Compelled savers may have to take another step into future

It was unveiled as Australia was grinding through a painful recession and was battling rising unemployment. It was slammed as an enormous gamble that would cost jobs, drive up inflation and shatter business confidence as a tarted-up payroll tax that was potentially unconstitutional.

And when it at last cleared Parliament in the final hours of the autumn sitting, different versions of the bill were mistakenly passed by the House of Representatives and the Senate, leaving the legislation dead for two months.

Twenty years ago today the Hawke government unveiled a promise that would reshape how people thought about their money, their retirement, and their nation's place in the world of global commerce.

It was the superannuation guarantee. It would compel every worker to relinquish some of their immediate wealth on the promise of a better life after retirement it would, on the one hand, enforce how much workers would have to contribute, but would make no promises on how much those workers would eventually get.

Twenty years later, it is a move frequently described as "visionary".

"Having a system of this size has two implications," Ian Silk, the chief executive of AustralianSuper, says. "One is that each individual has a stake in it ... [the other] is that the nation has a pool of capital that it would not otherwise have had."

"It's part of the democratisation of finance," Jeremy Cooper, who chaired the recent Super System Review, says.

"It would be hard to imagine Australia without it," Craig Dunn, the chief executive of AMP, says.

"Winston Churchill once said that democracy is the worst system of government in the world, except for all the others," John Brogden, the chief executive of the Financial Services Council, says. "We have the worst super system in the world, except for all the others."

In 20 years "super" has let the country's workers amass a collective savings pool of $1.3 trillion, a nest egg that has grown from 39 per cent of gross domestic product to match, then overtake, it.

It has made the country the envy of the world, providing capital for companies and serving, in the words of the Association of Superannuation Funds of Australia this week, as the "ballast of the Australian economy" during the global financial crisis.

It has spawned a thriving and complex industry that employs 60,000 people, that has given Australia the fourth-biggest pool of pension assets in the world and, among Organisation for Economic Co-operation and Development nations, allowed it to spend one of the lowest amounts on age pensions as a percentage of GDP. It is no coincidence that those nations carrying some of the highest pension burdens, Italy and Greece, are at the epicentre of Europe's debt crisis.

But super has also exposed citizens - in a way that few other nations have - to the vagaries of global markets, hitching workers' savings to the serendipitous mining boom that took off in 2005 but tethering them to the market dives seen in 2008 and just this month - including yesterday's 148-point drop.

As the 20th anniversary of the super guarantee lands, super itself is under scrutiny, and on the cusp of significant change.

Labor, the party that produced the super guarantee a generation ago, is mounting its case for a rise in the super guarantee from 9 per cent to 12 per cent, in a move cheered by the super industry but slammed by the federal opposition and some in the business world.

And the Gillard government is ploughing ahead with reforms to the system called for by the year-long Super System Review: MySuper, a plan to offer no-frills, low-cost super in which most people will end up, and SuperStream, which promises to find $1 billion of efficiencies by improving the creaking back-office of the super industry.

The findings of the Cooper Review helped fuel concerns that the industry has become bloated and opaque, with its own language and its own warring factions.

And the recent extreme volatility on sharemarkets has again sparked debate about how much risk the average Australian is shouldering. After the sharemarket ructions of July and August, the median growth fund - which includes most default funds - was down 3.4 per cent this financial year by the close of business on Wednesday, according to Chant West. Yesterday's losses will worsen that figure.

Most people have between 61 per cent and 80 per cent of their funds in growth assets such as shares. This has meant that, for many people, the ups and downs of the sharemarket are closely linked to the ups and downs of their super.

While pretty much everyone is happy to declare Australia's super system among the best in the world, pretty much everyone is able to find fault with it, too. How it should change over the next 20 years is a subject of intense debate.

For many people who joined the workforce in the past decade, super is a given - it has always been there, and is almost as unremarkable, mundane and inevitable as income tax.

But getting it over the line was a long, difficult slog. The super system the country ended up with was the product of compromises and bargains, of agreements forged over many years and in a few frenetic weeks in mid-1991.

The super guarantee grew from the historic accords struck between Bob Hawke and the Australian Council of Trade Unions, which aimed to rein in inflation by restricting wage rises and creating a national safety net including healthcare and superannuation. Accord mark II, struck in 1985, sealed 3 per cent superannuation for all workers covered by awards - a trade-off for a slide in real wages. But according to Bill Kelty, then the secretary of the ACTU, employer-contributed super of 3 per cent of pay was only ever the beginning. "The central agreement we came to with Hawke and [the then treasurer Paul] Keating was, we'll have the real wage reduction now but you've got to deliver the rest of the superannuation," Kelty says.

Kelty, with Keating, is described by the Minister for Financial Services and Superannuation, Bill Shorten, as a "founding father" of super. "We were taking a real reduction, transforming the system in terms of wages. We were having all these fights, on the basis of that future promise - that superannuation's got to go at least to 9 per cent," Kelty says.

The argument for a national, compulsory super scheme was made more urgent by the ageing population, and the threat of a blowout in age-pension costs creating an unsustainable burden on taxpayers.

In 1990 the ACTU began assembling its case for 6 per cent super under what was to be the accord mark VI - a case it had to make to the then-powerful Industrial Relations Commission.

Kelty and Iain Ross, the former ACTU assistant secretary whom Kelty credits with getting super over the line, believed the commission would reject the claim, and approached Keating to find another way forward.

The crucial meeting took place at a restaurant called India House, then on Swanston Street in a building now occupied by a convenience store, in the months before the commission was due to rule.

"We said, 'The IRC is going to reject our position for a whole range of reasons, therefore we've got to have a fallback and you've got to have a fallback,"' Kelty says. Keating agreed to legislate if the commission turned it down. But, as Kelty says: "We then got caught up in the politics."

In April the commission rejected the ACTU's claim, including 6 per cent super. And in June Keating challenged Hawke for the leadership, lost, and retreated to the backbench, resigning as treasurer in the process.

"We've lost the No. 1 supporter for the keeper of the agreement, who's now no longer in the key spot," Kelty recalls. The ACTU quickly made its position clear - no super in the next budget would mean no future for the accord. Weeks of frantic negotiations began, led by Ross. He pressed the case for legislating compulsory super to the new treasurer, John Kerin, who had never been part of the India House deal.

Slowly, an agreement came together and, on August 20, 1991, Kerin unveiled the superannuation guarantee, which would have compulsory super rise to 9 per cent by 2002.

One of the ACTU's biggest opponents in the super debate was the Confederation of Australian Industry, an ancestor of the Australian Chamber of Commerce and Industry. The confederation was the super guarantee's loudest critic, determined to "resist with every means at its disposal" - including threats of a court challenge on constitutional grounds. It warned of job losses and business closures if the guarantee went ahead.

The chief executive of today's ACCI, Peter Anderson, says the big problem was that, "it was part of a Labor government-trade union accord that did not involve the business community".

"It was not opposed to the principle of super, but because industry had been excluded from the negotiation," Anderson says.

He argues that although the first 3 per cent included in awards was a trade-off for wage increases, the extra 6 per cent "largely occurred without any wage trade-off". He still maintains that employers have carried an "unfair and unbalanced burden" in funding compulsory super.

Super has become part of Labor's mythology - one of its proudest achievements. Little wonder that, as it prepares for the introduction of the divisive carbon tax into parliament next month, the Gillard government harkens back to Labor's achievement on superannuation to steel itself for the fight ahead.

Pricing carbon "stands with those big changes: Medicare, superannuation, the deregulation ... it's in that league," Keating told the ABC last month. "It's part of the Labor tradition of change, the Labor tradition of the adaptation of the economy."

Are there any lessons in the fight for super 20 years ago? "Almost any significant economic reform has its opponents at the time and you can only really assess it 10, 20 years down the track," Ross says.

Now Justice Ross and the president of the Victorian Civil and Administrative Tribunal, he continues: "So you have to have a strong belief in what you're doing. That is probably the lesson: you need a strong belief that what you're doing is the right thing to do, and you have to know that you're going to have to stick to it, and there's going to be a degree of opposition."

'Many countries in the world wished they'd started accumulation schemes 20 years ago," Shorten told Weekend Business last week. "I'm glad we did it then. What I don't want to do is miss out on the opportunity to keep improving it. It's been at 9 per cent now for a decade - time for a lift."

But the Gillard government, like its 1980s Labor predecessor, is facing vocal opposition to the move. The opposition and some business groups are fighting the proposal, with the ACCI again warning that it will be businesses that end up shouldering the cost. Mathias Cormann, the opposition's spokesman on superannuation, says the plan is unfunded. Labor says proceeds of its mining tax will help pay for the rise in the guarantee, but that money will merely offset a resulting drop in tax revenue.

The chief executive of financial services group MLC, Steve Tucker, says the super industry is prepared to back the government and help argue the case for the rise. Silk says the same arguments that were mounted against the guarantee 20 years ago "are almost precisely the same issues that are being run out today".

Surveys suggest the public overwhelmingly supports a move to 12 per cent. But confidence in super took a battering during the global financial crisis, with an unprecedented two years in a row of negative returns. The intense scrutiny of commissions and fees in financial advice since the crisis also helped fuel perceptions of an industry grown fat and complacent, more interested in raising its own revenue than members' returns.

The year-long Cooper Review of the super system found much to criticise. A recurring theme was the lack of what it described as "systemic transparency" in the system.

It reasoned that, because employed super fund members had no choice but to contribute to super, governance and transparency should be higher in a super fund than in a listed company, whose shareholders are free to sell at any time.

In fact, the opposite is now the case. Much work is under way. MySuper is forecast to cut fees by about 40 per cent for the average member, and the Future of Financial Advice changes, which the government hopes to have in place by July 1, will ban commissions on life insurance linked to default funds.

This month, the industry unveiled plans to standardise disclosure of investment risk, in response to a request by the Australian Prudential Regulation Authority. That was part of what the Association of Superannuation Funds of Australia says is a move to increase transparency.

But the opposition says more work is needed. "Given this is now an industry that looks after $1.3 trillion of other people's money, I think there is a serious job to be done to ensure it as efficient, transparent and competitive as possible," Cormann says. "I think there is a lot of work still to be done in this regard."

Kelty has his own vision for the future of super - a rise to 15 per cent over the next two decades, "consistent with the economic capacity of the nation", while using it to help pay for the ballooning healthcare costs of the ageing population.

And he says more super should be invested in infrastructure, to avoid over-investment in Australian equities. "Super will, almost automatically, go to twice Australia's GDP," Kelty says. "You can't go to twice GDP with a limited range of investment options. So you're going to have to have very good investment options in terms of infrastructure."

A report this week from the Allen Consulting Group, commissioned by the ASFA, concluded that raising the guarantee to 12 per cent in 2013 would boost GDP by $5.46 billion, or 0.33 per cent, by 2025. It argued such a move would benefit workers and be affordable for employers.

When the global financial crisis hit in 2008, capital was scarce. Australia's super funds came to the rescue of its listed companies, especially the banks, with almost $40 billion raised in institutional share placements in 2008-09. The Allen report estimates about 29 per cent of Australian shares are held by Australian super funds.

"When you have crises, you have to draw on your national savings," the AMP's Dunn says. "[Super] was absolutely critical for surviving the GFC."

Few would like to contemplate an Australia without superannuation. "On balance, did it serve the country? Is the country better for it?" Kelty says. "Well, every time you look at a crisis, I know which country I'd rather be in."