continue to be regulated entirely
under an unemasculated SIS regime. We urge that any outcomes emerging from the super
working group’s recommendations be engineered in a way that provides benefits for members
of super funds which exceed the costs of additional regulation—costs which are charged to the
funds in higher levies and compliance costs, thus reducing the adequacy of benefits. We urge
that the proposals on choice of fund be rethought to provide deeper consideration of the
potential hazards inherent in the proposals, particularly in light of overseas experience.

   I have one final important point. To implement these suggestions that we have made would be
to the government’s advantage. There would be lower costs of regulation and money would be
saved on both a short-term basis and an ongoing basis. Most importantly, the benefits provided
by our members would be higher—a vital contribution to the adequacy of future retirement
incomes. That is really a run-down of where the thinking emerging from our submission was

  CHAIR—Why do you think the non-profit organisations should be exempt from some of the
more onerous provisions of the retail funds given, for example, that it is known that some
industry funds actually advertise their products? You cannot allow advertising for a similar
product under one regime to be free of regulation and heap regulations on it under another
regime, can you? Is that not unreasonable?

  Mrs Goddard—Yes, I agree that would be unreasonable. I suppose, from a selfish point of
view, we were really thinking about the majority of our funds, which do not advertise and do
not promote themselves to people other than the employees of our sponsoring funds.

  CHAIR—You spoke of all not-for-profit organisations, and I just drew that to your attention.

  Mrs Goddard—We certainly did not mean to imply all not-for-profit organisations. We are
concerned particularly with our members, the majority of whom do not offer to the public.

  Mr McKenzie—I think you could say that the reason the corporates offer superannuation is
to increase the value of the corporation—it is to the corporation’s advantage. The corporate
funds we represent have shown their bona fides by offering better superannuation to their

  CHAIR—Yes, that is taken for granted.

  Mr McKenzie—I think that is the point we are making here—that those who do demonstrate
that they are offering something more should be rewarded in some way. They are offering more

Thursday, 18 July 2002                     SENATE—Select                               SUPER 467

than they legally have to in terms of super guarantee support or they are subsidising costs—they
are somehow demonstrating that they are doing something to the advantage of their members.

  Senator SHERRY—I certainly take on board that last point you have raised. Could you take
on notice to provide the committee with a list of your members, not by name, just A, B, C, D, E,
unless you want to identify them; the level of contribution over and above the nine per cent for
each different fund—that is, the mandatory minimum—and the level of fee and charge; and
whether or not the fee and charge is met by the employer in part or whole.

  CHAIR—What about confidentiality issues? You might have to take a sample or something.

  Mr McKenzie—We have a sample survey that I think is reasonably comprehensive, isn’t it?

  Mrs Goddard—Yes.

  CHAIR—Would you be happy with a sample survey, Senator Sherry?

  Senator SHERRY—Yes, I would be happy with a sample. I do not want to know the names
of the funds, and you will notice that I have not asked for membership numbers.

  Mr McKenzie—We can provide that.

  Mrs Goddard—I think we have data available in that sort of line.

  Senator SHERRY—You can take the question on notice.

  Mrs Goddard—Yes; that will not be a problem.

  Senator SHERRY—When a corporate fund closes down—and this has happened—is there a
tendency for the replacement vehicle, whatever that is, to simply retreat to the nine per cent SG
only and not pay any of the additional that was probably the case when it was operated as a
corporate fund?

   Mr McKenzie—From the evidence that we have seen out there among corporations that are
continuing in business—not the ones that have disappeared off the face of the earth but those
that have decided to change their superannuation—it seems as though there is a number of
straws piling up on the camel’s back, as it were, and that corporations eventually reach the stage
where they decide that their relationship with their work force is not worth the extra cost in
effort and angst. One of the points that Liz made is that it is very difficult to tell your employees
about the benefits you are providing under the new FSR regime. Therefore, you cannot get
recognition from your work force for what you are doing, not so much by advertising but at
least offering a benefit that you can tell people about.

  It is an odd situation but that is where corporations are finding themselves. So I think each
corporation has a limit that will be reached somewhere along the line in terms of the difficulty
in continuing that has been created. Once you break that nexus between the corporate super
fund, its sponsor and its members, the only really logical thing for a corporate to do is to go

SUPER 468                                SENATE—Select                  Thursday, 18 July 2002

straight to offering SG only and probably outsourcing it through a master trust—a clean break,
if you like. This seems to be the way most corporates have responded to the problems they have

  Senator SHERRY—What has been the development in investment choice within a fund over
the last five years for corporates? I have seen surveys that indicate that it is now very
widespread across the general superannuation industry, but what is happening in the corporate

  Mr McKenzie—There are two points we need to make here. One is that within our corporate
membership there is still a large component of defined benefit. That is one of the other great
advantages that these funds offer people—there is certainty in the benefits and they are
insulated from investment risk. Where defined contribution type arrangements are being
offered, while we do not have a survey on this, I think generally most of these funds now offer
choice. It is possible to do a quick ring around—

  Mrs Goddard—We could certainly get confirmation.

   Senator SHERRY—If we put aside the issue of retail choice, I understand that investment
choice provides the ability for an individual to pick and choose—at least within a range,
whatever that may be—among different investment categories if they are particularly interested
to do that.

  Mrs Goddard—Yes, and that really goes a long way toward satisfying any perceived need
for choice.

  Mr McKenzie—Without the cost.

   Senator SHERRY—You might look at a bit of a survey of what the take-up rates of
investment choice are within a particular corporate fund. I do not want confidentiality broken; I
would just be interested to see what is happening in this area. Is the outstanding performance in
terms of fees and charges—which are very competitive and in many cases picked up by the
employer anyway—the product of bulk membership, if you like; of bulk buying or economy of
scale that comes as a consequence of that?

  Mrs Goddard—Do you mean bulk buying because our funds are large?

  Senator SHERRY—Yes.

  Mrs Goddard—It is partly that sort of muscle. Partly, also, there is an element of diligence
amongst our member boards. They have no axe to grind in not getting the best deal, so they are
independent in their approach to selecting suppliers.

  Senator SHERRY—But let us take the administration cost of that approach. There is a cost
advantage in a larger fund, isn’t there, with administration costs?

Thursday, 18 July 2002                   SENATE—Select                               SUPER 469

  Mr McKenzie—Yes. I think we could possibly even divide our survey up into size to give an
indication that size is an important factor. There are fixed costs and variable costs. When fixed
costs are expressed as a percentage it is a lot easier to get those down in a large fund.

   Senator SHERRY—That is my understanding from the general surveys that are published—
I have seen the ISFA survey, the ASFA survey and the Bateman paper. I would be particularly
interested to see what is happening and getting a bit of an overview of the corporate super,
because 750,000 people is a lot of people—and a lot of people to upset, I would have thought. I
had intended to go into choice in more detail but I will leave that for another time. On another
issue, we have spent a bit of time discussing insurance costs. Most funds offer at least death and
disability insurance. I assume corporates are no different in that regard. Is that correct?

  Mr McKenzie—Yes, they offer it. A lot of the larger funds do it on a self-insured basis. That
cost is always picked up by the employer in a defined benefit arrangement and it often is—I
can’t be sure about that, but I believe it is—in some other funds as well.

  Mrs Goddard—Yes, I think that is certainly the case.

   Senator SHERRY—We have had a number of cases where insurance costs are debited
against the contribution. I would be interested to see what type the insurance cost is. There seem
to be some excessive insurance costs that are debited against the accumulation in some areas. I
am not suggesting this is happening with corporate super funds—

  CHAIR—Master trusts.

  Senator SHERRY—Certainly the master trusts. I would be interested to see what the
emergence is there. Do many of the corporate super funds still offer pension annuity products
on retirement?

   Mr McKenzie—I think a lot of funds now offer retained benefit components for people who
have left employment. The rationale for that is that these are ambassadors for the corporates, so
they are happy to continue to provide a rollover arrangement so people can stay until they reach
retirement age. The offering of allocated pensions is becoming more and more common. I am
not sure that there are very many true pensions left out there, unfortunately. The lump sum
culture has really caused those not to be valued in the way that they should. I suppose very few
corporates would still be offering pensions—although I think there are still some, but not for
large numbers of their members.

   Senator SHERRY—Where a person leaves a corporate—and you might tell me whether this
is correct or not—and where they can transfer the money out in an accumulation type system, I
assume that there are minimal or no exit or entry fees.

  Mr McKenzie—No. I know of no corporate funds that have entry or exit fees.

  Mrs Goddard—I do not know of any, but we can certainly confirm that.

  Senator SHERRY—If you could just confirm that, that would be good.

SUPER 470                                 SENATE—Select                    Thursday, 18 July 2002

  Mrs Goddard—Yes.

  Senator SHERRY—By their very nature, there is no commission selling—that is my

  Mrs Goddard—No.

  Senator SHERRY—On the tax issue, we have had some discussion about levels of taxation
and obviously the contributions tax, which includes the surcharge. Is there a simpler mechanism
for administering the collection of the surcharge tax that the corporates can identify?

  Mrs Goddard—I think where we are at now is that the corporates have developed a
mechanism for dealing with the surcharge as it exists. There are still recurring difficulties,
which people have mentioned. I just cannot remember precisely what they are. I think people
have proposed methods of dealing with them.

  Ms Guthrie—The main problem is that, now they have gone ahead and gone through a lot of
expense, time and trouble developing procedures, changing it—you might get rid of it—creates
another set of problems in the administration costs of the funds.

   Mr McKenzie—Although if you are looking at potential solutions to the problems that all
funds have dealing with the surcharge, I cannot see a way of overcoming the problems with the
surcharge as it is. It would need to be simplified by making it a normal tax. I think the problem
is that the tax is on the trustee, not on the individual, which pushes the onus on the trustee to do
something about keeping track of obligations or collecting that back. The only solution I can see
is if it were changed from a tax on the trustee to a tax on the individual affected.

   Senator SHERRY—On the issue of the application of the surcharge, we have had an
argument put to us that the surcharge is based on an average notional contribution, and there are
clearly departures from an average in a defined benefit fund.

  Mrs Goddard—Yes.

  Senator SHERRY—Is that an issue with those corporate funds that have a defined benefit?

  Mrs Goddard—You are really talking about the fact that the notional contribution rate is
going to differ from the actual contribution rate?

  Senator SHERRY—Yes.

  Mrs Goddard—Yes.

  Senator SHERRY—So people are overtaxed; they are taxed above what the tax rate should
be because of the averaging process. Sorry; they may be. Some people have certainly
complained to us about it.

Thursday, 18 July 2002                     SENATE—Select                               SUPER 471

   Mr McKenzie—It depends a bit on the scheme design and it also depends on what the
trustees put in place to collect the surcharge back, because the tax is on the trustee and once that
has been collected there is no issue as far as revenue collection is concerned. It is what has been
put in place by trustees in order to preserve equity. It is really an issue of equity amongst
members of the funds and/or an issue of protecting a corporate. Some of these things could have
been picked up. The trustee could just pay it, but the government’s intent and desire, it would
appear, is for trustees to collect it back, so it does appear as a tax on individuals. But that nexus
is not there, and it is trustees who are being put in a position to do that step of the process.

  Mrs Goddard—Senator Sherry, are you also thinking about the fact that there is an average
notional contribution rate and a person who, for example, left a fund part way through the
funding process might not have had the benefit of that average level of support?

  Senator SHERRY—That is part of the issue.

  Mrs Goddard—Yes.

  Senator SHERRY—Do any of the corporate funds require a compulsory employee

  Mrs Goddard—Some of them do.

   Senator SHERRY—Again, I would be interested to identify that. We have discussed the
options for compulsory employee contribution more generally, and a number of people have
raised that with us. I am particularly interested in whether or not those funds have done any
attitudinal surveys of their membership about the concept of compulsory employee
contribution—whether it is accepted, rejected, disliked or whatever.

  Mrs Goddard—My perception is that where you have a compulsory employee contribution
you are generally working towards a defined benefit which is sufficiently generous to be a good
motivation for compulsory contribution.

   Senator SHERRY—I would appreciate it if you could take it on notice. If there are
attitudinal surveys on compulsory contributions from employees, and if anyone is willing to
provide the committee with that information—it may have to be confidential—I would be
interested in seeing any such research. You referred in your opening comments to the UK
document. I do not know whether the secretariat has a copy of it.

  Mrs Goddard—We can provide a reference to it.

  Senator SHERRY—If you could provide a reference, the secretariat can follow that through.

   CHAIR—Why do corporates, when they outsource, tend to go to a master trust? Are not the
costs higher than under an industry fund? In outsourcing to a master trust, are they really acting
in the best interests of their members—of their ordinary employees; I am not talking about chief

SUPER 472                                SENATE—Select                   Thursday, 18 July 2002

   Mrs Goddard—Part of the perceived attraction of a master trust would be the ability to
retain some element of badging of your employer involvement. Would you agree with that,

   Mr McKenzie—Some have done that and a lot of them would have negotiated better
arrangements, but I do not know that all corporates go out to master trusts. Those who have
award agreements and things would be involved in becoming employer sponsors of industry
funds, and I think the Bernie Fraser ads are directed towards corporates to do that. If you are
looking at the difference in costs between industry funds and master trusts, we would put that
difference down to the for-profit side of the business. Master trusts are there in order to make a
profit, whereas industry funds are mutual arrangements.

   CHAIR—But surely a trustee who is making a transfer from a corporate fund to an
alternative fund should look at the rates of return, costs et cetera. It surprises me that where
these transfers are made they seem to be predominantly made to a master trust, as opposed to a
low-cost industry fund. Do the corporates pay the initial entry fees? There has to be something
in it for the employees, otherwise they are dudded.

  Mr McKenzie—I think there is not much in it for the employees. What is happening is that
the larger corporates that we would know about go out to service providers—an implemented
consulting sort of service provider, which is another layer on this. BHP would be an example of
that. They have preserved some role for themselves in overviewing the arrangement. Corporates
cannot totally remove themselves from the process, given that the super guarantee legislation is
an obligation on employers. They do have to ensure that they have provided a minimum level of
guarantee, either through super or through the tax charge, so corporates still have that onus.

  I think that the ones we would know about have gone through the process of assessing the
options open to them. Some have come down in master trusts. One of the perceived attractions
of master trusts, from an employee’s perspective, is the range of options and other services they
offer. Whether they are actually of value in an adequacy sense in the end or whether these bells
and whistles are things more of a marketing nature, I do not know. But that is not really

   CHAIR—This is our worry: we do not want lots of bells and whistles and no effective return
at the end of the day. We are talking about adequacy, so bells and whistles mean absolutely
nothing. At the end of the day, the return is not adequate.

   Mr McKenzie—The issue with return, and one of the points we have made in the total
adequacy sense, is that return cannot be increased for everyone. The market is the market, and
therefore the returns available out of economic wealth creation are limited and cannot be made
greater for everyone, so there are winners and losers. But the relative performance of super
funds is not going to alter the adequacy position. All they can really get in a macro sense is the
return available from the market.

  CHAIR—As the committee looking after superannuation we want to make sure that those
mandated contributions get the maximum return at the lowest cost risk. That is basically our
unwritten charter.

Thursday, 18 July 2002                   SENATE—Select                              SUPER 473

  Mr McKenzie—Yes.

   Mrs Goddard—I think another reason for choosing a master trust instead of an industry
fund, whether rightly or wrongly, would be a perception that there might still be a greater
element of involvement and control in the process.

  Mr McKenzie—I would refer you to the Sandler review in the UK for a discussion about
investment return versus costs. That review has concluded that there is no relationship between
the fees you pay and the return you get and that returns are ultimately driven by the lowest
cost—that is the determiner.

  CHAIR—But this raises the question: how efficient is the superannuation industry in
Australia? Do we have too many players? Do we need asset consultants? Do we need
investment advisers on top of investment managers? There are a lot of players in this game and
they are all taking a share. Obviously, if you are looking at trying to get a maximum return at
low cost and maximum flexibility you must have some experience in this area. Can you help the

  Mr McKenzie—I think we would contend that the key driver and ultimate return is cost: if
you minimise your costs you will end up with higher returns for a given level of risk; there is
always a risk issue.

  CHAIR—But, in an environment where we have had sharply reduced returns in the last
couple of years, the members are naturally focusing more heavily on the costs and taxes side
than they have before. If you have been getting 18 and 20 per cent, fees, charges and taxes are
not as significant as when you are losing at minus 4.3 per cent.

  Mr McKenzie—Over long time periods, whatever happens, the difference in costs of two per
cent between, say, the corporate funds and the retail funds will be reflected in the returns.


  Mrs Goddard—The other thing would be that, although you focus on costs in lean times and
they stand out more dramatically in lean times, there are certain costs you cannot eliminate. You
have to keep maintaining the services to the fund; you have to keep buying investment advisory
services and so forth, even when the investment returns are not good.

  CHAIR—But do you think you are getting sufficient adequate return from having an asset
consultant added to your advisory team and people who give you advice about which are the
best performing funds? There are a lot of players with mixed interests out there.

   Mr McKenzie—I think there is an interesting point here in that everything subtracts from

  CHAIR—Precisely; that is the reason for the question.

SUPER 474                                  SENATE—Select                   Thursday, 18 July 2002

   Mr McKenzie—Everything you do in this game subtracts from return. You cannot actually
make the return higher, so costs are the real drivers for it. I think trustees who are able to take a
long-term view and not be worried so much about short-term marketing issues can operate at
lower costs. That was one of the drivers of the difference between corporate and other funds in
terms of costs: they do not need to spend money on these things that do not actually reduce the

  CHAIR—In your experience do asset consultants improve returns significantly to more than
justify their costs?

  Mr McKenzie—Do consultants improve returns?

  CHAIR—Yes, asset consultants—they are another layer of costs.

  Mr McKenzie—They are a layer of cost, but asset consultants are there to assist trustees to
come up with reasonable, long-term investment strategies. Whether or not the strategies trustees
come up with would be better or worse in the absence of asset consultants I do not know, but
prudence would suggest—

   CHAIR—Why would they be better than Maple-Brown Abbott, which is the best performer
in this environment at the moment?

  Mrs Goddard—One presumes that Maple-Brown Abbott would in their turn be incurring
costs in asset consulting services.

  CHAIR—Yes, but we also have this other layer which advises the trustees as well.

  Mrs Goddard—The other angle to this is that trustees by their nature tend not to be experts.
Because of the complexity of the investment environment, they would actually be derelict in
their duty if they did not seek a measure of expert advice. I think a reasonable person would
conclude that, in the current investment environment, it would be appropriate to seek asset
consulting advice. It is the norm. I agree with you that norms should always be examined, but it
would certainly be considered to be a reasonable approach.

 CHAIR—How are we going to replace this contributions tax that you want taken away? It is
worth $2½ billion.

   Mrs Goddard—We have not placed a lot of emphasis on the removal of that tax, because a
lot of other parties who have made submissions to you have had a lot of ideas on that topic. I
think it is really quite a complex question. It is certainly something that would have to be done
over a period to reduce the pain.

  Mr McKenzie—I think it is reasonable to say that the contributions tax reduces adequacy;
that is known. One thing worth pointing out is that, way back when it first came in, a lot of it
was absorbed by corporates, especially those in defined benefit funds, because there was no way
you could reduce benefits. So that was the first of the difficulties that corporates had: their costs
went up by 15 per cent, because they could not really reduce the benefit.

Thursday, 18 July 2002                  SENATE—Select                             SUPER 475

 Senator SHERRY—Because the funds still paid the tax but had it locked in a defined benefit
which they could not reduce to offset the tax.

  Mr McKenzie—That is right.

  Senator SHERRY—Is that still the case generally today?

  Mr McKenzie—Yes. I think those defined benefits that are still going have not had their
benefits reduced and so that is still happening. Corporate costs are 15 per cent more than they
would otherwise have been before it was introduced.

  CHAIR—Thank you very much for appearing before the committee and for giving us your

SUPER 476                                SENATE—Select                  Thursday, 18 July 2002

[2.16 p.m.]

AGLAND, Mr Reece Graeme, General Counsel, National Institute of Accountants

ORD, Mr Gavan Russell, Technical Policy Manager, National Institute of Accountants

  CHAIR—Welcome. I invite you to make a brief opening statement and then we will ask you
some questions.

  Mr Agland—The National Institute of Accountants welcomes the opportunity to appear
before this committee. The National Institute of Accountants is the third professional
accounting body, with over 12,000 members across various sectors of the accounting

   Australia, like most of the other Western nations, is facing the prospect of an ageing
population, people living longer and families becoming smaller. The government’s
Intergenerational Report released with the budget this year sets a sobering picture of the fact
that, without change, the ability of future governments to meet the needs of an ageing
population will be greatly diminished. The truth is that none of this is new; nor is it unique to
Australia. The longer it takes for reforms to take place, the harder the choices will be, and the
costs will be greater. Maybe this debate should have been had five years ago. However, we
cannot wait another five years for a decision to be made. The NIA and others have said that
decisions have to be made in relation to what is an adequate level of income in retirement and
what level of contributions are needed to achieve that; how to tax superannuation having regard
to efficiency, equity and simplicity; and how to educate people to make appropriate choices in

   A number of previous submissions have highlighted that an annual income of around $25,000
to $30,000 in today’s dollars will be required to meet the basic expectations of most people in
retirement. The NIA does not dispute this. It has been said in a number of submissions that the
current nine per cent contribution rate will be inadequate to achieve this, even for those who
will be in the system for a number of years, and is woefully inadequate for most baby boomers,
many of whom are approaching retirement age having made superannuation contributions for
ten or fewer years.

  The NIA submission addressed largely the issue of taxation of superannuation as an issue
impacting on the level of final retirement incomes. It is noted in the NIA submission as well as
others that Australia is unique in taxing superannuation at three points. While this ensures a
constant stream of income to the government, it reduces the overall funds available to persons
on retirement. The purpose of superannuation is to save for retirement. Up-front taxation acts
against this. The question is whether we are looking at retirement income or a taxation policy.

  The NIA believes that the contributions tax and the surcharge tax are the two taxes that
should be addressed as a matter of urgency. The contributions tax hits hard because it deprives
the fund of money before it even reaches the superannuation fund. It deprives the fund of
money to grow with. Every dollar that is taken out is not only a dollar lost but a dollar lost

Thursday, 18 July 2002                   SENATE—Select                               SUPER 477

compounded over the life of the fund. While removing the contributions tax will impact on
current revenues, it will add to government revenues in the future, and extra money from the
funds ensures that there are greater sums on retirement. The Intergenerational Report shows that
the greatest threat to government revenue is not today but over the next 20 to 30 years. It would
seem to make sense to sacrifice some revenue today to ensure greater revenues in the future.
Attempts to change superannuation, while remaining revenue neutral in the short term, are
bound to fail. All that they will ensure is that superannuation becomes more complex as
attempts are made to make up for taxes lost in one area by putting them somewhere else.

   The problem is the time frame that is being looked at. The question should not be whether a
change will be revenue neutral in the short term—that is, one to three years—but what the
impact will be over the longer term. Some have suggested, to reduce the impact of removing the
contributions tax all at once, that a reduction could be staggered over time. This would give
time for adjustments to be made and give greater certainty over the medium term. While this
would not be as advantageous as doing away with contributions tax now, it is preferable to the
current situation.

   The NIA, however, suggests an option aimed at those in most need of urgent respite: the baby
boom generation. This is to remove immediately the tax on contributions for those who are 50
and over while staggering the removal of the contributions tax over a five- to 10-year period. As
others have noted, many in the baby boom generation have not had the opportunity to
accumulate superannuation over the whole life of their employment. Research commissioned by
AMP showed that the average balance for the 50- to 64-year-old group was only $56,000. This
will be inadequate to meet their requirements. Removing contributions tax on their future
contributions will not solve the problem but it will ensure that their balances will be greater on
retirement than they would otherwise be.

  Removal of surcharge is a more controversial proposal, due to the perceived equity in taxing
those at higher income levels. The NIA believes that the equity considerations of this tax are
overwhelmed by the efficiency and simplicity arguments against the tax. As others have said,
the surcharge is one of the most inefficient taxes. The cost of implementing it is almost as great
as the revenue raised by it. It places the burden not on funds but on individuals and is unfairest
on those who experience spikes in their income from year to year, and any equity considerations
are more effectively and more efficiently dealt with at the benefit stage.

   Again, the surcharge is especially hurtful for those in the baby boom generation. Some of
these people are at the pinnacle of their career. They have got to their position through hard
work over many years. While they may be in a relatively high-income stream at the moment, at
least compared to those on $30,000 or less, they have generally not been in a high bracket
throughout their lives. It is inequitable to now add a surcharge to them when they may only
have a few years left to save for their retirement. We are not talking about Kerry Packer here;
we are talking about people who have worked hard over 30 years to attain their current position.
If the surcharge is not removed, we suggest that it should at least be removed for those in the 50
and over bracket. The NIA believes that, by removing the surcharge and contributions tax, many
of the complications of superannuation will be removed and the system will be simpler for
individuals to understand and, more importantly, for funds to administer.

SUPER 478                                      SENATE—Select                        Thursday, 18 July 2002

  However, reforming taxation of superannuation is not enough in itself to ensure adequate
funds in retirement. A lot of evidence has been provided to this committee that a rate of around
12 to 15 per cent would be needed. This could be achieved either through greater employer
contributions, through some sort of contribution from government or through greater
contributions from employees. Employers are already heavily burdened by the contribution. We
believe the appropriate way for the government to contribute to superannuation is by reducing
or getting rid of the up-front taxes.

  However, it is important for us to focus on individuals and ways to ensure that they provide
for their own superannuation. The current taxing of contributions is a disincentive to people
choosing to take money out of current expenditure and putting it into their superannuation
funds. While there are no simple answers on how to encourage people to contribute to their own
super, other than removing taxation disincentives, we believe that this is a very important issue
that will go beyond the life of this committee. The NIA supports our colleagues at the CPA in
calling for a task force or some similar sort of arrangement to promote any recommendations
that come out of this committee and believes that such a task force should include not just
government representatives but representatives of the professions.

   Finally, the NIA also believes that is important to address the issue of how to educate the
population on their superannuation decisions. While it is not possible to educate people about
all of the complex issues surrounding superannuation, it is important that they have a general
understanding of how the system works, how various parts are taxed, what level of
contributions will be needed to achieve the retirement incomes they believe they need, how they
can make personal contributions and what decisions they need to make as they approach

   This last issue is one of great importance. Part of the problem for many retirees is that they
are not properly informed of the choices; therefore, they do not always make the most optimal
choices. They go for lump sum payments, because at least they understand that. For high-
income earners, this is not such a problem. They often have access to, and can afford to see, a
financial planner, who can set out the choices for them. However, many retirees have limited
money and may not feel that they can afford the expert advice of a financial planner. The NIA
believes that this committee should look at some way of ensuring that all those who are about to
retire have access to appropriate advisers, whether this is through government agencies such as
Centrelink or rebates to see financial planners, or some other mechanism the NIA has not made
a final opinion on. However, we believe it is just as important to ensure that funds are
appropriately dealt with post retirement as well as pre retirement. We are happy to take any

  CHAIR—Thank you very much for a succinct presentation; it was very much to the point.
Your members may not be aware, but you have raised the question about the government having
an advisory body in recommendation 8, which says, in part:

The NIA recommends that Government establish Retirement Planning Experts throughout Australia who can help those
about to enter or who are in retirement ...

Centrelink generally has officers available. I know I frequently refer constituents to them and
suggest that they certainly go there before they go to their bank or to a financial planner.

Thursday, 18 July 2002                   SENATE—Select                               SUPER 479

  Mr Agland—I guess the issue is that a lot of people are not aware that Centrelink has those

  CHAIR—Yes, but I mentioned it because it is a service that is out there and available and,
generally, I think it is very much appreciated. Not everybody takes their advice, and sometimes
they go a bit far in terms of their recommendations but, nevertheless, it is an option.

   Mr Agland—Yes, and I think that is very important. As we have said, the problem is that a
lot of people think superannuation is too complicated, so they just throw their hands up in the
air and do not deal with it. I think people need to know that these services are out there, that
there are experts who can help them.

  CHAIR—Yes. Do we really need to go to 15 per cent and reduce the government taxes on
superannuation? Are we really going just a bit too far?

  Mr Agland—The recommendation is 12 per cent, with the removal of the contributions
taxes. If you retain the contributions taxes, then you would probably need a rate of around 15
per cent. We are suggesting that the government contribution, in effect, is removing those taxes.
So it would not be 15 per cent overall but around 12 per cent, with the removal of the
contributions taxes.

  CHAIR—It just seems to be putting a little excess icing on the cake in terms of where we are
coming from.

  Mr Ord—We can compare that with other countries with compulsory superannuation, such
as Singapore, where the individual contribution is 20 per cent and the company contribution is
around 12 to 13 per cent. The Australian compulsory contribution is quite low in comparison
with most other countries.

   CHAIR—Do you think Australians generally would live with a regime such as that operating
in Singapore?

  Mr Ord—That is a good question; I am not sure.

  CHAIR—It could be thrown at us: why don’t we adopt the Singapore system? What do we
lose if we go into a Singapore style of system?

  Mr Ord—First of all, I do not think the funds would be very happy, because the Singapore
system has one, central government fund, so you would have to deal with that vested interest;
the contribution for employers is much higher, so employers would not like it; and individuals
would lose 20 per cent of their income. Most people, especially younger people, enjoy having a
greater part of their salary for themselves now rather than having it pile up in superannuation.
However, in Singapore you can access your funds to buy housing as well as shares in
government listed companies. So there is the ability to access those sorts of funds for retirement
and to at least have a better standard of living before then as well. There are aspects of the
Singapore system that have been adopted elsewhere that do have some merit, and perhaps the
committee might like to consider the Singapore system.

SUPER 480                                SENATE—Select                  Thursday, 18 July 2002

 CHAIR—Do you think we have too many funds offering superannuation in Australia?
Would it be a more efficient industry if we had fewer, or even just one scheme?

  Mr Ord—It is an interesting question, but we do not necessarily have an opinion on that

  Senator SHERRY—Mr Agland, I understand that you have suggested scrapping the tax for
people of 50 years of age and over.

  Mr Agland—We suggest getting rid of the contributions tax altogether. However, there have
been a lot of comments that that is going to affect the revenue; how do we reduce the impact?
One way of reducing the impact is to look at the groups most in need of help. One of those
groups is people in the 50 and above bracket, who are about to enter retirement. They should
probably get priority in having that tax taken away from them. We suggest that it should be
taken away altogether but, in order to afford it, that we should start off with them.

   Senator SHERRY—I think that is useful. We have raised the issue of the transition period
for those who, for obvious reasons, will not be in a compulsory system for a lifetime—
particularly that group, whose expectations are that things are looking good but whose outcome
is pretty grim. We have discussed fees and charges as well as tax. In your experience, in the
performance of your duties as accountants, what is the approach of the accounting profession to
fees and charges in the area of superannuation products?

  Mr Ord—Going back to that original question about the number of funds, as an accounting
body I think we would try to minimise the cost to the fund as much as possible. That is why
there are many self-managed super funds out there and many of them are administered by

  Senator SHERRY—You might not know what I am getting at—and a previous accounting
body discussed this: my understanding is that it is a fee for service, someone comes to you for
advice, you send them an account, they pay for it.

   Mr Agland—Yes. The preference in the accounting profession is to have fee for service
rather than other sorts of arrangements. When someone comes to an accountant they usually do
not come for just one thing; there is usually an existing relationship built up over a number of
years. That is why they generally favour a fee for service rather than other types of funding.

   Senator SHERRY—So the accounting profession, or at least those you represent, are not
into trailing commissions through the life of a product?

   Mr Agland—In general, no. I cannot speak for every single member, but the general answer
is no, they do not use those sorts of arrangements.

   Senator SHERRY—If it is legal, do you think it is ethical? Do you think people really
understand what they are getting for their money when there is a trailed commission through the
life of a product—perhaps for 20 or 30 years?

Thursday, 18 July 2002                     SENATE—Select                                SUPER 481

   Mr Agland—One problem is that people do not really understand what that means. They will
say, ‘That’s just a fee,’ and they will sign off on it. We are not going to make a comment on
whether it is ethical or not, but I do not think it is the preferable way of paying for those sorts of

  Senator SHERRY—When, for example, a person sees one per cent charged as commission,
do you believe they understand the true impact of that over time?

   Mr Agland—No. They probably think, ‘One per cent—that’s not much.’ But, as I heard you
say earlier, that can be anything up to $40,000 over the life of the fund. I do not think a lot of
them realise that that is $40,000 out of their retirement income. So just having a one per cent fee
in that way confuses a lot of people.

  Senator SHERRY—Again, pardon my ignorance of the accounting profession—I am unlike
our chair, Senator Watson, who has had some deep experience in this area: do accountants have
a standard range of fees and charges? I know it is not regulated, but do you have standard
patterns of fees and charges—recommended fees, perhaps?

  Mr Agland—We do not have a recommended fee but it is probably one of those areas where
competition really regulates the fees. In reality, there probably is not a huge range but we do not
actually set that range; we allow the marketplace to set it.

  Senator SHERRY—How does it compare to lawyers, for example? Lawyers tend to have, if
not a standard fee, an indication of what is charged for particular services—and, sure, there can
be departures from it.

  Mr Agland—We as an accounting body do not set anything like that.

   Mr Ord—There are a number of fairly large providers who specialise in superannuation and
they often set the industry benchmark for the fees. Especially with self-managed super funds, a
lot of our members go to these superannuation experts who set a benchmark, which depends on
the service that they are wanting. That is where the competition is. Often, accountants do not get
involved in the administration of funds; they pass that on to specialists. There is a group of
specialists called Super Concepts based in Melbourne.

  Senator SHERRY—In relation to the issue of the mix of compulsory versus voluntary
contributions and however voluntary is driven and the extent to which there are incentives, in
your submission are you suggesting higher compulsory contributions?

   Mr Agland—I think we have to look at the issue of compulsory contributions by individuals
if we are to achieve what we think people want to achieve. The choice is either they contribute
now and they will get that as part of their superannuation or they pay higher taxes and maybe
they will recoup that through other means. If people really want to achieve that level of income
in the future, then they are going to have to make a sacrifice. Unfortunately, Australians are not
terribly good at saving voluntarily. They may understand that it is something good for them but
unless they are given a little kick in the pants they probably will not do it.

  Senator SHERRY—They will do it tomorrow.

SUPER 482                                SENATE—Select                  Thursday, 18 July 2002

  Mr Agland—Exactly.

  Senator SHERRY—And tomorrow never comes.

  Mr Agland—Yes.

   Senator SHERRY—Obviously, the self-employed are excluded from the SG. I have looked
at the latest figures. I think about two-thirds of the self-employed have a super fund but only
one-third are actively contributing at any one time. This obviously means there is a significant
group that is not having moneys put aside. Have you got any thoughts about how we could deal
with that issue?

  Mr Agland—One of the complications with those sort of people is that their income goes up
and down, so they probably tend to put more contributions into their superannuation fund when
they have a good year. But if they have a particularly bad year they may feel that is something
they have to sacrifice to get through the next year.

  Senator SHERRY—To the extent that it is tax incentive driven—to the extent that that
happens—do you have any comments to make about the current tax incentive regime for self-
employed people?

  Mr Ord—I think our comments are basically the same: that there are incentives in the system
but the disincentive remains to be the contributions tax for self-employed people. But the other
disincentive for self-employed people is they have this sum of money that they would rather
invest in their business than in their super fund. A lot of them now know that there are
incentives with capital gains tax to keep the money in their fund and at the time of retirement
they can get up to $500,000 tax free, CGT free. So the system acts against itself in that it
encourages people to invest into their business.

   Senator SHERRY—There are two points from that: one is that a lot of businesses go broke,
so your retirement fund effectively goes broke with it. I think that is a particular problem. It
does remind me that we should perhaps follow through and see whether people, because of
those tax incentives in respect of capital gains, are converting the capital from their business
into a retirement income product. I have not seen any figures on it. Do you have any anecdotal
experience about what is happening in that area?

   Mr Agland—I think those changes are pretty new, so it will take a while for those figures to
come through. We do not have anything at the moment. But I agree: it would be interesting to
see how many of them actually do follow through on that. Their intention may be that, yes, that
is what they are going to do but halfway through they go broke and there goes what they
consider to be their superannuation fund.

   Senator HOGG—Do you have any comment on the limit of $450 per month income below
which a contribution does not have to be made for superannuation? Should that remain, should
it go? Is that a way to start to contribute to greater adequacy?

  Mr Ord—This is an issue we have not considered. We will take it on notice and put it in a
separate submission.

Thursday, 18 July 2002                    SENATE—Select                              SUPER 483

   Senator HOGG—If you could take it on notice, I would be pleased. Whilst a contribution of
less than $10 a week into a fund is not a big amount, it is nonetheless a significant amount in the
longer term. It is in that context I want you to take it into consideration, bearing in mind that
there are fees and charges that come out of that and that there is a limit below which you cannot
go anyway.

 Mr Agland—There is a limit where the costs outweigh the benefits of doing that; however,
we agree that it is something that needs to be looked at and perhaps lowered to capture a lot

  Senator HOGG—If you could take that on notice and come back to us with a
recommendation, I would be pleased to hear it.

   Mr Ord—I have some preliminary comments on that. Usually people in this lower level are
itinerant workers and move from job to job. They build up many funds; hence, the SHAR
scheme at the ATO. A problem is that people in that lower area of monthly salary tend to have
10 or 15 funds—depending on how many employers they have had—and they do not keep track
of the funds. Over time, the funds are poured into this SHAR fund at the ATO and one day they
might access it; however, an issue for people who are part-time employees is that they do not
keep track of their funds.

   Senator HOGG—Let me raise one other issue that was raised in the opening submission. Mr
Agland, you made a remark that many people going into retirement do not necessarily have the
capacity to seek advice from financial planners. I got the feeling you were hinting that there was
either a need to have some sort of cap on the financial advice that is received on the SG
contributions—the mandatory contributions that have gone into people’s retirement funds—or
that there something broader might be necessary to allow these people to access a reasonable
amount of advice as some form of retirement benefit.

  Mr Agland—We believe that people reaching retirement, especially in the current group, do
not have a lot of experience in financial products. They do not understand them very well. They
see the opportunity to get a lump sum, and they take it. Sometimes they need it to replace debt.
There should be more mechanisms for these people to get some sort of advice on options before
they get their superannuation—for example, ‘Putting your superannuation into a fund that will
pay over a life of five to 10 years is a better option than taking a lump sum.’ We believe there is
a need for someone to be able to give advice so people make the right decisions, especially in
rural areas where they do not have as easy access to financial planning advice. Someone should
be able to give them that sort of advice so they make the right decision and do not stuff up one
of the most important decisions they will have to make for the next 15 or 20 years of their lives.

  Senator HOGG—That raises the issue of protection of your superannuation post retirement.
This committee, in another form, had a number of people come before it who had lost all their
superannuation retirement savings in solicitor mortgage schemes and the like. If we are looking
at an overall retirement policy, is there a case for protection of that part which was the
compulsory SG but not necessarily the non-compulsory and voluntary contributions of persons?

SUPER 484                                SENATE—Select                  Thursday, 18 July 2002

  Mr Agland—I guess you would have to look at the cost of any such scheme. It has value on
the face of it, but you would have to really look at the cost of doing that. We would not be
opposed to such a regime as long as the costs did not outweigh any benefits.

  Senator HOGG—I accept that. But you have not really thought it through?

  Mr Agland—No, we have not done any in-depth research on the issue.

  Senator HOGG—But more and more people now are coming onto the marketplace with
their nest eggs. There is not a lot of it from the SG at this stage, as we know, but nonetheless
these are nest eggs which people thought were going to fund them in retirement. We had a
number of people appear before us who invested in Commercial Nominees and who had lost all
of their money in the enhanced cash management trust. I know they are going to get some of
that back now, but they are never going to fully get back what they put into it.

  Mr Agland—We already have rules in relation to the money as it is growing; I think it is
probably a good idea to look at some sorts of rules for the post-retirement period, so that those
moneys are not wasted.

   Senator SHERRY—The difficulty is that, whether they should or not, people see retirement
moneys, both in the accumulation and the draw-down period, as different because it is what
they expect to live on in their retirement. It generates enormous emotion in the community. The
chair and I know of the stress and concern—and Senator Hogg was sitting in on some of the
committees—when people lose that element of their retirement money. It is obviously
disastrous for the individual, and it also attracts a lot of publicity and public sympathy. Even
though the relative number might be small, there is an attitude in society—a correct one, I
think—that retirement incomes are something different. So you might have a look at that issue.

   CHAIR—Finally, you indicate that investigations should be undertaken to find ways for
retirees to make better use of the equity currently locked up in housing. Have you thought about
the mechanics of implementing that?

   Mr Agland—I would say that I am not an expert in that, so I would not want to advise the
committee on exact ways of doing it other than to say that in the United States and other
jurisdictions they are looking at ways for people to make some sort of income stream out of the
equity they have in their homes. It is something that will probably need to be looked at in the

  CHAIR—We will certainly look at that. Thank you very much for appearing before the

                     Proceedings suspended from 2.47 p.m. to 3.11 p.m.

Thursday, 18 July 2002                      SENATE—Select                                SUPER 485

HEWETT, Ms Helen, Fund Secretary, Cbus

  CHAIR—I am pleased to welcome Ms Helen Hewett. Thank you very much for appearing
before the committee and for your submission. We ask you to make a short presentation
highlighting the most important features of your submission.

  Ms Hewett—Thanks for this opportunity to talk about our submission. Cbus is the national
industry super fund for the building and construction industry. It now has about 338,000
members and 30,000 participating employers across Australia and around $3.7 billion in assets
under management. Cbus was the first industry fund, formed in 1984. Even so, after 18 years
our average account balance is only $10,946. About 33 per cent of members have account
balances large enough to avail themselves of the allocated pension, which has a very low entry
level of $10,000. So even after 18 years only one-third of our membership has sufficient assets
under management to take an allocated pension. The largest group of members, at 38 per cent,
are those with account balances between $1,000 and $5,000.

   We have been offering an allocated pension for about five years and until about two years ago
the minimum entry level was $20,000. We decided to reduce it to $10,000 because there was an
increasing demand from members wanting to have even that very smallest amount of additional
income in retirement. Interestingly enough, 90 per cent of people retiring took their balance in
cash in the year ended 30 June 2000 and after just one year of reducing that limit we found that
by 2001 that had reduced to 74 per cent. It reduced further to 68 per cent in this year just
finished, on 30 June.

   So there certainly seems to be a willingness and an interest from members to take up some
form of pension rather than grab the lump sum, even though it is a relatively small lump sum.
The average retirement benefit we paid out in the last 12 months was $19,600. It is still very
small, even though we have been around for 18 years. During those years people have been
receiving contributions but, because they have long and frequent broken periods of work,
clearly the contributions and their capacity to build income are affected.

  I will use some figures to illustrate for you in a moment how frequently people receive
contributions. Before I do that let me say that, as most of you would know, the construction and
building industry is a significant contributor to the economy, contributing about six per cent of
GDP. Our figures show that it employs a little over 660,000 people, and about 50 per cent of
those people are in the residential or housing sector. It is in this sector that we find that there are
very high numbers of self-employed people working and frequent non-payment issues arising.

  Activity in our industry tends to be reflected in the short-term business cycles. It is also very
much influenced by interest rates, demographic trends, housing stock availability and
commercial vacancy rates, in addition to the sorts of levels of investment in infrastructure that
we are seeing now. The industry is very much project focused, with frequent and sometimes
very long gaps between projects when members are often unemployed. So you very often see
members who switch quite regularly from being an employee to being a self-employed person
and, when they are self-employed, invariably there will be no contribution for super. We have
very high numbers of self-employed members, compared with a lot of other public offer

SUPER 486                                  SENATE—Select                   Thursday, 18 July 2002

industry funds. We now have about 7,000 active self-employed members. Generally speaking,
they are either project managers or much more highly paid people in the industry, rather than
the typical construction worker.

   Given the rate of population growth, the ageing of the population and the fact that people are
living longer, it is unlikely that governments will be able to afford to increase the pension in real
terms or value. In fact, we may find that the number of people aged over 65 who are living in
poverty will increase further. Over the 10 years to 2000, that percentage increased from 7.3 per
cent to 11.2 per cent. Clearly, a significant number of people are reliant upon the age pension,
and many of them find it inadequate—so inadequate that they are classed as being in poverty.

  We think there is a need for Australians to try to finance their own retirement if they can but,
for many, we feel this just is not possible under the current arrangements. I believe there is a
weight of evidence that suggests that the SG will not be sufficient for the vast majority of
Australians to retire with some dignity and with a reasonable level of income that will afford
them some comfort. We believe the calculations made are based on assumptions that really do
not reflect the experience of many ordinary workers in the industries that we represent, let alone
across a much wider group of industries. These assumptions are usually based on people
working for 40 years without any periods of broken service. We know that, for women and
other groups, this is just not the case, and it certainly does not reflect the experience of most
building workers. Of the 338,000 members of Cbus, only 190,000, or 56 per cent, had a
payment in the last year. On average, 114,000 received a payment in any one month—that is,
just 34 per cent. Sixteen per cent of people who received a payment in the last year have not
received anything at all over the last five months, and a further six per cent have received
nothing for more than seven months.

   While we often see activity rates for superannuation funds, those activity rates simply
illustrate that people may have one received payment—maybe—or one or more payments in the
last 12 months. Many people in the industries we cover receive very infrequent payments. As I
mentioned before, another factor that clearly influences the ability to accumulate super is
becoming a self-employed worker. ABS statistics for 1997-98 show that 27 per cent of our
industry is self-employed, compared with an average of 10 per cent across all industries. As I
said, many in the industry move from being self-employed to being employer sponsored, and
this means no provision is made when they are self-employed and there are gaps in their periods
of employment when no superannuation is being accumulated.

  Injuries are another factor that influence the ability of someone to accumulate
superannuation. The building industry is certainly a high-risk industry. WorkSafe figures show
that fatalities in the industry were 15.2 for every 100,000 workers, compared with 5.6 for
100,000 workers across the whole work force for 1993-94 and 1995-96. In the year ended 2000
there were 32 fatal injuries and 13,929 non-fatal injuries in the building and construction
industry. Our insurers tell us that our fund pays out about 2.2 times the industry average for
TPD claims.

  For a couple to self-fund at the level of the age pension, our figures show they need a lump
sum of $223,000. I am not suggesting for one moment that the age pension is an adequate level
of income for retirement. There is much evidence to show that this certainly is not the case. As I
said a moment ago, there are figures that show that significant numbers of people aged over 65

Thursday, 18 July 2002                    SENATE—Select                              SUPER 487

are living in poverty. However, if we take the age pension as a measure, we will see that most
workers in the building and construction industry will fall well short of this level of income
even after 40 years in the work force.

   To illustrate this, Cbus has been in existence for 18 years and many construction workers
receive amounts in excess of the SG when they work. About 40 per cent of our members are
covered by enterprise agreements which typically reflect much higher rates than the SG rate.
Even so, only 0.3 per cent of members in our fund have over $100,000 after 18 years. So clearly
after 40 years, which is not much more than twice that, it is unlikely that they will be able to
self-fund even to the level of the age pension. As I said, after 18 years in existence our average
retirement benefit is only $19,600. The majority of members over that time have been receiving
benefits. The problem is that they have had very high levels of broken service and have very
often been unemployed.

   There are of course other influences, such as investment returns, costs and taxation. It is well
known that industry funds have low costs. Generally our costs are around half those of our retail
competitors. Cbus’s total MER—its management expense ratio, or the percentage of assets
under management used to manage the fund—is 0.96. This amount is recovered by charging
members $1 per week—that is for an active member; if you are inactive you are charged 85c a
week—and the balance is deducted from investment earnings prior to determining the crediting
rate to members.

  Cbus believes that commissions are not well understood by people because very often they
are reflected as a number of fees and very often they are percentages. We know from research
we undertook some years ago that a lot of people thought that less than one per cent sounded
very low and $1 a week sounded like a lot of money. They do not understand the effect of the
percentage fees—as their account balance grows, so do their fees. I think this will be the case
even in an improved disclosure environment. For this reason, we think commissions on
compulsory superannuation should not be allowed and fees should be limited to a fixed dollar
amount on rollovers. This fixed dollar amount should just reflect the cost of processing that
payment, so that the cost of processing for those who want to move frequently is not at the
expense of other members.

   We also believe that taxation on small accounts is a huge burden on those small accounts.
Members on low incomes should be encouraged and need greater incentives to save for their
retirement. Taxation penalties for people on low incomes with low superannuation accounts are,
we believe, a significant burden. Small accounts are protected from fees but they are not
protected from tax. This means that it takes those accounts a very long time to grow to amounts
in excess of the $1,000 where other members are not required to assist with their protection

  We think that there are some compelling reasons for a review of taxation on superannuation. I
am sure that many who have appeared before you throughout this inquiry have illustrated some
of those reasons, but one issue we would like to raise is the question of low-income earners who
have limited superannuation assets. Usually these superannuation assets represent 90 per cent of
their assets or more in some cases. Many do not own their own home, despite the view that
every Australian owns their own home. We find very high numbers of claims from members
who are in severe financial hardship. We have very strong auditing and review procedures to

SUPER 488                                  SENATE—Select                    Thursday, 18 July 2002

look at those claims. Clearly, lots of members are living on very high credit and lots of members
are paying significant amounts in rent and are well behind with their rent.

   Whilst it is not a simple thing for the government to transition taxation arrangements from the
existing arrangements, we believe that at some stage changes do need to be made. One small
start that could be made would be to try and address the issue for low-income earners. The
taxation rate applied to them is quite significant and it has a big impact on their ability to grow
their account. These people are not going to be self-funded in retirement, so one way or another
the government purse will pay, through the age pension, unemployment benefit or some other
benefit. We think it would be better if people could be encouraged through some sort of taxation

  We are suggesting that consideration be given to some sort of rebate which would be
administered through the tax system so that people with multiple accounts could not get the
benefit and could not exploit any rebate. Such a rebate would be paid to their nominated fund.
These could be bulk transfers to the fund and they could easily be accommodated by the fund.
Those were some of the issues we wanted to raise in relation to people’s ability to accumulate
greater superannuation benefits and improve their standard of living in retirement.

   CHAIR—Thank you very much; that was very interesting. The UK government standards
refer to management charges capped at one per cent of fund assets. Would not a fairer charge be
applied as a percentage of assets purchased? Why give them the benefit of the portfolio when a
manager may not have been responsible for putting much of that portfolio together?

   Ms Hewett—We looked at this a few years ago when we were reviewing our fees. It is
difficult if you are not going to have multiple levels of fees. For a lot of funds that would create
an additional administrative burden which would have costs associated with it. One of the
things that we did was to have this flat $1 fee, which is meant to cover the cost of things such as
access to the call centre, sending out your statement—

  CHAIR—I am sorry. I am talking about the investment manager’s fee.

  Ms Hewett—Yes.

  CHAIR—Wouldn’t it be better if we capped the investment manager’s fee not as a
percentage of the total assets of the fund under administration but, say, as a percentage of funds
purchased during the relevant period?

  Ms Hewett—You could do that, but how would that address the issue of commissions and
those sorts of charges?

  CHAIR—In a sense, I suppose it is a commission for a reward. But in terms of making a
calculation it is more related to the way they perform in terms of the assets or investments they
purchase, rather than a global calculation. For example, if there are a lot of payouts there may
be virtually no acquisitions during the year, but they still get the benefit of, say, four per cent of
the total assets under investment.

Thursday, 18 July 2002                    SENATE—Select                               SUPER 489

  Ms Hewett—I think that is true. One way that funds have attempted to deal with that is by
having some of their portfolio—for example, in Australian or overseas equities—indexed where
the fees paid to managers are very low. That is meant to reflect the level of activity and the level
of purchase of assets. I think there has been some attempt to try and take that into account
through very low fees on indexed management. In fact, one manager charges no fee on indexed
management; they get a fee if they outperform the index.


  Ms Hewett—That is one side of the coin. The other side of the coin is the cost of
commissions and charges that are applied that are not investment related charges.

  CHAIR—That is my next question. The UK model suggests we provide columns and
columns of figures at different levels. How can we benchmark for fees and charges using a
simpler model than the UK model? You might say it is all there, but how many people can
really understand that? We had trouble the other day working out what was in it and what was
not in it.

  Ms Hewett—You may not be able to do it in the way that it is done in the UK in terms of
breaking it down, but there may be some overall benchmarking for people because I think

  CHAIR—That is what we are seeking your assistance on.

  Ms Hewett—I think that there is a lot of trouble. We find that even professional consultants
advising companies looking at collapsing their corporate superannuation funds are confused by
fees. We have had it happen to us where we have been competing for business and the
competitor has shown our fee as $1 a week plus 0.96 per cent, whereas the 0.96 per cent—

  CHAIR—That is incorporated in it.

   Ms Hewett—incorporates the $1 per week. This is a very common thing. Sometimes there
may be some mischief behind it, but very often I think it is a genuine mistake. Lots of people
are involved in advising people on superannuation these days, including tax agents who have
some limited licence. We find that this is a very common thing. We were suggesting that funds
should have to more clearly disclose their total operating costs. I do not think the current way
the MER is constructed is always accurate. For example, in our case where we use some
unlisted vehicles where the fees offset against the income, you cannot see that fee and it is not
reflected in your MER. In our fund we have what is called an MER and an enhanced MER—in
other words, what we really think it is—adding back those fees. I know that some work has
been done by people in the industry, including David Coogan who may have presented to you
from PWC, about how you could more accurately show an MER and how that might become a
measure or a benchmark for people to see whether their fund is in the two per cent plus group or
in the one per cent area. But the reality is at the moment people have no idea.

   CHAIR—We certainly need something equivalent to a health warning if it is above a certain
figure. You need to look at further explanations for one, too, three or four—items which we

SUPER 490                                 SENATE—Select                    Thursday, 18 July 2002

draw their attention to. What about that approach? People have warned us against using a global

   Ms Hewett—I would suggest that you have a look at the key features statement that needs to
be produced as well, and some of the prescribed wording that is used there. We find that that
confuses people. It talks, I think, about ‘previous fees and charges that are ongoing’. The
terminology is very confusing. We find that we need to put out supplementary information to
explain the terminology that is prescribed wording in the key features statement.

  CHAIR—Could you give us a supplementary submission on that?

  Ms Hewett—Yes.

   CHAIR—It would distress us a little if what has just been put on the statute books is difficult
to interpret and needs clarification.

  Senator SHERRY—I thought the take-up rates for the pension that you have introduced
were quite interesting and surprising too, given the low level of benefit. What is the charge for
that? How does it work?

  Ms Hewett—Off the top of my head, I do not know what the charge is. It is based on the
same principles, the same philosophy, as industry funds, so there are no commissions attached.
The mandates are similar sorts of mandates. They are quite sizeable mandates to the managers,
so the fees are relatively low. It was ranked recently, in a study of allocated pensions, and it got
quite a high ranking. That presumably reflected not just its performance but also its fees. I could
provide that information.

  Senator SHERRY—I would appreciate that. What is the fee charge for an inactive member
of Cbus?

  Ms Hewett—It is 85c.

  Senator SHERRY—And what is it for an active member?

  Ms Hewett—It is $1 for an active member.

  Senator SHERRY—I want to talk about the issue of adequacy, particularly for people who
have only been in the system for 20 years or so—I think you said that Cbus has been going for
18 years and was one of the earlier funds. I am interested in specific policies to deal with that
group of people who will not be in the system for 30 or 40 years of working life—
notwithstanding the problems you have identified with dropping in and out of the work force.
Do you have any suggestions about policy options we could look at for this group of people
who clearly will not be there for 20 years, let alone 35 or 40 years?

  Ms Hewett—We are finding now that a lot of members who leave the industry because they
just cannot cope with the heavy nature of the work will stay in our fund because we are a public
offer fund. So we have very high retention rates. I think that that benefits them a great deal. We

Thursday, 18 July 2002                     SENATE—Select                               SUPER 491

think taxation again is a big burden for these members, because their working lives are often
shortened and the frequency of their periods out of the work force is quite considerable. So
taxation is an issue, but so is the level of contribution. The level of contribution, in our view, is
clearly too low.

  Senator SHERRY—You provide death and disability insurance. What is the cost of that?

   Ms Hewett—It costs $1.95 a week. If you are a blue-collar worker, your current benefit rate
is $25,000 for death and $12,500 for TPD.

  Senator SHERRY—Do you have optional units?

  Ms Hewett—We do, and we have a non-blue-collar rate for people who only spend a short
period of time on construction sites, like architects, design professionals and project managers.
They get a higher benefit rate because they are a lower-risk group. We have 20 different
insurance options, basically.

  Senator SHERRY—We spent a bit of time discussing this and the impact on the retirement
saving. Do you have salary continuance?

  Ms Hewett—We do. We offer that as an option for people.

  Senator SHERRY—It is not compulsory?

  Ms Hewett—No.

  Senator SHERRY—What is the cost of that?

  Ms Hewett—It depends on your age and your salary when you enter, but you get 75 per cent
of your current salary for a period of two years after you have been off work. You can select 30,
60 or 90 days.

  Senator SHERRY—We discussed this morning how much should be allowed to be debited
against what is a saving for retirement. Let us deal with the issue of whether or not salary
continuance is allowed under the sole purpose test. Do you have any advice on that?

  Ms Hewett—We do. In fact, our current salary continuance is offered outside the fund. They
have to pay a cheque; they pay for it separately.

  Senator SHERRY—Okay, fair enough.

  Ms Hewett—We are bringing it in to the fund from 1 November this year and, as part of that,
we got some advice about whether or not it was a breach of the sole purpose test. As you would
probably be aware, there are many funds that do offer it in the their fund.

  Senator SHERRY—Yes.

SUPER 492                                 SENATE—Select                    Thursday, 18 July 2002

  Ms Hewett—We have just been through a very big insurance review. We went out to tender
and our benefits will improve a little from 1 November this year. We found that there is an
increasing level of interest in salary continuance. A lot of members are more interested in that
than in TPD because they think that TPD is too hard to get and they are concerned that they
may be unable to work and meet their living expenses and yet not qualify for TPD.

  Senator SHERRY—In that case, doesn’t salary continuance become a form of early access?

  Ms Hewett—It does, but another issue with salary continuance which is a bit of a problem is
that you have all these offsets that come in. It is just not applicable to everyone. For a lot of
low-income earners who are paying quite big premiums to get salary continuance, by the time
they take into account offsets such as sickness benefits, unemployment benefits and other
benefits, the amount they receive might be virtually zero, and yet they have paid the premium as
though they were getting the full benefit rate. So it is very often not suitable. We warn members
on a low income that this may not be a product that they will get any value out of. We do not
want them to spend all their superannuation savings on insurance that they might never get a
benefit from.

  Senator SHERRY—That is precisely my concern: whether we should be allowing this. I can
see the argument for death and disability insurance at a reasonable cost and I know the extent to
which it applies, but all these costs come off the final retirement benefit. Perhaps there needs to
be some restriction on the level of insurance that can be debited against the contribution.

   Ms Hewett—Another approach that we are investigating at the moment is whether the TPD
benefit should be able to be drawn after a period, let us say, of not being able to work, where
they can draw down some of the benefit and then, if they still cannot return to any kind of work
at the end of the six months, they get the rest of it. That is one issue we are looking at, where,
say, they are off work for three months and it is unlikely that they will be able to return to work,
but it is not certain, and they have fairly serious injuries. We will look at whether we would
allow people to draw down. Another problem is that people get their lump sum TPD payment
and they buy the new car or fix the roof or buy a new television, or whatever it is, and it is gone.
Then they have to rely on some other form of benefit during the period they cannot work.

  Senator SHERRY—You may not know this, but what is the relationship between a total
permanent disability payment and workers compensation? Is there any offsetting at all?

  Ms Hewett—No, there is no offsetting. The definitions are very often quite different.
Someone can qualify for workers compensation and not for TPD.

  Senator SHERRY—I understand that, but where a person receives a total permanent
disability payment and they will receive workers compensation, the workers compensation
payment does not take into account TPD, if it has been paid.

  Ms Hewett—No.

  Senator SHERRY—But in the case of unemployment benefit?

Thursday, 18 July 2002                    SENATE—Select                              SUPER 493

  Ms Hewett—Our TPD benefit does not have any offsets against it at all, but you have to be
unable to work for six months and then you have to show that you are not fit to work in any
employment that you have had the experience, training or education to do. So it is a fairly hard
definition to meet. For some people six months is a very long time to wait because very often
they will be waiting on other forms of income support as well.

   CHAIR—Cbus has been making some direct investments. With the exponential growth in
superannuation under investment, do you worry about the ability of the Australian equities
market or the share market to absorb all of these contributions and still pay an adequate return
on investment or will we see a lot of this money go overseas in the same way that money has
flowed out of country Australia to Melbourne and Sydney—principally to Sydney—and then a
lot of that went overseas? Is that in Australia’s best interests? Nick and I come from Tasmania
and we have the same problem—our employers are saying, ‘Let’s keep the money in Tasmania
if we can’ and Tasplan is playing its part, but an awful lot of money goes to Sydney out of
Tasmania in the same way that it goes out of Alice Springs to Sydney. If increasingly the
Australian market is not big enough to absorb it, it is going to go overseas. Our players in free
trade and globalism say that is a good thing in terms of restoring balance and all that sort of
thing, but how do you view that? From a superannuation point of view, you have to maximise
the return to your members, but, on the other hand, your members have to have work, don’t

   Ms Hewett—That is the reason why Cbus embarked on a program of trying to allocate some
funds to direct investment back into the industry, provided, of course, that they met the risk
return requirements for the fund and fitted with our asset allocation. By way of example, we
were under a lot of pressure from employers in Tasmania who wanted to see some money
invested in Tasmania—particularly when our industry was going through very lean times—and
it took us years to get a project where we could get the sort of return we needed. It is expected
from people in the industry, and I think that more and more industry employers and members
are looking for this.

   In terms of the Australian equities market, I think it is an issue because superannuation assets
are growing at such a rate and I am not sure that those investment opportunities are there. It is
the same when you look at the property sector. The Property Council held a conference in early
June where they talked about this very issue and whether there were opportunities to invest in
property in Australia to accommodate the asset allocation of institutional investors to that asset

  CHAIR—That is the point I am making.

   Ms Hewett—In some areas some funds have reduced their asset allocation, but I think that to
date it has been accommodated by the creation of additional asset classes such as private equity.
There is money going into infrastructure and our fund has got a little over seven per cent
invested in infrastructure in Australia. We do not have any money invested in property overseas.
We did look at the possibility of doing that and we found that it was very difficult to manage
and there is certainly, we believe, increased risks at this stage. But some Australian companies
in the property sector and in the construction industry are looking at whether Australian
superannuation moneys could be directed to projects overseas where the Australian work force
is involved.

SUPER 494                               SENATE—Select                  Thursday, 18 July 2002

  CHAIR—Like Leighton in Asia?

  Ms Hewett—Yes, in Asia and so forth. There is some level of interest there. I think the point
that you raise is correct. I think it will be a real challenge.

  CHAIR—At the same time, if you are making direct investments, the onus on the trustees is
so much greater because the expertise is in another field.

   Ms Hewett—I think that is right. That is why the direct investments we have made have been
in our own industry. Our board—with the exception of the chair and the independent director—
is drawn from the industry and has considerable experience in the property sector. Even so, it
does take a higher level of resources to manage those assets. There are issues about
diversification within the property sector that you have to be mindful of—for example, being
overexposed to hotels in a period when hotels are not necessarily trading at their best.

  Senator SHERRY—Do you have investment choice within the fund?

  Ms Hewett—Yes, we do.

  Senator SHERRY—Do you make an additional charge for people who switch to a particular
form of investment choice?

  Ms Hewett—We let people switch once a year. If they want to switch more than once a year,
they pay a small fee—it is $10—which is exactly what we pay.

  Senator SHERRY—What is the take-up rate like?

   Ms Hewett—This is very interesting. A lot of funds, including ours, measured the take-up
rate as the number of people who moved from the balanced fund. We undertook some research
earlier this year, which we would be happy to make available to you. We found that a lot more
members than we thought were making a choice, but their choice—like mine—was to stay in
the balanced fund. They did not move, and so they were not captured by a measurement. We
found that it was much higher than what we thought.

  Senator SHERRY—What is the number that opted for something other than the balanced

  Ms Hewett—Only about three per cent of the fund.

  CHAIR—It is likely that the choice legislation will come before the committee. I hope that
you will be available to present evidence.

  Ms Hewett—Yes, we would be happy to do that.

  CHAIR—I have some questions that I will leave until that stage. Before concluding the
hearing, I must express some concern about the changes to the legislation in terms of reporting
on some of these issues that Ms Hewett referred to, including the lack of clarity on the

Thursday, 18 July 2002                   SENATE—Select                             SUPER 495

requirement of funds to provide additional information to their members. Given all the expertise
that went into that preparation, I think it is quite outrageous that they do not have a clearer
methodology. That concludes the committee’s hearing. On behalf of the committee, I thank all
witnesses who have given evidence today.

                             Committee adjourned at 3.53 p.m.


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