CHAPTER ONE
RETIREMENT SAVINGS ACCOUNTS
Introduction
1.1 During the 1996 March Election Campaign the Coalition parties gave
a commitment to allow financial institutions such as banks, building societies,
credit unions, life offices and super funds to offer individual superannuation.
1.2 The election document also stated that " the Coalition's intention
is not replace existing superannuation funds, but to complement current
options by expanding the range of options open to consumers." [1]
1.3 On Budget night, August 20 1996, the Treasurer announced that the
Government had decided to " allow banks, building societies, credit
unions and life insurance companies (life offices) to provide superannuation
without a trust structure in the form of Retirement Savings Accounts (RSAs).
RSAs will be "capital guaranteed'. The accounts, into which a member
and / or an employer on the members' behalf will be able to make deposits,
will be fully portable, owned and controlled by the member, and subject
to the retirement income standards of superannuation products, including
preservation. RSAs will also be able to accept superannuation contributions
on behalf of non-working and low income spouses." [2]
1.4 In the second reading speech, the Parliamentary Secretary (Cabinet)
to the Prime Minister, the Hon Chris Miles said the following:
"Retirement savings accounts - or RSAs for short - have
a central role to play in the Government's strategy for increasing choice
and competition in the superannuation sector. Choice gives employees
greater scope to control the management of their superannuation savings."
Conduct of the Inquiry
1.5 On 12 December 1996 the Senate Selection of Bills Committee referred
the package of legislation for RSAs to the Senate Select Committee on
Superannuation for full public examination.
1.6 The Committee wrote to selected organisations inviting submissions.
It also advertised this reference in The Australian Financial Review on
Tuesday 11 February 1997 and received a number of inquiries from
other persons who were provided with information about the inquiry. As
a result the Committee received 20 submissions from those persons listed
in Appendix 1, and held three public hearings, two in Canberra on 11 and
25 of February and one in Melbourne on 21 February 1997. A list of witnesses
who appeared at those hearings is at Appendix 2.
Retirement Savings Accounts Bill
1.7 1.8 Provisions of the Retirement Savings Accounts Bill (RSA Bill)
allow banks, building societies, credit unions, life insurance companies
and prescribed financial institutions to provide superannuation accounts
that do not require the trustee structure presently required for superannuation
providers to receive concessional taxation treatment. Subsequent to foreshadowed
Government amendments to this Bill, certain friendly societies will be
included as approved financial institutions, where the Australian Financial
Institutions Codes (AFIC codes) apply to them. Details of the new structure
will be contained in the regulations.
1.9 The RSA Bill provides for the functional supervision of RSAs by the
Insurance and Superannuation Commission (ISC). The Bill is based on the
regulatory regime currently in place for superannuation entities under
the Superannuation Industry (Supervision) Act 1993. 'This will ensure
that the treatment for RSAs is as consistent as possible with that which
applies to existing superannuation products.' [3]
1.10 Provision is made for:
- the approval of RSA institutions and the capacity for that approval
to be suspended or revoked;
- annual reporting to the ISC by RSA providers;
- the clear delineation of basic duties and responsibilities of RSA
providers;
- rules relating to the opening of RSAs and disclosure by RSA providers;
- a mechanism to deal with benefits in respect of members that have
left employment or who are lost, and unclaimed benefits;
- the collection and use of tax file numbers;
- certain disclosure obligations on auditors of RSA providers; and
- powers for the ISC to enable effective enforcement of the retirement
income and other standards on RSA providers. [4]
1.11 It is important to note that by establishing the role of the ISC
as functional regulator of RSA providers, the legislation effectively
imposes a dual regulation regime, as prudential regulation of providers
remains with "home" regulators. For example, prudential supervision
of banks marketing RSAs will remain with the Reserve Bank of Australia,
while functional supervision will fall to the ISC. The Opposition members
of the Committee note that the regulation of RSAs will continue to remain
uncertain due to the existence of the Wallis Inquiry into the Financial
Services Sector. The Committee anticipates that a number of Wallis' recommendations
and the subsequent Government response may in fact result in a radical
overhaul of the current regulatory regime.
1.12 1.13 The Opposition members therefore note that due to this current
environment it may be appropriate for the Committee to examine the provision
and supervision of RSAs post Wallis.
Retirement Savings Accounts (Consequential Amendments) Bill
1.14 The Retirement Savings Accounts (Consequential Amendments) Bill
(CA Bill) contains provisions amending a number of Acts to create a similar
environment to that currently applying to existing superannuation products
such as superannuation funds and approved deposit funds by:
- putting in place an equivalent taxation regime of RSAs as applying
to existing superannuation products;
- allowing employers to make Superannuation Guarantee contributions
to an RSA;
- allowing the Superannuation Complaints Tribunal to deal with complaints
concerning RSAs;
- allowing RSAs to be used as a rollover vehicle for preserved superannuation
benefits; and
- providing for a mechanism for the calculation and collection of the
RSA supervisory levy. [5]
Retirement Savings Accounts Supervisory Levy Bill
1.15 Provisions of the Retirement Savings Accounts Supervisory Levy Bill
(Levy Bill) creates a levy to be paid by entities providing RSAs. The
purpose of this levy is to recover the costs of supervision by the Insurance
and Superannuation Commission (ISC) in monitoring the compliance with
retirement income and other superannuation standards. [6]
1.16 The Levy Bill proposes to effect full recovery of the ISC's supervision
of RSAs. It does this by imposing a levy on RSA providers (banks, building
societies, credit unions and life insurance companies) that offer RSAs
and who lodge an annual return with the ISC.
1.17 This Bill makes provision for the application of:
- a retirement savings account levy on RSA providers consisting of two
components - the basic levy amount and the late lodgement amount;
- the basic levy amount to be prescribed by regulation based principally
on the amount of assets and/or the amount of RSA money they hold - to
not exceed $30,000;
- a late lodgement amount calculated monthly and added to the basic
levy - intended to encourage timely lodgement and cover additional costs
of processing late annual returns; and
- the total late lodgement amount being the sum of the monthly amounts
calculated. [7]
The Superannuation System
1.18 In 1992 the Labor Government, with bipartisan support introduced
the Superannuation Guarantee Charge Act 1992. This legislated for a compulsory
employer contribution to be made to an employee's superannuation account
the total contribution level is to be 9 per cent by the year 2001-2.
1.19 The SGC was the first pillar in what has become an unique system
of superannuation saving. Australia's superannuation system has been recognised
by the World Bank as being a leader. Founded upon three pillars, these
being compulsory employer contributions, the ability to voluntarily save
for retirement and the continuance of a universal pension safety net.
The Australian superannuation system provides a high level of security
and flexibility.Retirement incomes is one of the greatest challenges facing
a modern market driven economy. Australian demographics indicate that
by the year 2026 the average age of the population will be 41 [8].
The Labor Government took the decision in 1992 to introduce a compulsory
system of superannuation savings to achieve the dual aims of ensuring
that citizens could expect a decent standard of retirement income, as
well as fostering intergenerational equity.
1.20 1.21 The SGC followed the 1985 Productivity Wage Case in which the
Commission determined that all employees would receive a productivity
wage increase of 3 per cent which would be delivered through an employee's
superannuation.It is against this background that superannuation policy
in the 1990's has been formulated. Foremost in all policy consideration
has been, and must continue to be so, the fact that superannuation is
part of an employees wage that has been compulsorily saved.In 1995 the
Labor Government announced that all employees would be required to save
one per cent of their average weekly earnings into superannuation from
the 1996-97 year. This employee contribution would rise to three per cent
by the year 2002.
1.22 1.23 1.24 The Labor Government also announced that it would match
the employee contribution. The total cost of this policy announcement
once fully implemented is to be $4.5 billion in the year 2002.
1.25 This initiative was developed in order to achieve the maximum amount
of contributions into superannuation. It has been well documented by a
number of industry experts that for an employee to have a sufficient level
of income in retirement contribution levels have to be in the realm of
between 12 to 15 per cent of an employee's average weekly earnings. [9]
1.26 The Labor Government considered that the 9 per cent employer contribution,
3 per cent employee contribution and the matching 3 per cent government
co-contribution represented sound policy mix.
The current trustee system
1.27 Given the compulsory nature of superannuation savings the Labor
Government considered it appropriate to ensure that public confidence
was maintained through a world class system of prudential regulation.
In 1993 the Labor Government introduced and implemented, with bi-partisan
support the Superannuation Industry Supervision (SIS) Act 1993. Fundamental
to this system is the principle that superannuation monies must be managed
on trust. Arguably the most demanding commercial test in Australian law,
at present, trustees of superannuation funds are both personally and professionally
criminally liable for their actions in relation to the investment, management
and administration of superannuation monies.
1.28 1.29 A crucial part of this trustee structure is the equal representation
of both employer and employee representatives at Board level. For a decision
to be binding a two thirds vote must be taken, thus ensuring that no class
of member can dominate the superannuation fund.Due to the compulsory nature
of the system, the SIS Act provides for compensation in the event of theft
or fraud. The combination of these protections facilitates a high level
of public confidence in the overall security and stability of the superannuation
system.
1.30 1.31 At present superannuation products are issued under a trust
structure. This requires trustees to be responsible for the actions of
the trust according to trust law, and to observe various prudential and
other regulations.
1.32 The incentive to comply with SIS is the 15 per cent concessional
rate of tax which applies to complying superannuation funds. Non-complying
funds are subject to the normal taxation regime for companies and trusts
which would normally mean the company tax rate.
1.33 The trustee structure reflects that superannuation monies are held
by the funds on behalf of their members. Any net earnings on investments
are credited to members' accounts, rather than to the investment entity.
Financial institutions such as life offices, banks, credit unions and
building societies are not prohibited now from the provision of superannuation
services, as they can establish subsidiaries with a trustee structure
so as to construct complying funds. A number of such subsidiaries now
exist.
Individualised Superannuation
1.34 Individualisation of superannuation occurred in the United Kingdom
through the encouragement of individual superannuation products from 1988.
It is currently estimated that 1.5 million people may have to be compensated
costing the United Kingdom government between four to eight billion dollars.
1.35 In his recent visit to Australia, Mr Tom Ross of the United Kingdom
National Association of Pension Funds stated,
" And I think it's the best illustration I have come across
in the financial world, at any rate, that giving people freedom, flexibility
and the ability to exercise choice without suitable education and without
adequate regulation of those who were purveying the choices is a recipe
for disaster." [10]
1.36 The SIS Act was the Australian response to the Maxwell disaster.
1.37 Given the compulsory nature of the superannuation system and the
fact that superannuation represents an individual's retirement income,
it is essential that Government policy maintains a secure and safe system.In
this environment it is entirely appropriate that the Senate Select Committee
on Superannuation examine these RSA bills to ensure that the broad thrust
of retirement incomes policy is being maintained.
What RSAs will do
1.38 1.39 The proposed RSAs are seen to address three problems arising
from superannuation arrangements, namely lack of choice, small balances
and proliferation of accounts. In the words of the Treasurer's press release
of 20 August 1996:
RSAs will be a simple, low cost, low risk product especially
suited to those with small amounts of superannuation, such as itinerant
and casual workers, those wishing to amalgamate several small superannuation
accounts and those nearing retirement (wishing to minimise risk). Their
introduction will complement existing arrangements by increasing competition
and choice in the superannuation industry, thereby putting downward
pressure on fees and charges, and encouraging better standards of service.
1.40 There has been general agreement that the returns on RSAs will be
less than other superannuation accounts. This reflects in part the capital
guaranteed structure of RSAs where the amount invested cannot be reduced
by negative investment returns. The proposal for a maximum limit for RSAs
was rejected by the Government. Instead it was decided to require RSA
providers to inform holders of their investment options when the limit
is reached. This will allow RSA holders to remain with their RSA if they
wish.
1.41 However a number of organisations namely the Australian Council
of Trade Unions, the Australian Institute of Superannuation Trustees and
the Australian Consumers' Association amongst others did indicate that
they believe the $10 000 mark to be a considerable level of accumulated
superannuation savings for those employees who earn the average weekly
wage.
1.42 These organisations highlighted the absolute necessity for a clear
statement in relation to the health warning, and suggested that the health
warning used for cigarette smoking may in fact be appropriate.
[Return to Table of Contents]
Footnotes
[1] Coalition March 1996 Election Policy "
Super For All"
[2] 1996/97 Budget Press Release entitled "Retirement
Savings Accounts".
[3] Retirement Savings Accounts Bill 1996, Explanatory
Memorandum, p 1.
[4] Retirement Savings Accounts Bill 1996, Explanatory
Memorandum, pp 1-2.
[5] Retirement Savings Accounts (Consequential
Amendments) Bill 1996, Explanatory Memorandum, p 1.
[6] Second Reading Speech on the Levy Bill
[7] Retirement Savings Accounts Supervisory
Levy Bill 1996, Explanatory Memorandum, p 1.
[8] Australian Bureau of Statistics, Projections
of the Populations of Australia, States and Territories, 3222.0, Table
9.5
[9] The extension writing os Vice Fitzgerald
regarding the requirement for 18 per cent of an employees average weekly
earnings to be contributed to super, ASFA publications and more recently
the Coalition Government's own National Commission of Audit.
[10] the 1996 ASFA Conference Edition of SuperFunds.
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