The Hon Josh Frydenberg MP
Federal Member for Kooyong Assistant Treasurer
Address to the SMSF Association
20 February 2015
E&OE………. Thank you Andrea for that kind introduction, and to Peter Crump, the Chairman of the Board.
Our financial services industry and superannuation system are world-class and play an important role in our economy. The figures speak for themselves:
• $1.9 trillion in superannuation assets and $2.4 trillion in managed fund assets.
• The financial services industry contributes over $130 billion per year to our economy -
representing around 8½ per cent of GDP.
• Over 400,000 Australians – including most of this audience - work in the financial services industry.
Superannuation will play an even more important role over time.
• Future retirees will have received compulsory Superannuation Guarantee contributions – and
made voluntary contributions - for a greater proportion of their working life than ever before.
• As well as the added impetus from the Superannuation Guarantee progressively increasing from
9.5 per cent currently to 12 per cent by 2025.
The Self-Managed Superannuation Fund (SMSF) sector has grown rapidly, having been formally created by the Howard Government in 1999. This is a good thing. In 1997, there were around 138,000 of what were then known as excluded funds with $26 billion of assets.
The number of SMSFs has grown by over 8 per cent per year since then to more than half a million SMSFs today. Over 1 million Australians now have superannuation in an SMSF.
The assets managed through an SMSF have grown exponentially – at around 20 per cent per year - and now exceed half a trillion dollars.
SMSFs are a key source of competition, pushing other players in the market to improve their service offering to consumers.
And the future is bright with one projection by Deloitte Actuaries and Consultants indicating that there will be $2.23 trillion dollars in SMSFs in 2033.
GOVERNMENT’S ECONOMIC REFORM AGENDA
The Government has a comprehensive economic reform agenda.
Our key challenge is to get Government finances in order. We have a serious budget problem with the Federal Government spending $100 million a day more than it collects in revenue.
The Treasurer has foreshadowed that the next Intergenerational Report will be released in the coming weeks. It will facilitate a conversation with the Australian people on the challenges our nation faces over the next 40 years.
This will be followed by the commencement of the Tax White Paper process which is of key interest to your sector. I know you have strong views on issues such as dividend imputation credits as well as superannuation tax concessions.
Other key processes underway include the Federation White Paper, the competition policy review and responding to the Financial System Inquiry.
Today I want to focus on some areas of key interest to Australian’s with SMSFs and their professional advisers:
• setting an objective for the superannuation system, • borrowing in superannuation,
• boosting professional standards, • superannuation tax concessions,
• the retirement phase of superannuation, • and reducing red-tape.
I, together with you, have the opportunity – and the responsibility - to build an even better superannuation system.
Fundamentally, I want to see Australia having the most efficient, transparent and competitive superannuation system with the highest professional and corporate governance standards. This will deliver the best possible value superannuation system for all Australians.
SETTING AN OBJECTIVE FOR THE SUPERANNUATION SYSTEM
As you are all aware the consultation period on the Financial System Inquiry final report closes at the end of March.
A key recommendation is to agree a clear objective for the superannuation system.
This recommendation is designed to address one of the most common criticisms of the superannuation system – a lack of certainty and stability in policy settings.
For example, the SMSF Association supported the Inquiry’s observation that the lack of stability in superannuation policy settings undermines consumer confidence and trust in the superannuation system. The Inquiry’s preferred model includes enshrining the objectives in legislation and public reporting on how policy proposals are consistent with these objectives.
My view is that a carefully drafted objective – with bipartisan support – would have positive benefits for the stability and accountability of the system and those who play a role in it.
I welcome the recent indication from the Shadow Treasurer that he also supports a bipartisan approach in this area.
The Government will have more to say on this issue when it officially responds to the Financial System Inquiry.
BORROWING IN SUPERANNUATION
I understand that an important and sensitive issue for many of you here is the Financial System Inquiry recommendation to restore the prohibition on borrowing by superannuation funds.
The Inquiry’s key concern here is that
“Further growth in superannuation funds’ direct borrowing would, over time, increase risk to the financial system”.
The Inquiry highlights that leveraged borrowing arrangements have grown rapidly but noted that “the level of borrowing is currently relatively small”. For example, they currently represent around 1.6 per cent of total SMSF assets.
However, we need to get the policy setting right and bear in mind a valid consideration that super is intended to generate a reliable and sustainable retirement income.
With an open mind, we will consult with all parties to ensure that we are in a position to make a fully informed decision that serves the best long-term interest of consumers and delivers a financial system which is as resilient as possible to economic and financial shocks.
The Inquiry recommended a complete ban on borrowing, but we need to continue to explore the full range of options in this area. For example, should personal guarantees by SMSF trustees be banned? I welcome the SMSF Association’s best practice guidelines for SMSF lending and SMSF advice. But should we be doing more to improve the standards of advice given to SMSF trustees considering leveraged investments?
These are important issues for the industry to continue providing views on.
RAISING PROFESSIONAL STANDARDS
One of my key priorities will be to work in partnership with industry to increase professional standards. In this regard I’d like to pay tribute to the SMSF Association. I know raising professional standards is a key focus of yours.
Your association was an active participant in the work of the Parliamentary Joint Committee on Corporations and Financial Services on boosting professional, ethical and education standards in the financial services industry.
I understand my colleague - Senator David Fawcett – who chaired that inquiry has participated in this conference. I’d like to pay tribute to his Committee’s important work.
The PJC’s proposed model for improving adviser competency would apply to personal advice on “Tier 1” financial products including shares, superannuation, life insurance and managed investment schemes. The proposed model has three main components:
Firstly, increasing educational standards from a diploma-level course to a degree-level qualification. In addition, there would be a formal professional year of training ending with a registration exam, as well as continuing professional development.
Secondly, an independent Finance Professional’s Education Council to set educational standards and professional frameworks.
Thirdly, requiring all financial advisers to be members of a professional association that has been approved by the Professional Standards Councils, and that has accepted a code of ethics.
This report provides a vital opportunity for the whole industry – perhaps for the first time - to work together to boost professional standards.
At the end of the day we are talking about people’s life savings, which underlines just how important the competency and professional standards of the financial planning industry are.
I will be a willing partner on this journey. But I am looking to the industry to show leadership and work together towards this incredibly important common goal.
I am wary of introducing unnecessary red tape. I believe the best outcomes will be achieved if the industry itself can lead the way.
Between now and the end of June, we will be engaging with all interested stakeholders as we work towards the development of a workable, robust and credible education and professional standards model for financial advisers.
SUPERANNUATION TAX CONCESSIONS
The issue of superannuation tax concessions has attracted a lot of media attention recently.
Firstly, let me emphasise that superannuation is, and should remain, the pre-eminent savings vehicle for Australians.
We also need to remember that superannuation is not government money – it is the savings of Australians.
As the Treasurer has recently said, the Government made a commitment before the last election that we would not make any unexpected detrimental changes to superannuation.
Of course, superannuation tax concessions are a significant part of our tax system and will be considered in detail as part of the Tax White Paper process.
I note that your conference this year is titled ‘Life cycle’, focusing on the different stages of superannuation – accumulation, transition to retirement and drawdown.
It is important that the superannuation policy debate also focuses on the drawdown phase of superannuation.
The broad direction of the Financial System Inquiry on the issue of retirement incomes is to make it easier for people who are retiring to take their superannuation as an income stream rather than as a lump sum. And to increase the range of products available to retirees.
The SMSF Association’s response to the Draft Report noted that
“the SMSF sector successfully provides retirement income streams to retirees under the current regulatory settings.”
This certainly seems to be backed up by the evidence with 37 per cent of SMSFs reporting to the ATO that they were making pension payments to at least one member.
Of course, there are always improvements that can be made.
The SMSF Association has highlighted the need to improve the quality and provision of financial advice regarding retirement incomes. So I welcome the ‘Life cycle’ focus of your conference as a step in that direction.
CUTTING RED TAPE
Finally, I believe that we need to cut red tape in Australia.
Having been responsible for leading the Government’s deregulation agenda, when Parliamentary Secretary to the Prime Minister, I’m proud that we have already announced cuts of $2.1 billion per year in red tape across the economy.
The Financial System Inquiry raised concerns that superannuation fees haven’t fallen as fast as they could have with the benefits of scale.
I acknowledge this analysis and want to work with the entire industry to identify ways to lower costs for the benefit of consumers.
Government clearly has a role to play. The costs of unnecessary or excessively burdensome government regulation inevitably drive up fees for consumers or the costs of running an SMSF – reducing retirement incomes.
I’m especially conscious of the need to minimise compliance costs associated with any reforms.
Minimising compliance costs requires a proper consultation process, appropriate transitional arrangements and the use of self-regulation where appropriate.
Your tireless CEO - Andrea Slattery - has already highlighted some areas where we can work together – such as extending the limited licensing exemption under the Corporations Act to SMSF Association members. I can assure you I will look at these proposals closely.
In conclusion, there are a wide-range of issues on my agenda in superannuation.
My approach will be to methodically work through the issues and engage closely with all stakeholders in building broad agreement around how the system can be improved.
Thank you all for your time today and I look forward to working with you closely.