ACTU Secretary, Greg Combet address at AIST Lunch on 14th October, 2004
Why is super a union issue?
Australias compulsory super system was established through the vision of ACTU, unions and the then Labor governments.
The objective of the ACTU in the 1980s was to lift national savings, extend to all workers the ability to save for retirement, and ensure that the Australian economy was able to accommodate the demographic shifts that we are now encountering.
It has been a remarkably successful venture certainly one of the most important achievements of the labour movement.
There are over five million members of the industry funds that we jointly created with employers, with $70 billion in funds under management. Combined with pubic sector and corporate funds, the all profits to members sector has over 10 million members and $240 billion in funds under management.
Without super the wealth gap in the society would be even greater. Last year NATSEM produced a report concluding that the compulsory super system has been the single most important factor mitigating the widening of wealth inequality over the past 15 years.
In addition, the industry funds are leaders in investment and corporate governance and have consistently out-performed for-profit competitor master trusts and retail funds, often for a fraction of the cost to members.
Most of you here will be familiar with the research conducted by Super Ratings that found that over five years, the average industry fund provided $8.93 of earnings for every dollar of fees taken out, while the average master trust only provided $2.04 – more than four times greater net benefit.
I will return to the effect of fees on workers super, but these figures illustrate the value of membership of an industry super fund.
Financial benefits for workers
The industry funds with ACTU and union support are also building genuine value-for-money benefits for members.
Members Equity for example was established in 1994 by the ACTU and National Mutual. We were looking for a way in which super could be used to assist workers buy a home.
It has since grown to be the 6th largest bank in Australia and has over $11 billion dollars in funds under management.
Members Equity offers fund members and union members low cost home loans, credit cards, personal loans and savings facilities. It has essentially been built through workplace marketing and distribution and a lean administrative and advertising cost base.
We are now looking to consolidate some the industry fund wholesale fund management activity into ME to provide the industry funds with a financial institution of significant scale and the capacity to provide a wider range of banking and non-super retail investment products and financial advice.
Like the industry funds, Members Equity provides members with tangible financial benefits.
For example, customers of ME can save $55 per month on a $150,000 loan compared to the standard variable rate of the major banks. This translates to $16,500 over the life of the home loan.
These are significant savings for people.
The ACTU also has a keen interest in investment in infrastructure. The establishment of Development Australia Fund by the industry funds has enabled significant investment in a range of national infrastructure projects.
In recent times DAF has extended into social infrastructure. DAF has taken up opportunities in areas like the construction of public schools, water treatment and the Spencer St station redevelopment.
This has been a contentious issue in the union movement given our long term concerns about privatisation and PPPs – not surprising when you consider the record of these projects in Australia and other countries and their effect on the quality of services offered to the community and the effect on wages and conditions of those employed.
Under some PPP deals governments are not getting value for money and commercial providers are ripping out fees that are ultimately passed onto the taxpayer.
While the ACTU and unions continue to argue for government to fund infrastructure investment through borrowing (after all governments are capable of getting the lowest rates) I do not believe that this means super funds should not invest in public or social infrastructure as was done through the DAF Social Infrastructure fund.
The point is that the investment is needed, governments are not investing directly, and industry fund involvement will lead to far more efficient public policy outcomes.
Social infrastructure also provides super members with stable returns and delivers to communities the investment in services and infrastructure that is needed.
So thats a bit of context for where we are at. But there are some key issues facing workers about super. These are the adequacy of retirement incomes, and choice of fund.
There is symmetry between the challenges we faced twenty years ago then and those we face now: we are fighting for workers to have enough super to retire upon and for the right to save their super in an industry fund.
There is something of a consensus that existing retirement savings will not give people what they consider an adequate retirement income – for most at least two thirds of their pre-retirement income. This is a particular concern for the increasing number of people who have interrupted working lives and periods of part-time work – mostly, but not entirely women.
So how much do people need and how much will they have?
ASFA/Westpac research shows that for a modest lifestyle a single person would need $16,930 pa and a couple $23,550 pa. For a comfortable lifestyle the figures are $32,800 and $43,350 respectively.
A comfortable lifestyle includes a glass of wine a day, eating out occasionally, running household appliances like a dishwasher, buying magazines and CDs and the occasional holiday.
An ASFA/ANOP poll found that 70 per cent of people want a retirement income of at least $30,000, which would be a net replacement rate of 88% for someone on AWOTE (average weekly ordinary time earnings) at the time.
This would enable retirees to just about have a comfortable retirement.
However, the modelling suggests that a person retiring after thirty years of SG contributions at 9% would have approximately 60% of net replacement income a long way from their expectations.
Further, it will be 2032 before we see employees who have received the 9% SG for thirty years and the modelling for these employees assumes 30 years of continuous full time employment.
The growth in part time and casual work mean that for many workers, particularly women, 15% contributions let alone 9% will not be sufficient. The model of 30 to 40 years of full time continuous employment is not relevant to many workers in todays labour market.
All the evidence therefore points to the fact that 9% will not provide sufficient retirement savings for workers currently in the workforce, or entering the workforce today.
What are unions doing?
It is unlikely that this issue will be addressed politically without significant campaigning from unions. The Howard government has not had a constructive agenda for super during its 8 years in office, its first act being to abandon the Labor Partys plan to lift contribution rates to 15%.
Unions will therefore need to bargain for increases in contribution rates, as part of the enterprise bargaining processes, to address the issue of adequacy.
As with the campaigns for super 20 years ago, there may be many workers who will not want to trade off pay rises available now for an increase in super contributions which they can only access when they retire.
Unions have found that older workers are more interested in the idea than their younger colleagues, however an ACTU-Newspoll in May found that 73% of respondents would be interested in making a small personal contribution if it was matched by their employer or government.
Some unions are already making ground and successfully campaigning to increase employer and employee super contributions, including the CFMEU in Queensland and the Independent Education Union in NSW.
The industrial reality is that any increase in contribution rates will be achieved in the context what can be achieved across the bargaining table and what unions and their members are prepared to campaign for.
Choice of fund
The ACTU sees the two issues of adequacy and choice of fund as being inextricably linked. There not much point campaigning for increased contributions if they get eaten up by fees and commissions.
We see the choice of fund legislation simply as a direct push by the banks and life companies to increase their funds under management and lift their profits.
The choice legislation does nothing to improve the retirement income of Australian workers. In fact it is likely to have opposite effect.
I spoke briefly before about the net benefit to members of industry funds in comparison with retail funds.
The effect of fees and commission over time is startling. Here is an example:
If through bargaining a union were able to deliver members 4% pay rises annually for someone on a starting salary of $40,000 over 30 years it would deliver $95,000 in pay rises over that time.
If at the same time those workers were to transfer their super to a bank owned retail fund from an industry fund, Rainmaker estimates that they would lose over $82,000 in fees and interest over the corresponding 30 years.
These figures provide stark evidence of Alan Kohlers statement that industry funds add value after fees while commercial funds destroy it.
The ACTU and unions will not stand by while banks and financial planners destroy the retirement savings of our members through excessive fees and trail commissions.
How can industry funds respond to choice?
While there is enormous potential for union members to be ripped off by financial planners and banks, there is also the potential for industry and public sector funds to use their comparatively better returns to increase their market share. Industry funds, public sector funds and corporate funds have served Australian workers well.
So what are the key challenges facing industry funds?
An obvious start is the lack of engagement amongst most workers about their super. There are 2.7 million Australians (one third of the workforce) with over $7 billion of unclaimed super.
Secondly, it is likely to be employers rather than employees that make the decisions about super. Employers will be encouraged to consolidate their employees super with their existing financial services arrangements, commonly with one of the major four banks.
The disclosure system demanded by the government is inadequate. Banks will not have to disclose their fees beyond the first year. So expect honeymoon rates offered by banks and financial planners, without disclosure of ongoing fees.
Finally, banks and insurance companies will spend tens of millions of dollars on TV advertising and in trail commissions to financial planners.
How can industry funds respond?
Clearly each fund will now be formulating their own strategies to address choice that meet the challenges specific to their industry and membership.
Broadly, it will be imperative that industry funds work closely with their sponsoring organisations both employer and union. Employers will play a fundamental role in the determination of where many workers super is invested.
Unions and the ACTU will be campaigning hard not only for increased contributions but also for workers to continue to invest their super in the relevant industry, public sector or corporate fund.
Workplace marketing will be fundamental to the success of industry funds. Low cost distribution has been the key to the low fees that industry funds have been able to charge.
For industry funds to maintain their cost advantage, workplace marketing and distribution channels will be vital. The ACTU has been developing a comprehensive education strategy for union delegates to complement the marketing of the funds.
It will also be important to continue to have a strong public brand.
The ACTU supports the joint marketing campaign of the industry funds featuring Bernie Fraser and you can look forward to hearing more of his reassuring tones on TV.
The ACTU is proud of its contribution to the development of super in this country and of the role played by unions. There are many union end employer trustees and trustee staff that have made contributions that should be recognised.
The choice of fund legislation presents both opportunities and threats to the industry fund movement.
I am confident that the strength of the product offered by industry funds and the advocacy and support of unions and employers will stand our members in good stead.